Japar Tax Part1_grupong Tapsi Notes_2007

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES These notes are meant to be shared to all who may benefit from it, provided, that THE USER SHALL NOT IN ANY MANNER WHATSOEVER DELETE, DIMINISH, OR OTHERWISE REFUSE TO GIVE CREDIT TO THE PEOPLE WHO MADE THIS. Whoever does such ungrateful and dastardly acts shall most definitely suffer the consequences under the law of Karma and no amount of prayer can save them from its effects. This was made available through the collective efforts of the following UST bar examinees and friends:

Atty.LordV Atty.Julan Atty.Tracy Brian NickG. Atty.DennisM. Atty.Levie Atty.Rommel Atty.Dk Edwin Atty.Claudette Bim Charm Deo Atty.Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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I. II. III. IV. V. VI. VII. VIII.

Income Tax Remedies (incl CTA) General Principles Estate Tax Donor’s Tax Local Tax Real Property Tax Tariff and Customs

2005 13 9 7 1 0 3 0 3

2004 5 7 9 1 1 1 0 1

2003 8 2 2 1 2 2 1 1

2002 5 17 1 0 1 1 2 0

2001 12 3 2 2 1 0 1 1

2000 7 8 7 2 1 0 0 2

1999 10 6 0 0 1 0 0 0

INCOME TAX (TITLE II- SECS. 22-83) The law on Income Taxation is found in Title II of the NIRC, as amended by RA 8424, otherwise known as the 1997 Comprehensive Tax Reform Act. Only Sec 22 up to Sec 42 are the more important ones. Sec 43 to Sec 83 are seldom asked in the Bar Exams. This is a Bar subject which cannot be understood through self-study. I am here to guide you, to tell you the provisions which you should memorize and the related provisions so that all the probable questions may be covered once we discuss them. As far as taxation law is concerned, just concentrate on the 20 provisions – Sec 22 – 42. Just read the subsequent provisions. I will mention some of them in this lecture and what you will hear will be sufficient and you need not to read Sec 43 – 83. Let me start with this – 22 to 23. You check whether you have understood these sections or provisions and you never can tell it might be asked in the bar exams. You know this was asked: question 1 in the 1996 bar exams but if this will be asked again, I’m sure the examiner will modify this question. There is really this instruction not to ask questions previously asked in the Bar Exams. But you can modify the questions and the answer will be the same. Sec 32A – this was asked in the 1995 Bar Exams (Sec 28 under the old tax code). ―Define Gross Income.‖ But the examiner may change the tenor. If you notice the title of 32A, ―General Definition‖ of gross income, so the examiner may modify this as follows: ―State the general definition of gross income.‖ The question asked in 1996 has something to do with the salient features of our present income tax system. So that can be answered under the old tax code. The examiner may modify as follows: ―What are the salient features of the NIRC, as

amended by RA 8424, otherwise known as the Comprehensive Tax Reform Act?‖ There are actually 45 amendments introduced by RA 8424. So I advice you not to master all the suggested answers to the bar questions asked before 1998 because those questions which we answered before 1998 were based on provisions of the old tax code. In 2003, a question on tax benefit was asked. Last year, 2005, I told them that may not be the question. The examiner may modify that. You will recall that tax benefit rule applies to two cases – tax refund, recovery of what is written off. I told them that may be the question. It came up. When you speak of features, this may include methods of income taxation, systems of income taxation, basic rules or principles.

I. SALIENT FEATURES OF OUR PRESENT INCOME TAX SYSTEM: A. Schedular System of Taxation and Global System of Taxation B. Income Tax Situs C. Determinative Test of Whether Income is Taxable – Doctrine of Constructive Receipt of Income D. Basis of Taxable Income E. Net Income Taxation F. Gross Income Taxation G. Pay as you file H. Creditable Withholding Tax I. Final Withholding Tax J. Substituted Filing of Income Tax Return

A. SCHEDULAR SYSTEM OF TAXATION and GLOBAL SYSTEM OF TAXATION: 1. TAN vs DEL ROSARIO – 237 SCRA 324  Landmark case that was asked twice already in the Bar Exams

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 1 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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The two recognized systems of income taxation:

tax rules and tax treatments that may apply.

a. SCHEDULAR SYSTEM OF TAXATION  Is the system of taxation adopted in imposing taxes on the income of individual taxpayers.  SC: The Schedular System of Taxation is the system employed where income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer.  It is a system that provides for different tax rules or treatments.  By making it depend on the kind or category of taxable income, it means that it classifies or categorizes income.  1997 Bar: discuss the meaning of Schedular Tax System. Possible modification: How does the Tax Code impose tax on the income of individual TP?  These features are incorporated in the present tax code.

2. Do not memorize 24 and 25. Just try to read.  Sec 24  Sec 25

 IMPORTANT CHARACTERISTICS OR FEATURES i. Income is classified or categorized  Section 32A gives 11 categories of income (actually 13)  Sec.32. Gross Income- (A). 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: 1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items; 2. Gross income derived from the conduct of trade or business, or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and Winnings; 10. Pensions; and 11. Partner's distributive share from the income of the general professional partnership ii. It provides for different tax rules or treatment. 1. How are dividend income, royalties, prizes and winnings taxed? Correlate with sec 24 and 25 where you will find the different

So, to answer the Question, ―How does the tax code impose tax on income of the individual taxpayer?‖, just state the 3 characteristics. The Answer therefore is: the income of the individual taxpayer is taxed under the schedular system of taxation. Under this system, it operates as follows or has these following characteristics: 1. the income of the taxpayer is categorized or classified; 2. it is subject to different tax rules or treatment; and 3. the tax code imposes different tax rates on these different categories of income There are 3 basic rules/ formula that you should remember here: A. Where income is derived from the performance of services, sec 35 applies. From gross compensation income is deducted personal and additional exemptions. Also to be deducted under sec 34(10) are premiums on hospitalization and health insurance (2001 Bar). After such deductions, you arrive at Taxable Compensation Income. B. Where income of individual TP partakes of the nature of business income, a different tax treatment applies. The formula is as follows: Gross Income from the conduct of trade or business or the exercise of profession less allowable deductions under Sec 34. Personal and additional exemptions may not be deducted as these are allowable only in compensation income. C. Where income is derived solely from income subject to final tax, as in dividends received from a domestic corporation, such is not included in gross income. The tax withheld will constitute a final settlement on the tax liability on that particular income.  Fringe benefit is subject to final tax under 33A. The individual TP is not required to report this as part of gross income because the tax withheld which is a final tax will serve or constitute a final settlement on the tax liability on that particular income.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 2 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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iii. 

Other income subject to final tax – royalties, interest on bank deposits, prizes and winnings. It imposes different tax rates. Sec 24 and 25 provide for different tax rates which are known as the progressive rates of income tax.

b. GLOBAL SYSTEM OF TAXATION  one adopted in imposing tax on income of corporate taxpayers  Try to recall this technical definition cited by the SC in the case of TAN vs. DEL ROSARIO. The SC said ―it is the system where the tax treatment views indifferently the tax base, and generally treats in common all categories of income of the taxpayer‖.  Indifferently views the tax basemeans uniform tax rules or tax treatments  generally treats in common all categories of income of the taxpayermeans that it does not classify or categorize income  Global system is really the opposite of Schedular Tax System  Secs. 27 & 28 are the 2 important provisions as far as Corporate Taxpayers are concerned. These are classifications similar to 32 A.  in 32 A- it classifies income into 11 categories. Here in Secs. 27 & 28, the rules are uniform as far as Domestic Corporations are concerned, subject to certain exceptions. Also, the rules are uniform as far as Non Resident Foreign Corporations are concerned; and also uniform as applied to NRFC.  Sec 27  Sec 28  So, uniform corporate tax rules, subject to certain exceptions. No classification of income and also imposes a uniform or fixed corporate rate of 35%. The 32% has been amended to 35% by RA 9337 (EVAT LAW) which took effect on July 1, 2005 (RR-14-2005 implemented it on Nov. 01, 2005)

B. INCOME TAX SITUS: provision is Sec. 23)

(Relevant

Sec. 23. General Principles of income taxation in the Philippines.- Except when otherwise provided in this Code: A. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

B. A nonresident citizen is taxable only on income derived from sources within the Philippines; C. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income 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; D. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; E. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and F. 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

1996 Bar: Basis on imposing income tax (RPN): [Tan vs Del Rosario] 1. R- residence 2. P- place where the income was derived; and 3. N- nationality or citizenship Residence: Resident alien-can be taxed on his income derived from sources within RFC- basis of the imposition of tax is the doing/conduct of business in the Philippines Place: NRA- can only be taxed from its income derived from sources within the Philippines NRFC-can only be taxed from its income derived from sources within the Philippines Nationality:  the place is not the basis, it is the nationality. That's why even the income derived from sources without can be taxed  You know that Resident Citizen (RC) and Domestic Corporation (DC) can be taxed (Sec 23(A&E) on income derived from sources within and without the Philippines. ● Please be reminded of the amendment because this has been the subject of misleading 2002 bar Q. #1 regarding NRC and NRA. Take note of the effectivity of RA 8424,Jan. 1,1998. ● These rules in Sec.23 about NRC (that they can only be taxed on income derived from sources within, and so is with Resident Alien, took effect on Jan. 1,1998

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 3 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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therefore, if the income was derived in 1997, within and without, it is subject to tax

2002 Bar Q. #1- this has something to do with the income derived from sources w/in and w/out of a seaman or NRCitizen. Several examinees answer the Q. under the new rule. This is not correct. What they have in mind is that the 1997 Comprehensive Tax Reform Act took effect in 1997. This is not correct. This RA8424, took effect only on January 1, 1998 

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Pls be reminded about this. That these 2 individual taxpayers (Nonresident Citizen and Resident Alien) have been the subject of the amendment introduced by RA 8424. they could be taxed on their income derived from sources w/in and w/o in 1997, or before 1998. But starting 1998, they could only be taxed on their income derived from sources within. The word used by the SC in describing the present income tax situs, and this is also provided under the present tax code is ―COMPREHENSIVE‖. The SC said ―we have adopted a Comprehensive Income Tax situs‖ xxx ―because we have practically adopted all the possible criteria in imposing tax on income (residence, nationality or citizenship, and place)‖.

Q: Why is it that the Income derived by Resident Citizen from sources w/in and w/o is subject to tax? What is the rationale behind this? What must be the basis for this? CIR vs. Lednicky (re: Partnership Theory) -GRN L-18169 July 31, 1964:

Issue:

Right of the Philippine Government to tax the income of resident from outside the Philippines.

Held: The right of a government to tax income emanates from its partnership in the production of income, by providing the protection, resources, incentives, and proper climate for such production, the interpretation given by the respondents to the revenue law provision in question operates, in its application, to place a resident alien with only domestic sources of income in an equal, if not in a better, position than one who has both domestic and foreign sources of income, a situation which is manifestly unfair and short of logic. NOTE: This case was decided during the OLD Tax Code. Under the principle of Personal Jurisdiction, wherever you go, citizens of the Philippines, you are entitled to the protection of the Philippine Govt. This is in relation to Partnership Theory between the Taxpayer and the State---the State will provide protection but in return you have to pay taxes. The right of the Govt, therefore, to impose taxes on income must be based on its capacity to extend protection. In other words, if the Phil. Govt cannot provide protection, then it has no right to imposed taxes. As simple as that. This is the reason why the income derived by Resident citizen from sources without can be subject to Philippine income tax.

SUMMARY: KIND OF TAXPAYER

CRITERIA or INCOME TAX SITUS

SOURCES of TAXABLE INCOME

RC

Residence and Nationality

Within and without

NRC

Place

Within

RA

Residence - They can claim personal and additional exemptions and as well as deductions

Within

NRA

Place - In certain cases, they are not allowed to claim deductions

Within

DC

Nationality

Within and without

RFC

Residence

Within

NRFC

Place - they are not allowed to claim deductions

Within

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 4 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

C. DETERMINATIVE TEST OF WHETHER THE INCOME IS TAXABLE – Doctrine of Constructive Receipt of income: ●

This is cited in the case of Filipinas Synthetic Fiber Corp. vs CIR. The SC said that it is not the actual receipt of income but the right to receive that determines when to include an amount as income in the gross income. This is the most important pronouncement of the SC in this case which you should remember. This is consistent with the Doctrine of Constructive receipt of income.

FILIPINAS SYNTHETIC FIBER vs. CA – 316 SCRA 480, GRN 118498 October 12, 1999 Under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income – whether the income is taxable.  In Title II, there are specific rules regarding Constructive Realized Cash or Property Dividends. The Rule is provided in Rev. Reg. #2 Sec.53. It gives us 2 requisites: 1. The income or the amount must be credited to the account of the taxpayer or set apart or set aside for the taxpayer; and 2. It must be unconditional; that is, not subject to any limitation or restriction. The right to receive must not be subject to any contingent event Examples: a.) Dividend income perceived to be received from Domestic Corporation→ it is not required that the stockholder must actually receive the dividends before the 10% tax must be imposed. As long as it is set apart for the stockholder and the latter could demand the same w/o any limitation, the 10% tax may be imposed to the corporation b.) As cited in Rev. Reg #2, the Partner's Share in the Income of the Partnership→it is not required that the share of such partner be actually received or distributed. As long as the partner could demand the same w/o any limitation or restriction, such share is already taxable. ●

Classic example using the word ―credited‖→Interest income on Money Deposit → if you have money deposit in the bank and it earns interest, such interest income is credited to your account. So, constructive receipt of income. An example of an income that is constructively in your hand, you have yet to receive the same, no actual receipt, but it is already subjected to 20% tax. The 20% Final Tax already applies because the 2 requisites are present (1) credited to your account and (2) you can withdraw the same anytime during the taxable year without any limitations or restrictions.

Case: Limpian Investment vs. CIR (17 SCRA 703) --- What is the income considered as constructively received here? it is the rentals deposited in court by the lessee as a result of the unjustified refusal of the lessor to accept the same. The rentals were consigned in court. The rentals deposited in court is considered as constructively received by the lessor because the lessor can withdraw the same without any restriction. So, take note of this constructive receipt of income.

D. BASIS FOR THE COMPUTATION OF TAXABLE INCOME:  If you have not read Sec.43, you cannot answer this. Sec 43.

General Rule - the taxable income shall be computed upon the basis of the taxpayer's annual accounting period ( fiscal year or calendar year, as the case maybe) x x x

 if we try to analyze this, it uses the words basis, then taxable income, then computed. It shall be computed on the basis of what? Answer: your taxable income shall be based on either of these accounting periods: 1) fiscal year period or 2) calendar year period 1990 Bar: There was a Q. on the distinction between these 2 accounting periods. The importance of this Q. is that it tells us that there is a basis in the computation of taxable income. These terms are defined in Sec.22 P & Q.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 5 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Sec 22.

Definitions(P) The term ―taxable year‖ means the calendar year, or the fiscal year ending during such calendar year, upon which the net income is computed under this Title. x xx (Q) the term ―fiscal year‖ means an accounting period of twelve (12) months ending on the last day of any month other than December.

 You must know these terms because individual taxpayers can only adopt the calendar year period, starting January 1 and as defined under Sec 22 Q, Fiscal Year Period is that accounting period of 12 months ending on any month other than December. Therefore, Fiscal Year period can only be applied to Corporate TP. Corporate TP have the option either to adopt the calendar year period or the fiscal year period. 

Correlate with Sec.77B, you'll find therein that Corporate taxpayers have the option to adopt calendar year period or fiscal year period. But in the case of individual taxpayers, there is no choice but to adopt the calendar year period. So the taxable period will cover only from Jan.1 up to Dec.31. You must master this so as to correlate with Sec. 229.  Under Sec. 229, and you are Familiar w/ this Doctrine-- the 2 year period for filing tax refund shall commence to run from the filing of the final adjustment corporate tax return (_________vs. CIR 205SCRA184). You ought to know whether the Corporation adopted the fiscal or calendar period.

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There’s no problem if the corp. has adopted the calendar period because it is April 15. What if it adopted the fiscal year period? When can you apply this 2 year period? Sabe, ―the 2 year period of filing the tax refund shall commence to run from the filing of the final adjustment corporate tax return‖.  If the corporation has adopted the fiscal year period, then it is not April 15. Sec. 77B says th th ―on the 15 day of the 4 month following the end of the taxable period. So if the fiscal year th ended on June 30, you count 4 months---July,August, September & October. On the 15 th day of the 4 month following the end of the fiscal year period. So that would be on October 15 (2 yr. period starts from this date). So correlation

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It is really very important to correlate because questions will be asked on the application of the 2 year period and the problem will state that the corporation has adopted the fiscal year period. Take note of Sec. 77B, it is not April 15.

E & F. NET INCOME TAXATION and GROSS INCOME TAXATION: NET INCOME TAXATION (NIT) vs. GROSS INCOME TAXATION (GIT): ●

NIT- one generally adopted under the present tax code. Bases are Secs. 34 & 35  Under Sec. 34 (Deductions from Gross income), NIT allows deductions. It also grants exemptions, basic and additional personal exemptions under Sec. 35.

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GIT- can be applied or adopted under exceptional cases.  It is not really correct to say that we have not adopted GIT  Sec. 25 B, C, D, and E, speak of gross income  Sec 25 B: the provision says ‖the income tax is imposed on the entire income‖. That means that the basis is the Gross income. The subsequent paragraphs (C, D, &E) consistently say or provide or use the word ―gross income‖.

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Who are these individual taxpayers whose income shall be taxed at gross, and therefore the method of taxation is GIT? NRA-NETB  The income of these individual taxpayers is taxed at Gross, therefore, the method or system that apply to them is GIT Who are those individual taxpayers who cannot claim any deductions/exemptions? NRA-NETB

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As regards Corporate taxpayers:  Sec. 28 B (1,2,3&4) provide for those corporations taxed under GIT  Sec 28 B (1) - the 35% corporate income tax is imposed on Gross Income (NRFC-NETB) (2) - The 25% corporate income tax shall be imposed on gross income on rentals(NR film owner) (3) - The 4.5% corporate income tax shall be imposed on gross income on rentals or charter fees (lessor of vessels) (4)- The 7.5 % corporate income tax shall be imposed on gross income on rentals or fees (lessor of aircraft, machineries)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 6 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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Corporations covered by Sec. 28B (1,2,3,&4) are nonresident foreign corporations. So, corporate taxpayers who cannot claim deductions are NRFC. The method of taxation applied to these corporation is, no doubt, GIT.

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Simply put, NIT is the Rule. GIT is the exception to the rule. Exception in the sense that it applies only to these 2 kinds of taxpayer: 1. Individual -NRA-NETB; and 2. Corporate- Nonresident foreign corporation

1997 Bar: Explain NIT 2000 Q#10Define Net or Taxable Income (the word 'taxation is not present here) 1983 BarExplain the meaning of GIT 1995 Q#1Define Gross income →the use of the word ―taxation' really matters ●

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In 1995 Q#1- Define Gross income. 1 examinee answered: One where the tax is imposed at gross. This is not really correct. This maybe partly correct if the Q. asked was that of 1983 Bar, because if we speak of GIT, that is really the method or system If the Q. is the Definition of Gross Income, then you really have to enumerate the items under Sec. 32 A

GIT- is a method or system that allows no deduction; it grants no exemptions. In other words, the tax base or the basis of the tax rate is Gross Income NIT- not the same with Net Income or taxable income. Sec. 31 ( one sentence provision) defines Net or Taxable Income. Do not confuse this with the concept of NIT because the word 'taxation' connotes method or system. 

Sec. 31-Taxable Income Defined- The term 'taxable income' means the pertinent items of gross income specified in the tax 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

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So what then is Net Income Taxation? How does it operate? ---NIT allows deductions and grant exemptions. The basis of the tax rate is taxable/net income as defined under Sec.31

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Probable Bar Q. here: What are the distinctions between GIT and NIT?  Answer: 1. As to the claim for deductions or exemptions: GIT-No exemption/deductions; NIT-allows deductions and grants exemptions; 2. As to the basis of the tax rate: GIT-Gross income; NIT- Net/Taxable income; 3. As to the applicability under the tax code: GIT applies to 2 taxpayers: 1) NRA-NETB(Sec.25 B,C,D,&E) and 2) NRFC (Sec.28 B(1,2,3,&4)) NIT applies to the following taxpayers: 1) RC; 2) NRC; 3) RA; 4) NRA-ETB; and Corporate:1) DC; 2) RFC

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Q.: Are you in favor for the adoption of GIT? Congress is proposing a change from NIT to GIT → this may be a bonus Q. but your answer or opinion must be based on tax. Point out significant advantages. There's no such thing as perfect system because both have their own disadvantages.

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As regards NIT, it allows deductions and grants exemptions. Therefore the tax paid is less. I think, we can develop advantages on this. → Try to recall these, as these are the characteristics or features of NIT: 1) To the taxpayers, they may consider this as fair, just and equitable system of taxation. One or two sentence will suffice and you have to explain that. Favorable/fair in the sense that taxpayers can claim those business connected expenses as deductions, and taxpayers can also claim exemptions; 2) This brings us to the next advantage, as cited in Sec. 2 (State Policy) of RA 8424. this is one of the underlying purposes of the amendments. It says that ― it provides for equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity. o Equitable relief may refer to those allowable deductions under Sec.34 and personal exemptions under Sec.35. The effect of this is that it will increase the levels of their disposable income. If taxpayers can claim those business related expenses as

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 7 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

deductions, they may file their income tax return religiously and they may be encouraged to engage in income producing activities. This is the amplification of the provision under Sec. 2 of RA 8424 when it says increase economic activity. That will be the effect of that grant of deductions and exemptions 3) We can also cite as an advantage, that NIT minimizes fraud. In what sense? o Through this tax audit examination of the taxpayers' books of accounts. The taxpayer can not just claim expenses not supported by receipts. BIR will check whether these expenses are indeed business connected or not. This is what we called ― counter checking‖. If you incurred expenses, make sure that it is supported by receipts or is connected to business otherwise the BIR will disallow the same. So it minimizes fraud in this context. → The result of this is that, if we have fair, just and equitable tax system, taxpayers will religiously file their income tax returns and fraud will be minimized. This will generate more revenues to the Govt which is really the objective of every system of taxation ●

Q: if you are against NIT (in effect, you are for the adoption of GIT) what must be your reasons here? → Take note of the 2 salient features of GIT: a) No deductions are allowed and no exemptions may be granted; and b) The tax basis is the gross income. Have these in mind. 

Reasons: 1) The complaint of showbiz people under the present system is that, according to them, we have a complicated system because there are so many requirements that must be complied with and they could not just determine their taxable income-services of CPAs are still needed. But here in GIT, since no deductions are allowed, this will simplify our income tax system. In what sense? You can easily compute your income tax due or payable. Just multiply your Gross income by the tax rate and that is the Income tax due. It dispenses with these several requirements on the claims for deductions. And this is consistent with or in harmony with the sound fundamental principle of ADMINISTRATIVE FEASIBILITY. GIT makes our system sound in the sense that it is capable of effective enforcement or implementation. 2) So what would be the effect of this? If we have a simplified income tax system which can be easily understood by common citizens, more will be religiously filing their income tax returns because they can easily understand the system, they can easily file their tax returns w/o the assistance of a CPA or tax experts.

3) The most important about GIT, as cited by the sponsor of the proposed Bill is that it minimizes (we cannot use the word ―eradicate‖ because this is next to M I 3) it minimizes graft and corruption. → How do we explain this? The evil of NIT, is that there's that abuse of discretion; margin of discretion on the part of the BIR examiner. They abuse it by collaborating with the taxpayer and allow deductions not supported by receipts. This reduces the taxpayer's liability. Because of this margin of discretion, there's that measure to the effect that this should not be the source of graft and corruption. So, no more deductions and no more exemptions must be allowed so that the BIR cannot make use of the same. Here, it can no longer be the source of graft and corruption, so it minimizes the same. → The result of this GIT is that, it will generate more revenues to the Govt. which is really the objective of every system of taxation. ●

NIT vs GIT (As regards the objective of generating more revenues): 1. In NIT, more revenues may be brought by these 3 factors: a. favorable system b. system that provide for equitable relief c. minimizes fraud (by the taxpayer) 2. In GIT, more revenues may be brought by these 3 factors: a. simplification b. easy to understand system c. minimization of graft and corruption (by the BIR Examiners)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 8 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

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You should also know the disadvantages of these 2 systems. In the case of NIT, #1 disadvantage is that it really is vulnerable to graft and corruption because of the margin of discretion (BIR can allow or disallow the grant of discretion). #2 is that it is a complex or complicated system. It is very complicated and there are so many requirements to be complied with. → the effect of this graft and corruption is tax evasion

●

The disadvantage of GIT is that there's always tax evasion. In NIT, tax evasion may be brought about by graft and corruption. In GIT, it is the employment of fraudulent methods, schemes or devices to understate Gross income. Also, if you are a businessman who cannot claim those business expenses as deductions, you may find this system as unfair. In what sense? Even legitimate expenses cannot be classified as deductions.

●

Sec 24 A, you'll find 32% progressive rate in 2000. if we will formally adopt this GIT, do you think this tax rate will be retained? →If this will be retained, that would make the system unjust. These tax rates are quite high up to 32%. but it allows deductions, so there's a balancing feature. But once we formally adopt GIT, we cannot retain the same. We really have to reduce the rates to make this system just. In my view, it must not exceed 10%. Eliminate deductions, no more Sec. 34, but we have to reduce the rates.

●

In my view, it should be modified income tax system. I'm not really in favor of pure Net Income or pure Gross income taxation. It should be modified income tax system.

G. FILING OF INCOME TAX RETURN AND PAYMENT OF TAX: ●

The system that we have adopted is PAY AS YOU FILE. → In the case of individual, Sec. 36 A (1) states that the tax shall be paid upon the filing of income tax return  Sec. 36 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. X X X  In the case of Corporation, Sec. 77 C provides that corporate taxpayers shall pay their corporate income tax upon the filing of corporate income tax return  Sec. 77 C. Time of payment of Income Tax - the income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Secs. 75 and 76 shall be paid at the time of the declaration or the return is filed X X X

●

2001 Q#4. This will test your knowledge about the filing of tax return by a corporation. I will modify: How often does a Domestic Corporation file its Income Tax Return for income earned during a single year. Explain the process. What must be the reason for such procedure? Answer: LIFEBLOOD DOCTRINE---Hehehehehe → Refer to Secs. 75 and 76. Is it annually? No. How often, Once? No o Sec. 75 explains the process. It says ―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, shall be levied, collected and paid. X X X → So, four times. The word used is ―Quarterly‖. All Domestic Corporation file their income tax st nd th quarterly. Quarterly, so 1 Quarter, 2 Quarter, 3rd Quarter and the final (4 ) quarter requires the filing of Final Adjustment Return (Sec. 76) → What are the words that you should say in your answer aside from Quarterly? You should say in your answer, that under Sec.75, it requires the Quarterly declaration of gross income and th deductions. As regards the 4 Quarter, it requires the filing of final adjustment tax return. → Now, what do you think is the reason for the procedure? LIFEBLOOD, (hehehehe) If we allow the Corporation to file their income tax returns annually, what would be the effect? The effect is that the Govt would run out of funds before it can collect. That's the reason—the timeliness of collection of corporate income tax...Medyo may Lifeblood pa rin → Answer should be: The reason for this procedure is to ensure timeliness of collection of corporate income tax because (lifeblood na) taxes are the lifeblood of the Govt...hehehehe. There should be no undue delay

●

What if it is an individual? How often does an individual taxpayer file his income tax return? 4X? Hehehe → Only Once (Annually) (Sec. 56)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 9 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

→ What is the reason why individual taxpayers are only required to file their ITR Annually? LIFEBLOOD na naman,hehehe...iba na cguro to. If we allow them to file their ITR Quarterly, sa tingin mo kaya the BIR can check compliance with such? Millions of individual taxpayers will be filing their ITR quarterly. The reason here is to make our system capable of effective implementation or enforcement consistent with the sound principle of Administrative Feasibility ●

This is modified by these 3 systems: 1. Creditable withholding tax system 2. Final Withholding tax system 3. Substituted filing of ITR

H & I. CREDITABLE WITHHOLDING TAX AND FINAL WITHHOLDING TAX SYSTEMS: ●

medyo mahirap to. 1995 Bar- 5 Q. on these: Creditable Withholding tax system (CWTS) vs. Final Withholding tax system (FWTS): → the common feature with these withholding systems is that there's a withholding agent authorized by the Govt to deduct and withhold the tax 1) As to income subject of the system: ● As regards CWTS, Sec. 78 enumerates those items subject to CWTS. → Classic example of this system is Compensation Income. The employer is the withholding agent, the employee is the recipient of the income. Under this system, the employer will deduct and withhold the tax on that compensation income. Remember that the employee is required to include the income in his gross compensation income ●

On the other hand, classic examples of income subject to FWTS are dividends received from Domestic Corp., Royalties, Prizes more than 10,000, Winnings, and Interest income on bond deposit. If you are the recipient of these, you are no longer required to include these incomes in your gross income. → The word 'final' connotes that the tax withheld will constitute as a final and full settlement (FAFS for brevity) of the tax liability on that income.

2) As to whether or not the income should be reported as part of the gross income: ● According to CWTS, since the income will not constitute as a FAFS of the tax liability on that income, the recipient should report the said income in his gross income. → this is provided for in Rev. Reg. 2-98. it is said therein under Sec 2.54, that an income subject to CWT must still be reported by the recipient as part of his gross income ●

On the other hand, the said Rev. Reg. 2-98 also provides that in the case of FWTS the recipient may not report said income as part of his gross income because the tax withheld will constitute as a FAFS of the tax liability

3) As to the effect of the tax withheld: ● The tax withheld under the CWTS can be claimed as a tax credit or may be deducted from the income tax due or payable. → if you are a compensation earner, and you have other sources of income. Let us assume that your income tax due is 150,000. the tax withheld by your employer can be claimed as a tax credit. It may be credited against or deducted from your income tax due or payable. Say, if the tax withheld is 50,000, deduct this to your income tax due or payable of 150,000, the final income tax due is 100,000. → Again, Creditable implies that the tax withheld by the employer can be claimed as a tax credit or can be deducted from your income tax due or payable ●

On the other hand, in FWTS, the tax withheld cannot be claimed as a tax credit. The Final Tax Withheld will constitute as a FAFS on the tax liability on said particular income → For instance, the stockholder is not required to report as part of the gross income the dividends received from a domestic corp. The reason is because the 10% tax withheld on the amount will constitute as a FAFS of the tax liability on the dividend income → Fringe Benefit under Sec. 33 A is subject to Final Tax, therefore this is also governed by FWTS. This is another example of income subject to FWT → 2003 Bar: Who is legally obliged to pay Fringe Benefit Tax? This Q. is not about the definition of FB but requires your knowledge about withholding tax. Rev. Reg. 398 Sec. 2(2) say that the employer is the one legally obliged to pay the tax → person legally obliged to pay the tax---is the one who in case of nonpayment may be legally demanded to pay the tax. If the Final tax on FB will not be paid, the BIR will not go after the employee but to the EmployER. This is the same in the case of interest on

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 10 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

bond deposit. In case of nonpayment, the BIR will not run after the stockholder but to the corporation. The Corporation being the withholding agent is the one legally obliged to pay the tax. The rule is that ― it is the withholding agent that is legally obliged to pay the tax 4) As to the Filing of Tax Return: ● In the case of CWTS, the compensation earner reports the income received as part of his gross income. Necessarily , he has to file an ITR ● Whereas if the only source of income is subject to Final tax, you need not file an ITR 

These are the provisions on individual whose sole income is one that is subject to final tax (Sec. 51 A(2C)): 1. 25% final tax under Sec. 25 B-NRA-NETB 2. 15% final tax under Sec. 25 C, D, and E (Alien employed by Multinational Companies, offshore banking unit and petroleum service contractor or sub contractor)



So they are NRA-NETB



Bar Q: Why are NRA-NETB not required to file ITR? This can be answered by 1 sentence. It is because their income is already taxed as a Final tax.



So as to the 2 Questions: 1) Who are these individual taxpayers who are not required to file ITR? NRA-NETB 2) Why are NRA-NETB not required to file ITR? Because they are subject to a final tax rate. Final tax withheld will constitute as a FAFS of the tax liability



How about Corporate taxpayer? ● Sec. 52 A. it says 'except nonresident foreign corporation'. The rule is that corporate taxpayers must file their ITR, except Nonresident foreign corporations ● Why? The reason is Sec. 28 B(1,2,3,4) Sec. 28 B- Tax on Nonresident Foreign Corporation1. FC not engaged in trade or business- 35% FT; 2. Nonresident Cinematographic Film Owner- 25% FT; 3. Nonresident Owner or lessor of Vessel- 4.5% FT 4. Nonresident Owner or lessor of Aircraft, Machineries- 7.5% FT ●

these are all Nonresident Foreign Corporations. Apply the Rule that they are not required to file ITR because the tax withheld constitutes as a FAFS of the tax liability

J. SUBSTITUTED FILING OF INCOME TAX RETURN : 

Rev. Reg. 3-2002 (1,2,3,4). the effect of this system is that you are no longer required to file ITR. Requirements for one to avail of this system: 1. You must be a compensation earner, meaning that your income is derived solely on compensation. If you have other sources of income such as business, trade or profession, you are still required to file an ITR; 2. You must have only 1 employer in the Philippines. So if you have 2 or more employers, you are not allowed to avail of this system; 3. The tax withheld by the employer must be the same or equal to the tax due or payable after applying the tax rate. → For example: tax due is 250,000. Make sure that the exact amount is withheld by the employer. Otherwise, you will be required to file ITR. 4 The employer must file an information return (BIR Form 1704) showing therein the income tax withheld on the compensation income.



Rev. Reg. 3-2002 declares ―that is tantamount to a substituted filing of ITR by the employees hence they are no longer required to file ITR‖.



Let us examine Sec. 51 A and B. Rules laid down therein: 1. If your compensation income is not more than 60,000; 2. Only 1 Employer; and 3. Tax withheld is the same with the tax due,

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 11 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

→ Then you are no longer required to file ITR. But if your compensation income is more than 60,000 even if you satisfy requirements 2 & 3, you are still required to file ITR  these rules have been modified by Rev. Reg. 3-2002. Under 3-2002, it imposes no limitation as to the amount. What is important is that as long as the tax withheld is the same with the tax due, irrespective of the amount, this new system applies.  is this not an impermissible encroachment on administrative prerogative because it is a mere regulation? BIR has the power to promulgate regulations for the enforcement of rules as part of its administrative functions. Nobody questioned this.

II.

GENERAL PRINCIPLES OF INCOME TAXATION:  

This is precisely the title of Sec. 23 - General Principles of Income Taxation in the Philippines Sec 23. General Principles of income taxation in the Philippines.- Except when otherwise provided in this Code: A. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; B. A nonresident citizen is taxable only on income derived from sources within the Philippines; C. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income 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; D. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; E. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and F. 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

 

Sec. 23 classifies taxpayers into two: individual and corporate Can only answer the Q: Can we tax the income derived from sources w/in and w/o? Sec 23 cannot answer the Q. on whether the taxpayer can claim deductions, (which is also a general principle or basic rule). There's a need to supplement this particular provision. That's why under Secs. 24 & 25, there are provisions that apply to individual taxpayers that answer the Q. on whether they can claim deductions



As regards Corporate Taxpayers: Q. on whether they can claim deductions cannot also be answered by Sec. 23. We really need to refer to Sec. 27 & 28 which give us the tax rates and the tax base



Bar Questions on General Principles:  2000 Bar Q#8, 2002 Q#1 & 1998 Q#2. Try to refer to these Q because these are really questions on the general principles of income taxation  2000 Q#8- the tenor of the Q was: How will this individual taxpayer, a NRA-NETB be taxed on his income derived from sources w/in and w/o?  In 2000 bar, our suggested answer includes not only these 2 sources: 1) whether income from w/in and w/o can be taxed; and 2) regarding tax base; whether the taxpayer can claim deductions. 3) We also mentioned about the applicable tax rates  2002 Bar- the tenor of the Q has been changed: What is the Rule of Income Taxation with respect to the income of Mr. Sebastian, a NRC deriving income from sources w/in and w/o?  2002 Q#1 also requires these 3 basic principles  The answers to these Q are the same even if the examiner changed the tenor of the Q.  However, 1998 Q#2 can be squarely answered by Sec. 23 alone. This is a Q. on sources alone.  So when we speak of General Principles, these are not limited to sources alone under Sec. 23. These also include Rules on tax base as well as tax rates.  There are really different ways on how to ask Q on General Principles  Provisions regarding General Principles : Sec. 23, 24, 25, 27 & 28  The tax code classifies the taxpayer as either individual or corporate. So, this General Principles may be broken into 2: 1. General Principles of Individual Income Taxation; and 2. General Principles of Corporate Income Taxation

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 12 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

1. General Principles of Individual Income Taxation: RESIDENT CITIZEN:  How will the income of RC be taxed? RC can be taxed on his income w/in and w/o (Sec. 23 A)  Can a RC claim deductions? The income tax is imposed on the taxable income. That means that RC can claim as deductions those expenses paid or incurred w/in and w/o (Sec 24 A [1][a]  The taxable income of RC is subject to 5-32%. it is known as the Progressive tax rate schedule NONRESIDENT CITIZEN:  Can only be taxed on his income from sources w/in (Sec.23 B, C). this has been the subject of an amendment . This is a new rule (took effect on Jan. 1,1998). So that if the income w/in and w/o was derived in 1997, that income could be taxed under the old tax code. But beginning 1998, we can only tax his income derived from sources w/in  Can he claim those expenses incurred within the period? Sec. 23 is not clear on this. This can be answered by Sec. 24 A(1, b). it says that the income tax is based on the taxable income under Sec. 31. Meaning, Gross income less allowable deductions. But the allowable deductions are only those expenses paid or incurred w/in the Philippines because he could only be taxed on his income derived from sources w/in.  this taxable income is subject to 5-32% progressive rate schedule  2002 Q#1: Mr. Sebastian, a seaman, received income in 1997 from sources w/in and w/o. What is the rule with regard to the income of Mr. Sebastian in 1997? o Some answered this Q. under the new rule. This is not really correct. This should be answered under the old tax code because the present tax code took effect only on Jan.1, 1998. RESIDENT ALIEN:  Could be taxed only on his income derived from sources w/in  Entitled to deductions (Sec. 24 A (1, C)) because you can see therein the word ―taxable income‖. But the allowable deductions are only those expenses paid or incurred w/in the Philippines  Subject to 5-32% progressive tax rate schedule NONRESIDENT ALIEN ENGAGED IN TRADE or BUSINESS:  How do you know that a NRA is engaged in trade or business? Determinative test is Sec. 25 A(1)- He is considered engaged in trade or business if his aggregate stay in the Philippines is more that 180 days.  Sec. 25 A (1) – X X X A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a ―nonresident alien doing business in the Philippines‖ X X X  If it is exactly 180 days, then it is not engaged in trade or business because the law is very clear. This must be strictly construed because of the tax benefit that may accrue to this alien individual.  What is that tax benefit?  If the alien is engaged in trade or business, the tax benefit is that, he can claim deductions because the tax base is taxable income under Sec. 25A (1). On the other hand, if he is not engaged in trade or business, he is not entitled to this tax benefit because the tax base is Gross income under Sec. 25 B.  Refer to Sec 25 B, you will find therein the rule that ―NRA-ETB can claim basic personal exemption subject to reciprocity‖. This is another tax benefit that can be availed of by NRA-ETB to the exclusion of NRA-NETB.  2000 Q#8- Mr. Corpuz, A NRA was based in Hongkong. In 1999, he stayed in the Philippines for more than 180 days. Q: How will the income of Mr. Corpuz derived from sources within the Philippines and other countries, be taxed?  When it made mention about w/in and w/out, then refer to Sec. 23 D. NRA-ETB can only be taxed on his income derived from sources w/in the Philippines. The rule has not been changed. This is still the same under the old tax code

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 13 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 Q: can he claim deductions?  Yes. Sec 25A (2) - the income tax is imposed on the taxable income. Of course, only those expenses incurred w/in the Philippines could be deducted. The tax base is subject to 5-32% progressive rate  Authoritative answer: You’ll know that the problem did not categorically state that he is engaged in trade or business. So you should start with this: Having stayed in the Philippines for more than 180 days, Mr. Corpuz is engaged in trade or business. Under the tax code (You need not cite the Provision), NRA-ETB shall be taxed under the following general rules/principles: a. Only his income derived from sources w/in the Philippines can be taxed. We cannot tax the income derived from other countries; b. Indicate also the rule regarding deductions: Mr. Corpuz can also claim deductions because the tax base is taxable income. These 2 will suffice. But you can add this c. the taxable income is subject to the progressive tax rate schedule of 5-32%.  Modifications: Supposed the examiner changed this to 9 months?  In answering this problem, Art. 13 of the NCC will come in handy – one month is equal to 30 days, so multiply 9 (months) with 30 (days) = 270 days. Mr. Corpuz is a NRA – ETB.  What if it is exactly 6 months?  the law says ―more than 180 days‖. This is strictly construed, so he is a NRA-NETB. The Rule says, he cannot claim deductions  How about if the problem is specific in that it indicates the Specific months, for example from April 15, 2004 to October 15, 2004?  Remember the ―boxer rule‖: April - 15 May - 31 June - 30 July - 31 August - 31 Sept - 30 Oct - 15 183 days = NRA–ETB  So, remember that the problem may categorically state more than 180 days; or will state the number of months; or will indicate specifics months. Remember the rules applicable in each of the situation NONRESIDENT ALIEN NOT ENGAGED IN TRADE or BUSINESS:  Under Sec. 23 D, NRA-NETB can only be taxed on his income derived from sources w/in (same with the old tax code)  Can he claim deductions? No. Under Sec. 25 B, the basis is entire income, meaning Gross income. So, he cannot claim any deductions. This is the one that you should underscore.  As regards tax rate, it is not 5-32 %. the tax rate applicable to NRA-NETB is 25% FT. that means that this is subject to Final withholding tax, and the tax withheld constitute as a FAFS of the tax liability on the income  Questions regarding these 3 special NRA-NETB, have yet to be asked in the Bar:  Sec. 25 C, D, E: [C] Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies [D] Alien Individual Employed by Offshore Banking Units. [E] Alien Individual Employed by Petroleum Service Contractor and Subcontractor. 

they can only be taxed on their income derived from sources w/in; they cannot claim deductions because tax base is Gross income; and the tax rate has been reduced to 15%

 Q: Mr. Corpuz stayed in the Philippines for more than 180 days. How will his income be taxed if he was employed by Regional Headquarters of Multinational Company? Would your answer be the same as in the previous bar exam Question?

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 14 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



You have to change only the tax rate. As to the sources and tax base, the rules are still the same

SUMMARY:

GENERAL PRINCIPLES OF INDIVIDUAL INCOME TAXATION KINDS OF INDIVIDUAL TP

SOURCES OF INCOME (Sec. 23)

TAX BASE (Sec. 24 and 25)

TAX RATE (Sec. 24 and 25)

RC

Within and without

Sec. 24A – 1 (a) – TAXABLE INCOME. Hence, can claim deductions expenses paid within and without.

Progressive rate 5-32%

NRC

Within (1 – 1 – 98)

Sec. 24A – 1 (b) – TAXABLE INCOME. Hence, can claim deductions expenses paid within.

Progressive rate 5-32%

RA

Within (1 – 1 – 98)

Sec. 24A – 1 (c) – TAXABLE INCOME. Hence, can claim deductions expenses paid within.

Progressive rate 5-32%

NRA – ETB

Within

Sec. 25A – 1 (a) – TAXABLE INCOME. Hence, can claim deductions expenses paid within

Progressive rate 5-32%

NRA – NETB

Within

Sec. 25B – GROSS INCOME. Hence, NO deductions or exemptions can be claimed.

25% FINAL TAX

Within

Sec. 25 C, D and E – GROSS INCOME. Hence, NO deductions or exemptions can be claimed.

15 % FINAL TAX

Special NRA – NETB: 1.

Alien Individual Employed by Regional or Area HQ and Regional Operating HQ of Multinational Co. – par.C

2.

Alien Individual Employed by Offshore Banking Units. – par D3. Alien Ind Employed by Petroleum Service Contractor and Subcontractor – par E

2. General Principles of Corporate Income Taxation: DOMESTIC CORPORATION (SEC 23 E):  taxable on its income derived from sources w/in and w/o  as to the tax base, refer to Sec. 27 A. It says that the corporate rate is based on the taxable income. This means that expenses paid or incurred w/in and w/o are deductible.  the taxable income w/in and w/o is subject to 35 % ( effective July 1, 2005 implemented on Nov. 01, 2005)) RESIDENT FOREIGN CORPORATION (SEC 23 F):  Taxable on its income derived from sources w/in only  as to the tax base, refer to Sec. 28 A (1). It says that the corporate rate is based on the taxable income. This means that expenses paid or incurred w/in are deductible.  the taxable income w/in is subject to 35 % (effective July 1, 2005) NONRESIDENT FOREIGN CORPORATION (SEC 23 F):  Taxable on its income derived from sources w/in only  as to the tax base, refer to Sec. 28 B (1). It says that the corporate rate is based on Gross income. This means that expenses paid or incurred are nondeductible.  the taxable income w/in is subject to 35 % FT

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 15 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 Just like NRA-NETB, there are also special kinds of Corporate taxpayers, and this is yet to be asked in the Bar: [B][2] – Nonresident Cinematographic Film Owner, Lessor or Distributor-25% FT [B][3] – Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals4.5%FT [B][4] – Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment7.5% FT  1994 Bar: The Secretary of Finance upon the Recommendation of the CIR issued BIR regulation using Gross Income as the tax base for Corporation doing business in the Philippines. Q: Is this BIR Regulation valid?  It is not a valid BIR Regulation for the simple reason that it runs counter to the provisions of the tax code. The SC, in one case held that the Requisites for the BIR Regulations to be valid are as follows ( CRUP): a. Consistent or in harmony with the provisions of the tax code or the law it seeks to implement; b. Reasonable; c. Useful and Necessary; and d. Published in the OG or in a newspaper of general circulation 

CASE: Misamis Oriental Association of Coconut Dealers vs. Sec. Of Finance  The SC made a pronouncement in this case that BIR Regulations are mere interpretative rules. Therefore, it cannot go beyond the scope of the provision of the tax code



Another case: Auto Products Incorporated vs CIR 240 SCRA 368  the SC said in this case that BIR Regulation is designed or intended to carry out the provisions of the tax code. It cannot supplant, modify, or alter the provisions laid down in the tax code.



You need not cite the name of the case. It is enough to use the following words: ―it has been held that‖' or ―settled is the rule that‖, or ― it is jurisprudentially settled that‖ .... BIR Regulation is valid if it is in harmony or consistent with the provisions of the tax code. The BIR Regulation in question contravenes the provision of the tax code that the tax base for the corporation doing business in the Philippines is taxable income. It is a mere interpretative Rule intended to carry out the provisions of the tax code. It cannot alter, supplant, or modify the provisions of the tax code. The BIR Regulation in question therefore, constitutes an impermissible encroachment on legislative prerogative.

SUMMARY: GENERAL PRINCIPLES OF CORPORATE INCOME TAXATION KINDS OF CORPORATE TP

SOURCES OF INCOME (Sec. 23)

TAX BASE (Sec. 27 and 28)

TAX RATE (Sec. 27 and 28)

DC

Within and without

Sec. 27A– TAXABLE INCOME. Hence, can claim deductions expenses paid within and without.

35%

RFC

Within

Sec.28A(1) – TAXABLE INCOME. Hence, can claim deductions expenses paid within.

35%

NRFC – NETB

Within

Sec. 28B(1) – GROSS INCOME. Hence, NO deductions or exemptions can be claimed.

35% FINAL TAX

Within

Sec. 28B(2) – GROSS INCOME Hence, NO deductions or exemptions can be claimed.

25 % FINAL TAX

Special NRFC – NETB: (Sec. 28B2,3, and 4) 1. Par. B2 – Nonresident Cinematographic Film Owner, Lessor or Distributor.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 16 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. Par. B3 – Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. 3. Par. B4 – Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.

Within

Sec. 28B(3) – GROSS RENTALS, LEASE or CHARTER FEES Hence, NO deductions or exemptions can be claimed.

4.5% FINAL TAX

Within

Sec. 28B(4) – GROSS RENTALS, CHARTER FEES and OTHER FEES Hence, NO deductions or exemptions can be claimed.

7.5% FINAL TAX

SPECIFIC RULES: NRA-ETB vs. NRA-NETB: NRA – ETB

NRA – NETB

As to the TAX BASE

- taxed on the basis of his taxable or net income

- taxed on the basis of his gross income

As to the right to claim deductions

- Can claim deductions

- not allowed

As to the filing of the ITR

- required to file his ITR

- not required to file since he is subjected to final tax – see Sec. 51-A2(c) in relation to Sec. 25B, C, D and E



Q: When is a corporation considered as ―Doing Business‖?  In Mentholatum vs. Mangiliman (72 Phil 324), the SC said that it implies continuity of Commercial transactions. It was cited in BOAC vs. CIR. Doing business, engaging in business, conducting business must imply continuity of commercial transactions. There's OCT (Original Certificate of Title,hehehehe): O - The activity is done in connection with its ORDINARY business in the Philippines C - There is a CONTINUITY of commercial transactions or dealings (so, look at the intention) T - TRADE or business  It must engaged in a business here in the Philippines; it must be an ordinary one; and there must be continuity of the same  In the case of _____ vs CA, it is the intention to engage in a continued business in the Philippines; it is not the number; it is not the frequency; but the intention to engage in a continued business in the Philippines, that determines whether the Corporation is doing or engaging business.  If the corporation is not doing business, the tax effect is that it cannot claim any deductions because the tax base is Gross Income.  In the case of individual, it is easy because it is fixed, it says more than 180 days. But in the case of a corporation, the SC said that it depends upon the peculiar circumstances of the case. But in one case, the SC said that it is really the intention to engage in a continued business.

RFC vs NRFC: RFC

NRFC

As to the TAX BASE

- taxed on the basis of his taxable or net income

- taxed on the basis of his gross income

As to the right to claim deductions

- Can claim deductions

- not allowed

As to the filing of the ITR

- required to file its ITR

- not required to file since it is subjected to final tax – see Sec. 52A in relation to Sec. 28B 1, 2, 3 and 4

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 17 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

III.

GROSS INCOME:  Sec. 32 A must be memorized. There are 13 items here 

Keywords:

PBC PRP WPD PARI PBC – Provincial Board of Canvassers PRP – Peoples Reform Party WPD – Police PARI – Priest

 Section 32A – Except when otherwise provided, GI means all income derived from whatever source, including but not limited to the following items: 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions and similar items; 2. Gross income derived from the conduct of trade or Business or the exercise of a Profession; (two items here); 3. Gains from dealings in Property; 4. Interest; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities; 9. Prizes and Winnings; (2 items also) 10. Pensions; 11. Partner’s distributive share from the net income of the general professional partnership; 

1995 Q#1- Define Gross income for purposes of income tax? As modified in the next bar: State the General Definition of Gross income  you can easily answer these questions by the keyword. But if you cannot recall all the enumeration, then answer in paragraph form



ENUMERATION UNDER Sec. 32A IS NOT EXCLUSIVE:  The following is likewise included in the taxpayer’s gross income: a. Treasure found or punitive damages representing profits lost b. Amount received by mistake c. Cancellation of the TP’s indebtedness d. Payment of usurious interest e. Illegal gains f. Tax refund g. Bad Debt Recovery

ITEM # 1: COMPENSATION INCOME:   

Fringe Benefit is a form of compensation income. Under the old tax code, Fringe Benefit was taxed as part of the Gross compensation income of the employEEs. But Sec. 33 modified or changed this rule→ FB is now subject to Final Tax. Sec. 35, provides the rule that personal and additional exemptions are deductible from the Gross compensation income 1977 & 1978 Bar: Q was so basic: Define Compensation Income.  How do you answer this Q? Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items---this is not really the answer to this Q.  the definition is found in Rev. Reg. 2-98. it defines compensation income in 1 sentence: ―All remuneration for services rendered by an employee for his employer under an EE-ER relationship unless specifically excluded under the Tax Code‖  The meaning of this is that, there are really tax exempt or excluded gross compensation income from gross income and you will find this in Sec. 32 B. This implies that not all compensation for services rendered may be subjected to tax, there are those that are tax exempt and should be excluded from gross income under Sec 32 B.  Example: in the case of services performed by an independent contractor, in the absence of EE-ER relationship, (actually there's really no EE-ER relationship), the income received by the independent contractor shall be recorded as trade or business income. Professional income should not be included in the gross compensation income in the absence of EE-ER relationship.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 18 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



TEST WHETHER INCOME IS COMPENSATION INCOME:  It is not the name of the remuneration upon which it is paid and the manner of payment, what is important is that it is derived from E-E relationship. 

TEST TO DETERMINE THE EXISTENCE OF E-E RELATIONSHIP: A – Appointment or selection C – Compensation or payment of wages D – Dismissal C – Control



2 Tax implications when the payment is made for services rendered: 1. as far as the ER is concerned, it may be claimed as deductible expense. Under Sec. 34 A (1, a), it says ...reasonable allowance for salaries.... the tax implication as far as the employer is concerned is that it can be claimed as a deductible expense. 2. It is an income to the employee



Requisites for Deductibility: a. it is a payment for services rendered; b. it must arise from EE-ER relationship; c. it must be reasonable, meaning that it represents the fair value of the services rendered Example: ER pays 30,000 for the services rendered by his secretary. Assume that of the 30,000, only 20,000 represents the FV of the services rendered. The 10,000 is a manifestation of the love and affection of the ER to his EE being his Sexytary. Q: how much can be deducted on the part of the ER?  Apply the Rule under Sec. 34 A [a][1], it must be reasonable. It is very clear, 20,000 can be claimed as a deduction as it is the only amount that represents the FV of the service rendered. Q: How much can be taxed as income on the part of the EE?  To the employee, the entire 30,000 is taxable: 20,000 - Taxable as part of the compensation income 10,000 - Sec. 32 A, taxable as it is considered as derived from whatever source. So it forms part of the Gross Income.







Keyword: AC-DC

LIFE INSURANCE PREMIUM:  As to taxability or nontaxability--- Consider Sec. 32 A(1), that is, in whatever form paid. This may be taxed as compensation income because the premium is maintained by the employer under ER-EE relationship. Also, under Sec.33 B(10), one of the taxable Fringe Benefits applies to Insurance Premiums. Here, it is subject to Final tax.  When you speak of taxability, that is the implication as far as the EE is concerned  As to deductibility (it is as far as the ER is concerned) ---Consider Sec. 34 A (1) (a,1)--- this is the basis for that. It says ―xxx reasonable payment for salaries, wages, and other forms of compensation for personal services rendered.‖ Life Insurance premium is one of the other forms of compensation.  Sec 36A (4), says that this life insurance premium is nondeductible. So, let us summarize 4 provisions in the tax code relative to this Life insurance premium. You will see how technical the rules are. That is, you really have to group related provisions that apply to this item  Beneficiaries that may be designated: 1. The heirs, family, executor or administrator of the estate of the EE 2. Employer 

Implications:  To the employer, it may be treated as an expense; and to the employee, as income



Q: As to assumption that the beneficiary is the heirs, family, executor or administrator of the estate: Can the employer claim deductions?  Under Sec. 34 A (1) (a,1), the provisions say ― other forms of compensation for personal services rendered‖. So this includes Life Insurance premiums paid by the employer under ER-EE relationship. So, YES.  Is the amount taxable to the Employee?  Qualify: Bear in mind that there is a new rule --- Sec. 33 B (10). So: 1. It is taxable FB and therefore subject to Final tax if the insured employee is a supervisor or managerial EE; 2. If the insured EE is a rank and file EE- that's the time to apply Sec. 32 A(1) when it says ― in whatever form paid‖. So, that may include Life insurance premium. The employee here must be rank and file

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 19 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 Simply put, it is taxable to the employee, but you should qualify:  it is subject to FT (Sec.33B (10)) if the insured EE is a supervisor or manager; and  it is subject to compensation income subject to 5-32% progressive rate if the EE is a rank and file 

As to second the assumption that the employer is the beneficiary: Can the employer claim it as a deductible expense?  No. Why? Because upon the death of the EE, the proceeds will go to the ER, being the beneficiary. Shall we allow him to deduct the premiums paid? No because it is just a mere return of capital. The Proceeds received by the ER is a mere return of capital (of the proceeds paid by him). That's the reason why in Sec. 36 A (4), whether the EE is directly or indirectly designated as beneficiary, Sec. 36 A(4) says, NONDEDUCTIBLE.  Is the amount taxable to the employee? This is not taxable to the employee for the simple reason that his family will receive no benefit. His estate will receive no benefit. The proceeds will go the employer. If there's no benefit received, there's nothing to tax. There's no basis for imposing the same

SUMMARY OF THE TAX TREATMENT ON THE LIFE INSURANCE PREMIUM: BENEFICIARY

EMPLOYER

EMPLOYEE QUALIFY: if the employee is a:

The heirs, family, executor or administrator of the estate of the EE

The ER can deduct the amount of the premiums paid as a form of business expense – Sec. 34A(i)

Employer

The ER cannot claim it as deductions or expenses because the insurance proceeds are but a mere return of capital. (Sec. 36A(4))



a. Managerial or supervisory EE - it is subject to FINAL TAX (fringe benefit) b.

Rank-and-File EE – it is considered a COMPENSATION INCOME and is therefore subject to the progressive rate of 5-32%

- NOT TAXABLE – Since there was no benefit received by the EE or his family.

TAX IMPLICATION OF CANCELLATION, CONDONATION or FORGIVENESS OF INDEBTEDNESS:  This is a favorite bar Q. on forms of Compensation income. If you try to read Secs. 32-83, you'll find no specific tax rules on this.  The amount condoned may be considered as compensation income or a donation or a capital transaction, depending on the circumstances of the case.  Sec. 32A says compensation in whatever form paid. We have already discussed one, that is Life insurance premiums. The next is cancellation or forgiveness of indebtedness. 

3 Tax effects / implications / incidences: 1) Considered as Compensation Income to the EE/ Deductible to the ER:  Requisites: a. the cancellation or forgiveness must be in consideration or based on account of services rendered; b. the creditor must be the ER, the debtor must be the EE; c. the ER condoned or canceled the debt of the EE in consideration of the services rendered 

Effects if these requisites are present:  To the ER-Creditor, that may be claimed as a deductible expense because this is really a form of compensation for services rendered (Sec. 34 A (1).  To the EE-Debtor, it is a compensation income taxable (Sec.32A (1) ―in whatever form paid‖.

2) As a Taxable Donation:  If no consideration was given; the obligation was simply condoned, renounced by the creditor-employer; then that may amount to a taxable donation. There is a donation in accordance with Art. 1270 of NCC: it says ― if it is gratuitous in character, it shall be governed by the rules on donation. Also, under Rev. Reg. 2---- it says‖ if

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 20 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES







the cancellation or forgiveness was made w/o any consideration, that may amount to donation Effects: 1. If there's a donation, the creditor becomes the donor. The debtor becomes the donee or the recipient of the liberality 2. The creditor-donor is subject to donor's tax 3. the debtor-donee is no longer subject to donee's or inheritance tax as the same was abolished by PD 69 on Nov. 24,1972 4. It is not also subject to income tax because Sec 32 B(3) says that donations/gifts shall be excluded from Gross income. So the debtor-donee is neither subject to donee's or income tax 1997 Bar- An insolvent company has an outstanding obligation to its creditor for 100,000. Since the debtor could not pay its obligation, the creditor agreed to accept through dacion en pago document, property valued at P30,000. Q1: What is the tax effect on the discharge of the unpaid balance on the debtor-corporation? Explain.  The unpaid balance discharge here is 70,000; and the transaction referred to in the Q is the condonation of the unpaid balance  The creditor, having received no consideration as regards the 70,000 unpaid balance, is liable to pay donor's tax as the transaction gives rise to a donation. The debtor becomes the donee, the recipient of the liberality. He is not subject to donee's tax as donee's tax was abolished by PD 69. Neither is he subject to income tax, as donation under Sec. 32 B (3) is excluded from Gross income Q2: in so far as the creditor is concerned, tax-wise, how is it affected as a result of that transaction?  The creditor becomes the donor--The one who canceled or renounced the obligation without receiving any consideration. As donor, he is subject to donor's tax

3) The other tax implication is declared by Rev. Reg. #2 Sec. 50., that may amount to capital transactions. This may take the form of INDIRECT DISTRIBUTION of dividends by a corporation. Hence, the creditor here must be a corporation and the debtor must be a stockholder. That must be the situation.  Under Sec. 43 of the Corporation Code (Provision on declared dividends)- Dividends that may be declared may be in the form of cash, property, stock, liquidated, script and indirect dividends.  Indirect dividends may arise when a corporation condoned or canceled the obligation of the stockholder.  This is a form of indirect dividends in the sense that it is made through the cancellation or forgiveness of stockholder's obligations.  On the part of the stockholder, such amount condoned or canceled is a taxable income subject to 10% FT.  On the part of the Corporation, this is considered as Interest on Capital.  Is this interest deductible? 1999 Bar #14- Q. on whether or not this Interest is deductible or not?  De Leon is of the opinion that it depends upon the circumstances. He is of the view that if the declaration of the dividends is dependent upon surplus profits, there is no obligation to speak of, so it is not a deductible interest. On the other hand, if the declaration is not dependent upon surplus profits, there is an obligation to speak of, in this case, it is a deductible interest.  In our suggested answer in the 1999 Bar, we did not qualify our answer because interest on preferred shares of stock is considered as interest on capital. In your book, I did mention about this RMC 17-71, July 12, 1971, w/c enunciates the rule that interest on capital, and that may include interest on preferred shares of stock, is a non-deductible interest. So, we can apply this, that it may be treated as interest on capital. And it is now an absolute rule that interest on capital is a non deductible interest. So, the corporation cannot claim this as a deductible interest. Since it partakes the nature of a dividend, though indirect, and since dividend under the tax code if received by individual taxpayer is subject to 10%, 20% or 25% Final tax depending on the kind of the taxpayer receiving the same, said indirect dividend is therefore subject to the same rate as if it is a dividend

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 21 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

SUMMARY: TAX IMPLICATION OR CONSEQUENCE OR INCIDENCE OR EFFECT of CONDONATION Rev. Reg. 2, Sec. 50 – must be made in consideration for services rendered on account of an E-E relationship.  ER is the creditor and the EE is the debtor.

COMPENSATION INCOME

 ER can claim it as a deduction and the same is considered as a taxable compensation income on the part of the EE. 

Article 1270 of the NCC – if the creditor condones the obligation of the debtor without receiving any consideration. It is considered as a taxable donation because only the creditor’s liberality is the consideration involved. Q: Does it mean that the donor and the donee will be made to pay donor’s tax? A: NO. PD 69 abolished donee's and inheritance tax which became effective on Nov. 24, 1972.

TAXABLE DONATION

Q: Is the amount donated/condoned part of the donee’s gross income? A: NO. Sec. 32B(3) provides that donations are excluded from GI. 

When the debtor is the corporation and the creditor becomes a stockholder in exchange of the condonation of the debtor’s obligation -considered as indirect dividends  The amount condoned is subject to 10% FINAL TAX if the corporation is a DC.

CAPITAL TRANSACTION  The corporation (creditor) cannot claim the same as a deduction. When corporations declare dividends, it can be considered as ―interest on capital‖. Rev. Memo. Circ. 17-71, effective on July 12, 1971, provides that interest on capital – which includes stocks or dividends – ARE NOT deductible.



Favorite Bar Q: Convenience of the Employer Rule (Hernandez Doctrine) 1 SCRA 649  This is the justification that may be used in granting exemptions from income tax on certain benefits that may be received under an ER-EE relationship



HOUSING PRIVILEGE/ BENEFITS  You should consider the employee who may be recipient of this.  In Rev. Reg. 3-98, there's a provision on this, and this applies to Managerial / Supervisory EEs  What are these housing benefits that are tax exempt and granted to the convenience of the ER?  If the EE is a Rank and file EE---the governing rule is Rev. Administrative Memo Order (RAMO) 1-87  Before the amendment on some of the parts of Sec. 33, it was RAMO 1-87 that applies to all employees.  In the light of the new provision under Sec 33 C (a new rule on Fringe Benefit), the rule under RAMO 1-87 has been modified. And this has been implemented by Rev. Reg. 3-98  Rev. Reg. 3-98 says, housing benefits that is exempt is one situated w/in the business premises of the employer. The new rule included here is ― including housing units that are situated w/in the 50 meter perimeter of the business of the employer (adjacent housing units). RAMO 1-87 provides no provision to this effect. This Rev. Reg. 3-98 will only apply to managerial employees  So, if the housing unit is outside the premises of the employer, it may or may not be covered by the exemption. If it is within the 50-meter perimeter, then covered by the exemption, otherwise, it is not exempted  2001 Bar: House constructed w/in the premises of the employer and the employee is a manager. Yet to be asked (in the light of Rev. Reg. 3-98): Suppose the house is constructed outside?  Answer is YES, as long as it is within the 50-m perimeter. If not, no longer covered by the exemption  The trick of the Q is that, would your answer be the same if the employee is a rank and file employee? Remember that Rev. Reg. 3-98 applies only to managerial/supervisory employees.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 22 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 As far as rank and file EE are concerned this is the rule: Housing units covered by the exemption are those situated within the business premises of the ER. RAMO 1-87 provides 2 Conditions which are not really found or covered by RR 3-98: 1. It must be situated w/in the business premises of the employer 2. this must be given as condition of employment  If you read Rev. Reg. 3-98, it imposes no conditions. These requisites are provided only in RAMO 1-87 and these requisites apply only to rank and file EE. 

MEAL ALLOWANCE  Traditional rule is: As long as it is given within the business premises of the employer and it is justified by the Convenience of the Employer, it is tax exempt.  New Rule: Rev. Reg. 10-2000 (Meal Allowance for Overtime Work)---- It says ―it is exempt provided that the meal allowance for overtime work does not exceed 25% of the basic minimum wage‖; and it applies only to managerial/ supervisory employee because this is not provided under RAMO 1-87



FRINGE BENEFITS: (Sec. 33B)  Bar Q: Watch out for this: Compensation Income (under Sec. 32 A (1)) vs. Fringe Benefit (Sec. 33). What are the notable distinctions between the two?  The common features of these 2 is that both must be given under the ER-EE relationship  Distinction: 1. As to the tax rate-- Compensation income is subject to 5-32%; FB is subject to FT 2. Whether to be reported as part of the Gross income-- Compensation income is to be reported; FB, being subject to FT, need not be reported as part of the Gross income 3. As to the tax withheld-- Compensation income is subject to creditable withholding tax; FB is subject to FT 

Define Fringe Benefit (FB): Sec 33 has 3 paragraphs: Par A (Imposition of Tax Rates) is the most difficult one (this is only proper for CPA Board exams). You will not be asked to compute but you might be asked to enumerate those tax exempt FB  In Par. A, you must note that the tax base is the Grossed-up monetary value; the tax rate is a FT (32, 25 or 15%). Multiply the 2, and the result would be the FB tax



2000 Q#3: Who is legally obliged to pay FB tax?  It is the employer (Rev. Reg. 3-98 Sec 2.33(2)



Fringe Benefit 1) may be in cash or in kind; it may be goods, services or other benefits; 2) the giver/source must be the employer. So, the benefits are given under an ER-EE relationship; 3) Recipient must be a managerial or supervisory employee  Q: Suppose the recipient is a rank and file employee?  There's an author who is in the view that the benefits received by the rank and file employee is exempt from the income tax. Do not follow this!  Under Sec 33 C, it states ―the following FB are exempt from the tax imposed therein (1,2,3, &4). And the tax imposed on taxable FB is a FT.  The correct interpretation of this is that FB given to rank and file employee are not subject to FB Tax which is a Final tax but it does not mean that it is also exempt from the income tax. That can still be taxed as part of the gross compensation income. The FB should be reported as part of the Gross Compensation income.  Example: A managerial employee's basic salary is 75,000/month. He received housing benefit the monetary value of which is 25,000/ month. How do we tax this 75,000 representing basic salary?  Do not be confused. It does not mean that all benefits/salaries received by the managerial EE are subject to FT. Excluded from the imposition of FBT is the basic salary of the managerial EE.  If you read Sec. 33B, it is not clear on this. But Rev. Reg 3-98 clarifies it. It says other than basic salary‖. This is because basic salary is taxed as Compensation Income subject to 5-32%. It is only the housing benefit that is subject to FBT.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 23 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 Take note of this because the Q may be framed like this: are all salaries & wages received by the managerial EE subject to FBT? No, you should exclude the basic salary because it is subject to 5-32% progressive rates. 

Taxable Fringe Benefits: Sec. 33B Means any good, service or other benefit  furnished or granted by an employer  in cash or in kind, given in addition to the basic salary  of an individual employee, EXCEPT rank-and-file, such as, but not limited to the following:  Keywords: HEV HIM HEEL 1. Housing 2. Expense Account 3. Vehicle of any kind 4. Household personnel – maid, yaya, driver etc. 5. Interest on loan at less than market rate (12% benchmark rate) to the extent of the difference between the market rate and actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations 7. Holiday and Vacation expenses 8. Expenses for foreign travel 9. Educational assistance to the EE or his dependents 10. Life or Health Insurance and other non-life insurance premiums or similar amounts in excess of the law allows.  Item #5: The actual rate of interest must be less than the market rate. According to Rev. Reg. 3-98, market rate refers to 12% benchmark rate  If the actual rate of interest is not less than 12%, or 12%, or more than 12%, then there's no taxable FB  Example: Loan amounting to 300,000 granted to managerial employee. Situation that may arise: 1) If the actual rate is 14 %----then it does not result to taxable interest benefit 2) Employer imposed 12%---- still it does not result to taxable interest benefit 3) 6%--- then it is taxable interest benefit 4) 0%--- also taxable interest benefit  Rationale: Rate is peg at 12%. So, it is possible that the employer will secure loan from other sources and he may only be made to pay the legal interest rate. By lowering the rate to less than 12%, there's that benefit that will accrue to the employee

SUMMARY OF LEGAL PROVISIONS OF TAX EXEMPT FB: Under Rev. Reg. 3-98

- 3 tax exempt housing benefits 2 tax exempt educational benefit 3 tax exempt life insurance premium

RAMO 1-87

- 1 tax exempt benefit (expenses for foreign travel)

Sec 33 C

- 4 Not taxable FB

SEC. 33B

H–1

TAXABLE FB

EXEMPTIONS, if any, UNDER RR 3 – 98 1. Military Housing 2. Temporary Housing Unit ( 3 months or less stay in the premises) 3. Business premise of the ER including housing unit within 50 meters from the perimeter of the business premise.

HOUSING

KEYWORD: M T B E– 2

EXPENSE ACCOUNT

V–3

VEHICLE ANY KIND

H–4

HOUSEHOLD PERSONNEL

OF

Helicopters or aircrafts are exempted because they are considered as business expenses of the employer.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 24 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

IF the ACTUAL interest imposed is LESS THAN 12%, the same is taxable. If it is exactly or more than 12%, it is tax exempt. Ex. INTEREST LOAN

I–5

ON

Loan of P500,000 extended to a managerial employee at the rate of: a.) 14% - NOT taxable b.) 12% - NOT taxable c.) 6 % - Taxable d.) 0% - Taxable

REASON: Lowering of interest rate on loan gives benefit to the employee (they get to save). So if the actual rate is less than 12%, the FB will be taxable to the extent of the difference between the market rate and the actual rate. M–6

MEMBERSHIP BENEFIT

H–7

HOLIDAY AND VACATION EXPENSES EXEMPT IF: 1. Required by the nature of the employer’s trade, business or exercise of profession; 2. Paid or incurred in connection with the business conventions, mtgs or seminars abroad; EXPENSES FOR FOREIGN TRAVEL

E–8

3. 4.

All expenses are substantiated by receipts or documents there must be an official communication coming from the business associates abroad;

Tax treatment of the cost of airline ticket: Economy class- Exempt Business class- Exempt st 1 class tickets--- are exempted only up to 70% 5. Allowance exempt only up to $300.00 EXEMPT in 2 CASES: EDUCATIONAL BENEFIT – for the employee or his dependent

E–9

1. Scholarship grant to managerial or supervisory employees – there must be a written agreement that the employee shall remain in the employ of the employer for a certain period of time, and such a scholarship is required by the nature of the employer’s business. 2. Scholarship grant to the dependent/s of an employee – the dependent must have passed the competitive exam conducted by the employer.

LIFE or NONLIFE INSURANCE PREMIUMS

L – 10



3 Tax Exempt Life insurance Premium: a. Life insurance premium on GSIS b. Life insurance premium on SSS c. Life insurance premium on Group Insurance policy

Sec. 33 C- Fringe Benefits Not Taxable1) Fringe benefits which are authorized and exempted from tax under special laws; 2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; 3) Benefits given to the rank and file EE, whether granted under a collective bargaining agreement or not; and 4) De minimis benefits  The recent regulation is Rev. Reg. 10-2000  These refer to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting HEALTH, GOOD WILL, CONTENTMENT or EFFICIENCY of his employees.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 25 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Tax exempt de minimis benefit: REVENUE REGULATIONS 10 – 2000 ● MONETIZED VALUE OF UNUSED BENEFITS ●

QUALIFY: PRIVATE EMPLOYEES – vacation leave – exempt up to 10 days; sick leave – always taxable. GOVERNMENT EMPLOYEES – VL and SL are always tax exempt regardless of the number of days.

MEDICAL CASH BENEFIT or ALLOWANCE GIVEN TO THE DEPENDENTS OF THE EMPLOYEE

- P125.00 per month OR P725.00 per semester.

RICE SUBSIDY

- P1,000.00 per month OT 1 sack of 50kg rice per month – not more than P1,000.00

UNIFORM or CLOTHING ALLOWANCE

- NOT to exceed P3,000.00 per annum

MEDICAL BENEFIT EMPLOYEES

GRANTED

TO

LAUNDRY ALLOWANCE

- NOT to exceed P10,0000 per annum - NOT to exceed P300.00 per month

EMPLOYEE’S ACHIEVEMENT AWARD ACCT OF LENGTH OF SERVICE

ON

- must be in the form of TANGIBLE PERSONAL PROPERTY other than cash or gift certificates, NOT to exceed P10,000.00

GIFTS or DONATIONS DURING XMAS and MAJOR ANNIVERSARY CELEBRATION

- NOT to exceed P5,000.00 per employee per annum th – with respect to XMAS bonus, add the 13 month bonus to the XMAS bonus – the same must not exceed P30,000.00.

FLOWERS, FRUITS, BOOKS and SIMILAR ITEMS OF RELATIVELY SMALL VALUE:  death of a child  marriage of the E-yee  birth and birthdays

- Reasonable value – depending on the Employer’s capacity

MEAL ALLOWANCE FOR OVERTIME WORK

- NOT exceeding 25% of the Eyee’s basic minimum wage – managerial and supervisory employees.

ITEM # 2: INCOME FROM BUSINESS or TRADE or EXERCISE of PROFESSION: 

INCOME COVERED: 1.

Income derived by SELF-EMPLOYED from trade or business (trading, manufacturing, merchandising, farming and others).  SELF-EMPLOYMENT INCOME (Sec. 74) consists of the earnings derived by the individual from a) the practice of profession or b) conduct of trade or business carried on by him as a sole proprietor or c) a partnership of which he is a member.  SELF-EMPLOYED – a person engaged in trade or business or performs services for others for a fee and who derived personal income from such trade or business or from the performance of such services.

2. Income derived by PROFESSIONALS from the practice of professions  PROFESSIONALS – persons who derive their income from the practice of their profession – lawyers and other persons registered with the PRC. It may also refer to one who pursues an art and makes living there from such as artists, athletes and others who are similarly situated.  NOTE: It is not material whether they have a business license or whether they are registered or if they are self-declared. – so si Mang Kepweng taxable (joke ni Japs to) 

BUSINESS INCOME:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 26 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

FORMULA of GROSS INCOME: GROSS SALES Less:

P1,000,000.00

COST of INVESTMENT: 2. cost of sale 3. cost of goods 4. sales allowance 5. sales discount P 530,000.00

GROSS BUSINESS INCOME 

P 470,000.00

BUSINESS includes: one, which entails time, effort and activity for purposes of LIVELIHOOD and PROFIT  Q: Is income from ―illegal business‖ taxable?  A: YES, it falls under the phrase ―income from whatever source‖ – section 32A  Q: Are expenses from illegal business deductible?  A: NO. By express provision of law, only legitimate expenses are deductible  Q: Suppose Corporation A gave P100,000.00 to a customs official to process their license. Is the P100,000 taxable as income? May the corporation deduct the same as business expense?  A: The P100,000.00 is taxable and should be included in the gross income of the customs official since it is income from whatever source. However, the same is not deductible since unlawful or illegitimate expenses are not deductible items from gross income (sec. 34A)

ITEM # 3: PROPERTY INCOME- GAINS DERIVED FROM DEALINGS IN PROPERTY: 

You should know the provisions that amplify this. There are 2 Provisions: 1. Sec. 39-- in Sec. 39, there are 4 set of rules that will apply to Gain from dealings in property; 2. Sec. 40- in Sec. 40, are also 4 set of rules that will apply to Gain from dealings in property. 

So, all in all there are 8 Rules that apply to Gains from Dealings in Property or property income



Favorite Bar Q: Sec 39A (1)- Ordinary Asset vs. Capital Asset  1998 Q#10: a) Distinguish Ordinary Gain from Capital Gain; b) What is ordinary income?  2003Q#6(b)- Distinguish Ordinary Asset from Capital Asset  Q. not yet asked: 1) What is Ordinary loss?; 2) Distinguish Ordinary Gain from Ordinary loss



Classification of Assets (Sec. 39 A (1)): 1. Ordinary Asset- defined by way of enumeration. There are 4 categories of Ordinary asset ( SOUR) 2. Capital Asset- defined by way of exclusion. Meaning, other than ordinary assets. What is not included in SOUR is considered as capital asset 

S O U R: 1. Stock in trade such as inventoriable asset. These are really assets that remain in the inventory of the taxpayer at the end of the taxable year. This includes raw materials, workin process and finished goods 2. Ordinary course of business or trade. So, property primarily held for sale to customers may be ordinary if it is held in the ordinary course of business or trade  Example: A real estate dealer sold real properties. Such real properties, being held in the ordinary course of trade or business is an ordinary asset. The gain derived from such sale is treated as Ordinary income 3. Used in business- Property used in business subject to depreciation. These are really depreciable assets. If these assets are not used in trade or business, they are capital assets, and therefore the gains from such sale of assets are treated as Capital income. Ex. Furniture & Fixture, Machineries & Equipment- these are

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 27 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

really subject to depreciation, but these must be used in trade or business, otherwise it would be classified as capital asset 4. Real Property used in trade or business such as parcels of land, machineries& buildings. If these are not used in trade or business, then they are considered as Capital Assets. Real property not used in trade or business include residential house and lot 

What is not included in this enumeration is automatically considered as capital asset ORDINARY ASSETS Keyword: SOUR ●

S

Those which remain in the inventory of the TP at the end of each taxable year.

STOCK in trade or inventoriable properties

Ex. Raw materials, goods under process ● O

Properties in the ORDINARY COURSE of business

Ex. ●

U

USED in business

Primary for sale to customers in the ordinary course of business. Sale of land in a real property development business

Properties used in the business which is subject to depreciation – if they are NOT used in business then its capital asset and therefore subject to capital gain. Ex. Furniture and fixtures, machineries and equipment

R



REAL PROPERTY used in trade or business

- sale of a building or parcel of land by a real estate dealer

Q. Are all properties used in trade or business by the taxpayer considered as ordinary assets?  No. Not all properties used in trade or business are considered as ordinary asset because they are only limited to SOUR. Assets which may be held in connection with the business but not included in SOUR may be considered as Capital Asset Examples: 1. Accounts Receivable- these are held by the taxpayer in connection with the business. But since it is not included in the SOUR, the gain derived from sale of A/R is considered as Capital Income 2. Investments in Stocks 3. Sale of Goodwill- Goodwill may be sold and the gain from the sale of goodwill is a capital income



You will note that in the provision, the definition of Capital Asset includes properties whether or not held by the taxpayer in connection with the trade or business. So, you cannot apply the business test because these are really properties which are held in connection with the business of the taxpayer and yet considered as capital asset. So capital assets cover not only properties not used in trade or business. It may also include properties used or held by the taxpayer in connection with his business. This is true in the case of A/R, Investment in stocks,& Goodwill



But the definition of Ordinary Asset may refer only to properties used in trade or business. So it is safe to say that Ordinary assets are limited only to those used in connection with his trade or business and capital assets may include all properties not used in trade or business including those assets which may be used in trade or business



2003 Bar: Distinguish Ordinary Asset from Capital Asset  Answer: In ordinary asset, you cannot use the word ―includes‖ because that is not really accurate. The word ―includes‖ may be used only in defining capital asset because the enumeration of Ordinary Assets is exclusive. So, you will just say that ―Ordinary asset may refer or is just limited to the following items: SOUR  On the other hand, Capital Asset (You can now use the word include) includes properties whether or not connected in trade or business, except or other than SOUR, because capital asset is defined by way of exclusion. So, you have to exclude SOUR

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 28 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

ORDINARY ASSET Refers to and is limited to the following assets: Stocks in trade or business, properties in Ordinary course of business, those Used in business and Real property used in trade or business.



CAPITAL ASSET includes property whether or not connected with the trade or business of the TP other than Stocks in trade or business, properties in Ordinary course of business, those Used in business and Real property used in trade or business.

Q: Distinguish Ordinary Gain from Capital Gain  Answer: Ordinary gain refers to the gain derived from the sale or exchange of ordinary assets whereas capital gain may include gain derived from the sale or exchange of capital assets. To elaborate on this, you may define it in this way: Ordinary gain is a gain derived from the sale or exchange of an asset such as SOUR whereas capital gains refer to the sale or exchange of an asset whether or not used in trade or business except that of gain derived from the sale or exchange of the following asset: SOUR ORDINARY GAIN

CAPITAL GAIN

Gain derived from the sale or exchange of ordinary assets such as Stocks in trade or business, properties in Ordinary course of business, those Used in business and Real property used in trade or business.

Gain derived from the sale or exchange of capital assets OR property whether or not connected with the trade or business of the TP other than Stocks in trade or business, properties in Ordinary course of business, those Used in business and Real property used in trade or business



Q: Define Ordinary income  Refer to Sec. 22(Z). The term ―ordinary income‖ includes any gain from the sale or exchange of an ordinary asset. So, it made mention of Sec 39 A (1). Ordinary income is not only limited to that gain derived from the sale or exchange of an asset. Remember that there may other business that may be the source of this ordinary income. But if the only source of income is sale or exchange of ordinary asset, that definition may be considered as is really defined in that limited sense. Hence, you can use the word ―includes‖ because there are other sources of this income



Q: Define Ordinary Loss  This is a loss that may arise or may be sustained from the sale or exchange of an asset that is SOUR



Q: Distinguish Ordinary income from Ordinary loss  Answer: Ordinary income refers to the income that may be derived from the sale of an asset SOUR. On the other hand, Ordinary loss is one that may be incurred from the sale or exchange of an asset considered SOUR





ORDINARY INCOME

ORDINARY LOSS

Includes the gain derived from the sale or exchange of ordinary asset

Loss which may be sustained from the sale or exchange of an ordinary asset.

Q: Capital Gain vs Capital Loss  Answer: Capital gain may include gain derived from the sale or exchange of an asset whether or not connected in trade or business except SOUR. On the other hand, Capital loss is one that may be incurred from the sale or exchange of an asset whether or not used in the ordinary trade or business except SOUR CAPITAL GAIN

CAPITAL LOSS

Includes the gain derived from the sale or exchange of an asset, WON connected with T or B, except SOUR

Loss which may be sustained from the sale or exchange of an asset, WON connected with T or B, except SOUR

Q: If an asset is considered ordinary, can it be converted to Capital Asset?  Answer: there's no really rule that says Ordinary asset is always an Ordinary asset. There's no rule to that effect because there are exceptional case that Ordinary asset may become capital asset. Conversely, there's no such rule that say that Capital Asset is always a Capital asset. Capital Asset, also under certain situation may be converted to Ordinary Asset

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 29 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



2 important cases:  TUASON vs LINGAT Jr. – 58 SCRA 170  CALASANZ vs CIR – 144 SCRA 664  these are the cases decided by the SC laying down the criteria /test on when Ordinary asset may become Capital Asset and vice-versa 

TUASON vs LINGAT Jr., 58 SCRA 170: In this case, the SC mentioned 7 circumstances that may convert a Capital Asset to Ordinary Asset: 1. Area of the property 2. Whether the property or land is divided into lots 3. The improvements introduced must be valuable 4. Whether the lots are for sale 5. If for sale, if they are for sale on installments 6. If a broker was employed to manage or administer the sale 7. If the seller is engaged in the real estate business  All of these circumstances were present in this case. It turned out that the seller was really in the real estate business; the property (78 h) was originally classified as Capital asset; it was subdivided into lots; improved; sold in installment; and the seller derived substantial income from such sale  Q: What is really the importance in knowing whether the asset is OA or a CA?  Bear in mind that capital transaction is accorded preferential tax treatment (i.e. reduced tax rate). Under Sec. 39 B, this holding period rule which reduces the taxable capital gains by 50% only applies to capital transactions. This is a form of tax avoidance. If you sell a capital asset, try to recall this provision. Don't sell it w/in the 12 month period because if the sale is w/in that 12 month period, the gain is 100% taxable. The tax avoidance scheme is that you sell after the lapse of the said holding period because the gain is taxable only up to 50%. You cannot apply this rule to sale of OA. This is what the taxpayer is alleging in this case, that the asset is a CA so as to avail of the reduced tax rate  OA Converted to CA:  Situation: A real estate dealer, business is buying and selling of real property. So, this is considered as OA. When will this OA become CA? What happened?  The real estate dealer died. Upon the death, this property is transmitted to the heirs under the law on Succession. The heirs now are in possession of the property.  Answer: It really depends upon the circumstances: 1) If the heirs will continue the business, these properties will remain as OA. 2) If the heirs will not continue the business, then these properties will now be converted to CA, so that if the heirs sell these properties, the gain is considered as Capital Gain



CALASANZ vs CIR, 144 SCRA 664: In this case, the SC cited the circumstance ―substantial or extensive improvements‖. How do you improve a parcel of land? You subdivide it; construction of concrete gutters (?); mapping; installation of lighting systems and drainage facilities. These are substantial improvements according to the SC. The SC in this case mentioned that it may become an Ordinary asset if the cost of the improvement is twice the cost of the property. In this case, the cost of the property is 4, 742.66; the cost of the improvement is 170,028.60, more than twice the cost of the property.  there is really no fixed rule or formula that will determine whether an OA will be converted to CA or vice versa. Consider these circumstances. These are really the criteria or tests  3 Rules that apply only to Capital Transactions: (Sec. 39 B, C, D) 1. Holding Period Rule (HPR) (Sec. 39 B) 2. Capital loss limitation (CLL) (Sec. 39 C) 3. NELCO- Net Capital Loss Carry Over (Sec. 39 D)  2001 Bar- Q. on the Distinction between NELCO (Sec. 39 D) and NOLCO (Sec. 34 D(3))  NELCO- Net Capital Loss Carry Over  NOLCO- Net Operating Loss Carry Over  3 Notable Distinctions: a. NELCO arises from capital transactions (meaning, involving capital assets); NOLCO arises from Ordinary transaction (may involved ordinary asset)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 30 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b. Sec. 39 D Categorically says‖ other than corporate‖, So NELCO can only be availed of by individual taxpayer. Under NOLCO (Sec. 34 D(3)), there's no similar provision. Sec. 34 D(3) admits of no distinction, so individual and corporate taxpayer may avail of this NOLCO. c. NELCO may be carried over only in the next succeeding taxable year. On the other hand, NOLCO allows carry over of operating loss in 3 succeeding taxable years or in the case of mining companies, 5 years.  If you will be asked, Define tax avoidance? Distinguish the same from tax evasion. 1996 Bar: there's a follow up Q. Give examples of tax avoidance. You can cite these as examples  Holding period rule - this implies that the asset sold has been held by the taxpayer for a period of more than 12 months; if the sale took place after the lapse of the said 12-month period, then the gain is taxable only up to 50%.  Will this rule apply to Ordinary assets?  No, the gain from the sale of OA is always 100% taxable. The gain derived from the sale of OA is 100% taxable, immaterial of the holding period. This 50% reduced tax rate can only be availed by individual taxpayer.  Q: An individual taxpayer, Mr. A, sold his property considered as CA. He derived a gain amounting to 150,000. The property has been held for 2 yrs. from the date of purchase.  Q#1: What is the tax treatment on the 150,000 capital gain?  Only 50% (70,000) is taxable  Q.#2: What if the seller is a corporation?  The whole amount (150,000) is taxable. Sec 39D says that ―other than Corporate taxpayers‖, that means that 100% taxable if capital gains is derived by Corporate TP 

―Capital Loss is deductible to the extent of Capital Gain‖  this means that you can only deduct capital loss from capital gain. If there's no capital gain, no deduction is allowed. The deductibility of Capital loss is dependent upon the existence of Capital Gain. Since you can only deduct capital loss from capital gain, then you cannot deduct capital loss from Ordinary gain. To allow such is to violate this rule (Sec. 39 C)



2003 Bar- the rationale behind the prohibition that capital loss cannot be deducted from Ordinary Gain  Answer: Under Sec. 34, there's a rule on matching cost against revenue. This principle states that ―Only ordinary and necessary expenses (business connected expenses) are deductible from Gross income or Ordinary income. These non-business connected expenses cannot be considered as deductible items. Capital loss is non-business connected expenses as it arises or can be sustained only from capital transactions. If we allow capital loss as a deduction from ordinary income, it will violate this rule that only ordinary and necessary expenses are deductible from Gross income as required by the Principle of Matching cost against revenues

SUMMARY: CAPITAL TRANSACTIONS – 3 special rules Sec. 39 B, C and D

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 31 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

TAXABLE CAPITAL GAINS:  100% subject to tax if capital asset sold after being held by the TP for a period of not more than 12 months. RULE 1: HOLDING PERIOD RULE – Sec. 39B - applies only to INDIVIDUAL TP

RULE 2: CAPITAL LOSS LIMITATION – Sec. 39C  applies to INDIVIDUAL and CORPORATE taxpayers except, in the latter’s case, – banks and trust companies.



50% if holding period is more than 12 months NOTE: Gain from ORDINARY ASSETS is always taxable regardless of the holding period. Ex. Individual TP sold a car which is not used in business for P100,000 Tax treatment:  If the car was NOT held for more than 12 months the whole of P100k is taxable.  If the car was held over 12 months, only P50k is taxable RULES: ● Ordinary loss is deductible to the extent of ordinary gain ● Capital loss is deductible from capital gain ● Capital loss IS NOT deductible from ordinary gain Q: Reason why capital loss is NOT deductible from ordinary gain? A: Sec. 34 (Allowable Deductions) follow the principle of matching of cost against revenue. Only ordinary and necessary expenses are deductible from ordinary income. Capital loss is a non-business loss; if we deduct it from ordinary income then it would be violative of the principle. Q: Can you deduct ordinary loss from capital gain? A: YES, the NIRC provides no prohibition against it.



When capital loss is more than capital gain: Capital gain Capital loss Net capital loss

RULE 3: NET CAPITAL LOSS CARRY OVER – Sec. 39 D  applies only to INDIVIDUAL TP

GR:

P 50,000.00 P100,000.00 P50,000.00 – may be carried over to the succeeding taxable year BUT the loss must not be more than the net income for the year it was incurred.

Expenses which includes losses may not be carried over to the succeeding taxable year.

XPN: NET CAPITAL LOSS CARRY OVER – such loss (in an amount not in excess of the net income of such year) shall be treated in the succeeding taxable year as a LOSS from sale or exchange of capital assets held for not more than 12 months. NET CAPITAL LOSS CARRY OVER (Sec. 39D)

NET OPERATING LOSS CARRY OVER (Sec. 34D(3))

- Arises from capital transactions which necessarily involves capital assets

- arises from ordinary transactions which necessarily involves ordinary assets

-―other than corporate TP‖ – Hence, available only to INDIVIDUAL TP

- may be availed of by BOTH individual and corporate TP

- may be carried over to the succeeding taxable year (1year only)

- Allows carry over of operating loss for 3 succeeding years, 5 years for mining companies



Rules to be remembered: 1. it is settled that OL is deductible for OG 2. It is also allowed to deduct CL form CG (Sec. 39 C)  Justice Vitug asked this Q: Can you deduct OL from CG?  His opinion is that the tax code provides no prohibition. The prohibition only applies to the deductibility of CL from OG, as the rule says ―CL is deductible only from CG‖. But the tax code, Justice Vitug emphasized, provides no prohibition in deducting OL from CG, therefore, it is allowed. 3. in the case of Capital Loss Limitation- it applies to both individual and corporate taxpayer, except trust companies and banking institutions 4. NELCO- this only applies to individual taxpayers. Sec. 39 B says ―other than corporate taxpayer‖. So, corporate taxpayers are not allowed to carry over Net capital losses.  The term Net Capital Loss is defined in Sec. 39A (3). It says ―it is the excess of Capital Losses over Capital Gains‖. It means that Capital Loss is more than Capital Gain

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 32 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



Example: CG - 150,000 CL - 200,000  It says there can only be Net Capital Loss if the CL is more than the CG. In this case therefore, Net Capital Loss is 50,000. This is the one that may be carried over as a deduction in the CG of the succeeding taxable year.

 Net Capital Gain-- excess of the CG over the CL. Just the opposite of Net Capital Loss  The general Rule is that expenses must be paid and be claimed in the year the same is paid or incurred. You cannot, as a rule, carry over an expense.  Exception: Sec. 34-- Net Operating Losses- these can be carried over as a deduction from the GI in the next succeeding taxable year. Thus when we speak of Capital Transactions, this is the Exception, Sec. 39 (D)--Net Capital Loss can be carried over as a deduction from the CG in the succeeding taxable year 

SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET:  Sec. 27 D(5): A final tax is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/ or buildings which are not actually used in the business of a corporation and are treated as capital assets based on the GROSS SELLING PRICE or FMV, whichever is higher, of such lands and/or buildings. 

Sec. 24 D: X X X a final tax is hereby imposed upon capital gains presumed to have been realized on the sale, exchange or disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales X X X



Favorite Bar Q: Sec. 24 D; compare this to 27 D (5)  Sec. 24 D applies to individual taxpayer while Sec. 27 D (5) applies to Domestic Corporation  It is 27 D (5) that is yet to be asked in the Bar. Sec. 24 D was asked 3x already  These 2 provisions pertain to sale, exchange or other disposition of Real property classified as Capital Asset. This is the transaction contemplated therein. Try to compare these 2. It will help you establish distinctions between these 2.  The tax rate is the same---6%. The tax base is likewise the same—it is the higher amount between the Gross Selling Price and Zonal Value.  These are the distinctions: (24 D vs. 27 D(5)) A) As to the taxpayer---Sec 24 D applies to individual taxpayers; Sec 27 D(5) applies to Domestic Corporation; B) In 24 D, it says Real Property. However the Real Property in 27 D(5) covers only land and building. In 24 D, it says Real Property while in 27 D (5), it is very specific that it covers only land and building.  You must have learned in Civil law that under certain conditions, (Art. 415 (5)), machinery may be considered as R/P. But since 27 D(5) limits this to land and building, this machinery which may be considered under 24 D as R/P, may not be covered.  You have to refer to the definition of R/P for purposes of R/P tax. We can adopt Art. 415(5) and this has been cited by the SC in several cases, since there is really no clear definition of R/P under the Tax Code. By analogy, we can apply the definition under the Civil Code; in fact under RA 7160 Sec. 99(M), it incorporates Machinery. C) Another point of distinction-- in Sec 24 D(2), there is tax avoidance scheme, whereas Sec. 27 D(5) provides no tax avoidance scheme. In other words, Domestic corporations cannot legally avoid the payment of Capital Gains Tax on the Sale of Real Property classified as Capital Asset involving land and building.  We have extensively discussed the meaning of Capital Assets [C/A]. Take note that this applies to R/P (Expressio Unius Est Exclusio Alterius), so this does not include those considered as Ordinary Assets Real Property used in trade or business. So here in Sec 27D(5), it must be land and building not used in trade or business, that's why it is considered as Capital Asset.  Let us emphasize these additional requisites as provided for in RR 17-2003. This was mentioned in your book:  This 6% Capital Gains Tax can be legally avoided if the following requisites are present: 1. The proceeds of the sale of Principal Residence must be applied either to construct or purchase new principal residence. It is very clear in

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 33 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2.

3.

4. 5.

6.

Sec.24 D (2) that the same must involve Principal Residence (So, it only applies to sale of principal residence). Principal residence may include also the land which it is built as clarified in Rev. Reg. 30-99)  The trick of the problem is that: Suppose what was sold was not in the nature of Principal Residence. Then this tax avoidance scheme will not apply. It must be a sale of Principal Residence. We may call it ―own principal residence‖; then Observe the 30 day notice to the BIR. That means that w/in 30 days from the date of sale, you should notify the BIR for their recognition of this tax avoidance scheme. The ―date of sale‖ as construed under Rev. Reg. 17-2003 refers to the date when the deed of sale was notarized--It is the date of the Notarization of the Deed of Sale; Comply with the 18-month period. How do you comply with this?  Within 18 months from the date of sale, the construction or purchase of this residence must be made. So, the construction of new principal residence or the purchase of the new principal residence must be made w/in 18 months from the date the sale was notarized There's another limitation, the 10 year period. This can be availed of only once every 10 years. Under this Rev. Reg., the 6% capital Gains Tax must be deposited under an escrow account with the authorized agent bank.  You must be familiar with the term escrow because it is in the Corporation Law---shares held in escrow.  Here, the purpose is to ensure compliance with the requisites. Under this escrow agreement, there are certain limitations set by the authorized revenue district officer to the effect that if the seller can comply with these requisites, then the seller can ask for the withdrawal of the same.  After the execution of escrow agreement, it is required under Reg. 17-2003 that the seller and the buyer should file joint tax return with respect to this 6% Capital Gains Tax so as to comply with the filing of the so called ITR of this 6% Capital Gains tax there is another rule under RR 17-2003: within 30 days after the lapse of th the 18 month period, the seller should submit documents showing that he has complied with these requisites. That he used the proceeds to construct or purchase new principal residence. If there's no compliance th from the lapse of the 18 month period, RR 17-2003 says that ―the seller is considered as a delinquent taxpayer as far as non-compliance of this provision is concerned‖. And he can be charged with appropriate penalty. This is cited in your book, and the 30 day period from the lapse th of 18 month period really applies to the submission of certain documents showing compliance to this regulation.

 So if this will be asked again, you should state these new requisites and the execution of escrow agreement among the buyer, seller, RDO and authorized agent bank.  So far, we have mentioned 3 tax avoidance scheme: 1. I mentioned that Sec. 39 B- the holding period rule- is really a tax avoidance scheme because it reduces your taxable gain by 50%, and the permissible method to reduce the same is to sell the Capital Asset after 12 months from the date of purchase; 2. We also discussed Sec 40 C(2). What is that tax avoidance scheme or legally permissible means?  The exchange of properties, shares of stocks or securities must be made in accordance with the plan of Merger or Consolidation (M or C) 3. And this is the third. If you want to avoid the effect of the 6% Capital Gains Tax, comply with the requisites laid down under Sec. 24 D(2) D) Another distinction between Sec 24 D and Sec. 27 D(5) is when the buyer is the Gov't , political subdivision of the state, agency, instrumentality or GOCC.  You will note that under Sec 24 D, the seller has the option. There's that option granted by law for the seller (that is, individual taxpayers only) either to avail of the 6% Capital Gains Tax or the progressive tax rate of 5-32% under Sec. 24A.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 34 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

It is unfortunate that the BIR has yet to issue a Regulation to this effect. In applying the 6%, there's no doubt that the basis is either the SP or Zonal Value, whichever is higher. The cost is nondeductible. If you apply Sec. 24A, you will note that the tax rates are higher; and the very purpose here is for the seller to avail of the reduced rate. So, is the cost deductible under Sec. 24 A?  If you read Sec. 24A which provides progressive rates, the tax base is taxable income. So an opinion must be expressed that since the purpose of the law is to make the seller to avail of the reduced tax rate, he must be entitled to deduct the cost.  On the other hand, under Sec. 27D (5), there's no option given to Domestic Corporation if the buyer is the Govt, political subdivision of the state, agency, instrumentality or GOCC.

SUMMARY: CAPITAL GAINS TAX – 6% FINAL TAX Applicability

Applies to real property classified as capital asset

Tax Base

GSP or the Zonal value of the property, whichever is higher ● ● ●

BIR ruling includes:

Exchange of property and other dispositions such as: assignment of real rights over real property pacto de retro sale conditional sale subject to a suspensive condition

If the buyer is the GOVERNMENT – option of the seller to apply the tax rates under 6% capital gains tax as provided in Sec. 24D of the NIRC or the progressive tax rates under Sec. 24A

NOT applicable to corporate TP

Avoidance of 6% CGT

- In cases of sale or exchange of principal residential house of the individual TP – see the requirements for the tax avoidance.

CG Tax of 6% under Sec. 24D

CG Tax of 6% under Sec. 27A 5

- a TAX AVOIDANCE SCHEME for individual TP– sec. 24D 2

- Corporate TP cannot avail of any tax avoidance scheme

- applicable to individual taxpayers

- applicable only to Domestic Corporations

- applicable to all real property classified as capital asset

- only to land and building

- OPTION of the tax rate applicable in case the government is the buyer – 5-32% or CGtax of 6%

- no such option available



PRESUMED GAIN:  There is a term you should remember under Sec. 24 D & Sec. 27 D(5). The word there is ―presumed gains‖. The CG Tax of 6% shall be imposed on the presumed gains.  2001 Q: A doctor by profession acquired a parcel of land in 1990 for 1 Million. He sold the same in 2000 at 800,000. It would appear that he had incurred an actual loss in the amount of 200,000 because he received the SP amounting to 800,000 (the problem did not state the Zonal Value so, we considered this as the basis) and he previously acquired it at 1 Million, so he incurred an actual loss of 200,000. The doctor argued that he should not be made to pay the tax because he derived no gain, in fact he incurred a loss. Is the contention of the doctor/seller tenable?  The problem may be answered by these provisions:  NO. Because the cost is a nondeductible item. If you are an ordinary citizen/taxpayer, you will surely argue that how can I be made to pay the tax if I derived no gain and more so I incurred a loss? Not all taxpayers are aware of this Sec.24 D which fixed the tax base at GSP or Zonal value, whichever is higher. The cost is nondeductible. The contention of the doctor is not tenable because the basis of the 6% CG tax is the amount received (the GSP

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 35 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

which is presumed in this problem to be higher than the Zonal Value), so the cost is disregarded. 

Q#1. Can a taxpayer-seller be made to pay tax even if he derived no gain, for instance: GSP (higher than the Zonal Value) 800,000 Cost 800,000 Gain - 0 Answer: Even if he derived no gain, since the basis is the higher between the GSP and Zonal Value, he can be made to pay the 6% CG tax



Q#2: Is there a situation wherein a seller can be made to pay a tax even if he incurred a loss from such transaction?  YES. He really incurred an actual loss of 200,000 but he is still required to pay the 6% CG tax because the cost is not allowed to be deducted (Actual Bar Question in 2001)  Note under Sec. 24 D the meaning of ―other dispositions‖. Sec. 24D says‖ sale or exchange‖ (sale is defined in Art. 1458 NCC, and exchange or barter in Art.1638), and then, ―other dispositions‖. If you read the subsequent provision, this covers also conditional sale such as pacto de retro sale.



Q#3: Would your answer be the same if the seller is a Domestic Corporation?  Recall Sec 27 D(5)---that's the 6% CG tax. Sec. 28 A applies to RFC while Sec 28 B applies to NRFC  So, there is really no provision mentioned about this 6% CG tax in Sec. 28 (A & B), as this 6% CGTax is a rule on corporate income tax that applies solely to Domestic Corporations  This is a capital transaction which is not covered by the rules w/c we discussed under Sec 39 (B, C, D)



Q: What are the capital transactions not covered by the Rules under Sec 39 B, C & D (Holding period, Capital loss limitation & NELCO)  Answer: 1. Capital transaction involving the sale of Real Property (of course, this must be a Capital Asset): this is subject to 6% CG Tax based on the higher between the GSP and the Zonal Value. So, Sec. 39 ( B, C, D) does not apply to all capital transactions 2. Another can be found in 4 Sections (Secs 24, 25, 27, & 28): this means that this is a rule that applicable to both individual and corporate taxpayer.  If you will be asked: Is there a common rule that can be applied to both individual and corporate taxpayer?  YES. It is a capital gain (which is really a capital transaction) derived from the sale of shares of stock NOT listed and traded through local stock exchange. The tax rates are 5% & 10% Net CG not exceeding 100,000 - 5% In excess of 100,000- 10%



Q: Suppose the shares of stocks are listed and traded through the local stock exchange, will your answer be the same?  The examiner should not ask this Q because this is excluded from the coverage as this is really a percentage tax. You can find in Title V Sec. 127: if the shares of stocks are listed and traded through LSE, the tax applicable is not an income tax (that's why the examiner should not ask this Q) but a percentage tax, ½ of 1 % of the GSP. But you must still answer the same even if the examiner inadvertently overlooks the coverage as we will recommend that the Q be a bonus one.  Thus, these are the 2 capital transactions not covered by the Rules under Sec. 39 (B, C, & D)

ITEM # 4: INTEREST INCOME:  If a Q will be asked on Interest income, it would be on whether it is taxable or tax exempt.  There are only 5 items under the tax code w/c are exempt from income tax as far as interest income is concerned: 1. Interest income from bank deposit;  The recipient must be any of the following tax exempt recipients: a. Foreign Government; b. Financial institutions (FI) controlled or financed by foreign govt c. Regional or Int'l FI established by foreign govt 2. Interest income on loan extended by any of these 3

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 36 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

3. Interest income on Bonds, Debentures and other certificate of indebtedness received by any of these 3.  The first 3 you'll find in Sec. 32 B (7, a) 4. This has been the subject of amendment by RA 8424. It is an interest income on bond deposit maintained under the expanded foreign currency deposit system. The rule has been changed.  Under the old tax code- irrespective of the recipient of this deposit---TAX EXEMPT  Under the present tax code (as amended by RA 8424) -- it is only tax exempt if the recipient is a NONRESIDENT taxpayer whether individual or corporate. Thus, if the depositor (the recipient of this deposit maintained under the expanded foreign currency deposit system) is a resident taxpayer, it is subject to 7.5 % FT.  Under the old tax code, tax exempt; Now, 7.5% 5. Interest income from long term investment or deposit. You'll find the meaning of this under Sec 22 F. It is regulated by the BSP & the term is 5 yrs. or more. If less than 5 yrs this is subject to the diminishing rates. 

If we refer to Sec. 24 & 25, you'll find therein a provision exempting interest income from long-term deposit from income tax. Is this found in Sec. 27 & 28?  Note that Secs. 24&25 apply to individual taxpayers while Secs. 27& 28 apply to corporate taxpayers. There is really no similar provision that you'll find in 27 & 28. So, the exemption therefore, applies only to individual taxpayers; it does not apply to corporate taxpayer



Q: What is this interest Income that is subject to Final Tax?  It must be an interest income on bank deposit. If it is an interest income on loans, assuming it is not tax exempt, then such interest income is subject to regular income tax, whether the deposit is Philippine or Foreign Currency Deposit. This is also one of the amendments introduced by RA 8424.  Before, it only applies to Philippine Currency. Now, the law makes no distinction, bank deposit whether Phil. Deposit or not, is subject to Final tax.



Hypothetical Q: a taxpayer derived income from a loan that he extended to a certain person. He has also interest income from his bank deposit. Q#1. As regards his interest on loan, what is the tax treatment?  Subject to regular income tax since it is not subject to exemption. Q#2: As regards interest on bank deposit?  It is subject to Final Tax The tax treatment here is that interest income from loans must be reported as part of his gross income but the interest on bank deposit, since it is subject to FT, need not be reported as part of the Gross income.

 



Regarding interest income on Gov't Securities, don't be misled. Under Sec. 32B, that item was deleted. There is no item under 32 B regarding interest income on Gov't securities. That's why it is not included in the exemptions. Interest income on Govt securities, effective Jan. 1, 1998, is already taxable. This is no longer tax exempt as the item was deleted from the enumeration on the exclusion from Gross income.

SUMMARY:

INTEREST

TAX EXEMPT

INTEREST FROM BANK DEPOSITS – Sec. 32 B – 7(a) INTEREST ON LOANS EXTENDED BY INTEREST INCOME ON BONDS or OTHER CERTIFICATES OF INDEBTEDNESS ISSUED IN FAVOR OF: INTEREST INCOME ON BANK DEPOSITS MADE UNDER THE EXPANDED FX CURRENCY DEPOSIT

1. 2.

Foreign Governments Financial Institutions controlled or financed by FX govts, Regional or international FI established by FX

- The recipient must be a by a NRTP – NRA or NRFC - If by a resident, its subject to 7.5% FINAL TAX

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 37 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

INTEREST INCOME from long-term deposit or investment Sec. 22F – term of 5 years or more made in pursuance of CB regulations and in denominations of P10,000 or more



- only INDIVIDUAL TPs are exempted

NOTE: As of January 1, 1998 INTEREST on GOVERNMENT SECURITIES are no longer tax exempt.

ITEM # 5: RENT INCOME:   

Fixed sum either in cash or property equivalent, to be paid at a definite period for the use or enjoyment of a thing or a right. SCOPE – ALL rentals derived from lease of property, whether used in business or not, from real estate or personal property; earnings from copyrights, trademarks, patents and natural resources under lease. Q: What is the difference in terms of tax treatment between Rent Income and Royalties

AS TO REPORTING AS TO TAX RATE

RENT

ROYALTY

- must be reported as part of gross income

need not be reported since subject to FINAL TAX

- regular progressive rate of 5-35%

FINAL TAX



2002Q#3: This is a Q designed by the examiner to test the knowledge of the examinees regarding the difference between Royalties & Compensation Income.  Q: UKV-UK entered into a licensing agreement with UKV-Phils. UKV-UK authorized UKV-Phils. to distribute computer software in the Philippines. UKV-Phils., thereafter entered into a licensing agreement with a bank in the Phils. In the contract, it was categorically stated that the licensing agreement entered into by UKV-Phils and the bank did not involve the transfer of proprietary rights over the assets. Thereafter, Royalty was paid by UKV-Phils. to UKV-UK. How do you treat these payments made by the banks to UKV-Phils? Is it in the form of Royalty or compensation for the services rendered?  The key here is, since it does not involve the transfer of proprietary rights when UKV-Phils. Entered into a licensing agreement, and it rendered technical services to the bank, then that partakes the nature of compensation for services rendered. It is therefore subject to regular or normal tax. (if this is in the nature of royalty, it is subject to FT.) (Jap’s answer is different from the suggested answer of the UPLC)  Modification: Is the payment be subjected to FT? If not, then why? (the words ―if not ― is a guide that pag hindi subject to FT, what would then be the appropriate treatment?)  So, it should be treated as compensation for services rendered because it rendered technical services to the bank although there's a licensing agreement, because it is authorized by UKV-UK.  If there was really no transfer of proprietary rights, that may be treated as compensation for services rendered, otherwise (that is, there was transfer of proprietary rights), that may be treated as Royalty.



ADDITIONAL RENT INCOME:  Rev. Reg # 2 Sec. 49 provide Rules not found in Title II which states that: Rent Income is not only limited to the ordinary rent but also to additional rent income.  There is no rule under Title II regarding Additional Income. What you can find in Sec. 32A(5) is only ordinary income. Additional Rent Income may be grouped into 2 according to Rev. Reg. #2 Sec. 49: rd

1. Obligations of lessors to 3 parties assumed by the lessee:  real estate taxes on the leased premises  insurance premiums paid by lessee  dividends paid by lessee to SH of lessor – corporation  interest paid by lessee to holder of bonds issued by lessor-corporation; 2.

Value of permanent improvements made by the lessee on leased property that will become the property of the lessor upon the expiration of the lease.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 38 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



VALUE OF PERMANENT IMPROVEMENT: A permanent improvement may arise in long term contract of lease. Under the long term contract of lease, which is usually 10-30 yrs., the lessee can introduce improvements, such as building on the property. As far as taxation is concerned, the value of the property may be taxed as additional rent income. Under Rev. Reg #2 Sec. 49, it may be reported under either of the 2 recognized methods: a. Spread-out method; and b. Outright method



There will be no computation. You will only be asked to state the methods which this value of permanent improvement may be reported as additional rent income. In legal ethics, if you will be asked to draft Long term contract of lease, you should not forget, say it is for the period of 30 years, to incorporate the usual stipulation that the lessee can introduce improvements on the premises and upon the expiration of the LT contract of lease, the ownership of such improvements on the premises shall be transferred to the lessor.





In Outright method--- it is the FV of the permanent improvement upon its completion that should be reported as additional rent income during the taxable year it was completed



In Spread-out method--- (the technical term to be remembered as to what should be spread-out is ―depreciated Value‖. It is the depreciated value of the permanent improvement upon the expiration of the contract of lease. You have to consider the depreciated value of the permanent improvement upon the expiration of the contract and divide it by the remaining term of the contract of lease. Every year, an aliquot part of the depreciated value should be reported as additional rent income in addition to the regular rent income.



Ex. Term of the Contract of lease is 30 years. In the 5 year, a building is constructed with a value of 25M; the remaining term of the lease therefore is 25 years. Every year, 1M is to be reported as additional rent income (25M / 25 yrs.) This 1M is the aliquot part of the 25M. You need not state the amount in your answer. As long as you can explain that an aliquot part of the depreciated value of the improvement should be reported.

th

► ADVANCE RENTALS: - if there is material benefit to the lessor, it is taxable 1. Prepaid Rentals- taxable if so received under a claim of right and without restrictions as to its use 2. Security deposit--- generally not taxable; it is only taxable if the lessee violates any provision of the contract and lessor forfeits the deposit 3. Loan- not taxable ITEM # 7: DIVIDEND INCOME: 

There are 8 provisions under Title II that deal with Dividend Income: 1) Sec. 24 B (2)--- RC, NRC & RA are subject to 10% FT on dividends received from Domestic Corporation effective year 2000; 2) Sec. 25 A (2) --- covers NRA-ETB. Tax is 20% FT on the dividends received from Domestic Corporation; 3) Sec. 25 B--- NRA-NETB. Tax is 25% FT on the dividends received from Domestic Corporation; 4) Sec. 27 D(4)--- Dividend received by a Domestic Corporation from another Domestic Corporation. It is tax exempt; 5) Sec. 28 A (7, d) --- 2005 Bar--- Recipient is RFC. Is that Taxable? No. it is tax exempt; 6) Sec. 28 B (5, b) --- received by NRFC. This is subject to 15% FT and this is subject to tax credit system; 7) Sec. 42 A (2) --- the source is a FC. In the first 6 provisions, the source is DC; Q: the giver is a FC, what is the tax treatment? Answer: It is an income derived from sources w/in if: a) the Gross Philippine Income of this FC in the last 3 preceding taxable years is at least 50% of its foreign income (income w/o). if it is less than 50%, that's not an income derived from sources w/in, so not taxable;

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 39 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

8) Sec. 73 B--- It provides that stock dividend is not subject to tax. because it is just a transfer from the surplus to the capital account.

It is not subject to tax

SUMMARY:

TAX RULES ON DIVIDEND INCOME GIVER of DIVIDEND

RECIPIENT

BASIS

TAX TREATMENT

DC

RC NRC RA

Sec. 24B – 2

10% FINAL TAX

DC

NRA – ETB

Sec. 25A – 2

20% FINAL TAX

DC

NRA – NETB

Sec. 25B

25% FINAL TAX

DC

DC

Sec. 27D – 4

Tax exempt

DC

RFC

Sec. 28A – 7(d)

Tax exempt

DC

NRFC

Sec. 28B – 5(b)

15% FINAL TAX – subject to the tax credit system for corporate income tax INCOME FROM WITHIN IS TAXABLE IF: ➢

FC

STOCK DIVIDENDS

Individual or corporate TP

Sec. 42A – 2

Sec. 73B

If the income from within is AT LEAST 50% of its income from without. Otherwise it’s not taxable.

GENERALLY TAX EXEMPT



TAXABLE GAIN AND DEDUCTIBLE LOSS:  Sec. 40 has 3 paragraphs: Par. A) provides the basic rules on taxable gain and deductible loss; B) Provides the rules on the determination of the cost or adjusted basis thereof; and C) States 2 Rules: 1. ―NO GAIN, NO LOSS‖ which means that if the gain is not taxable, the loss is not deductible 2. ―GAIN RECOGNIZED, LOSS NOT RECOGNIZED‖



Q: When you sell property how do you know whether you derive gain from such sale or exchange or you incur losses from such sale or exchange of an asset or capital?  The Rules are basic, there's taxable gain if the amount received or realized is more than the cost or adjusted basis.  Example: You sold your property; the selling price (that's the amount you received) is 500,000. This 500,000 is not the taxable gain. You are allowed under Sec. 42B to deduct the cost or adjusted basis. Say for example, you acquired it at 300,000. It is really the difference between the Selling Price and the cost. So, the taxable gain is 200,000.  Is there an exception to this rule, that as a rule the cost is deductible from the amount received or realized?  YES. It is clear in Sec. 24 B (1) that the basis of the tax rate of 6% Capital Gains tax is the higher amount between the Gross Selling Price and the Zonal Value.  Thus if you will be asked: It is the general rule that cost or adjusted basis is deductible from the Selling Price, is there an exception to this Rule? YES. What is that Sale? It is a sale of capital asset, and that must be real property. It is a sale of capital asset classified as real property.  The general rule is, If there is a loss, that is, the amount received or realized is less than the cost or adjusted basis, such loss is deductible. That means that, for example, the Selling Price (the amount received or realized) is 300,000. This property was previously acquired for 400,000, there's a loss of 100,000. As a rule this is deductible. Exception to this is Sec. 24B (1).

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 40 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



BASIS FOR DETERMINING GAIN or LOSS FROM SALE OR DISPOSITION OF PROPERTY:  It is really important to know the cost or adjusted basis because this will help you determine whether or not you incur gain or loss. What are the Rules on this? It depends upon the Mode of acquisition or purchase of such property.  Sec. 40 B enumerated all the possible modes of acquiring property MODES: 1. Purchase 2. Succession or inheritance 3. Donation 4. Acquired through insufficient or inadequate consideration 5. Property or shares of stocks acquired through the so called tax exempt transactions  

If the property is acquired under the above modes, we call that ―NO GAIN, NO LOSS‖ transaction The last 2 modes are the technical ones.  You sold property for 500,000; property was previously acquired through purchase.  The basis therefore is the purchase price. Thus, if the Purchase price is 300,000, deduct it from 500,000. The gain therefore, is 200,000  #2: the law says, it is the FMV of the property at the time of acquisition. What does that mean?  In the law of succession, when the property was acquired through inheritance, the right accrues upon the death of the decedent/testator. For purposes of determining the amount refer to Sec. 88. How would you know the FMV of the property transmitted through succession? Sec 88 says‖ it depends upon the nature of property, whether real or personal‖.  Correlate. The exam will not ask you to compute. Just remember: the basis is the FMV at the time of death of the decedent that is the date of acquisition. If you sold property acquired through inheritance, selling price is 500,000. What must be the cost or adjusted basis?  To answer this, determine how you acquire this property which you sold for 500,000. you acquired it through inheritance. And since Sec. 40 B(2) says the cost or the adjusted basis is the FMV of the property. Then it is a matter of referring to the date of property to determine the FMV. The schedule of FMV of the property is usually supplied by the executor or administrator. So, if according to the Schedule of FMV of property, the FMV at the time of death is 400,000 (date of death is very material). The gain derived would be 100,000  #3: The tax Code provides all the possible mode of acquiring properties. It is possible that the property was acquired through Donation. Say, the property was donated to you by your friend. You are in dire of money so you subsequently sold the same for 500,000. How do you know whether you derived a gain or incurred a loss?  The provision is quite long. It may be simplified as follows: a) it is the same basis ―in the hands of the donor‖. In the case of inheritance above, it is the FMV of the property at the time of death of the testator. Here, it is the same basis in the hands of the donor. What you have to do is to inquire from the donor his basis in acquiring the property. It is possible that the donor acquired it through purchase, so he can tell you the purchase price.  the rule under this situation may change if it is acquired through inadequate or insufficient consideration  Example: B acquired property through insufficient consideration from A. B sold said property to C. SP=500,000. So the property was not acquired through purchase or inheritance. It was acquired by the seller for inadequate or insufficient consideration imaginable. It is below or way below the FMV of the property.  1986 Bar- many examinees complained to the SC that taxation was a killer subject because several Questions involved computations. The example above was one of the Q. If this will be asked again, I think you will only be asked about the legal provisions: What may be the basis for the sale of the property acquired through insufficient or inadequate consideration?  Answer: it is the amount paid by the transferee who now becomes, as far as the present sale is concerned, the transferor.  Example: A had this property with a FMV of 500,000. He sold it to B for 200,000. it was acquired by B for inadequate or insufficient consideration in money's worth. Under ordinary transaction, A can sell that at a price not below the FMV but he sold

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 41 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

it a price way below the FMV, so it was sold for inadequate or insufficient consideration. B therefore acquired the property valued at 500,000 for only 200,000 (this is the amount paid by B to A in acquiring the property). Subsequently, B disposed the same to C. What then is the basis for the sale of the property?  It is the amount or consideration paid by the transferee (as far as the first transaction is concerned--A to B), now the transferor (as far as the present transaction is concerned which is the sale from B to C). Since B paid 200,000, that is the amount or consideration as far as A is concerned. B is the transferee, now the present transferor. So, deduct 200,000. the gain derived is 300,000.  1994 Q#4 -- Suppose the property was acquired through these exempt exchanges as provided for in Sec. 40 C(2). What are the situations covered therein?  These are tax exempt exchanges of properties, shares of stocks or securities when these are paid in accordance with the plan of merger or consolidation. According to Sec. 40 C(2), All these exchanges made in accordance with the plan of M or C are tax exempt. This is not a subject of subsequent sale. So if these properties, shares of stocks or securities were acquired pursuant to the plan of M or C, the gain derived from this exchange is tax exempt.  However, subsequently, these were sold.  As regards the subsequent sale, that is the one that is subject to tax.  Example: ABC Corp. entered into a contract of M or C with LMN corp. All those exchanges of properties, shares of stocks, and securities are tax exempt. But the subsequent disposition is already subject to tax. For instance these properties were subsequently sold by the Corp for 500,000. Remember that this was acquired through an exempt transaction. What would be the tax treatment?  Answer: Just take note of the legal provision under Sec. 40 C (5). It says' in the same basis in the hands of the transferor. In UP law Center suggested answer the basis is the original cost of the property or shares of stocks or securities, as the case may be. The basis shall be the original or historical cost of the property, shares of stock or securities when still in the hands of the transferor SUMMARY OF THE RULES:

MODE OF ACQUISITION

COST or ADJUSTED BASIS (tax base) 

PURCHASE

Ex.

 INHERITANCE or SUCCESSION

DONATION

TRANSFER CONSIDERATION

Purchase price

FOR

Selling price Cost of acquisition Property income

P500,000 P300,000 P200,000

FMV at the time of death of the decedent or testator – correlate with Sec. 88B. Ex.

Selling price FMV Property income

P600,000 P500,000 P100,000



FMV is the same basis in the hands of the donor



The amount paid by the transferee who is the transferor at the present sale

INSUFFICIENT

Ex. A’s house and lot’s FMV was P500,000 but A sold his house and lot to B for P200,000, thereafter B sold the same to C for P600,000.  deduct P200,000 (SP of A to B) from P600,000 (SP of B to C) – P400,000 property income

PROPERTY OR SHARES OF STOCKS ACQUIRED THROUGH THE SO CALLED TAX EXEMPT TRANSACTIONS



- The original or historical cost of the property or share of stocks, as the case may be.

Sec. 40C – TAX EXEMPT EXCHANGES:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 42 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



NO GAIN, NO LOSS RECOGNIZED:  The Rule is No Gain, No Loss recognized. This means that the gain if the gain is not taxable, or the transaction is tax exempt, the loss is not deductible. There are four transactions covered by this Rule: 1. Properties for Stocks 2. Stocks for Stocks 3. Securities for Stocks 

These 3 transactions are exchanges purely in kind. Each of the transactions must be made in accordance with the plan of M or C

4. Exchange of property for corporate control----this is also a purely in kind exchanges. This is another form of Tax Avoidance  Sec.40 C(6,b)- Supposed the exchange is not made in accordance with the plan of M or C as it is a transaction wherein, say, ABC Corp. transferred all its property to LMN Corp. in exchange for shares of stock. No M or C was made. Is this transaction covered by the exemption?  If you have not read Sec. 40C (6, b), you may answer that since it is not a M or C, then it is not exempt. This is not correct. The meaning of M or C a a requisite under Sec. 40 C (2) has been relaxed. According to Sec. 40 C(6 (2)), it is not only limited to the ordinary meaning of M or C. Under the Corporation Code (Secs. 76-87) this is not definitely covered. But the Tax Code says ―it also covers the acquisition and substantial transfer of all properties to another Corp. in exchange solely for shares of stocks‖. So, it is considered as M or C in so far as the Tax Code is concerned. So this transaction is also covered by the exemptions. Therefore, if there is any gain, the gain is tax exempt.  The trick in the Q is: Would your answer be the same if the exchange is made not in accordance with the plan of M or C. It is a transaction that involved the transfer of all assets of the corp. to another corp. in exchange solely for shares of stock.  The answer would still be the same. It is still tax exempt.  Another Tax Avoidance is, that transaction is also tax exempt, not in accordance with the plan of M or C, is the exchange for Corporate Control. That means that as a result of the exchange of property for shares of stocks, the transferor/s has/have acquired corporate control.  What do you mean by Corporate Control?  Sec. 40 C (6,C), it means that at least 51% ownership of the Outstanding Capital. The provision says ―one person alone, including others not exceeding 4‖. How do you construe this?  This means that: the transferor may be 1, that is alone; or including others not exceeding 4 (that is 1 transferor plus 1 other; 1+2 up to 1+4, or up to the maximum of 5). To be exempted, the transferor must acquire at least 51% ownership of the outstanding capital stock SUMMARY:

PURELY IN KIND EXCHANGES

REQUIREMENT FOR EXEMPTION 

Must be in accordance with a plan for merger or consolidation Ex. ABC Corp, pursuant to a plan of M or C, gave all its properties to LMN Corp in exchange of stocks – such transaction is tax exempt BUT should LMN Corp sell the said properties to another person, such sale would be subjected to tax.

PROPERTY FOR STOCK

STOCK FOR STOCK



Must be in accordance with a plan for merger or consolidation

SECURITY FOR STOCK



Must be in accordance with a plan for merger or consolidation

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 43 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



Must result to corporate control of the transferee corporation – corporate control should be 51% or more - there may be more than 1 transferor but the same must not exceed 5 – whether the transferor is an individual or a corporate TP. Ex.

PROPERTY FOR STOCK

ABC Co. transferred all its property to XYZ Corp in exchange of shares of stock but there was no plan for M or C. Is the transfer exempt from tax?

 The concept of merger or consolidation under Sec. 40C(2) has been relaxed. The concept is not limited to the ordinary concept of M or C – it likewise covers transfers of ALL properties in exchange for stocks even if there’s no plan for M or C PROVIDED that the transferors would acquire control over the corporation – shares of stock is 51% or more.  So, in the case at bar, if the shares of stock would be at least 51%, the transaction is tax exempt, otherwise it’s taxable.

TAXABLE GAIN DOES NOT ONLY ARISE FROM ORDINARY SALE, it is also derived from exchange of property for stocks: FMV of shares of stocks Less: Cost of the Prop Gain or Loss



GAIN RECOGNIZED, LOSS NOT RECOGNIZED: 

Q: When does this occur?  A: In the following circumstances: 1. When the transaction is NOT solely in kind – that is, aside from the property, cash is also given in the transfer  Thus, suppose cash is given as additional consideration? This means that cash + property, securities or shares of stock. A different rule will apply. The Rule that will apply now is ―GAIN RECOGNIZED, LOSS NOT RECOGNIZED‖. How do you describe this transaction?  This is a transaction not solely in kind because it involves cash or money as an additional consideration. The gain will now be subject to tax. So, don't give additional cash or money because it will now be governed by this Rule ―GAIN RECOGNIZED, LOSS NOT RECOGNIZED‖. 2. Illegal transactions  2001 Bar: Illegal transaction is governed by this rule because the illegal gain is taxable but the illegal loss or expense is not deductible. We can tax the illegal gain because of Sec 32 A(1) ―derived from any other source‖, but the loss that may be sustained from illegal transaction is a nondeductible loss because only those losses that are legitimate ones, actually sustained from legal transactions are deductible  ―illegally acquired income constitutes realized income under the claim of right doctrine‖ 3. Transactions between related TP  Transactions between related taxpayers shall be governed by this rule. If there's a gain, the gain is definitely taxable, but the expense or the loss is a nondeductible expense  Group of Related Taxpayers (Sec.36 B) a. Members of the same family b. A Stockholder and a Corporation---- 1-man Corporation, that is, the corporation is owned or controlled by a single individuals c. Between 2 corporations---they are related in the sense that they are owned and controlled by the same stockholders d. Parties to a trust 1. trustor

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 44 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. Trustee 3. Beneficiary 4. Fiduciary 4. Wash sale----one of the illegal trading devices  The reason why it is an illegal trading device is because there's really no substantial change of beneficial ownership  Q: 1. What may be the subject of wash sale?  It may be shares of stocks, securities, including stock options  Q: 2. Who must be the seller of such shares of stocks, securities or stock options?  It must not be a dealer in securities  Are there periods that must be observed?  YES. a) 30 days before the sale; and 2) 30 days after the sale. These 2 periods are really determinative of whether it is a wash sale or not  What must be that event that must transpire or occur 30 days before the sale or 30 days after the sale (this is the reason why this is called ―61-day sale‖)?  The event that must transpire is the purchase or acquisition of identical or substantially the same stock or securities  It is important to know whether it was a wash sale or not because if it was a wash sale transaction, the gain is taxable and the loss is nondeductible (Sec. 38)  Q: What must be the reason for this?  The rationale behind this is that, this is a mere artificial loss and it is not actually sustained. In actual transaction, the seller can recover his loss by adding the amount of loss to the Selling Price involving the sale of stocks or securities. The seller can recover this loss through the subsequent sale of the same. In effect, the loss can be recovered. So there is really no loss actually incurred or sustained as it is a mere artificial loss 

STOCK DIVIDENDS: Generally: Tax Exempt  These are the 3 important cases that provide exceptions to the rule that stock dividend is tax exempt: 1. CIR vs. ANSCOR---this pertains to the redemption of shares of stock 2. CIR vs. MANNING--- this was 1994 Bar Q #1---this pertains to dividends declared in the guise of stock dividends 3. BACHRACH vs SEIFERT (87 Phil 483)--- this pertains stock dividends received by the usufructuary 

CIR vs. ANSCOR: The requisites of redemption of stock dividends that may result to taxable income according to this case are: a. there must be a redemption or cancellation b. it must be of shares of stock involving stock dividends c. the cancellation must result in distribution of taxable dividend or income  Sec. 73 B second sentence thereof made mentioned of these 3 requisites -- ―at such time and in such manner that may result in the distribution or cancellation of taxable dividend‖. These are really the criteria or tests.  According to the tax courts of US, consider the following: a. the real or business purpose that would justify redemption; b. the redemption must be bonafide; c. the lapse of time between the issuance and redemption; d. the net effect of the redemption of the shares of stockholder  ANSCOR CASE: The 2 purposes raised by the taxpayer: a) legitimate business purpose; and b) justification for the cancellation or redemption, were not considered by the SC. The case made mention about the Filipinization(?) of the Corp. and citizenship(?); and the reduction of foreign exchange transactions. These 2 were not a justification. The period of 23 years was not also considered. However, the net effect, the SC said, resulted in taxable income. Here 108,000 shares ____(?) the original 25,247.50 shares____(?). It turned out the corporation redeemed the original investment on the original 25,247.50 shares of stocks. The SC modified the decision of the CA on the amount representing the taxable income. In Corporation law, shares of stock may be classified as redeemable upon incorporation but it must be expressly provided for in the Articles of Incorporation as redeemable. If this will be redeemed by the Corporation, this is not the one referred in the exception. So, if the source is the original subscription or the initial investment, Sec. 73 B will not apply because

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 45 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

it is still capital. But if the source is additional shares of stock, that is, stock dividends were declared and these are in the nature of redeemable shares, then this is the one contemplated by this Sec. 73 B. The SC said, if these redeemable shares of stock are in the nature or formed part of the original investment, the redemption is not covered by Sec. 73 B. the exception is not applicable. It must be the shares of stock declared as stock dividends and were classified as redeemable shares. The situation in this case is that the corporation declared stock dividends classified as redeemable shares. The rule regarding stock dividend is that it is tax exempt because there is just a transfer from surplus to capital account. There is No realized gain or profit. In this case, a device could really be availed of by the corporation. If this stock dividend declared would be categorized as redeemable shares of stock, this would be the situation: under the Corp. Code this may be redeemed in cash. Once this will be redeemed the stockholder will receive cash. There is now a flow of wealth according to SC. This is the reason why stock dividends declared in the nature of redeemable shares of stock is taxable. In the language of the SC, it is really a constructive ploy or device to evade the effect of taxation having in mind that the stock dividend is stock exempt but if it is classified as redeemable shares of stock once redeemed from the corp., the stockholder will receive not only receive cash but be also exempt from tax. There being a flow of wealth, stockholders cannot allege that stock dividend is tax exempt. You cannot apply the principle here because there is a flow of wealth. Here, there may arise a flow of wealth because the stockholder will now receive cash. The reason of the exceptions that you'll find in Sec. 77 B is that it is an income constructively devised to avoid the effects of taxation. So, stock dividends, as a rule is tax exempt. But once it is in the nature of redeemable shares of stock, there being a flow of wealth as the stockholder may receive cash, then that's the time we can tax such stock dividends 

CIR vs MANNING 66 SCRA 14:

Disguised Dividends

In the case of, it is in this case that you'll find the language ―in the guise of stock dividends‖. What does that mean? The board may declare dividends and treat the same as stock dividends, name it as stock dividends in the books. But the BIR may examine the books. In this case it was discovered that the stocks were declared not in accordance with the Corporation Code. It was not declared out of the unrestricted retained earnings of the corp. It was declared out of the Outstanding capital stock. So there was a violation of the basic requirement under the Corp. Code that dividends, including stock dividends can only be declared out of unrestricted retained earnings. So as to evade the effects of taxation, stock dividend being tax exempt, the Corporation, in connivance with the stockholders treated such as stock dividends. So it is a dividend in the guise of stock dividends as to avoid the payment of tax. This is taxable of course. This is taxable as there is no stock dividends legally declared under the Corporation Code 

BACHRACH vs SEIFERT 87 Phil 483: The Q here is: Is the stock dividend received by the usufructuary tax exempt or taxable? This is taxable according to the SC, rejecting the opposite view that it is tax exempt. The SC adopted the Pennsylvania Rule. The SC cited Art. 566 of the Civil Code. Under this Article ―the usufructuary is entitled to the natural, industrial, and civil fruits of the thing in usufruct‖. The thing in usufruct here is the shares of stock. As this is a thing in usufruct, the SC considered this an exception to the rule and held that the stock dividends received by the usufructuary are subject to tax. Stock dividend is a fruit of the thing in usufruct. It is a civil fruit, therefore, it is subject to tax.



WHEN THERE IS A CHANGE IN THE STOCKHOLDER'S INTEREST IN THE CORPORATION:  This is another exception to the rule.  Illustration: A, before the declaration of stock dividends had a 20% ownership of the Outstanding capital stock of the Corporation. If there's no change pertaining to the percentage of ownership after the declaration of the stock dividends, then such stock dividends is tax exempt. But if

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 46 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

there's a change, and it must be an increase in the interest, if this increase to 22%, it is considered as an exception to the rule 

OTHER SOURCES OF INCOME:  CAPITAL GAIN FROM SALE OF SHARES OF STOCK  ACQUISITION & DISPOSITION OF CAPITAL STOCK WHICH INCLUDE SALES AND RETIREMENT OF BONDS  ILLEGAL GAINS  gambling betting, extortion or fraud  RECOVERY OF DAMAGES  Taxable only when it represents lost profit or income.  BAD DEBTS RECOVERY  Taxable if it results in reduction of the TP’s tax liability in the previous year. TAX BENEFIT RULE or DOCTRINE OF EQUITABLE BENEFIT applies in this case.  It must be claimed as a deduction from the gross income in the preceding year – the reduction results in a tax benefit.  TAX REFUND  Taxable if it results in reduction of the TP’s liability in the preceding year. This means that the tax refunded must be previously claimed as deduction from gross income. The tax benefit rule also applies.



In the items mentioned under Sec. 32 A ( we said that there are 13), the following are subject to FT: 1. Royalties; 2. Prizes--- take note of the clarification.  Prizes subject to FT must be more than 10,000. If the amount is 10,000 or less, the tax treatment is that it is subject to 5-32%. It must be included in the Gross Income of the taxpayer; 3. Winnings except lotto and sweepstakes; 4. Interest  this is subject to FT if this is an interest income on bank deposit. If it is an interest on loan, then it is subject to regular tax;--reported as part of the gross income 5. Dividends are subject to FT under 2 cases: a) When it is received by Individual taxpayers. We can simply say that when a dividend is received by an individual taxpayer from a Domestic Corporation, it is subject to FT; b) If the recipient is a NRFC. So, if it is received by a Domestic Corporation or a RFC, it is not a FT;(exempt) 6. Share of a partner from the net income after tax of a business or taxable partnership. Try to compare this to item 11 of Sec. 32 A. under Sec. 32A (11), the source is general professional partnership.  Q: A is a partner in ABC Partnership, a business partnership. A received an income amounting to 150,000 representing his share in the income of the partnership. 1. How do you tax the 150,000 income received by A from ABC partnership?  Answer: Since the source is a taxable partnership, this is subject to FT and therefore the partner is not required to report this income as part of his gross income 2. Would your answer be the same if ABC is a general professional partnership?  Answer: No. if it is received from a tax exempt partnership, Sec. 26 last paragraph states that the professional partner shall report such share from the professional partnership as part of his Gross income. So Sec. 32 A (11), as the tax treatment in Sec. 26 will tell you, should be reported as part of the Gross income of the professional partner. But in the case of a taxable partnership, Sec.24 states that the share of a partner if it is received from a ―taxable partnership‖ (that is‖ not a general professional partnership) shall be subject to FT. And the rule provides that the recipient of the same is not required to report that as part of his GI. 

2001 Bar: If a cash dividend (or property) is received by a RC or RA, this is subject to FT (Sec 24, 10% FT). Q: What do you think is the reason why these dividends received by RC or RA are subject to 10% FT and not by 5-32% progressive rate?  Answer: The reason is to ensure the collection of tax on these dividends. If we subject these to 5-32%, which can only be done through the filing of ITR, there is no assurance that the taxpayer will report these as part of his GI because he has also other sources of Income. It is extremely difficult for the BIR to monitor compliance w/ this considering the number of stockholders.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 47 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

By shifting the responsibility to remit the tax to the corporation, it is easy for the BIR to check compliance because there are fewer withholding agents compared to the # of stockholders. By subjecting this to FT the Govt. is assured of revenues in the earliest possible time because these taxes are needed by the Govt to carry out its legitimate objectives-- LIFEBLOOD na naman--hehehehe..... this is really favored by the LIFEBLOOD DOCTRINE. By the way, In the case of interest on deposits, it is the bank that is legally obliged to withhold the tax SUMMARY:

ITEMS SUBJECT TO FINAL TAX-not required to be reported R

●

ROYALTIES

P

Always subject to final tax

DEPENDS:  P10,000 or less – it forms part of gross income – subject to 532% progressive rate

PRIZES

 More than P10,000 – 20% FINAL TAX GR: W

Always subject to final tax

WINNINGS XPN: sweepstakes and lotto winnings (exempted)

I

INTEREST FROM BANK DEPOSITS

-

Subject to FT whether in Philippine or FX currency ●

NOTE:

D

S

IV.

DIVIDENDS GIVEN TO AN INDIVIDUAL TP

SHARE OF A PARTNER FROM THE NET INCOME OF A TAXABLE PARTNERSHIP

Subject to FT BUT if the recipient is a DC or a RFC, it’s exempt Cash Dividends given by DC to RC. NRC and RA is subject to 10% FINAL TAX due to the following reasons:

1.

To ensure collection on the cash dividends otherwise there would be no assurance that the TP will report it in his ITR

2.

The BIR will have a hard time monitoring compliance since there are numerous SHs

3.

Shifting the responsibility to the corporation as the withholding agent – easier collection since there are fewer Corps than SHs

4.

Taxes are made available to the govt in the earliest time possible.

●

If the source is a TAXABLE PAT the share is subjected to a FT. if the source is a TAX EXEMPT PAT, according to the last paragraph of Sec. 26, it must be reported and included in the gross income of the TP.

●

Sec 24B (2) and Sec. 25A (2) - JOINT PAT etc are tax exempt

EXCLUSIONS FROM GROSS INCOME: Sec. 32B In a recent case, the SC held that exclusions are in the nature of Exemptions and therefore these should be strictly construed against the taxpayer and liberally in favor of the Govt. So, this gives us this probable bar Q because in the Recent case of PLDT vs. Laguna, the SC distinguished Exclusions from Exemptions. There are 2 Probable Bar Q here: a) Exclusions vs. Exemptions; or

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 48 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b) Exclusions vs. Allowable deductions (Sec. 34) In this case of PLDT vs. Laguna (2005 case), for the first time the SC made distinctions between these 2, that's why this is a probable bar Q.

1. Exclusions---refers to the removal of otherwise taxable items from the reach of taxation (this is the language of the US tax court as cited in the PLDT vs. Laguna case); Exemptions--- refers to an immunity or privilege, freedom from charge or burden to which other persons are subject to tax. The court said, they are the same as to their effect or nature. That's why the old rule that would apply to them is the principle of STRICTISSIMI JURIS. Exclusions and Exemptions must be strictly construed against the taxpayer and liberally in favor of the Govt.  If that would not be asked, this would be the Q on this section-- What are the distinctions between Exclusions from Gross Income (32 B) and allowable deductions from GI (Sec. 34)?  According to Sec. 61 of Rev. Reg. #2:  Exclusions from Gross income refer to a flow of wealth to the taxpayer which does not form part of the GI because of the following reasons: 1) It is excluded by applicable laws; 2) Excluded by the tax code; or 3) Excluded by the Constitution.  On the other hand, allowable deductions refer to amounts, which the law allows to be deducted from GI in order to arrive at taxable or net income 2. Another point of distinction is that Exclusions may pertain to the computation (this is material) for purposes of determining GI, whereas allowable deductions is important for purposes of determining net or taxable income and this must be deducted from GI to arrive at taxable income. I repeat, exclusions may be material for purposes of determining GI because you have to exclude it to arrive at GI. 3. Exclusions are something earned or received which do not form part of GI, while deductions are something paid or incurred in earning GI. 

Try to analyze the enumeration under Sec. 32 B. if you count, there may be 19 Exclusions from GI. The Enumeration is not exclusive because there are other items not mentioned in 32 B but should be excluded. For instance, in Sec. 24 & 25, there is that tax exempt interest income which we have already cited and is not included in Sec. 32 B. This is Interest Income on Long term deposit. This is not included in the exclusion under Sec. 32 B. You will find that in Secs. 24 & 25---if the term is 5 years or more, the interest income is tax exempt. Keyword: L A G C I R M 1. Life insurance proceeds 2. Amount received as return of premium 3. Gifts, bequests, devises & legacies 4. Compensation for injuries or sickness 5. Interest exempt under tax treaty 6. Retirement benefits, pensions, gratuities, etc. ( favorite Bar Q) 7. Miscellaneous items 



Under item 6, there are 6 exclusions ( a-f) and under items 7, there are 8 items there. So, 19 items all in all

Favorite Bar Q: Life insurance proceeds, Compensation for injuries or sickness, Retirement benefits, pensions, gratuities, etc., and on item 7, just focus on 2 items (prizes and awards)

Item # 1. Life insurance proceeds:  

Correlate this with Sec. 85E because there are 2 Q on this in the previous bar exams. Sec. 85 E--- refers to the Rule regarding Exclusions or inclusions from Gross Estate of Life Insurance Proceeds.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 49 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

 When a beneficiary is designated, you ought to know whether it is revocable or irrevocable, in which case you must really consider the rule under Sec. 11 of the Insurance Code. 

In 1983 Bar: There are 3 Q on this: a) Whether the proceeds received by the beneficiary may be excluded from GI. So it's a Q on the Exclusion from GI; b) Whether this should form part of the Gross Estate. We have already discussed the tax implications of Life Insurance Premium. When the life insurance policy is obtained by the employer for his employee, premiums may be paid by the ER. And we have already extensively discussed the rule/tax implication of life insurance premium. Just incorporate the rules that we have simplified. Tax implications: a) Life insurance premium may be taxable or not taxable to the employee; or b) As regards the employer, it may be a deductible or non-deductible expense For these tax implications, you must know the beneficiary designated in the life insurance policy, and we have 2 assumptions: 1. Beneficiary is the heir, estate, executor or administrator of the EE rd 2. Beneficiary designated is a 3 person, which may include the employer Under assumption #1, this should always be excluded from the GI of the recipient whether irrevocably or revocably designated. rd

Under assumption #2---some examinees answered that, since it’s a 3 person, that should be subject to tax. That is not correct. The provision says ―any beneficiary‖. There is really no profit or gain here. This just represents indemnification) and the insured has the right to designate the beneficiary. So it is always excluded from the GI of the recipient irrespective of the beneficiary designated in the life insurance policy. Sec. 32B. Gross Income—Exclusions. (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 other wise, 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 Sec. 85. Gross Estate(E) Proceeds of Life Insurance--- To the extent of the amount received by the estate of the deceased, his executor or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. RULES under Sec. 85 E: A) Included and therefore subject to estate tax under 2 cases: 1. If the beneficiary designated in the life insurance policy is the heirs, estate,executor or administrator of the estate. ―Whether the designation is revocable or irrevocable, always included if the beneficiary is the estate, executor or administrator of the estate 2. If a third person (including the employer) is revocably designated as beneficiary. If a 3 person is designated as beneficiary, the rule says‖ excluded from gross estate‖

rd

B) Excluded and therefore Not subject to Estate tax under 2 cases: rd 1. if 3 person is irrevocably designated as beneficiary You see now the possible confusion. The designation of the beneficiary is IMMATERIAL if the one designated as beneficiary is the heirs, estate, executor or administrator of the estate. This is ALWAYS INCLUDED. rd But if the one designated is a 3 person, you ought to know or check whether the rd designation is revocable or irrevocable. If the designation of this 3 person as beneficiary is REVOCABLE, you have to INCLUDE that, therefore subject to estate tax.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 50 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

rd

If this 3 person is IRREVOCABLY designated, EXCLUDED from the Gross Estate and therefore not subject to estate tax. 2. if it partakes of a nature of Group insurance policy I mentioned about Sec. 11 of the Insurance Code. Under the Old Insurance Code, the rule was that designation is irrevocable. However, the rule now is REVOCABLE, unless that right is waived. Under Sec. 11 if the Insurance Code ―there is only Irrevocable designation of the beneficiary if the life insurance policy expressly so provides'. If it is silent, then it is presumed that the designation is revocable. So in A#2, it rd shall be included in the Gross Estate subject to Estate tax. But if a 3 person is] designated as beneficiary and the policy is silent, you may consider the designation revocable. RULES ON PREMIUMS: In Life insurance, premiums are paid. We say the following tax implications: To the employee, it may be a taxable income, and to the employer, that may be an expense. 1. Under the assumption that it is the heirs, estate, executor or administrator of the estate who received the premium as beneficiary, it is TAXABLE to the employee. It is taxable to the employee and the rules are: a. Under 32 A, taxable as compensation income if the employee is a rank and file employee; b. Under 32 B (m), taxable as Fringe Benefit if the insured employee is a managerial or supervisory employee  Q: Can it be claimed as an expense by the employer?  Yes. It is a deductible expense (32 A (1, a (i) ) as ― other forms of compensation for personal services rendered‖ rd

2. Under the assumption that a 3 person was the one designated ( and this may include the employer), it is NOT TAXABLE on the part of the employee there being no benefit accruing to the family or heirs. To the employer designated as beneficiary, the proceeds he received upon the death of the EE just represent a mere return of capital. This being the case, the employer should not be allowed to claim the life insurance premium paid as a deductible expense. SUMMARY RULES ON LIFE INSURANCE POLICY: Example: A life insurance was obtained by an employer for his EE. The estate of the EE was designated as the beneficiary. During the lifetime of the EE, premiums were paid by the ER.  Q#1. Upon the death of the EE, the proceeds shall go to the beneficiary designated in the Policy. Will that form part of the GI of the beneficiary?  Answer: No. For purposes of exclusion, since Sec. 32 B (1) make no distinction as regards beneficiary, the proceeds of life insurance policy are always excluded from the Gross income of any recipient or beneficiary of the same. It is excluded whether the beneficiary is the employer or the heirs, estate, executor or administrator of the estate.  Q#2: Will that be included in the Gross Estate of the decedent-EE? Is that subject to Estate Tax?  Answer: Qualify: Under Sec. 85 E: ― if the beneficiary is the heirs, estate, executor or administrator of the estate, it should always be INCLUDED in the Gross Estate whether the designation is revocable or irrevocable. This will form part of the Gross Estate. rd

rd

If the beneficiary is a 3 person, Sec. 85 E makes a qualification. If a 3 person is the designated beneficiary, it is INCLUDED if the designation is revocable. It is rd EXCLUDED from the Gross Estate and therefore tax exempt if the designation of the 3 person is irrevocable  Q#3. Are premiums paid by the ER on the policy: a. Deductible expense to the ER?

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Answer: YES. It is a deductible expense on the part of the ER if the designated beneficiary is the heirs, estate, executor or administrator of the estate. If the one rd designated as a beneficiary is the employer (considered as 3 person) that is not a deductible expense b. Taxable compensation income to the EE? Answer: YES. It is taxable compensation income to the employee if the designated beneficiary is the heirs, estate, executor or administrator of the estate. Since the beneficiary designated is the estate of the EE, then it is taxable. If the beneficiary rd designated is a 3 person ( that includes the employer), it is not taxable since it is just a mere return of capital SUMMARY:

TAX TREATMENT of LIFE INSURANCE PROCEEDS BENEFICIARY DESIGNATED EFFECTS

HEIRS, EXECUTOR OR ADMINISTRATOR

EMPLOYER

EXCLUSION FROM THE GROSS INCOME

EXCLUDED from the gross income of the beneficiary (revocable 0r irrevocable) --- it represents a compensation for the loss of life, hence a mere return of capital

EXCLUDED from the gross income of the employer – no realization of profit and express exclusion by law.

rd

WON INCLUDED or EXCLUDED IN THE GROSS ESTATE

INCLUDED- whether the designation is revocable or irrevocable( sec. 85 E)

considered a 3 person QUALIFY: IRREVOCABLE -- EXCLUDED REVOCABLE – INCLUDED

TAXABLE to the EMPLOYEE during his lifetime – Sec. 33B – 10:

PREMIUMS PAID

MANAGERIAL or SUPERVISORY employee (32 B (m)) – taxable as fringe benefits RANK & FILE (32A) – taxable as compensation income

NOT TAXABLE on the part of the employee-- there being no benefit accruing to the heirs NONDEDUCTIBLE EXPENSE to the employer as the same just represent a mere return on capital

DEDUCTIBLE EXPENSE to the Employer

Item # 2. Amounts received as Return of Premium: This is self-explanatory in the sense that, the same as that of Life insurance Proceeds, these are not included or mentioned under Sec. 32 on Exclusions, but still it is excluded because this really does not qualify as an income. It is just a return of capital. Return of premium means a repayment of a part or the whole of the premiums paid. Item # 3. Donations: There are 2 kinds of Donations: Donation Inter Vivos and Donation Mortis Causa. Distinctions: 1. Donation Inter Vivos- the giver is the donor Donation Mortis Causa-- the giver is the testator or decedent 2. Donation Inter Vivos-- the recipient is the donee Donation Mortis Causa-- recipient are the heirs or beneficiary 

Q: If a donation inter vivos is given, what are the tax implications?  Sec. 32 B (3) laid down just one of the tax implications.  As far as the donor is concerned----subject to donor's tax

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 52 – J. Dimaampao Tax Part One

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

 As far as the donee is concerned--1. Not subject to donee's tax as donee's tax was abolished by PD 69 (favorite # of my good friend Prof. Sandoval... Prof. Portfolio). 2. This is not also subject to income tax because the same, according to Sec.32 B (3) is excluded from Gross Income Q: Tax implications of Donation Mortis Causa  As far as the testator is concerned--- subject to estate tax  As far as the donee (heirs of the decedent or beneficiary) --1. Not subject to donee's tax as donee's tax was abolished by PD 69 2. This is not also subject to income tax because the same, according to Sec.32 B (3) is excluded from Gross Income



1994 Q#2b: Are donations inter vivos and mortis causa subject to Estate Tax?  Answer: It is donation mortis causa that is subject to Estate tax. Donations inter vivos are subject to donor's tax.



Q: What about the implication in so far as the donee is concerned?  Answer: At present, the right to receive donation is not subject to any tax

SUMMARY:

TAX TREATMENT or IMPLICATION MODE OF DONATION

GIVER

RECIPIENT Donee is NOT subject to donee’s tax since Donee’s tax has been abolished by PD 69

INTER VIVOS

Donor is subject to donor's tax

The same is not subject to income tax since donations are expressly excluded from the gross income by the NIRC Sec. 32 B 3)

Heir/s NOT subject to inheritance tax since Inheritance tax has been abolished by PD 69 MORTIS CAUSA

The estate of the testator is subject to Estate Tax

NOT subject to income since the same are expressly excluded from the gross income by the NIRC ( Sec. 32 B 3)

Item # 4 Compensation for Injuries or Sickness: 

In 2003 Q#5: Examinees were asked whether the following is subject to Income tax: a. Hospitalization expenses b. Cost of repair of damaged vehicle; and c. Moral and Exemplary damages



Q: X, while driving home from his office, was seriously injured when his automobile was bumped from behind by a bus driven by a reckless driver. As a result, he had to pay P200,000 to his doctor and P10,000 to the hospital where he was confined for treatment. He filed a suit against the bus driver and the bus company and was awarded and paid actual damages of 300,000 (for his doctor and hospitalization bill), P 100,000 by way of moral damages for what he had to pay his attorney for bringing the case to court. Which, if any of the awards are taxable as income to X and which are not? Explain  a. Hospitalization expenses---this is tax exempt because this represents compensation for injuries sustained ( this is the one covered by Sec. 32 B 94) b. Cost of repair of damaged vehicle--- not taxable. There is really no income here. So, compensation for the amount spent for the repair of the car is not subject to tax c. Moral and Exemplary damages--- Prof. Domondon advanced the view that moral damages and exemplary damages are taxable (he may have changed his view because when we answered this in the UPLC, we unanimously suggested that moral and exemplary damages are tax exempt.) He made mention about the definition of Gross Income under Sec. 32 A ―derived from whatever source‖. He pointed out that there are really no clear

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 53 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

exemptions from Gross income and there are really no clear exemptions from income under Title II. The Committee on taxation in UPLC always answers this Q as not subject to tax. Under the NCC Art. 2197 (you must master this) & 2229 (Exemplary damages) you should know the grounds for recovery of damages. There are 9 grounds under 2217 (you should memorize this article): 1. mental anguish 2. serious anxiety 3. wounded feeling 4. besmirched reputation 5. physical suffering 6. social humiliation 7. moral shock 8. fright 9. similar injury The enumeration is not really exclusive because there are other grounds in the subsequent sections. If we tax moral damages, you can just imagine the effect, taxing any of the 9 grounds for which moral damages are awarded. There is really no gain or profit realized, how can we tax that? We shall not tax that, otherwise, we are in effect taxing the grounds for which moral damages may be awarded. The is the same as in the case of exemplary damages under 2229. Under 2229, there are 2 grounds mentioned there: 1) by way of example; and 2) as deterrent for the commission of similar offense. If we tax that, we are in effect taxing the grounds laid down under Art. 2229. The correct answer is, and it is a unanimous decision of the members of the Committee in Taxation of UPLC---- it should not be subject to tax. 

Q: What about the award representing loss income or earnings or profit? He was hospitalized & wasn’t able to earn his 2 months salary amounting to, let us say P 30,000. This P 30,000 is included in the judgment rendered by the court. Is this subject to tax or excluded from Gross income?  Answer: What is clear here is that it is compensation for injuries or sickness that is not taxable. There is an opinion expressed by 1 author that it should not be taxed because it is the result of that injury or hospitalization. I mentioned this in my book (as revised, p. 17) citing that opinion of tax experts of U.S. It is there in 1961 that the opinion is that this award representing loss income or profit is the one taxable. So, all damages that may be included in the judgment of the court are tax exempt EXCEPT that amount representing loss of income. That is the one that is taxable.

Item # 6 Retirement Benefits, Pensions, Gratuities, etc:  

You should try to distinguish Paragraph (a) from paragraph (b). Par (a) refers to tax exempt retirement benefits, pensions, gratuities, etc. Par (b) is popularly known as separation pay. Item (a) refers to that retirement benefits received from private firm, whether corporate or individual. The Tax Code is strict on this, in that it provides 4 requisites for exemption or exclusion. But if you try to refer to item (b), there is only 1 requisite for exemption, that is, if it is received beyond the control of the employee or official.



In Par. (a) there are 4 Requisites for exemption: 1. There must be BIR approved retirement plan ( RA 4917); 2. The retiring employee or official must be at least 50 years of age; 3. The retiring employee or official must have rendered at least 10- years of service 4. This can be availed of only once. Subsequent retirement that may be received from a private employer is no longer tax exempt.



Compare the provisions:  In Par. (b) the source of payment in the case of separation pay is immaterial. So, even if it is paid under the approved BIR retirement plan or not, exempted. Also, Par. (b) does not require a certain age to avail of the exemption, even if the employee is below 50 years of age. There’s also no requirement on the length of service. Even if he rendered only 1 yr. or 2 yrs., if this benefit or pay is received on account or by reason beyond the control of the EE or official, it is tax exempt.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 54 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Example of causes beyond the control of the EE or official: a. death; b. physical disability; c. sickness or illness 

1996 Bar: An employee died and his surviving spouse received P 100,000 separation pay benefits from the ER. Is this amount subject to tax?  Others answered this Q in this way: taxable because under Sec. 32 A ―Gross income means all income from whatever source‖. This Q. is covered by item #6 (Sec. 32 B 6 (b)). This is a tax exempt separation pay and should be excluded from the Gross Income of the surviving spouse. So don’t always refer to Sec. 32 A ―derived from whatever source‖. Consider also Sec. 32 B. Sec.32 A is modified by Sec. 32 B. Yes, it is derived from whatever source but there are items that are excluded from Gross Income under 32 B and a retirement benefit is one of them.



Availed of only once--st  Illustration: Assume that A, received from his 1 employer 500,000. The employee is 50 yrs. old, at least 10 yrs. of service. Payment was made under a BIR approved retirement plan. He got employed in another ER and after rendering 10 yrs of service he retired from employer #2 and received P300,000. ―Can only be availed of once‖ means that the subsequent retirement benefit received form private firm is no longer tax exempt. It is the first retirement benefit that is covered by the provision. So the P 300,000 received from the subsequent ER is already subject to tax.  Suppose the subsequent ER is a Govt. Say, the employee was employed by a Government owned and controlled corporation (GOCC). Would your answer be the same? No. All benefit he received, according to RA 8291 (Revised GSIS law), are tax exempt, including retirement gratuity. So, this limitation applies only to retirement benefit received from a subsequent private employer. It does not apply to subsequent public employer as the benefits are still exempt; not subject to tax under RA 8291  1999 Q# 10: A Co., a Philippine Corporation has two divisions—manufacturing and construction. Due to the economic situation, it had to close its construction division and layoff the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are two groups of employees to be laid off: a) Employees who are at least 50 years of age and has at least 10 years of service at the time of termination of employment b) Employees who do not meet either the age or length of service A Co. plans to give the following: For category (A) employees--- the benefits under the BIR approved plan plus an ex gratia payment of one month for every year of service For category (B) employees--- one month for every year of service For both categories, the cash equivalent of unused vacation and sick leave benefits. A Co. seeks your advice as to whether or not it will subject any of these payments to Withholding Tax. Explain your advice

SUGGESTED ANSWER: For category A employees, all the benefits received on account of their separation are not subject to income tax, hence no withholding tax shall be imposed. The benefits received under the BIR approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from Gross income being in the nature of benefit received on account of separation due to causes beyond the employee’s control. (Sec. 32 B). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 55 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

For category B employees, all the benefits received by them will also be exempt from income tax, hence not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees' control, which are specifically excluded from gross income (Sec. 32 N) JAP's ANSWER: Majority of the examinees qualify their answer based on age & length of service; others also answered regarding the monetized unused sick leave credits. They mentioned about the 10 day rule and answered that sick leave credits are taxable. That is not correct. Answer: All of these benefits are not taxable. Why? They overlooked the second sentence ―due to economic situation.‖ This is considered as a cause beyond the control of the employee or official. So, when the benefit or separation pay received from the employer is brought about by causes beyond the control of the employee or official, that is tax exempt. Disregard the source. So, don't just take note of the benefits stated in the problem. Remember also the rule on separation pay, it must be one received on account of cause beyond the control of the employee or official. Separation pay as a result of voluntary resignation----this is subject to tax as the cause is not beyond the control of the employee or official.  In 1 Bar exam: A govt employee received benefits from GSIS. He deposited the amount received & it earned interests. Q: Is the benefit representing GSIS benefit taxable? No. It is tax exempt. But as regards interest on this benefit, that is the one that is subject to tax. This is the same also with SSS benefits. If the amount received is deposited in a bank & it earned interest, such interest is subject to 20% FT. So, do not apply in this case the rule that ―accessory follows the principal‖ because of the rule that exemptions must be strictly construed against the taxpayer and liberally in favor of the government.

SUMMARY:

ITEMS INCLUDED

CONDITIONS or PARTICULARS REQUISTES: keyword – FORT a. retiring official must be AT LEAST 50 years of age b. approved or availed only ONCE c. REASONABLE private benefit plan approved by the BIR d. 10 years in service

A

RETIREMENT BENEFIT FROM A PRIVATE RETIREMENT PLAN

NOTE: If the employee is still on active employment with the company, any and all the funds distributed from the fund to the private member over and above his personal contributions shall be taxable. nd

If he has a 2 employer and he has received benefits from the GSIS, the same shall be tax exempt. The benefit shall be tax exempt, whether his employee is a private firm OR the government PROVIDED the pay is given on account of:

B

SEPARATION PAY

a. Death b. Sickness c. Other Physical disability d. For any cause beyond the control of the official or employee cessation of business operation due to continued losses --- dissolution of the corporation --- other authorized causes under the labor code --- compulsory retirement --- terminal leave pay

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 56 – J. Dimaampao Tax Part One

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C

SOCIAL SECURITY BENEFITS, RETIREMENT GRATUITIES AND OTHER SIMILAR BENEFITS

D

BENEFITS FROM

E

SSS – RA 8282

Tax exempt

F

GSIS – RA 8291

Tax exempt

- received by RC, NRC and RA from foreign government agencies and other private or public institutions. US Veterans Administration – by veterans residing in the Phils

COMMUTATION OR MONETIZED VALUE OF LEAVE PAY IF it forms part of TERMINAL LEAVE PAY

VL

SL

NOT taxable

NOT taxable

IF given during the taxable year with NOT retirement to: ● ●

GOVERNMENT EMPLOYEES RANK-and-FILE

RR – 10 – 2000 TAX EXEMPT

TAX EXEMPT

Exempt up to 10 days

Unused – taxable

Item # 7 Miscellaneous Items: I am confident that 1 or 2 on this item will be asked in this coming bar! 4 most important items: Paragraphs a, b, c & d 

Par. (a) refers to investment in the Phils. By any of these: 1. foreign government 2. financing institutions controlled or financed by the foreign government 3. regional or international financing institutions established by the foreign government What are the forms of investments that may be made by these 3 parties? 1. interest income from bank deposits 2. interest income from loan extended to the persons or citizens of the Phils 3. interest income from bonds, debentures and other certificate of indebtedness 4. dividend income because the investment may be in the form of shares of stocks This now brings us to the case which has yet to be asked in the BAR CIR vs. MITSUBISHI METAL CORPORATION (181 SCRA 214). I hope this would be asked this coming bar Export-import bank of Japan is a tax exempt financing institution under the RP- Japan Tax Treaty. It extended 20 M loan to Mitsubishi Metal Corp., a Japanese corporation. The same amount was used by Mitsubishi in extending loan to Atlas Corp., a domestic corp. The contract was quite peculiar because it was denominated as sale, loan, then contract of sale. Loan in the sense that the 20M was extended as loan to Atlas. Sale because there is such an agreement to the effect that the produce of this mining equipment concentrates shall be sold by Atlas to Mitsubishi for a period of 15 years. So, there are mutual stipulations, terms and conditions. The BIR claimed that Mitsubishi is subject to income tax on the interest of the loan. This was protested by Mitsubishi and these were its argument: 1. tax exempt because it came from a tax exempt financing institution- source of 20M is a tax exempt entity (export-import bank of Japan) 2. tax exempt as Mitsubishi is an agent of export-import bank of Japan BIR denied the protest or request for consideration. The CTA ruled that Mitsubishi is considered as an agent of export-import bank of Japan therefore it should not be taxed on that interest income RULING: As to argument #1, in a contract of loan, once the contract is consummated, the money will become the exclusive money of the borrower (Art. 1953 NCC, opinion of Tolentino). Applying this, when such contract of loan between export-import bank of Japan and Mitsubishi was consummated, the 20M became the exclusive money of Mitsubishi. It ceased to be the money or property of exportimport bank of Japan. The export-import bank of Japan was never made a party to the contract of loan executed between Atlas and Mitsubishi. The creditor/lender as clearly stated in the contract is Mitsubishi.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 57 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

As to Argument #2, as to the argument that the interest is tax exempt as it was an agent of export-import bank of Japan, the SC said ― there was no clear and convincing evidence that Mitsubishi was agent of export-import bank of Japan. Since Mitsubishi failed to prove that it is entitled to such exemption, the interest income from the loan is subject to tax. In the ruling of the SC, it made mention of this and it is now found in Sec. 32 B (7, a)--Mitsubishi is not one of those tax exempt entities under the Tax Code. Under the Tax Code, interest income on loan is tax exempt only if the recipient is a foreign government or financing institution controlled or financed by foreign government, or regional or international financing institutions established by the foreign government. Mitsubishi is not one of these financing institutions. The possible modification is: Mitsubishi is designed as an agent of export-import bank of Japan. In the problem, it is clear that there is a principal-agent relationship. So, they are considered one and the same if that is the assumption in the problem. The interest income is tax exempt. But in the actual case as ruled by the SC, Mitsubishi was never made as an agent of exportimport bank of Japan. The examiner is aware of that. The source is a tax-exempt entity. That is the argument of Mitsubishi. That is immaterial because in the contract of loan, upon consummation of the same, that money will become the exclusive money of the borrower. You have to check in the problem if the creditor or the lender is not a financing institution controlled or financed by a foreign govt, etc. If not, the interest on the loan is definitely subject to income tax. This case was the favorite forecast of Prof. Jose Nolledo who died 2 years ago. In 1994, he mentioned that this is a sure Q. in taxation. Again in 1995, he made a prediction that this case will be asked. It was not asked, until he died!!! hehehehe. Hope this will be asked in honor of his memory, hehehe. Mr. Examiner, it’s about time that you ask this case!!!! 

Par. (b) Income derived by the Government or its Political Subdivisions: Sec. 32. Exclusions from Gross income-(B) 7b. income derived by the Government or its Political Subdivisions--- ― Income derived from any public utility or from the exercise of any essential governmental functions accruing to the Government of the Phils. or to any political subdivision thereof. Sec. 27. Rates of Income Tax On Domestic Corporations-(C) Government owned or controlled corporations, agencies or instrumentalities-- ―the provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government EXCEPT the GSIS, SSS, PHIC, PCSO and the PAGCOR, shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry or activity‖ There are 2 requisites for exemption: a) source - it is an income derived from the exercise of essential governmental functions. If it is derived from the exercise of proprietary function, that is subject to tax; and apply the principle of Strictissimi juris b) recipient - must be any of the following: 1. Government of the Phils. or Republic of the Phils. 2. political subdivision of the State (LGU) It does not say national Government. It says Gov't of the Phil. Thus in MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY vs. MARCOS (261 SCRA 667) the SC extensively discussed the distinction between ―Govt of the Phils.‖ and ―National Govt.‖ The SC said these are different. Gov't of the Phils is synonymous with Republic of the Phils but it is different from national gov't. Gov't of the Phils (or RP) refers to instrumentality to which the political authority is exercised through out the Phils. This may include autonomous regions and LGU. LGU is within the contemplation of Govt of the Phils or RP. 

1999 Bar: there was a Q regarding GOCC. Do government-owned and controlled corporations form part of the Govt of the Phils (RP) or national govt?  It is believed that GOCC are within the contemplation of national govt. so that if the income nd is received by GOCC, since it is not covered by this (2 requirement), even if it is an income derived from the exercise of essential Governmental functions, that may be subject to tax.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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But this is qualified by Sec. 27 C, as amended by RA 9337. Under Sec. 27 C, as amended, it grants exemptions to 4 GOCC: a) GSIS b) SSS c) PHIC d) PCSO PAGCOR is no longer a tax exempt GOCC. This is the amendment introduced by RA 9337 which took effect July 1, 2005. So, even if the recipient is not an LGU, as it is a GOCC, exemption is granted to the 4 GOCC under Sec. 27 C. PAGCOR was deleted from the list. Take note of Paragraphs C & D (favorite Bar Q). 

Par. (c) Prizes and Awards: Sec. 32. Exclusions from Gross Income(B) 7c. 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 The Tax Code is strict with regard to Paragraph C. There are 3 requisites in Par. C. while in Par. D, there is only 1, sanctioned by their respective sports association (Phil. Olympic Committee (RA 7549) 3 requisites for exemption under Par. C: 1. prize must be received in recognition with SCRALEC ( scientific, religious, artistic, charitable, literary, educational, or civic achievement); 2. No action on his part to enter the contest or proceedings; 3. Unconditional receipt of such prize---meaning that the recipient is not required to render substantial future services as a condition to receiving the prize or award 



2000 Q#10: Jose Miranda, a young artist and a designer, received a prize of P100,000 for winning in the on-the-spot- peace contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain  Answer: Yes it is in recognition of his artistic achievement but since he performed an act— he qualified as a contestant-- we pointed out that in the absence of the 3 requisites, the 100,000 received must be subject to tax. Exemptions must be strictly construed against the taxpayer.

Par. (d) – Prizes and Awards in Sports Competition Sec. 32. Exclusions from Gross Income-(B) 7d 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 Phils or abroad and sanctioned by their national sports association‖ Sec. 32 B 7d provides only 1 of the Rules under RA 7549. RA 7549 (which is the one you will find in 32 B 7d) provides that the recipient is exempt form income tax; it is excluded from Gross income. There are other Rules which are not incorporated in the Tax Code; the other Rule is: the donor or contributor of the award is not subject from donor's tax. If you read Sec. 101 A (3) (Note this as this is a favorite Q under donor's tax), this particular contribution or donation is not covered, but it is still exempt. The donor or contributor is exempt from donor's tax, not under the tax code but by virtue of RA 7549. 

Q: Is the contribution a deductible contribution?  According to RA 7549, it is a deductible contribution. But if you read Sec. 34 H (Exemptions), it enumerates all those deductible contributions, and this is not one of them.  To reiterate, it is deductible not under the provisions of the Tax Code but because of RA 7549. It is RA 7549 that is the source of the Rule that the donor of the award is exempt from donor's tax. It is also the law that allows the contributions as deductible from the Gross income of the donor or contributor.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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

1996Q#10: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land refuse to pay. Decide  Answer: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA 7549 explicitly provides that ―All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax‖.  Neither is the BIR correct in collecting the donor's tax from Ayala Corporation. The law is clear when it categorically stated ―that the donor's tax of said prizes and awards shall be exempt from the payment of the donor's tax.



But this Q may be asked also: How about the amount of the contributions, can that be claimed as deductible contributions?  Under RA 7549, YES. (You must state the # of the law to impress the examiner... 75— grade you must obtain; 49—avoid this, mortal sin!)



So to summarize, in paragraph d, the following are exempted: 1. the recipient of the award—exempt from income tax 2. contributor/donor of the award-- exempt from donor's tax 3. Contributor/donor is allowed to claim the same as deductible contribution. This is based on RA 7549 and not on the Tax Code.



Under the Old Tax Code, the following items were EXCLUDED from Gross Income: a) Informer's reward Under the Present Tax Code (as amended by RA 8424 Sec. 282), this informer's reward is now subject to 10% FT (effective Jan. 1, 1998); b) Interest income on Govt. securities This has been deleted from the enumeration under the Present Tax Code. This means that it is now taxable c) Interest income from bank deposit maintained under the Expanded Foreign Currency Deposit System Under the Old Tax Code, it made no distinctions, irrespective of the recipient or depositor, tax exempt. Under the Present Tax Code, if it is received by Resident Taxpayer it is now subject to 7.5% FT. It is exempt only if the recipient is a Nonresident taxpayer (Individual or corporate)

SUMMARY ON MISCELLANEOUS ITEMS: INCLUDES: a. Foreign Government b. Financing Institutions controlled by FX Govt c. Intl or Regional FI established by FX Govt INCOME DERIVED BY FOREIGN GOVERNMENT FROM THEIR INVESTMENTS IN THE PHILS

REASON: To lessen the burden of foreign loans inasmuch as the interest of these loans are, by contractual arrangement, borne by domestic borrowers. COVERS THE FF INCOME GIVEN BY (a-c): INTEREST INCOME 1. from bank 2. on loan granted 3. on certificate of indebtedness on banks issued in F/O 4. Dividend income received from DC –stock investment income

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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to be exempted it must be derived from GOVERNMENTAL FUNCTIONS

INCOME DERIVED BY THE GOVT OR ITS POL. SUBD.

XPN: Proprietary income of the ff. are tax exempt 1. GSIS 2. SSS 3. PHIC 4. PCSO NOTE: PAGCOR is no longer tax exempt – RA 9337 Expanded VAT REQUISITES: a. received in recognition of SCRA LEC – scientific, charitable, religious, artistic, literary, educational and civic achievement.

PRIZES and AWARDS

b. recipient was selected without any action on his part to enter the contest or proceeding c. recipient is not required to render substantial future services as a condition of receiving the prize Under RA 7549, the venue is immaterial BUT the sports competition must be sanctioned by the Philippine Sports Commission.

PRIZES and AWARDS IN SPORTS COMPETITIONS

13

TH

MONTH AND OTHER BENEFITS

GAINS FROM SALE OF BOND, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS

TAX TREATMENT: ● exempt from income tax ● donor or contributor is exempt from donor’s tax under RA 7549 ● he may claim the same as a deduction in addition to those available under Sec. 34H Total exclusion shall not exceed P30,000

- maturity of MORE than 5 years

GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND

V.

CORPORATE INCOME TAX: These are the provisions that apply to corporate taxpayers: 1) Under Sec. 22B---you'll find therein the definition of Corporate taxpayers; the meaning of corporation for purposes of income tax; 2) Secs. 27,28,& 29-- these provisions lay down different corporate rules 3) Sec. 30-- enumerates 11 tax exempt corporations 4) Sec. 34-- allowable deductions from GI of Corporate Taxpayers Tax Exempt corporations: Sec. 22B enumerates 3 tax exempt associations or entities. Add those tax exempts GOCC under Sec. 27 C, as amended by RA 9337. As amended, there are 4 tax exempt GOCC. Also add Sec .30 (11 items). So, all in all, there are 18 tax exempt corporations Sec. 22 B -- Definition of Corporation for purposes of Income Tax--- Corporation includes partnership no matter how created or organized. There are 6 cases cited by the SC on this and there is also a BIR Ruling on this. “No matter how created or organized”: EVANGELISTA vs. COLLECTOR (104 Phil 42): According to the SC, the phrase simply means that corporations may be formed or organized in writing, orally or in a public instrument. It requires no particular form under which a partnership may be formed or organized. RALLOS vs. RALLOS (?): 2 persons made a contribution to a common fund for the purpose of engaging in a profit oriented business. So, there was a contribution to a common fund. Remember

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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that under the law on Partnership, a partnership is formed or created or organized if these 2 requisites concur: 1. contribution to a common fund; and 2. Intention to divide profit among themselves. In this case, they have the intention to divide the profits among themselves. These persons, according to the SC, formed a taxable unregistered business GATCHALIAN vs. COLLECTOR: 15 persons made a contribution to a common fund to buy a sweepstakes ticket and agreed to divide the winnings among themselves. The SC held that there was a partnership formed. REYES vs. COLLECTOR (1968 case): Father & son purchased a building and put up a business. They agreed to divide the profit. Then an administrator was appointed. The SC said that there was a partnership created. These father & son formed a taxable unregistered partnership. OÑA VS. CIR (45 SCRA 74; Favorite Bar Q; 1972 case-asked 1997 bar): As a rule, co-ownership is tax exempt because the co-owners formed the co-ownership not for profit but for common enjoyment. One of the causes that give rise to co-ownership is inheritance. The heirs are considered co-owners and in that stage, they cannot be considered as unregistered taxable partnership. Here in Oña, after partition, the co-owners made a contribution to a common fund out of their inherited properties. They allow one of them to administer the properties and the surviving spouse made use of these funds and made investments in businesses that produced income. The SC said, this co-ownership was converted into a taxable unregistered partnership because: a) The heirs made a contribution to a common fund; and b) There was an intention to divide the profits among themselves. Co-ownership may be converted into unregistered taxable partnership once the heirs made a contribution to a common fund with the intention to divide the profit among them. The SC held that the circumstance of the case would reveal that there was an intention to divide the profits among themselves because they authorize the surviving spouse to administer the property and make use of these to invest in a profitable business. Cases which are yet to be asked in the BAR: OBILLOS, Sr. vs. CIR (139 SCRA 436) ---OBILLOS DOCTRINE - Obillos, Sr. entered into a contract with Ortigas Corp. The agreement stipulates that the parcels of land be divided into residential houses. But the children found the construction as expensive so they decided to sell the parcels of land. The BIR claimed that they formed a Partnership ―No matter how it is created‖. The SC said that there was no partnership created because it was just an isolated transaction. From the very beginning, the children never intended to form a partnership. There was really no intention to divide the profits among themselves. PASCUAL vs. CIR (166 SCRA 506; 1988 case): The SC ruled that there was no taxable unregistered partnership formed or organized. Pascual acquired 5 parcels of land. They sold these parcels of land for a profit. The BIR claimed that there was a partnership formed. The SC ruled that there was no partnership formed or organized. The SC cited Art. 1769 B of NCC, these are the tests to determine the existence of a partnership---it says ―mere sharing of gross returns does not of itself establish partnership‖. Here, they shared in the gross returns, not in the net profit. There was that absence of intention to divide the profits among themselves. These to my mind, are the probable bar Q's. Oña case was already asked but it may be asked again. Obillos and Pascual are the most probable Q. BIR Ruling 87-102 (April 8, 1987):  If the heirs who inherited a property, an apartment in this case, whereby rent income is derived on such property, continue to engage in the business (rental) and with intent to divide the rentals among themselves, then they shall be taxed as a taxable unregistered partnership TAX EXEMPT: Sec. 22 B- 3 tax exempt entities or associations: 1. General Professional Partnership; 2. Joint venture for the purpose of undertaking construction projects; 3. Joint consortium with the gov’t for the purpose of engaging in petroleum and other energy operations

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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Sec. 27 C-- 4 tax exempt GOCC's: 4. GSIS; 5. SSS; 6. PHIC; 7. PCSO Sec. 30- 11 tax exempt corporations: 8. labor horticultural organization not principally formed or organized for profit; 9. Mutual savings bank not for profit but organized for mutual purposes; 10. Beneficiary society or fraternal society. It is organized for the benefit of the members; 11. Non-profit cemetery formed or organized for the benefit of the members; 12. Non-stock corporations which must not be organized or formed for gain or profit; 13. Business League, Board of Trade or Chamber of Commerce, formed or organized for the promotion of collective business interest (Manila Stock Exchange is not qualified under this particular exemption); 14. Civic League formed or organized for the promotion of the general welfare of the people 15. Non-stock, nonprofit educational institution; 16. Government educational institution; 17. Farmers cooperatives; and 18. Fruit Growers Association You need not memorize these. What is important is that you are familiar with the characteristics or features of these tax exempt corporations. Q: Why are these corporations tax exempt? The reasons are: 1) they are not really organized for profit. They may be organized for charitable, educational, religious, philanthropic and other purposes. These are really non-stock corporations; 2) No part of the income of these corporations inures to the benefit of a particular member or individual. But Memorize the last paragraph of Sec. 30. This may be asked again! Sec. 30 last paragraph: ―Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code‖ 

2002 Q#6: XYZ Foundation is a non-stock, non-profit (NSNP) association duly organized for religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lots used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 300-square meter area of the second and third floors of the building for use as a boarding house. The foundation also operates a canteen and a gift shop within the premises, all the income from which is used actually, directly and exclusively for the purposes for which the Foundation was organized. A. Considering the constitutional provision granting tax exemption to Non-stock corporations such as those formed exclusively for religious, charitable and social welfare purposes, explain the meaning of the last paragraph of said Sec. 30 of the 1997 Tax Code which states that ― income of whatever kind and character of the foregoing organizations from any of their properties, real or personal or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code‖ B. Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding house and the operation of its canteen and gift shop subject to tax? Explain

SUGGESTED ANSWER: A. The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and exclusively used for religious, charitable and social welfare purposes. It does not cover exemption from the imposition of the income tax which is within the context of Sec. 30 of the tax code. As a rule, Non-stock, non-profit corporations organized for religious, charitable and social welfare purposes are exempt from income tax on their

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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income derived by them as such. However, if these religious, charitable and social welfare corporations derived income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income irrespective of their disposition (Sec. 30; YMCA vs. CIR) COMMENT: Since this was asked already, the possible problem may be based on that case of CIR vs. YMCA, which is a case wherein the SC construed the meaning of the last paragraph of Sec. 30. When it says ―NOTWITHSTANDING‖, it implies that these 11 tax exempt corporations are not totally exempt from corporate income tax because their income derived from their properties real or personal, regardless of the use of the same is subject to tax because their income derived from activities conducted for profit irrespective of the use of the same is subject to tax. They are not totally exempt form their corporate income tax because they can be taxed on their income derived from the sale of their properties, real or personal. They can be taxed on their income derived from the lease of their properties, real or personal. They can be taxed on the interest income from bank deposit. With more reason, income derived from businesses. YMCA falls under paragraph E, ―Non stock corporations, non stock associations, charitable, religious and educational organizations‖. 

CIR vs. YMCA (298 SCRA 83): 4 arguments of YMCA in claiming that it is a tax-exempt corporation or association: 1. it invoked the constitutional exemption under Art. VI, Sec. 28, par. 3. it says that religious, educational and charitable institutions are exempt from taxation; 2. YMCA, under Art. 14 Sec. 4(3), claimed that it is a NSNP educational institution therefore exempt form tax; 3. YMCA argued that it could not be taxed because it did not engage in a business; 4. Such an amount shall never be used for business or for gain. It shall be used to carry out its non-profit purposes which are religious, educational and charitable purposes. RULING: 1. Art. VI, Sec. 28 (3) applies only to property tax. The tax subject matter of the case is an income tax and not property tax. 2. YMCA is not qualified as a NSNP educational institution. The SC scrutinized the provisions of the Articles of Incorporation and By Laws of YMCA and ruled that it did not possess the features of NSNP educational institution 3. Yes it did not engage in a business. The leasing of such property cannot be considered as business. It is an isolated transaction. But this is where the provision in Sec. 30 last paragraph saying ―from any of their properties, real or personal‖ or ―from any of their activities conducted for profit‖, came into play. The SC construed that: ―whether for profit or not, that income derived from the sale of real property, lease of real property including personal property is subject to tax‖. So, this is now settled that such phrase ―for Profit‖ does not qualify this provision. But the basis of this, the SC said: Yes, that may be considered as isolated transaction; yes, we believe that YMCA is not engaged in a business, but the law says ―from any of their properties, real or personal‖. It is immaterial whether such transaction is for business or not, as even isolated transaction is covered by this. Transactions covered: a) Income derived from the sale of real or personal properties received by any of Corp. under Sec. 30; b) Income derived from the exchange of real or personal property even for isolated transaction; c) Income derived from lease of personal or real property or in other words, Income derived from dealings in property. Recall Sec. 32 A(3)---one of the items that will form part of the GI is gain derived from dealings in property. Here, it made mention of Real or Personal property as the source whatever the transaction-- be it in the nature of sale, exchange or lease of property. So: 1) the income derived from the sale of real or personal property of any of these corporations under Sec. 30 is subject to tax; 2) the income derived from the exchange of real or personal property of any of these corporations under Sec. 30 is subject to tax; 3)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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the rent income from real or personal property of any of these corporations under Sec. 30 is subject to tax; 4) as well as interest income from bank deposit is subject to 20 FT. The SC said in this case that if YMCA derived income from deposits in the bank, that interest income is subject to 20% FT. Can it argue that the interest income shall be used to carry out its educational, religious and charitable purposes? No. It brings us to the last argument: 4. That it being a religious educational charitable institution, the income (rent income) shall be used in furtherance of its purpose. It is clear in the last paragraph of Sec. 30 ―regardless of the disposition made on such income‖. Disposition also means use. So, even if this income (rent income or income derived from sale or exchange of real or personal property or interest in bank deposits) shall be used in furtherance of non-profit purposes, that is not an argument because the tax code categorically says ―regardless of the disposition; irrespective of use‖, that income is subject to tax. 

Q: What about NSNP educational institution, is this covered by the last paragraph of Sec. 30 (Par. H)? There is Constitutional infirmity. Don't apply the last paragraph of Sec. 30. What should be applied in so far as NSNP educational institution is concerned is Art. 14 Sec. 4(3) of the Constitution. It says ― as long as the revenue (income) shall be ―ACTUALLY, DIRECTLY AND EXCLUSIVELY‖ used for educational purpose, EXEMPT. But here in Sec. 30, even if such income is actually, directly and exclusively used for educational purpose, it is still subject to tax; source of the income is immaterial This Constitutional exemption must prevail over Sec. 30. amended as not to apply to NSNP educational institution.



Sec. 30 last par. must be

Q: A govt educational institution received interest from its bank deposits. #1. Is this subject to 20% FT?  YES. The last Par. Of Sec. 30 squarely applies to Gov't educational institutions. Gov't educational institutions cannot argue that it shall be used for educational purpose. #2. Would your answer be the same if the educational institution is a NSNP educational institution?  The answer would not be the same because as long as there is proof that the interest income shall be actually, directly and exclusively used for educational purpose, that is exempt from the 20% FT.

In par. E, it covers non-stock corporations. It includes charitable and religious institutions. YMCA falls under this. It is a charitable and religious corporation based on its By-laws. So, the last par. of Sec. 30 squarely applies to it. 

Q: Is the interest income received by YMCA subject to 20% FT? YES. It is a charitable and religious institution but it is not considered a NSNP educational institution.

Educational Institutions are favorite Bar Q. You should know the Rules on these (Rules under Title II; Exemptions from property taxation; tax treatment on donations that may be given to these educational institutions—inter vivos or mortis causa)

Classification of educational Institutions: 1) Private educational institution; 2) Government educational institution; 3) Non-stock, non-profit (NSNP) educational institution

There may be 4 Q on these educational institutions: 

Q#1. Are these educational institutions subject to income tax? (be guided by Sec. 30);  Answer: As regards Private educational institution--- Sec. 27 B imposes 10% preferential corporate rate or 35% as amended effective July 1, 2005. The 10% preferential corporate

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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rate applies if the income from unrelated trade, business or activity is NOT MORE THAN 50% of its total income. It means that if it is more than 50% of its total income, apply the 35% corporate rate. As regards Gov't educational institution--- it is not subject to income tax (Sec. 30 (I)). As regards NSNP educational institution--- Under Art. 14 Sec. 4 (3) of the Constitution, it is exempt from income tax, property tax and customs duties. The constitutional exemption from income tax is reiterated under Sec. 30 H.  Q: What is the importance of knowing whether it is a constitutional exemption or a statutory exemption? If a law is passed by Congress withdrawing this exemption (Sec. 30 I), is that a valid law?  YES. The power to grant an exemption carries with it the power to withdraw the same.  Would that be the same if the withdrawal pertains to NSNP educational institution?  That is UNCONSTITUTIONAL. The exemption is by virtue of a constitutional provision. Yes, the power to grant an exemption carries with it the power to withdraw the same but it cannot withdraw Sec. 30 H because it is just a reiteration of a Constitutional provision. It is the Constitution that grants the exemption 

Q#2. Are the properties of these educational institutions subject to property tax?  Answer: Under Art. VI Sec. 28 (3) of the Constitution it makes no distinction. Provided it is actually, directly & exclusively used for educational purposes LUNG CENTER OF THE PHILS vs. ROSAS (433 SCRA 119): The SC construed ―exclusively‖ to mean solely. This now abandons the principle of incidental facilities. Meaning, those incidental facilities may no longer be covered by this Constitutional exemption



Q#3. Are donations inter vivos given to these educational institutions subject to donor's tax? (Sec101 A (b))  Answer: Private educational institutions are not one of those mentioned under Sec. 101A(3). What it mentioned there is Non-stock Corporation that may include NSNP educational institution and Govt. educational institution formed or organized as non-profit educational institution. When this was asked in the bar exams, we suggested that the examinee should state these requisites for the exemption from donor's tax: a. the donee must be a NSNP educational institution; b. the institution must be governed by the Board of Trustees; c. the Trustees receive no compensation; d. the donation shall be used or devoted to the accomplishment of purposes stated in the Articles of Incorporation; e. Not more than 30% of the amount shall be used for administrative purposes If the Government educational institution and NSNP educational institution possess these requisites/ characteristics, the donor is not subject to donor's tax with respect to donation inter vivos given to these Government educational institution and NSNP educational institution



Q#4. Is donation mortis causa made in favor of these educational institutions subject to Estate tax? (Sec. 87 (d))  Answer: YES, under Sec. 87, the institutions covered are: a. transfers made in favor of social welfare organization; b. given to charitable institutions; c. cultural institutions So, Educational institution is not one of them. Since it does not cover educational institution, by the principle of strictissimi juris, any donation mortis causa given to private educational institution, government educational institution and NSNP educational institution is subject to estate tax.

SUMMARY: EDUCATIONAL

(Sec 30 NIRC) SUBJECT TO:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 66 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

INSTITUTION

PRIVATE

INCOME TAX

PROPERTY TAX

10% preferential corporate rate if the income from unrelated business is not more than 50% of the total income; if more than 50% then normal corporate rate of 35%;

DONOR'S TAX

ESTATE TAX

Exempt provided: actually, directly and exclusively used for educational purpose

Donor is subject to tax (Sec. 101 A (3) does not include private educational institution)

Donation is subject to Estate tax as Sec. 87 does not include educational institutions

Exempt provided: actually, directly and exclusively used for educational purpose

Donor exempt provided that: a. the donee/Govt educational institution is organized as nonprofit educational institution; b. the institution must be governed by the Board of Trustees; c. the Trustees receive no compensation; d. the donation shall be used or devoted to the accomplishment of purposes stated in the Articles of Incorporation; e. Not more than 30% of the amount shall be used for administrative purposes

Donation is subject to Estate tax as Sec. 87 does not include educational institutions

Exempt provided: actually, directly and exclusively used for educational purpose

Donor exempt provided that: a. the donee is organized as non-stock, non-profit educational institution; b. the institution must be governed by the Board of Trustees; c. the Trustees receive no compensation; d. the donation shall be used or devoted to the accomplishment of purposes stated in the Articles of Incorporation; e. Not more than 30% of the amount shall be used for administrative purposes

Donation is subject to Estate tax as Sec. 87 does not include educational institutions

20% FT on income from bank deposit

Exempt ; GOVERNMENT

Interest income on bank deposit---20% FT

Exempt ; Interest income on bank deposit—Exempt provided ADE used for educational purpose -certification from bank that the account exists -certification of the educational purpose -there must be a project for educational purpose

NSNP

TAX TREATMENT ON CORPORATIONS TAX RATE

GOVERNING PROVISIONS

MCIT

2% on Gross Income (DC, RFC)

Sec. 27E and 28A (2)

BPRT

15% of profits applied or earmarked for remittance

Sec. 28A (5)

TAX SPARING CREDIT

15%

Sec. 28B 5-b

IAE

10% IAE

Sec. 29



BPRT--- case is MARUBENI vs. CIR (177 SCRA 500)

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 67 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



TAX SPARING CREDIT (Sec. 28B5b): Cases are: Procter & Gamble Phils. vs CIR (160 SCRA 560) Wander Phils. vs. CIR ( 160 SCRA 573) Procter & Gamble Phils. vs CIR (204 SCRA 377)



You should also be aware of the modification on the BOAC Doctrine.  BOAC DOCTRINE--- CIR vs. British Overseas Airways Corporation--- this case has been modified by Sec. 28 A(3) as reiterated by RR 15-2002.

Minimum Corporate Income Tax of 2%: Before the adoption of this, there was that prevailing practice of corporations that prompted Sen. Enrile to introduce the new corporate rule. The prevailing practice to reduce their income tax payments are: Illustrations: 1) A Corp. had a GI of 10M. To understate its taxable income it claims 8M expenses not supported by receipts. Because there was an overstatement of expenses, it resulted to only 2M taxable income. This 2M is not really the net income of the corporation. It does not reflect the true income; 2) Understate GI to 8M. Even if true expenses is 8M, net taxable income is zero 3) It may also be possible that GI is 10M while expenses claimed is 12M. So it resulted to a net loss of 2m. Studies revealed that in reality, an examination of the books of the corporation may result in a contrary finding. The problem here is overstatement of expenses which resulted in a net income not clearly representing the true income; or resulted in a zero net income; or in a net loss. So, Sen. Enrile introduced this new corporate rule. Since it is impossible to eradicate this problem (which is really the evil of NIT), Sen. Enrile suggested to adopt a rule that even if these corporations will overstate its expenses, it can still be held liable to pay Corporate income tax. This is now the rationale behind this MCIT. From the language of Sen. Enrile ―the rationale behind this MCIT is to forestall the prevailing practice of corporations of over claiming deductions in order to reduce its income tax payments. So that even if these corporations have no taxable income, it is still liable to pay 2% of its Gross income. Corporations that have a net loss can still be held liable to pay 2% of its Gross income (answer to 2001Q#9---What is the rationale of the law in imposing what is known as the MCIT on Domestic Corporation?) You know the effect of this? Stockholders will no longer invest in a corporation because they are after dividends. MCIT goes against the business motive on the part of the stockholders to form a corporation. If every year a net loss arises and still it is required to pay tax, it goes against the business motive of forming a corporation.

Situations covered by MCIT (Under RR 9-98): 1. No taxable income as the gross income is the same as expenses. Corporation is still liable to pay 2% MCIT 2. If the corporation incurred a net loss, it is still subject to 2% MCIT under the Corporate Rule as implemented by RR 9-98 3. MCIT applies if the actual corporate income tax applying the corporate tax rate is less than 2% of its gross income Example: Actual corporate income tax is 300,000. 2% of the GI is 500,000. The MCIT therefore that must be paid is ―not lower than 500,000‖. The new rule says ―not lower than 2% of its GI‖ since 2% of its GI is 500,000, the 500,000 is the amount to be paid by the domestic corporation, and not the 300,000 actual corporate tax. Suppose the actual is 500,000 and 2% of GI is 300,000. How much is the corporate income tax that must be paid? Of course, 500,000. You apply MCIT (2% of Gross income) if the actual corporate income tax is less than 2% of the Gross income.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 68 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



Q: How do you counter the argument that MCIT is unjust or inequitable? Even if the corporation has no taxable income or incurred a net loss, yet it is still required to pay 2% MCIT? Are there equitable provisions?  YES under Sec. 27 E (2).What are these equitable provisions? 1. Corporation that incurred a net loss has a tax benefit. The excess of that 2% of GI over the actual corporate income tax may be carried over by way of tax credit---this excess of 2% MCIT over the normal corporate income tax may be credited against actual corporate tax in the next 3 succeeding taxable years

Illustration: 2000

2001

2002

Normal income tax

50,000

100,000

100,000

MCIT

200,000

50,000

60,000

Tax Payable (higher between MCIT & normal tax)

200,000

100,000

100,000

100,000

50,000

-0-

50,000

LESS: excess MCIT over normal income tax (distribute the 150,000 (200,000 – 50,000) excess MCIT for the next 3 succeeding TAXABLE year NET AMOUNT of TAX PAYABLE

200,000

2. Another equitable provision is that MCIT applies only after 4 years from the commencement of the corporate business and not in the first year of operation. If you st apply this in the 1 year of corporate existence---the year of adjustment of corporation— that would be unjust. (Sec. 27 E). The law assumes that corporations are already th financially stable on its 4 yr. Of operation. 3. This may be suspended under equitable exceptional circumstances (Sec. 27 E (3)): a. suspended in the sense that upon the cessation of this cause, MCIT shall automatically be applied; b. prolonged labor dispute experienced by the corporation.  Equity dictates MCIT must be suspended. This is clarified by RR 9-98. What is meant by prolonged labor dispute that will justify the suspension of this MCIT? This must be brought about by a labor strike and have lasted for more than 6 months and it must result in the shutdown of the business operations c. force majeure  this is construed under RR 9-98 to include FILES (Flood, Insurgency, Lightning, Earthquake, and Storm) d. Financial business reverses/losses brought about by FERT (Fire, Embezzlement, Robbery, Theft)  



2 Corporations covered by MCIT: a. Domestic Corporations (Sec. 27 E); and b. Resident Foreign Corporations ( Sec. 28 A2) 4 Tax Exempt Domestic Corporations from MCIT under RR 9-98: a. Private or proprietary educational institution; b. Non-profit hospital; c. Depositary bank that operates under the Expanded Foreign Currency Deposit System d. Enterprises or firms registered with: 1. PEZA pursuant to RA 7960; 2. registered with Bases Conversion Development Authority Resident Foreign Corporations not subject to MCIT: a. regional headquarters of multinational corporations doing business in the Phils b. those engaged in offshore banking activities c. international carriers which may include international airlines and international shipping or vessel d. Enterprises or firms registered with:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 69 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



1. PEZA pursuant to RA 7960; 2. registered with Bases Conversion Development Authority 2001 Q#9b: Is a corporation which is exempted from MCIT automatically exempted from the regular corporate income tax? Explain your answer.  Answer: No. Corporations may be exempted from MCIT but are still subject to corporate income tax. The MCIT is a proxy for the normal corporate income tax, not the regular corporate income tax paid by a corporation. For instance: a. Private or proprietary educational institution---exempt form MCIT but subject to corporate income tax of 10% under Sec. 27 B depending on its dominant income b. Non-profit hospital---exempt from MCIT but subject to 10% or 35% as the case may be c. Depositary bank that operates under the Expanded Foreign Currency Deposit System-- exempt from MCIT but subject to 10% FT d. Enterprises or firms registered with: 1. PEZA pursuant to RA 7960; 2. registered with Bases Conversion Development Authority  Exempt from MCIT but subject to 5% special corporate rate

Improperly Accumulated Earnings Tax of 10%: (new provision—has yet to be asked in the Bar) 

Q: Explain the rationale of this new corporate rule imposing what is known as IAET  Sec. 2, RR 2-2001—Don't just try to memorize this. Understand the implication so that you can easily recall the provision  Answer: In a domestic corp, if dividends are declared & distributed to stockholders, the stockholders are subject to the 10% tax on these dividends. The source of these dividends is earnings (Sec. 43 says ― unrestricted R/E). Let us say, the corporation Improperly accumulates the corporate earnings. It withheld the declaration of dividends. The effect of this is that the Govt was deprived of the right to impose tax on the dividends. Improperly accumulated earnings means that the corporation is not justified under the circumstances. Thus, according to RR 2-2201 Sec.2, it is imposed in the nature of a penalty to the corporations for such improper accumulation of corporate earnings and as a deterrent to avoidance of tax upon stockholders who are supposed to pay tax on that dividends. These are the reasons for the imposition of IAET.



What do you mean by this? When is an accumulation improper?  Under RR 2-2201, this 10% improperly accumulated tax can only be imposed if there is improper accumulation of corporate earnings. This brings us to the meaning of improper accumulation of corporate earnings. Improper in the sense that it is not justified by reasonable means. It is unreasonable and unreasonable means it is not necessary for the business of the corporation under certain circumstances.  As clarified by RR 2-2001-- Prima Facie Instances of IAE includes the following: nd 1. Based on 2 par. Of Sec. 43 of the Corporation Code--- ―stock corporations are prohibited from retaining surplus profits in excess of 100% of its paid in capital. If there's a violation of this, RR 2-2002 says that this may gave rise to IAE. This is a classic case wherein the 10% tax may be imposed; (retention of surplus profits exceeding 100%) 2. when substantial earnings and profits of the corporation were invested in unrelated trade, business or activity of the corporation; 3. when such corporation made an investment in bonds and other long term securities  This is a good Q in the Bar---what are the 3 instances that may give rise to prima facie evidence of IAE.  On the other hand, when is it proper to accumulate earnings in excess of 100% of paid in capital?  Sec. 43 Corporation Code & RR 2-2001: 1. when justified by definite corporate expansion projects or programs approved by the BOD; or

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 70 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. when the corporation is prohibited under any loan agreement with any FI or creditor, whether local or foreign from declaring dividends w/o its/his consent, and such consent has not yet been secured; or 3. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies; 4. to purchase land or building approved by the BOD  Note: there are 6 cases under RR 2-2001 but these 4 are the notable ones Sec. 29. Imposition of improperly Accumulated Earnings tax-B (2) Exceptions-- ―the IAET as provided for under this Section shall not apply to: a. Publicly held corporations; b. Banks and other non-bank financial intermediaries; and c. insurance companies‖ 

Since corporations covered are closely held corporations, not covered are the following:  Under Sec. 29--- 3 ( B-P-I): 1. Publicly held corporations; 2. Banks and other non-bank financial intermediaries; and 3. Insurance companies  In RR 2-2002, there are additional tax exempt corporations in addition to the 3 mentioned in Sec. 29: 4. Taxable partnership 5. General professional partnership 6. Non-taxable joint ventures 7. Enterprises duly registered with the Philippine economic Zone Authority under RA 7916 and 8. Enterprises registered pursuant to the Bases Conversion and development act of 1992 under RA 7227.  These are the 8 corporations or entities which are not covered by the 10% tax on Improperly accumulated earnings.



What was asked in the 2001 Bar is tax exempt or exempt corporations from MCIT. If this will be the trend, the Q maybe corporations which are not subject to the 10% IAE (Sec. 29)

Branch Profit Remittance Tax of 15%: (Sec. 28 A(5) 

2 amendments were introduced by RA 8424. These amendments refer to the basis and the enterprise not subject to 15% FT

Sec. 28 A— Tax on Resident Foreign Corporations-5 Tax on Branch Profit Remittances-- ― Any profit remitted by a branch to its head office shall be subject to a tax of 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. xxx Provided, that interests, dividends, xxx 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‖ 

Questions that must be answered: 1. What constitutes branch profits subject to 15% FT? 2. What is the tax base of the 15 FT? 3. What are the tax exempt branch profits?



Q#1. MARUBENI CORP. vs. CIR (177 SCRA 500) 1999Q#9: HK Co. is Hongkong company, which has a duly licensed Phil. Branch, engaged in trading activities in the Phils. HK Co. also invested directly in 40% of the shares of stock of A Co., a Phil. corporation. These shares are booked in the Head office of HK Co. and are not reflected as assets of the Phil. branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A. Co. seeks your advice as to whether it will subject the remittance to WT. No need to discuss WT rates, if applicable. Focus your discussion on what is the issue

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 71 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

SUGGESTED ANSWER: I will advise A Co. to withhold and remit the withholding tax on dividends. While the general rule is that a foreign corporation is the same juridical entity as its branch office in the Phils, when, however, the corporation transacts business in the Philippines directly and independently of its branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on non-resident foreign corporation. The dividends attributable to the Home Office would not qualify as dividends earned by a resident foreign corporation, which is exempt from tax. JAPS ANSWER: Branch Profits are gains or profits which are effectively connected with the conduct of trade or business in the Phils. That is exactly the last provision of Sec. 28A5. The case of Marubeni Corp. involves a direct investment by the mother corporation (Marubeni Japan) in the Philippine corporation. It received income from such direct investment. Marubeni Japan claimed that that should form part of the branch profit subject to this 15% FT. RULING: It should not form part of the branch profits because such investment has no connection with the trade or business conducted in the Philippines. With this ruling of the SC, we can now say that to be considered as effectively connected with the trade or business in the Philippines, it must be one that is made by the branch office. If the investment is directly made by the mother corporation, the income or profit derived therefrom cannot be considered as branch profit subject to this 15% FT. Don't be misled if in the problem the mother corporation invoked that ― under the principal-agent relationship theory, that may be considered as branch profit or profit of the branch office‖. Principal-agent relationship was rejected by the SC. You cannot apply that theory which dictates that the profit of the mother corporation is considered as profit of the agent and vice versa. It is not applicable because there is a clear provision under the Tax Code. This has not been amended. That is, it must be effectively connected with the conduct of trade or business in the Philippines. It may be considered as branch profit if that investment is made through the branch office.  Q: How do you know whether the investment is effectively connected with the conduct of trade or business in the Philippines?  You can determine it by inquiring with the SEC because a RFC is required to register its business with the SEC. There you can check the nature of the business of the RFC. 

Q#2. What is the basis of this 15% FT?  There are 2 decisions of the SC: City Bank case and Chartered Bank case. The SC based its rulings on the old provision because these 2 cases were promulgated before the effectivity of RA 8424. The SC said that the 15% branch profit remittance tax should be based on profits actually remitted. This is no longer the rule. With the effectivity of RA 8424 amending that particular provision, the basis now is, it is no longer the amount actually remitted, it is the amount applied or earmarked for remittance. So, in the problem, it is possible that the amount applied or earmarked for remittance is 5M. Amount actually remitted is 4M. This is the old rule which is deemed repealed by Sec. 28 A5.



Q#3. Tax exempt branch profits--- profits earned or derived by firms or enterprise registered under Philippine Economic Zone Authority. Under the old Tax Code, it was Export Processing Zone authority. But now, it is under PEZA.

Tax Sparing Credit:(Sec. 28B5b): What is the situation contemplated therein? 

Q#1: NRFC received a dividend from a Domestic Corporation. So, the income subject matter of that provision is dividend income. Is that taxable?  YES, that is taxable.  If it is taxable, is it subject to corporate FT or regular corporate rate?  The tax rate is in the nature of a FT (It is mentioned in Sec. 28B5b, and it made mentioned of Sec. 57A—this is the rule on Final Withholding tax---there are 26 items in Sec. 57A and this is one of them). This means that this 15% corporate income tax is a FT. Since it is a FT, the source (w/c is the domestic corporation) is considered as the withholding agent of the Govt. And applying the Rule under RR 2-98, as w/holding agent, it is the one legally obliged to pay the tax.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 72 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



Q#2. Why is it that the corporate rate has been reduced to 15%? The SC in the case of Proctor & Gamble Phils said that the purpose of the tax code is to attract/encourage foreign investment. If we reduce the tax rate from 35% to 15%, is there a tax saved or spared?  YES. As described by the SC, this is known as the Tax Sparing Credit. So, this implies that there is a tax saved.  Try to analyze, 35% would have been the applicable corporate income tax but Sec. 28B5b reduced it to 15%. so, the tax saved percentage wise, is 20%.



Q#3. What is the condition for the imposition of this 15% reduced corporate rate?  A condition sine qua non to the imposition of reduced corporate rate is that the foreign Govt, in the language of Sec. 28B5b ― shall allow tax credit on taxes deemed paid in the Philippines by this foreign corporation‖.



Q#4. When it say ―shall allow tax credit on taxes deemed paid in the Philippines‖ What does that mean? Will these corporations obliged to present clear & convincing proof of the amount actually granted as tax Credit?  This now brings us to the 2 cases decided by the SC on the same date (April 15, 1988): 1. Procter & Gamble Philis. vs. CIR (160 Scra 560) 2. Wander Phils. vs. CIR (160 SCRA 573) These 2 cases were decided on the same date but were in conflict with each other. (the jurisprudence has yet to be asked in the BAR) nd

In the Procter case, according to Justice Paras of the 2 Division, there should be proof of rd the amount actually granted as tax credit. However, in the Wander case decided by the 3 division of the SC, did not make any ruling to that effect. It can be inferred from the WANDER case that proof as to the actual amount granted as a tax credit need not be necessary. Prevailing Doctrine laid down in the MR of the Procter case (204 SCRA 377): On Dec. 02,1991, acting on the MR filed by Procter & Gamble, SC En Banc ruled that ― the Tax Code does not require actual grant‖. It says ―Shall allow‖, it did not say ―Actual grant‖. The SC is absolutely correct in its ruling that since the Tax Code does not require actual grant, proof of the amount granted as tax credit by the foreign Govt is enough. According to the SC, this is an old provision, except for the tax base. This provision is the same as the old tax code. And there is really no BIR Ruling requiring actual grant. So, the prevailing view is ―No proof of the actual amount granted as tax credit‖. ―What is only required is to prove that the foreign Govt allows such tax credit.‖  Q: How do you prove if the foreign Govt allows tax credit?  Refer to the Revenue Code of the foreign Govt. In fact, in the Procter case, there is a provision in the U.S Revenue Code allowing tax credit to these American corporations.  Twice asked in the Bar: Whether or not the withholding agent (subsidiary corp., in this case Procter Phils.) has the legal personality to file written claim for refund. nd  In the Procter case, the 2 division of the SC said ― It is the mother corporation that has a legal personality to file the written claim for refund because the mother corporation is the one considered as the taxpayer. Since withholding agent is not considered as taxpayer, it has no legal personality to file a claim for refund‖ rd  But in the Wander case, the 3 division said ―Withholding agent has the legal personality to file a written claim for refund‖.  This issue was also resolved by the SC en banc in the MR of the Procter case on Dec. 2, 1991. The SC en banc ruled that the withholding agent is not only an agent of the Govt.; it also an agent of the taxpayer. Since it is an agent of the taxpayer, it is technically considered as a taxpayer. As such, it has legal personality to file a written claim for refund. (The SC cited the case of Phil. Life Insurance vs. CIR 1 SCRA 15). ―It is an agent of the Govt for the collection of taxes and it is an agent of the taxpayer for the filing and payment of income tax. SUMMARY:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 73 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

PROCTOR & GAMBLE vs. CIR – April 15, 1988

WANDER PHILIPPINES vs. CIR – April 15, 1988

PROCTOR & GAMBLE vs. CIR – MR – Dec. 2 1991

WHETHER THE WITHHOLDING AGENT OF THE MOTHER CORPORATION MAY FILE FOR A WRITTEN CLAIM FOR REFUND NO personality to file an action for refund because only the mother corporation can file the same since it is the TP.

YES, since the agent is an agent of the TP and likewise an agent of the government. It is an agent of the mother corporation since it is the one responsible for the reporting of such an income – CONTROLLING DOCTRINE

YES - Under sec. 222, in case of failure to remit the tax withheld, the agent shall be liable for the same

PROOF NEEDED TO AVAIL OF THE TAX CREDIT

There must be proof of the actual amount of the tax credit by the FX government.

Actual proof is not required.

Sustained Wander ruling – the law didn’t mention ―actual‖ – the amount actually allowed need not be proved, it would suffice that under the Tax Code of the FX Govt, it allows its corporation to claim tax credit for the taxes paid to FX governments.

BOAC DOCTRINE (take note of the modification as to tax situs): 

Doctrine #1. Sources of income --- it reiterates the settled rule that the sources of income are PA-S (Property, Activity and Service). Recall the technical definition? Income is a gain derived from CAPITAL, LABOR or BOTH labor and capital (Fisher vs. Trinidad (?). In BOAC case, it just changed the terms: from capital to property; labor to services; but activity is added. This nd now brings us to the 2 doctrine



Doctrine #2. When can you say that an income is derived from sources within? It is also in this case that the SC enunciated the rule that: ―An income is considered as income WITHIN when the source of such income is undertaken within the Philippines‖. In the BOAC case, what is the determinative test of that income considered within? It is an income derived from sources within when the source of the same is made or conducted or undertaken in the Philippines. So, it is considered income WITHIN if: the property from which the income is derived is situated in the Philippines; or the activity from which such income is derived is undertaken in the Philippines; or if the service is perform\med within the Philippines. That’s the meaning of that.



Doctrine #3. State-Partnership Theory - The Philippines has the right to tax the same because it enjoys the protection of the Philippine Govt. It can be taxed if the particular subject of taxation enjoys the protection of the Philippine Govt. If that subject of taxation does not enjoy the protection of the Phil. Govt (Theory of Protection reiterated in the BOAC case), we cannot tax that. So, in the BOAC case, the SC said that an income derived from the sale of transport documents (airline tickets) can be taxed because such activity enjoys the protection of the Phil. Govt. This now brings us to the tax situs of sale transport document. In BOAC case, the tax situs is the place of sale or place of payment. This has been changed or modified by Sec. 28 A (3). The composition of Gross Phil. Billings or the determinative test of those revenues that would constitute Gross Philippine Billings has been changed by RA 8424.  Under the BOAC case, it is the place of sale or payment 

NEW DOCTRINE: Now, it is the origin of passengers, baggage, cargoes and the like.

This in effect changed the tax situs under Sec. 42A (6)—it speaks of sale of personal property and this may include sale of transport document or intangible personal property. In Sec. 42 A (6), the tax situs is the place of sale. This is modified by Sec. 28 A (3), that is, if the subject of sale is a transport document, then consider the origin of the passengers, baggage or cargoes. As amended by RA 8424, Gross Philippine Billings may now consist of revenue that may be derived from the transport of passengers, cargoes and the like, irrespective of the place of sale or payment.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 74 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

RR 15-2000 now declares that off-line international airlines cannot be taxed on the income derived from the sale of transport documents where the passengers and cargoes do not originate from the Phils. 

1994Q#15: An off line international airline sold transport documents (airline tickets) in the Phils to his clients and officers. Can this off line international airline be taxed from income derived from the sale of transport documents?  Under the BOAC case, YES because while it is true that it rendered no service; no property in the Philippines from which income may be derived; there was that ACTIVITY. There was such activity undertaken in the Philippines. The SC said that the activity refers to the sale of transport document. Since these transport documents are sold in the Philippines, payment is made in the Philippines, the flow of wealth therefore, occurred within the Philippines.  The rule now has been changed. We can no longer tax this. The origin of the passengers, baggage or cargoes must be here in the Philippines.

VI.

ALLOWABLE DEDUCTIONS & PERSONAL AND ADDITIONAL EXEMPTIONS: 

The TP must point to some specific provisions of the statute authorizing the deduction and he must be able to prove that he is entitled to the deduction authorized or allowed.



If a TP fails to deduct certain expenses for the taxable year, he cannot deduct them from the income of the next year or any succeeding year.



The following are not allowed to claim deductions – their tax base is GROSS INCOME: a. NRA – NETB b. NRFC

EXCLUSION FROM GROSS INCOME Section 32B

ALLOWABLE DEDUCTIONS Section 34

refers to a flow of wealth which doesn’t form part of the gross income because they are excluded by the TC or by special laws or the Constitution

refers to amounts which the law allows as deductions from gross income in order to arrive at net income or taxable income

material to arrive at gross income – exclude such items to arrive at gross income

necessary to arrive at net or taxable income

something earned or received which do not form part of gross income

something paid or incurred in earning gross income

ALLOWABLE DEDUCTIONS

PERSONAL EXEMPTIONS

As to nature

in the nature of business expenses

in the nature of personal, living or family expenses

As to purpose

is to recover or recoup the cost of doing business

to recover the personal living and family expenses paid or incurred during the taxable year

may be claimed by individual and corporate TPs As to claimant

As to amount

As to kinds of deductions or exemptions

Except:1) NRA-NETB (Sec. 25 B, basis is GI); 2) NRFC (Sec. 28 B1, basis of 35% is GI) the actual expenses paid or incurred in the conduct of trade, business or profession

Under Sec. 34 are classified into: 1) Itemized deductions 2) Optional Standard Deductions of 10% of GI

are granted only to individual TP except NRA-NETB

arbitrary amounts granted to approximate the personal expenses that may be incurred by individual TP Exemption may be classified into: 1) basic personal exemption; 2) addt'l personal exemption of P8k for every qualified dependent,legitimate, recognized illegitimate child or children not more than 4

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 75 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



Sec. 35 D-- Rule on reciprocity regarding NRA-ETB:  It only applies to basic personal exemptions and should not exceed our maximum basic personal exemption: for married individual = 32,000 head of the family = 25,000 single = 20,000



Q: A non-resident foreigner was doing business here in the Philippines. He is married and has 2 minor children.  Check if the country of the foreigner allows basic personal exemption to the citizens of the Phils. If no personal exemptions is granted by his govt, we cannot grant him any personal exemption. But if his govt allows basic personal exemption to Filipino citizens, we can grant him basic personal exemption but the amount must not exceed our maximum basic personal exemption.  Example: his country allows 25k basic personal exemption to married Filipinos. Then he is also entitled to 25k basic personal exemption here in the Phils. If his country allows 40k as basic personal exemption to married Filipinos in his country, he is only entitled to a basic personal exemption of 32k as the amount is the maximum basic personal exemption granted by our country to a married person.  the foreigner cannot claim additional exemption as regards his 2 minor children as the rule on reciprocity applies only to basic personal exemptions



OSD of 10% of GI vs. Itemized deductions:

CLASSIFICATIONS OF DEDUCTIONS ITEMIZED

As to proof

As to claimant



OPTIONAL STANDARD

substantiated by receipts or documents

requires no proof of expenses or incurred because allowable deductions is 10% of GI or gross receipts

claimed by individual and corporate TP

claimed only by 3 individual TP: a. RC b. NRC c. RA

Q: Suppose your friend asks you about these 2 deductions, would you advise him to avail of itemized deductions or OSD of 10%?  Answer: It depends upon the circumstances of the case. If your friend has receipts or documents which may substantiate all the expenses, it's better to avail of the itemized deduction because he can claim more deductions. On the other hand, if he has no receipts to substantiate the expenses incurred, he should avail of the 10% OSD. No proof or receipts are required to avail of the 10% OSD.



ALLOWABLE DEDUCTIONS FROM GROSS INCOME: Section 34 ● Business expense ● Interest expense ● Taxes ● Losses ● Bad Debts ● Depreciation ● Depletion of oil and gases wells and mines ● Charitable and other contribution ● Research and development ● Pension trust ● Additional requirements for deductibility of certain payments ● Optional standard deduction ● Premium payments on health and / or hospitalization insurance of an individual TP



COMMON REQUISITES OF DEDUCTIONS: ● must be incurred in the exercise of the TP’s the trade or business ● incurred during the taxable year EXCEPT losses which may be turned over ● must be substantiated by receipts

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 76 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

● must be reasonable ● must not be contrary to law, public morals or public policy



Favorite Bar Questions: A) Sec. 34 A (1)-- Ordinary and Necessary expense B) Sec. 34 B – Interest Expense C) Sec. 34 C-- Taxes (re: Tax Benefit Rule; asked 2003 Bar; Q was modified in 2005 Bar) D) Sec. 34 D-- Losses E) Sec. 34 E-- Bad Debt Expense

Tax Benefit Rule:(Sec. 34 C (taxes) and 34 E (bad debts): 

What is the provision under the Tax Code which enunciates the Tax Benefit Rule? This applies to two provisions under Sec. 34, paragraphs C and E. There is that common provision on income tax benefit.



Paragraph C provides: ―shall be included in the gross income in the year of receipt to the extent of the income tax benefit of said deduction‖. So, this refers to tax refund.



Paragraph E deals with recovery of bad debts. The provision says: ―shall be included in the gross income in the year of recovery to the extent of the tax benefit of said deduction‖



These are the provisions on ―Tax Benefit Rule‖. It applies to 2 cases: 1. Tax Refund 2. Recovery of Bad Debts written off

Tax Refund: 

―shall be included in the GI in the year of receipt to the extent of the income tax benefit of said deduction‖---it talks about deduction, so it means that what is involved is a deductible tax. This must be a deductible tax and must be actually claimed as deductions. That is precisely the tax benefit---it is one that may reduce the taxable income. Stated otherwise, that may only reduce the taxable income if it is a deductible tax



Example: 2003 taxable year: Net income before tax Less: Local Business tax Taxable Income

150,000 (50,000) 100,000



In 2004, the Local business tax of 50,000 was recovered through a refund because it turned out that the taxpayer is tax exempt. This 50,000 tax refund is subject to tax because applying the tax benefit rule, it was claimed as deduction and therefore it reduces taxable income by 50,000. It reduced your taxable income by 50,000.



However, if the taxpayer receives no tax benefit, the recovery of such tax refund may not result to taxable income. Example is when the tax refunded is a non-deductible tax. If a tax refunded is a non-deductible tax, it is not subject tot income tax in the year of recovery because it did not result in a tax benefit as it did not reduce the the taxable income of the taxpayer for the simple reason that it is not a deductible item.



So you ought to know what are non-deductible taxes because if the tax refunded is a non-deductible tax, common sense will tell you it never reduced the taxable income in the preceding year. There is no tax benefit, so there is nothing to tax. In short, it is not taxable

TAXES: 

Sec. 34 C—Non-deductible taxes ( S-I-D-E): 1. Special assessment; 2. Income tax; 3. Donor's Tax; 4. Estate Tax

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 77 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

These taxes if refunded, will not result in a taxable gain because the taxpayer received no tax benefit 

Deductible Taxes: 1. VAT; 2. Percentage Taxes; 3. Excise Taxes; 4. Documentary stamp taxes; 5. Local business taxes Take Note: Only Local taxes are included in the coverage of the exam!!!

NON – DEDUCTIBLE TAXES

DEDUCTIBLE TAXES

S – Special assessment tax

E – Excise tax

I – Income tax

V – Value added Tax

D – Donor’s tax

P – Percentage Tax

E – Estate tax

D – Documentary Stamp Tax L – Local business Tax

NOT taxable and does not form part of the gross income

Taxable if tax refunded was a deductible tax, hence forms part of the gross income in the year of receipt

Recovery of Bad Debts Written Off: 

Same principle as that of refund applies---- ―to the extent of the income tax benefit of said deduction‖. It presupposes that the bad debt was claimed as a deduction; that it was actually claimed as a deduction.



Example: 2003 taxable year: Net income before write off of worthless accounts Less: Bad Debts Written off Taxable income after BDWO

150,000 (50,000) 100,000



In 2004, this 50,000 was recovered by the creditor. Will this result in taxable gain?  Applying the Tax benefit rule, yes, because such taxpayer received tax benefit. By claiming the 50,000 as deduction from the net income, it reduced the taxable income by 50,000. it follows that if such amount was not claimed as a deduction, it will never result in a taxable income.



Suppose: 



Net loss (150,000) BDWO (50,000) Total Net loss (200,000) The 50,000 was subsequently recovered in 2004. Is that subject to tax?  That is not taxable because the taxpayer received no tax benefit since it was never claimed as a deduction. According to RR 5-99, the recovery of bad debts written off is a mere return of capital. The reason is simple: it was never claimed as deduction because the taxpayer has no net income in the preceding taxable year. There is nothing to reduce.

2000 Q#8: a) What is meant by the tax benefit rule? b) Give an illustration of the application of the tax benefit rule. SUGGESTED ANSWER: a) TAX BENEFIT RULE states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written off and claimed as a deduction from income. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited. The taxpayer is also required to report as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed when such taxes were previously claimed as deduction from income

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 78 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b) X Company has a business connected receivable amounting to 100,000 from Y who was declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X company to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of X company to only P1M . Three years later, Y voluntarily paid his obligation previously written-off to X company. In the year of recovery, the entire amount constitutes part of the gross income of X company because it was able to get full tax benefit three years earlier.



JAPS ANSWER: Citing 2 cases, tax benefit rule applies to: 1. Tax Refund. It is subject to tax if the tax refunded is a deductible tax; 2. Recovery of bad debts written off. It is subject to tax if the amount recovered was claimed as a deduction from gross income in the preceding year 2005Q#2: Are the following taxable: a) Tax refund b) Recovery of bad debts 

Answer: You really have to qualify your answer. In letter (a) it may be taxable depending on the nature of the tax refunded, whether it is a deductible or non-deductible tax. If it is non-deductible, then it is not taxable as there is no tax benefit on the part of the one claiming the refund. In letter (b) you must qualify and cite RR 5-99 if the problem states that there was a net loss in the preceding taxable year. It was just a return of capital, so not taxable.

BUSINESS EXPENSE: 

Considered as ordinary or necessary expenses. They are directly attributable to the development, management, operation and/or conduct of the trade or business of the TP or in the exercise of his profession



The enumeration of ordinary and necessary expenses under Sec. 34 A is not complete. Other reasonable business expenses are: ● Compensation for personal services rendered---ex. Life insurance premium paid by the employer ● Traveling expenses – meal and lodging ● Representation ● Entertainment ● Advertising or promotional expenses ● Rent ● Repairs and maintenance – must be ordinary or incidental



Q: How do you know whether or not an expense is ordinary or necessary?  ANSWER: D-O-M : An expense is ordinary and necessary if it is paid or incurred in connection with the DEVELOPMENT, OPERATION, or MANAGEMENT of the business or exercise of profession.  This is a new provision. Under the old tax code, there was no determinative test because as explained by the SC in several cases, ordinary and necessary cannot be defined with completeness



Promotional Expenses: CIR vs. ALGUE (158 SCRA 9):  Q: Is the P125,000 promotional expenses considered reasonable?  The word ―reasonable‖ is a question of fact. It is a relative term and will depend upon the circumstances of the case and the nature of the business of the taxpayer. According to the SC, the 125,000 promotional expense is reasonable under the circumstances. It is reasonable because the experimental project involves millions of pesos. P125,000 is unreasonable if your business is a mere sari-sari store. ESSO STANDARD DOCTRINE:

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 79 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

The doctrine enunciated here is that ― an expense is deductible if it is paid or incurred in the production of income‖. It is not deductible if it is paid or incurred after the production of income or disposition of income. The case is about whether the margin fee paid to the Central Bank is a deductible expense. The SC said that it is not deductible because this was paid or incurred not in the production of income. It was paid or incurred after the disposition of income.

INTEREST EXPENSE: 

Amount of compensation paid for the use of money or forbearance from such use. They are deductible under the following conditions:  There must be a valid and subsisting indebtedness  It must be an interest bearing obligation – see art. 1956  Obligation incurred or paid in connection with the business or trade or the exercise of one’s profession  Must be proven or substantiated by receipts or documents



Just focus on non-deductible interest!!! PICOP vs. CIR (yet to be asked in the Bar)-- a case regarding non-deductible interest  Q: Is theoretical interest deductible?  There are 2 reasons why theoretical interest is non-deductible (citing RR 2 Sec. 79): 1. It is not paid or incurred. Here, the interest is merely computed or calculated (iniisip pa lang); 2. It lacks the essential requisite for the deductibility of interest expense --- it must arise from interest bearing obligation. The SC said, this does not arise from interest bearing obligation

MANO A MANO: PACQUIAO vs. LARIOS------ unanimous decision PACQUAIO vs. ANTONINO--- Darlene Antonino won by TKO 

Interest on Capital: (non-deductible interest):  1994Q#14: A Co., a Philippine corporation, issued preferred shares of stock with the following features: 1. Non voting; 2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any period the amount is covered by earnings or projects; 3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full or ratably as the assets of the issuer may permit before any distribution shall be made to common stockholders; and 4. the issuer has the option to redeem the preferred stock. A Co. declared dividends on the preferred stock and claimed the dividends as interests deductible from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred shares with their features are really debt and therefore the dividends are really interests. Decide SUGGESTED ANSWER: The dividends are not deductible from gross income. Preferred shares shall be considered capital regardless of the conditions under which such shares are issued and therefore, dividends paid thereon are not considered ―interest‖ which are allowed to be deducted from the gross income of the corporation (RMC # 17-71, July 12, 1971) JAPS ANSWER: The Q here is: Is the interest on preferred shares of stocks deductible? De Leon qualifies his answer. Yes if the payment of dividends is not dependent upon surplus profits. No if the payment of dividends is dependent upon surplus profits. We do not qualify. Under RMC 17-71, it is clear here that interest on capital, which may include interest on preferred shares of stocks, is a non-deductible interest. It makes no qualification.

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 80 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

BAD DEBTS EXPENSE: 

Under Sec. 34 E; RR 5-99 (as amended by RR 25-2002) and PRC vs. CIR (256 SCRA 57), these are the requisites for the valid deduction of bad debts written off: 1. there must be an existing, valid and enforceable obligation; 2. this must be connected with the business, trade or exercise of profession by the taxpayer; 3. this must not arise from transactions between related taxpayers under Sec. 36 B:  Between FAMILY MEMBERS  Between an INDIVIDUAL and a CORPORATION, more than 50% of the OCS is owned by such individual  EXCEPT IN LIQUIDATION  Between 2 corporations  same exception as the foregoing  Between GRANTOR and FIDUCIARY of any trust  Between the FIDUCIARY OF A TRUST and A FIDUCIARY OF ANOTHER TRUST if the same person is a GRANTOR with respect to each trust  Between a FIDUCIARY of a trust and a BENEFICIARY of such trust 4. it must be charged or written off from the books of the taxpayer;  Under RR 5-99, there must be an actual charged off or written off of such amount; mere recording will not suffice. The implication is that: only those taxpayers who have books of accounts can claim these particular expenses as deductions; 5. It must be ascertained to be worthless and uncollectible as of the end of the taxable year; 6. PRC vs. CIR-- it must be uncollectible in the near future (not just at the end of the taxable year; there must be no slim chance of collecting the same)



Tests or factors that are determinative of worthlessness of a debt or obligation (p. 119-120 of the book)--- based on American Jurisprudence: 1. Consider whether the obligation has already prescribed (Application of Statute of Limitation-once it is already prescribed, it is already an exercise in futility); 2. The amount should also be considered. It may be collected but if the cost of collecting the same is more than the amount to be collected, it is impractical to collect such amount; 3. Injury that may be sustained by the debtor. For example, na hospital ang debtor, wala ng panggastos; wag mo na lang singilin; maawa ka naman); 4. Deathe of the debtor leaving no property (galang natin ang patay); 5. Bankruptcy/ insolvency of the debtor; 6. Insufficiency of collateral; 7. Destruction of documentary evidence or receipts which will prove the payment---if there's no evidence to prove that the debtor incurred obligation 8. Under RR as amended by 25-2002: a. The CIR is authorized to waive that required evidence regarding the determination of worthlessness of an account. It made mentioned of the financial incapacity or condition of the debtor; b. It also mentioned the insufficiency of collateral; c. Referral of debtor/defendant lawyer (?) ( the lawyer must execute an afffidavit to the effect that filing of the case in court would be unsuccessful (di ko maintindihan sinsasabi ni japs dito)

Coming soon: F4; Shrek3 (now showing na as of the time of the printing of this notes); Harry PotterOrder of the Phoenix plus the last book (July 21,2007)-2 characters will die; Pirates at world’s end; transformer the movie

EXEMPTIONS: 

In Sec. 35 there are 2 important provisions there: a. Master the definition of head of the family; the Q on senior citizen has never been asked in the Bar (marami tayo dito nyan, Dimayuga, Aligada, Alcantara) b. Sec. 35 C  Head of the 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 or her for their chief support; and where such brothers or sisters or children are 1) not more than 21 years of age, 2) unmarried, and 3) not gainfully employed, or 4) where such

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 81 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

children, brothers or sisters, regardless of age are incapable of support because of mental or physical defect (last paragraph Sec. 35 A)  RA 7432, as amended by RA 9257: Senior citizens shall be treated as dependents provided for in the NIRC and as such, individual taxpayers caring for them, be they relatives or not, shall be accorded the privileges granted by the Code insofar as having dependents are concerned.  Ex. 60 yrs. Old, resident citizen of the Phils. Even if he is receiving income, if the gross income is not more than 60,000, this senior citizen can be considered as a dependent.  Take note that relationship is not a requisite.  Sec. 35 C---there are 2 new rules here. Master this. This was asked in 2004. I told them don't forget this Sec. 35 C (yung natutulog, di nasagot to). This refers to change of status.  Q in 2004 Bar: Ram married Liza in Jan, 2003. Liza died in Nov., 2003. For purposes of filing his income tax return, what would Ram declare as status? a) Single b) married c) head of the family d) none of the above 

This may be answered by Sec. 35 C. Sec. 35 C has 3 paragraphs: st

1 Paragraph: ―if the taxpayer marries or should have additional dependent(s) during the taxable year, the taxpayer may claim the corresponding additional exemptions, as the case may be, in full for such year‖ Par. 1 covers 2 situation: a) Marriage of the taxpayer during the taxable year  Ex. You have developed an unexplained feeling with your seatmate. So, you agreed to get married after the Bar (Dec. 31,2006). You made it sure that the marriage will be solemnized before the midnight of December 31. Even if you will be considered married for only 1 hour, you can claim 32,000 basic personal exemption as married individual. As long as the marriage is within the taxable year. b) Additional dependent  Ex. Masipag si mister. Punong puno si Mrs. May anak ng isa, nanganak pa si mrs. Twice in the same year. Can you claim this 2 children as dependents? Yes nd

2 Paragraph: ―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 if he died at the close of such year‖ rd

3 Paragraph: ―If the spouse or any of the dependents dies or if any of such dependents marries, becomes 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 21 years old or became gainfully employed at the close of such year

2 new rules under this paragraph: 1. marriage of a dependent during the taxable year  Old Tax Code--- he could no longer be claimed as dependent  New Tax Code--- taxpayer can still claim this as dependent (P8K) 2. gainful employment of the dependent during the taxable year  Old Tax Code--- he could no longer be claimed as dependent  New Tax Code--- the taxpayer is entitled to claim that dependent. As such he can claim the P8K as additional personal exemption 

NRA-NETB is not entitled to claim personal exemption

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 82 – J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES



NRA-ETB--- Sec. 35 D requires the reciprocity rule. The foreign Govt. of the NRA-ETB must also grant exemption to Filipino citizen doing business therein. If no exemption is granted, we cannot grant exemption to this NRA-ETB. That rule in reciprocity applies only to basic personal exemption. So even if the foreign govt grants additional personal exemption to citizens doing business therein, we cannot grant additional personal exemption because it is clear in Sec 35 C basic personal exemption, that means additional personal exemptions are excluded.



Q: Who can claim the additional personal exemption of P8K in the case of married individuals?  The additional exemption for dependents shall be claimed by only one of the spouses in the nd case of married individuals. (2 par. Sec. 35 B). The husband shall be the proper claimant for st qualified dependent children (last par. Sec 2.79 (I) (1) (b), and the 1 sentence Sec. 2.79.1 A 5 of RR 2-98) 

Instances when the wife shall claim full additional exemptions for qualified dependent children: 1. Husband is unemployed  husband is a member of this group---PALAMUNIN 2. The husbands waives his right to claim the exemptions of children (waiver should be for all children)  husband is a member of RAMBO--- Report Again kay Misis Bawat Oras (Alcantara is a member of this)  or a member of BBB--- Bantay Bata Brigade 3. Husband is a non-resident citizen deriving income from foreign sources

END OF LECTURE ON PART I - INCOME TAX Special thanks to Ms. Lea Lara for her contributions

GOOD LUCK AND GOD BLESS!

--------------  -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes – page 83 – J. Dimaampao Tax Part One