lumbera TAX.pdf

July 26, 2017 | Author: jade123_129 | Category: Tax Deduction, Gross Income, Taxes, Income Tax, Property Tax
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EXECUTIVE COMMITTEE Over-all Chairman Vice-Chairpersons for Academics

Jan Raphael Salud Jonalyn Porquez Michael Quesada Cristina Elaine Mangrobang Amerissa Base Patricia David Kathleen May Clareza

Vice-Chairperson for Logistics Vice-Chairperson for Finance Vice-Chairperson for Secretariat Vice-Chairperson for Recruitment SUBJECT HEADS Political Law Maicha Lucaylucay Labor Law Roberto Martin Buenaventura Civil Law Michael Malvar Taxation Law Amerissa Base Commercial Law Cherylette Lingao Criminal Law Mina Batungbacal Remedial Law Michael Quesada Legal Ethics Miguel Justin Rigor Legal Forms and Legal Writing Karla Soleil Rosal MEMBERS Altares, Philip Neri, Jorgianna Basconcillo, Ian Zander Ngo, Dianne Cosico, Michiko Palacol, Jamie Rose Daganta, Fely Rose Palileo, Fernando Jr. Dechavez, Alyssa Mae Palmiery, Fritzielyn De Paz, Marvin Pastores, Cherie Escucha, Alexandra Gerardine Red, Karen Christine Galan, Cherie Amor Talatala, Juan Miguel Gloria, Nadine Alessandra Vibandor, Jo Marie Angeli Javier, Gemma Andrea Yang, Gladys Mae Ibasco, Caselyn Yapjoco, Soleil Llave, Miguel Ycong, Cherry Joy Martinez, Ambrosio Advisers: Atty. Bruce V. Rivera Munoz, Lirio Dean Ulpiano P. Sarmiento III

P u b l i s h e d i n c o o p er a t i o n w i t h

EDITORIAL BOARD Editor-in-Chief Associate Editor Managing Editor EIC Emeritus News Editor Feaures Editor Literary Editor Layout Artists

Aretha Eugenio Ma. Katerina Santiago Laisa Mae Aguila Mary Sayeh Hassani Joey Alfonso Rio Dizon Jenna Marie Dela Cruz Sam Santos Luvimindo Balinang, Jr. Carlo June Tibayan ADVISER: Atty. Rita Linda V. Jimeno

Real Property Tax/ Real Estate Tax I will start the discussion by comparing the exemption of various organizations. Kasi dito medyo naintindihan natin yung ibang constitutional provisions. Memorized na natin yan, enumeration, definition. But let’s do some comparison as to the exemption of various organizations from real estate tax, taxability for income tax purposes, taxability for estate tax purposes, for donor’s tax purposes and deductibility from the gross income, these are the points that we need to study. Let’s start with the government. Ang sabi natin: the government is exempt from payment of tax, but that is just a mere general rule. There are specific rules

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on application of exemption of governmental agencies. What are these specific rules?

e.g. Lay-out of building owned by DSWD

1) Government agencies to which the state exercises governmental functions are exempt, unless there is a law requiring taxation; and Building 1

2) Governmental agencies to which the state exercises proprietary functions are subject to tax, unless there is a law exempting them. Office

Building 2

Building 3

Park

Portion rented to

Parking Lot

KFC, McDo, Jollibee

Government Owned and Controlled Corporations (GOCCs) When we talk of Government Owned and Controlled Corporations (GOCCs), these are treated as ordinary domestic corporations and therefore, they are subject to all kinds of corporate taxes except for the following: SSS, GSIS, PHIC, PCSO. PAGCOR is no longer exempt. I will teach you how these governmental agencies are subjected to tax. So the rest of the GOCCs (except SSS, GSIS, PHIC & PCSO) are subject to tax just like an ordinary domestic corporation. Okay, now we also have rules for Government Educational Institutions. In layman’s language, we refer to it as public schools, public elementary schools, public high schools and state universities, iba rin yung tax treatment dito. I will teach you how the tax is imposed on these kinds of institutions. So let me start by giving you an example, ha? Para naman maintindihan ninyo. Governmental agencies performing governmental functions So let us say that this is a parcel of land. Let us discuss the rules on taxability and exemption of governmental agencies. Let’s start with governmental agencies to which the state exercises governmental functions, example DSWD, DPWH, napakarami niyan, these are the governmental agencies. So DSWD, let us say that this is the land occupied by the office, building 1, building 2, building 3, it has its office here, it has a small park and there’s a parking lot. Then a portion here is rented out by DSWD to private entities, let us say KFC, McDo and Jollibee, and these private entities are paying rentals to DSWD. That’s the physical set up of the government agency. The first question is of course, is DSWD, a governmental agency exempt or subject to payment of real property tax or real estate tax (RPT)?

You will not find the answer in the computation. When we talk of RPT, it’s always the Local Government Code of 1991 which governs exemption or taxability of properties for purposes of RPT. Ang sabi sa Local Government Code of 1991, the following properties are exempt from payment of real estate tax: “Real properties owned by the government of the Republic of the Philippines or any of its instrumentalities or agencies, provided, that the beneficial use thereof does not inure to the benefit of a non-exempt entity.” In other words, even if it is owned by the government, if the beneficial use pertains to a non-exempt entity, it will no longer be exempt from payment of real estate tax. The Local Government Code does not say, “actually, directly, exclusively used for governmental purpose.” Ang sinabi lang niya, lahat ng pagaari ng gobyerno ay libre sa RPT subalit kung ang gamit niya ay para sa tao o para sa taxpayer na hindi tax exempt, then hindi na siya magiging exempt. So, following that rule when you are asked, is this portion of the property subject to RPT? (Pointing to building 1 up to parking lot) EXEMPT. The portion which pertains to a non-exempt entity (portion rented to KFC, McDo, Jollibee) is no longer exempt from payment of real property tax. Recent jurisprudence There are a lot of cases, new cases decided by the SC applying this doctrine. We have two cases, the one involving Iloilo Fishing Port and Navotas Fishing Port. What happened there in those two cases decided by the SC in 2010 and 2009? Let’s take the case of Iloilo, ang city government ng Iloilo, ni-reclaim yung shoreline at kinonvert into a fishing port. After conversion, a portion thereof was rented to tenants, the local government of Iloilo assessed real estate tax on the portion occupied by tenants because they were paying rentals. So ang issue dito ay, “Paano ang taxability ng lupa ng gobyerno na ang isang portion ay ginagamit ng government at ang kabilang portion ay ginagamit ng non-exempt

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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entity?” Applying the rule under the Local Government Code of 1991, ang sabi ng Korte Suprema, “The portion of the fishing port rented out to tenants and paying rentals will be suject to real estate tax because those are not exempt anymore from payment of RPT.” Following the same doctrine is the Navotas Fishing Port. Ganun din ang sitwasyon, pina-rent naman. ‘Yung portion na pinarent sa public and paying rentals, hindi na raw exempt from payment of real estate tax. Build-Operate-Transfer Agreement Okay, now there is another doctrine as far as RPT is concerned. Under a Build-Operate-Transfer Agreement (BOT) the government owns the property. Here comes a third person, a tax payer, a private entity entering into an agreement with the government that the private entity will build, operate, and then later on transfer the improvements to the government. The agreement is: the private entity builds, operates and then eventually transfers the infrastructure to the government after a certain period of time. What is the question? During the BOT agreement while the property is owned by the government, is the property subject to RPT? Ang sabi ng SC, “it is subject to RPT because the beneficial use in the mean time that there is a BOT pertains to a non-exempt entity, and what the government has at that time is merely a contingent benefit Why? Because its benefit is contingent upon the subsequent transfer to the government and while it is being used by the non-exempt entity under the Local Government Code of 1991, it will not be exempt from payment of real estate tax. Income realized by government agency from projects Now, let’s continue. DSWD, a governmental agency, realizes income out of projects. ‘Yung mga batang kinukuha nila, matatandang kinukuha nila, their educational courses in the meantime that they are in the hospice. So meron silang mga projects, DSWD realizes income out of these projects, let’s say P50,000. Ang tanong satin ay: Is it income from DWD’s point of view? Is it INCOME? YES. Because income is anything that flows into the wealth of the taxpayer other than a return of capital or anything that increases his net worth or anything that flows into the wealth of the taxpayer other than a return of capital. Therefore, the P50,000 from the projects is income for taxation purposes. Is the rental income? Let us say, P100,000. Is this income on the part of DSWD? Yes, because income is anything that flows into the wealth of the taxpayer or anything that increases his net worth other than return of capital. Income, from the economic point of view in taxation, is

anything that flows into your wealth or anything that increases your net worth other than a mere return of capital. When income realized by DSWD is not subject to income tax So are these P50,000 from projects and P100,000 rental income subject to income tax? Is the answer found in the Constitution? NO. Is the answer found in the general rule that the government is exempt from payment of tax? NO. Saan hahanapin ang sagot? Nasa codal, Sec. 27. As far as the P50,000 income from the projects is concerned, it is income and not taxable because it is in the exercise of governmental function. But the rental income of P100,000 is out of proprietary function and therefore subject to income tax. Donation given to DSWD is income Sumunod na tanong: let us say that X gives DSWD P500,000, tinanggap ni DSWD. 1) Nung tinanggap ng DSWD yung P500,000 from X, is that income on the part of DSWD? YES. Because income is anything that flows into your wealth or anything that increases your net worth other than a return of capital. Sa tax, laging black or white pero konting movement, nag-iiba yung point of view. So we should get used to it. It is income because, from your end? Ang tanong is, “Did it increase my net worth other than return of capital? Is it flow of wealth into me? The answer is yes and so be it, the answer is yes, it is income. Donation to DSWD not subject to Estate or Donor’s Tax When X gives to DSWD, is it subject to estate or to donor’s tax? Estate tax-the way or mode of transfer from X to DSWD is taking effect upon death. Testamentary succession, bequests, taking effect upon death, the question will be, ‘Is it subject to estate tax?” But if the mode of transfer from X to DSWD is taking effect during the lifetime, the question is, “Is it subject to donor’s tax?” ‘Yan ang tatandaan ninyo. Basta ang mode of transfer ay taking effect upon death, ang laging tanong sa inyo ay estate tax. Pag nakita ninyo that the mode of transfer is inter vivos, then ang tanong sa inyo is, “is it subject to donor’s tax?” Ngayon, either way, is it subject to estate or donor’s tax? You will not find the answer in the Constitution. It is not in RPT. It is in Sec. 86 for Estate Tax and Sec. 101 for Donor’s Tax which we refer to as Transfers for Public Use. When a transfer is made in favor of the government or any of its agencies or instrumentalities, we call it ‘transfer for public use,’ and if the mode of transfer is taking effect upon death, we say that the transfer is exempt from estate tax. If the mode of transfer is taking

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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effect during the lifetime, we say that the same is exempt from donor’s tax. Donor’s Tax is Sec.101 and Sec. 86 is Estate Tax. Donor can claim the gift as a deduction from Gross Income Now from the point of view of X, can X claim the same as deduction? Magtanong kayo kung bakit maraming nagbibigay. Maraming nagbibigay dahil talagang dakila ang puso, dalisay. Pure ang intention na makatulong. But in recognition of that purity of intention and the effect of your gift, the government gives a benefit in favor of the donor and the benefit is in the nature of deductibility from gross income. May tax consequence ang pagbibigay kasi nire-recognize ng government ang pagtulong ng isang taxpayer by way of giving of gift. When X gives P500,000, it means may income siya kasi hindi siya makakapagbigay kung wala siyang kita. ‘Yan ang tandaan ninyo. Ang presumption dito ay, si X ay may kita na more than P500,000. Kasi walang taxpayer na normal ang isipan na magbibigay ng ikahihirap nya. Kaya siya nagbibigay kasi may sobra. So pag nagbigay siya ng sobra, yung gobyerno nirerecognize natin ang purity of intention and the effect of your gift by way of allowing you to claim as deduction, the gift that you made.

Deductions that may be claimed by a purely compensation income earner So from the point of view of X, can X claim P500,000 as deduction from his gross income? Ang sagot dito ay makikita sa Sec. 34 and 35 of the Tax Code. I don’t want you to memorize these numbers. I want you to understand what these numbers provide in the Code. Can X claim the P500,000 gift as a deduction? Ito ang sagot: If X were a purely compensation income earner, ano ang ibig sabihin nito? Nagta-trabaho, employer-employee relationship, ang kinikita mo ay puro sweldo. Wala kang ginagawa kundi ang magtrabaho under an employer-employee relationship. What you earn is compensation income. You are called a purely compensation income earner and under the law, if a taxpayer or individual is a purely compensation income earner, the only allowable deductions are: (PE), Personal Exemption of P50,000; (AE) Additional Exemption of P25,000 per child, maximum of 4; and (PHHI) Premiums on Health and/or Hospitalization Insurance. Nothing more, nothing less. So if you gave P500,000 and you are working as an employee in a company, ang presumption natin ay kinuha mo ang P500,000 sa sweldo mo. Kapag nag-compute ka ba ng income tax due from your compensation for the entire year, can you claim as deduction the P500,000? Ang sagot ay: NO. Because you are allowed only PE, AE and PHHI as deduction, and donation is not PE, AE or PHHI.

Donation to DSWD may be claimed as deduction by business income earner Now, if you were a business income earner, X may be a corporation or an individual. Whether X is a corporation or an individual taxpayer earning business income, and P500,000 is given to DSWD, then the business income earner can claim the same as a deduction in full especially if the donation is for the priority projects of the government. We’ll find this in Sec. 34 (h). These are the rules on the exemption from taxability of government institutions exercising governmental functions from RPT to income tax, from donor’s tax to estate tax. Walang ibang rules na madadagdag diyan. Kahit bali-baliktarin natin ang codal, yan lang ang pwedeng itanong sa inyo pagdating sa group na ito. When Government Educational Institution is exempt and not exempt from Real Estate Tax Let’s take the case of a Government Educational Institution (GEI) or what we refer to as public schools, public elementary schools in far flung barangays, wherever. Public high schools, science high schools, this is what we refer to as GEI, state universities or colleges. GEI ang tawag diyan. Let’s take for instance the University of the Philippines: Building 1, Building 2, may office, may swimming pool, may Building 3, Library, may Parking Lot, may canteen, at itong portion na ‘to pinapa-rentahan na naman sa KFC, McDo and Jollibee. These agencies are paying rentals of P100,000. Yan yung physical setup. e.g. Lay-out of the property owned by UP Building 1

Building 2

Building 3

Office

Swimming Pool

Library

Parking Lot

Canteen

Portion rented to KFC, McDo, Jollibee

Is the government educational institution subject to or exempt from payment of RPT? The basis of the answer is Local Government Code of 1991, not the tax code. What does it say? All properties owned by the government of the Republic of the Philippines shall be exempt from real property tax except when the beneficial use thereof pertains to a non-exempt entity. Following that rule, exempt or subject to tax? EXEMPT! This one (buiding 1 up to canteen)? EXEMPT. How about the portion rented out to KFC, McDo and Jollibee? TAXABLE. According to the Local Government Code of 1991, this portion will now be subjected to real property tax.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Tuition fee paid by students is income The school realizes income from tuition fees. Syempre nagbabayad din naman tayo, subsidized nga lang ng gobyerno so mas maliit ang binabayaran. Is the tutition fee income revenue of the school income? Yes! Because income is anything that flows into the wealth of the taxpayer or anything that increases the net worth other than a return of capital. Is the rental income, income? Yes. Because following the same rule, anything that flows into your wealth or anything that increases your net worth other than mere return of capital is treated as income for taxation purposes. Payment from rentals is income Is tuition fee an income? Yes. Is payment from rentals an income? Yes. When income is not subject to income tax Are the tuition fee and rentals subject to income tax? Where will you find the answer? Sec. 30 of the tax code. Sec. 30 is an enumeration or list of corporations which are not subject to income tax. The first sentence of sec. 30, makikita niyo yung salitang “as such”. Those two words are very important in Sec. 30. Tagalugin natin. Lahat ng korporasyon na nakalista ay exempt sa income tax. Nakasulat diyan, are not subject to income tax under this title. Kung titingnan mo, ano title? Income tax. “Ay hindi subject sa income tax sa income as such” that’s how you read it. All of these corporations shall not be subject to income tax for the income realized by them as such. Meaning of “income realized as such” What is the meaning of income realized as such? Income realized by each corporation pursuant to the primary purpose for which they are treated. One of them is a government educational institution, Sec. 30 (i). So anong ibig sabihin? Is tutition fee income, income as such? Yes. Therefore this is exempt. Rental income, income as such? No. Therefore, subject to tax. Income from real property is subject to income tax In addition to the first paragraph, you go to the last paragraph. Nakasulat din diyan, last paragraph, “notwithstanding the provisions above, income of whatever kind or character from real or personal property or from an activity conducted for profit, regardless of disposition, shall no longer be exempt from payment of income tax.” Very literal ang sinasabi ng batas. When you apply that,

P100,000 rental income is an income from real property and therefore according to the last paragraph, it is not exempt from payment of income tax. Interest income from interest on investment, generally taxable Let us assume that the GEI put P50,000 and P100,000 in a financial institution, earning interest of 10%. All in all P15,000. Is the P15,000 interest income, an income? Yes. Is it subject to income tax? Yes. Because according to the last paragraph of Sec. 30, income from an activity conducted for profit of the GEI, will no longer be exempt from payment of income tax. Yes or no? Yes! So this one is subject to income tax. Of course there are BIR Rulings, not BIR Regulations. The government educational institutions may seek a particular BIR ruling, if it can prove that the P15,000 income and the income from rental income will be devoted by the school for educational purpose, pwede ma-exempt. That is an exception to the rule, that is not the general rule. Without a specific ruling to the effect that this income, P15,000 and P100,000 rental ay dine-devote sa governmental purpose or sa educational purpose, hindi mae-exempt yan by reason of last paragraph of Sec.30. Meaning of “regardless of disposition” Let us assume that the P15,000 is not exempt; there’s no specific ruling. P15,000 is not exempt but the P100,000 is exempt. Let’s presume that the 50,000 and 15,000, 65,000 ginamit ng skwelahan, the school used the P65,000 income which is not exempt from income tax for purchase of computers, improvement of the school. Will that fact now exempt the P15,000 and P50,000 from payment of income tax? NO. Because ang sabi sa Sec.30 last paragraph ay “regardless of disposition”. Yan ibig sabihin nung regardless of disposition. Gifts, bequests, devises as items of exclusion from computation of gross income Next, X gives GEI P500,000. Is it income on the part of the school? YES. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it taxable income on the part of the GEI when the GEI receives P500,000? NO, because of Sec. 32 (b) (3). Gifts, bequests and devises are items of exclusion from the computation of the gross income of the decedent. Pag kayo tumanggap ng regalo, yun ay income sa inyo pero hindi siya taxable income. Hindi siya subject sa income tax. Bakit? According to Sec. 32 (b) (3), gifts, bequests and devises are items of exclusion from your computation of gross income. So pag binigyan ka ng limandaang libong piso at ikaw si GEI, income yan sa iyo. Gawin nating kayo at ako para mas madali. Kayo si GEI tapos binigyan ko

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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kayo ng P500,000. Income sa inyo? Oo. Taxable income sa inyo? HINDI. Bakit? Nakasulat sa batas na lahat ng tinatanggap na regalo ay hindi part ng gross income for income tax purposes. Gifts to Government Educational Institution not subject to estate or donor’s tax Ang susunod na tanong, pag binigyan kita ng P500,000 yan ba ay subject sa estate or donor’s tax? You will again find the answer under the NIRC, right? If you give in favor of the government, transfers for public use again, and are therefore exempt from either estate or donor’s tax.

Income of Government-Owned Or Controlled Corporations So we are through with government educational institutions. If it is a GOCC pabaliktad naman. GOCC-lahat subject to tax because it is treated as an ordinary domestic corporation. Madali pag GOCC, lahat- real property, lahat yan subject to tax. Now let’s continue our discussion by comparing the two with charitable, religious, educational institutions, non-stock, non-profit, stock or proprietary educational institutions (PEIs), we also have proprietary hospitals. These are some of the organizations that we have under the Constitution, under the tax code. And we are going to determine the taxability or exemption of these institutions using the same example so that you can see the variances in the rules.

Donation not allowed as a deduction if donor is a purely compensation income earner Noong binigay ko yan sa inyo, anong tax consequence sa akin? Pwede ko bang i-claim as deduction? The answers are the same. If Lumbera is a purely compensation income earner, eto lang tatlo ang pwede kong i-claim (PE, AE, PHHI). Therefore it cannot be claimed as deduction sa akin.

CT CHURCHES CONVENTS

A, D, E,

MOSQUES

used

Donation allowed as a deduction if donor is engaged in trade or business

Non-Profit Cemeteries

Kung si Lumbera is a corporation or individual earning business income, then I may claim the same as a deduction. That’s Sec. 34 (h) and Sec. 35 of the NIRC.

P L B I

Question: Barrister: Ma’am for Sec. 30 po, last paragraph, the “regardless of disposition”, does this fall under those characterized as one-time transactions? Atty. Lumbera: Ah kung one-time transaction iba yan kasi one time transaction, remember that in an activity conducted for profit, the presumption is regular. Because if it’s a one-time transaction, you can seek for an exemption from BIR. Kasi hindi mo ma-establish that you are engaging in business activity. Ang premise dito is habitual, regular. You are entering into commercial transactions on a more or less habitual or regular basis which give you profits. Pag regular kasi yung transaction mo, commercial activities and you are a government educational institution, ibig sabihin nawawala na ang serbisyong publiko ng inyong institusyon. That’s the reason why.

Charitable Religious

RPT

Educational

TAX

Now the Constitution states that, “All churches, charitable institutions, convents, mosques, non-profit cemeteries, parsonages as well as all lands, buildings and improvements, actually, directly and exclusively used for charitable, religious and educational purpose, shall be exempt from tax.” That’s Constitutional Provision NO.1. I-noun natin, dun sa elementary, may noun dito ang katapat niya charitable. Charitable institution, charitable purpose. Eto, religious walang educational na katapat sa sentence. Agree? So nagma-match yan. Magkaka-match yan. Ang sabi lahat daw ng mga institusyon na ito, kasama ang kanilang lupa, lahat ng building at lahat ng improvements doon sa lupain ay libre saan? Tax. Anung klaseng tax? RPT lang yan. At kaya libre sa tax eh dahil ginagamit actually, directly and exclusively for charitable, religious. So, ito ang laging tatandaan. Sa tax kasi this is very helpful. You don’t read the provisions of the law which are very long. Sundan lang ang outline, tagalog version, English version, easy to understand.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Requirement for exemption from RPT

Income realized from projects is subject to income tax

So what makes the exemption? The USE, regardless of ownership. So even if an entity which is not exempt allows these institutions to use it for these purposes, that property will be exempt from tax because ownership is not important. The use of the property is important. So kahit sinong may-ari. Basis? Constitution and the Local Government Code of 1991.

Now, yung mga tao diyan kinukupkop ay nag-aaral ng technical or vocational courses. Gumagawa ng proyekto: basahan, Christmas cards, Christmas baskets, bags out of paper, all of these things. So, the institution realizes income, not from tuition fee but from projects. P50,000. Income on the part of the institution? YES. Why? Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is the P100,000 rental income, income? Yes. Is the P50,000 income from the project subject to income tax? When you look at the constitutional provision, can you say that it is exempt or that it is not exempt? No, you cannot. Kahit bali-baliktarin natin yan hindi natin malalaman kung yung P50,000 ay subject sa income tax. Bakit? Kasi ang coverage nito ay RPT, hindi income tax. So saan makikita ang sagot? CODAL. Nakasulat diyan, Sec. 30 again, Sec. 30 (e). Nakasulat sa batas na ang income ng isang institusyon which is created for charitable purpose, income as such, shall be exempt, and therefore the P50,000 income is income as such, exempt from income tax.

Exempt property No. 2. One is government, exempt property No. 2 “All real properties actually, directly and exclusively used for charitable, religious and educational purposes.” Sa Local Government Code of 1991 nakalagay yan. It shall be exempt from RPT. Determination of purpose of a charitable Institution Let’s take the case of a charitable institution. Let’s say that this is Bahay ng Mga Taong Walang Pag-asa (BTWP). Kinukupkop ang mga tao diyan, mga taong walang pag-asa. How will you know if it is a charitable institution? You look at the incorporation documents, the SEC documents. Because each charitable institution should be registered as a charitable institution with documents, registered before the SEC, wherein the primary purpose is stated. Doon niyo makikita yan. Without any document proving that indeed the organization is a charitable one, no exemption will be allowed. Exemption of a charitable institution from payment of Real Estate Tax Let us say that this is Building1, Building 2, it has a canteen, kitchen, office, park, entertainment area, parking lot, plus KFC, McDo, Jollibee, paying rentals of P100,000 to BTWP, a charitable institution. Is it subject to or exempt from the payment of RPT? Are the Building1 to Parking Lot exempt from payment of RPT? EXEMPT. Basis? Constitution and the Local Government Code of 1991 which states expressly that, “all real properties actually, directly and exclusively used for charitable, religious and educational purpose shall be exempt from payment of RPT.” Building 1

Building 2

Canteen

Park

Entertainment Area

Parking Lot

Kitchen

Office

Portion rented to KFC, McDo, Jollibee

Rental income is subject to tax What about the rental income? Again we go back to last paragraph of Sec. 30, “income of whatever kind or character from real or personal properties or from an activity conducted for profit comma regardless of disposition comma shall be subject to tax.” Hindi niyo makikita and sagot sa constitutional provision. Bakit? Kasi RPT lang pinag-uusapan sa Constitution. Sa codal, NIRC, nandoon ang kasagutan kung bakit yung dalawang income ay taxable o hindi. Donation given to the charitable institution not subject to income tax Now let’s continue, X gives P500,000 to the charitable institution Bahay ng Mga Taong Walang Pag-asa (BTWP). Charitable institution. Kanina, gobyerno ang binigyan, sumunod ay government educational institution, ngayon charitable institution. Is it income on the part of the charitable institution? YES. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it subject to income tax? Is the P500,000 gift from X and received by the charitable institution taxable income? NO. Because of Sec. 32 (b) (3), gifts bequests and devises are items of exclusion from the computation of the gross income. So from the point of view of the recipient, that’s income but not taxable income. Basis? Not the constitution but the tax code.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Gift given to the charitable institution, not subject to Estate or Donor’s Tax If you give in favor of the government, it is not subject to estate or donor’s tax. 100% exempt. If you give to a charitable institution and the question is, is it subject to estate or donor’s tax? It will not be subject to either estate or donor’s tax, provided, that not more than 30% is used for administration purposes. Nakalagay yan, Sec. 87 and 101 of the tax code. So there’s a qualification. It cannot be subject to estate or donor’s tax, provided, that the donee does not use more than 30% of the gift or the donation for administration purposes.

corporate taxpayer, which gave out P500,000 to the charitable institution. Ang assumption natin is yung amount na binigay ko galing sa income ko from business. But I have the right to claim as deduction only to the extent of 10% of my taxable income, not 10% of the donation. 10% of my taxable income. Lumbera’s taxable income for 2011

Donation

P1,000,000

P500,000

Gift is subject to Estate or Donor’s tax if more than 30% of the gift is used for administration purposes What if ikaw na donee eh ginamit mo ang more than 30% ng binigay ko para sa administration purposes? Ang sagot lang diyan ay simple. Nagbibigay ka para makatulong sa institusyon, hindi para paswelduhin ang mga tao na empleyado ng institusyon. Hindi para bayaran ang kuryente ng institusyon at hindi para bayaran ang telepono, sabon, tubig. Hindi ganyan ang pagbibigay ko. Ang pagbibigay ko ay para makatulong sa mga taong walang pag-asa na magkaroon ng pagasa. That’s the reason why I am giving and that is why there is a requirement that when the donee (recipient) uses more than 30% for administration purposes, then the entire donation or gift will be subjected to donor’s or estate tax. The reason I am giving you is not for you to live but para matulungan yang mga taong yan. Kung bubuhayin lang din kita eh hindi yan donasyon sa akin, hindi kita binibigyan ng pag-asa na mabuhay. Ang binibigay ko sayo ay pera para mabuhay ang institusyon. So, if you violate that rule then I have the right to cancel the donation. If there’s a condition for the gift and the donee violates the condition for the gift, the donor has the right to rescind, That’s the logic. Gift given to the charitable institution as deduction Now on the part of X, can X claim as a deduction the amount of P500,000 given to the charitable institution? If Lumbera is a purely compensation income earner, only three (3) are allowed as deductions (PE, AE, PHHI) and this is not one of the three. Therefore, no deduction can be allowed. But if Lumbera were a corporate taxpayer or a business income owner individual, and she gives P500,000 to the institution, she has the right to claim it as deduction, with limitation. What’s the limitation? If Lumbera were a corporate taxpayer, deduction is limited to 5% of my taxable income only. And if an individual, 10% of my taxable income. What does it mean? Si Lumbera is a

Allowable deduction for gift 10% of taxable income P1,000,000 x10%=P100,000 (if individual) 5% of taxable income P1,000,000 x 5%=P50,000 (if corporation)

If my taxable income for the year 2011 is P1,000,000 and I donated P500,000 to the charitable institution, my deduction as a corporation is only equivalent to 5%, so P50,000 lang. Out of my gift, yung P450,000 walang effect sa akin. Hindi natin sinasabi na ‘wag ka na magbigay ng pera kung singkwenta mil lang. Ang sinasabi natin, ‘pag nagbigay ka, salamat, pero ang tax consequence sa iyo, Lumbera, ay hanggang sampung porsyento lang at hanggang limang porsyento lang kung korporasyon sa taxable income. The P450,000 is a gift but it will have no effect on the part of the donor. If si Lumbera is an individual, according to Sec. 34, it will be limited by 10%, up to P100,000 lang ang magiging tax effect sa akin out of the P500,000 gift that I made. Yun yung Sec. 34 (h), makikita niyo yan. Religious institutions Let’s talk about religious institutions. Again, the Constitution states: Churches, convents, mosques, non-profit cemeteries, parsonages, as well as all lands, buildings and improvements therein actually, directly and exclusively used for religious purposes shall be exempt from RPT. So let’s change it to a religious institution. San Beda, the school, is not the religious institution. San Beda-Order of St. Benedict (OSB), is the religious institution. Here we are talking about OSB, the religious institution, not San Beda the school. If we will talk about the School-San Beda, San Beda, the school will be covered by the other constitutional provision, not by this one. If we are talking of OSB, the religious institution, like Iglesia ni Cristo, Roman Catholic Church, Jesus Is Lord Movement, Lahat ng yan. These are the religious institutions.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Determination whether organization is a religious institution

Real property of religious institution exempt from real estate tax

Again, the requirements are that: in the articles of incorporation, it is incorporated as an organization and there are documents showing that it is a duly organized group. Without that proof, you cannot claim the exemption.

Ngayon eto bang property na ito ng simbahan ay subject sa real estate tax or hindi? Lahat ng ito, except this portion rented to KFC, McDo, Jollibee, will be exempt from real property tax. Basis? Constitution. Maliwanag pa sa sikat ng araw. Itong portion rented to KFC, McDo, Jollibee ang hindi exempt. Bakit? Because it is not actually, directly and exclusively used for religious purposes.

Properties and income of a religious institution

Income of Church, not subject to income tax Simbahan

Parsonage

Quarters

Kitchen

Office

Parking Lot

Park

Canteen

Portion rented to KFC, McDo, Jollibee

So let’s take the case of the Church, Katolikong Simbahan. Roman Catholic Church. So eto ang simbahan, bahay/parsonage ng pari, quarters, there’s a park, canteen, kitchen, office, parking lot, portion rented to KFC, McDo and Jollibee. Pagka-panganak bibinyagan, magbabayad sa opisina, mass sa binyag, special mass-mahal, susunod kumpil, mass sa kumpil special kumpil--bayad ka. Araw-araw ng buhay natin tayo’y nagpe-petisyon. Simula ngayon ang inyong petisyon ay: pumasa sana ako sa 2011 bar examinations. At kayo namang mga nasa college of law: sana’y wala akong bagsak at maka-enroll ako sa June! Ang mga petisyon nating yan, bayad na naman tayo sa opisina, singkwenta pesos, trenta pesos. Pag tayo’y nag-asawa, ganun na naman, bayad, depende kung may bulaklak, may carpet, mass sa kasal, special kasal, limang pari, walong pari, Obispo, whatever, iba ang rate. Pag namatay ka, ganun din-bebendisyunan ka, last rites, mass sa funeral o special, depende sa misa, kung ang mass ay fullblown na misa o di kaya eh may choir na kumakanta na tatlong oras tama ba? Ibaiba ang bayad natin. So these amounts of money go to the office. You pay, there’s a receipt. Now habang nagmimisa, habang may serbisyo ang mga pari, pagkatapos non kakain ang mga pari, masarap ang kain, hipon, alimango. Plus may, “father pasensya ka na,” merong envelope yan ang ginagawa natin, dahil ang paniniwala natin sa relihiyon ay nagdadala sa atin sa langit pagdating natin sa kabilang buhay. Di tayo dadaan sa purgatoryo, at hindi rin tayo pupunta sa impyerno. Diretso nang langit. That’s the exercise of our faith, so yan ang ating paniniwala at yan ang ating mga kustumbre sa relihiyon.

Let’s talk about the income of the church. P50,000 out of pamisa, pabinyag, pakumpil. Income? YES. Yung mga pamisa ninyo sa simbahan. Yan ba’y income? YES. Is it subject to income tax? Can you use again as basis the Constitution? No, again because the Constitution only pertains to RPT. So what again will be the basis for your answer? Sec. 30 of the Tax Code. Nakasulat na naman diyan, paragraph (e). So is it subject to income tax? NO. Because according to sec. 30, this is income as such of an organization devoted for religious purpose and therefore exempt. Rental income paid to religious institution, subject to income tax What about the income from rent paid by KFC, McDo and Jollibee? Income? YES. Subject to income tax? YES. What’s the basis? Not the Constitution, but the last paragraph of Sec. 30 which states that, “income of whatever kind and character from real and personal properties or from an activity conducted for profit, regardless of disposition, shall no longer be exempt from payment of income tax.” Interest income of religious institution, subject to income tax If the Church decides to put the money in a lending institution, financial institution, earning interest, is it income? YES. Subject to income tax? YES. Basis? Last paragraph of Sec. 30. Donation given to the Church, not subject to income tax Now let’s continue, X gives P500,000 sa simbahan sa paniniwalang kung nagbigay sa simbahan eh sa langit didiretso. Pero maraming nagbibigay sa simbahan kasi ganyan tayong mga Pilipino. So, nagbigay sa simbahan, income on the part of the church? Yes. Because income is anything that flows into the wealth of the taxpayer other than mere return of capital. Is it taxable income on the part of

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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the church? No. Because, gifts bequests and devises are items of exclusions from the computation of the gross income of the church.

kung korporasyon. The rules are the same for religious and charitable institutions. Walang pinagkaiba.

Income of the priest and income tax consequence

Non-stock non-profit educational institutions

Question, what about those that you give to the pari? Income on the part of the pari? Yes, because that increases his net worth. Is it taxable income on the part of the pari? Dalawa ang sagot diyan.

Non-stock, non-profit educational institutions. Let’s change this to a school. Kanina GEI. Ngayon non-stock, non-profit educational institutions. Private but nonstock, non-profit. Ang konstitusyon nakalatag, madaling intindihin. Yan din ang iaapply natin. So let’s say that this is a school, non stock non-profit. How do you know that?

1) One is that this is income but not taxable because it is in the nature of a gift. Ibinigay mo kay father, ang konsiderasyon gratuitous. Now if you give it to the pari because it is in the form of a gift, it is true that it is income but it is not taxable because of Sec. 32 (b) (3) but it should be subjected to donor’s tax. It should be subjected to the rules of donor’s tax. 2) The other answer is, it is considered as income because it is an income from exercise of profession. “Hindi naman ako nagbibigay sa pari dahil pari siya.” Nagbigay sa pari dahil nagbigay siya ng serbisyo. In consideration of the services rendered by the priest, it should be treated as income and taxable income in the exercise of profession, but not subject to donor’s tax. Ako (Atty. Lumbera), personally, I consider that as taxable income because the reason that I give it to the priest is because of the service that he renders although ang nature nga ng serbisyo is religious. So, that’s an exercise of profession and therefore it should be treated as taxable income. What kind of income is that? Income from exercise of profession, but it will not be subjected to donor’s tax because I did not give it gratuitously without consideration. I gave it for the service rendered by the priest.

Determination whether school is a non-stock non-profit educational institution Nakasulat na naman sa articles of incorporation at sa by-laws. What are the indicators of a non-stock non-profit institution? Nakalagay yon: governed by a board of trustees instead of a board of directors, walang dividends distributed, the income of the organization is not distributed to the members. These are the indicators that an organization is a non-stock, non-profit institution. But of course it should be registered with CHED kasi educational institution ‘to may special permit from DepEd or the CHED in case of tertiary schools.

When School is Subject to or Exempt from Real Estate Tax Portion rented out to KFC, McDo, Jollibee Building 1

Building 2

Park

Dorm 1

Canteen 1

Gift given to the Church, not subject to estate or donor’s tax X gives P500,000 to the Church. Income? Yes. Taxable income? NO. Is it subject to estate or donor’s tax? No, provided, not more than 30% is used for administration purposes.

K Canteen 2

A

L

Y

E Dorm 2

When gift may be claimed as a deduction by the donor Is it allowed as a deduction on the part of the donor? Now, if X the donor, were a purely compensation income earner, he cannot claim as a deduction even a single centavo of the P500,000. Pag binigyan ko kayo ng limandaan, pwede ko ba yon i-deduct sa akin (purely compensation income earner)? HINDI. Kasi sakin, tatlo lang ang pwede (PE, AE, and PHHI). Pag corporation or tao na engaged in trade or business, limited ang deduction ayon sa Sec. 34 by 10% kung tao and 5%

So yan ang eskwelahan, dagdagan natin (portion rented to KFC, McDo, Jollibee, building 1, building 2, park, merong dorm at may canteen sa loob ng campus, at eto ang kalye, meron ding dorm 2 at canteen 2 sa labas ng campus) yan ang set-up. Is the school subject to or exempt from payment of real property

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

11

tax? Building 1 & 2, park and canteen 1--exempt. The dorm? Exempt? YES because that is actually, directly and exclusively used for educational purpose.

When property located outside the school campus is subject to or exempt from real estate tax

Ilagay natin ‘to, Constitutional Provision No. 2. So ang sabi naman dun sa isang constitutional provision, “All revenues and assets of non-stock non-profit educational institutions as well as all lands, buildings and improvements actually, directly and exclusively used for educational purpose shall be exempt from taxes and duties.” Taxes here refer to all national internal revenue taxes, duties here refers to tariff and customs duties. So if you compare the two, this one is a lot broader than this (constitutional provision No. 1). Because there, the constitutional exemption is limited to RPT, here, all internal revenue taxes and tariff and customs duties. So makikita niyo agad ang distinction sa constitution pa lang.

Portion rented out to KFC, McDo, Jollibee

Application of the constitutional provisions How do we apply the rules? Basically pareho but meron lang konting variance yan. So let’s take the case of a non-stock non-profit educational institution. Question in your mind? San kaya ang gamit nito e meron namang ganito (Constitutional Provision No. 1)? Ano bang mali doon? Churches mosques, convents, parsonages, non-profit cemeteries, charitable institutions actually, directly and exclusively used for religious, charitable and educational purpose. Bakit ganon eh meron namang constitutional provision na devoted for educational purpose? Bakit hindi na lang siya tinanggal? Kasi po may mga institusyon na charitable at religious na incidental to charitable and religious purposes meron silang educational purpose. Incidental, hindi primary. Incidental, katulad ng ibang mga simbahan, sa kabilang gilid eh may day care center sa mga batang tinuturuan. Nagtuturo ng katekismo, catechism classes. Incidental lang siya na educational pero hindi sya skwelahan na established separately from the religious institution. Just like what I mentioned to you earlier, if we talk about San Beda, the school, which is a non-stock non-profit educational institution, this is the provision applied (CP No. 2), not that one (CP No. 1). But if we talk about OSB, the religious institution, dito tayo (CP No. 1). Pag sinabing San Beda, the school, eto tayo (CP No. 2). Maliwanag ang demarcation line sa constitutional provision.

Building 2

Building 1

Park K

A

L

Y

Dorm 1

Canteen 1

E

Canteen 2

Dorm 2

So balik tayo, building 1, building 2, park, dorm1, canteen1-exempt from RPT. Basis? Constitution and Local Government Code of 1991. This portion rented out to KFC, MCDO, Jollibee is not exempt because this is not actually, directly and exclusively used for educational purpose. Now, are these dorm 2 and canteen 2, which are outside of the campus, maintained and operated by the school, subject to real estate tax or exempt? Ano lang ang criterion? Actually, directly and exclusively used for educational purpose. If the circumstances of the dormitory outside the campus give us the impression that the same is actually, directly and exclusively used for educational purpose, anong scenario? Ang mga studyante lang ng eskwelahan ang pwede tumira, educational purpose. Ibig sabihin, exempt. Pero kung ang dormitory na ito, ang kalahati eh yung mga trabahador diyan sa gilid ng eskwelahan pinapatira diyan, hindi na exclusively for educational purpose. Therefore, hindi na magiging exempt. Kayo-studyante, puno na si dorm 1, sabi ng San Beda dun na kayo sa dorm 2 lahat, exclusively for students of San Beda. Exempt or not? EXEMPT. When property is not exempt from real estate tax Pero kung sabi ng San Beda, why don’t we just also cater to those who are working, who are not students but are working in the companies in Alabang. Yun bang dorm na yan ay subject to real estate tax? OO. Bakit? Because it’s no longer actually, directly and exclusively used for educational purpose. Same thing. What’s the difference between this canteen and this one? This one caters exclusively to students (canteen 1). This one (canteen 2) may cater to students or even the outsiders. That will contribute to the loss of the exemption because it is no longer actually, directly and exclusively used for educational purpose.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

12

Dorm and canteen inside school, operated by concessionaire

Rental income from KFC, McDo, and Jollibee

Let’s have a variance. Dorm and canteen maintained and operated by the school is exempt from real estate tax. Dorm and canteen operated by the concessionaire, subject to real estate tax or not? Agreement with the concessionaire is, I pay the school 10% of gross sales, that’s the agreement. Is it subject to real property tax or not? EXEMPT. Bakit? Ang sinasabi actually, directly and exclusively used, hindi naman sinasabi na actually, directly and exclusively maintained and operated by the school. Ginagamit ba exclusively for educational purpose? Yes. Then, still exempt.

Rental income from KFC and McDo. Income? YES. Taxable? Subject to tax. YES. Basis? Last paragraph of Sec. 30.

Dorm outside campus, maintained by concessionaire, subject to real estate tax

Payment of students for dorm and canteen

These two (dorm 2 and canteen 2), operated and maintained by concessionaire, subject to real estate tax? Yes. Bakit? Kasi kahit sino ang nagmemaintain, ang tinatanong sa real estate ay ano? GAMIT. USE. Ginagamit ba? Aba eh pag nasa labas ng campus most likely yan ay hindi ginagamit para sa eskwelahan kaya yan ay hindi exempt. Titignan ang circumstances. Ganito maginterpret ng batas sa tax. Hindi yung codal lang tas walang titingnan sa riyalidad. Lahat ng riyalidad titingnan mo. Anu-ano ba yung mga nandiyan? Mga estudyante ba lahat diyan o baka naman nagpapaupa ka na ng mga iba diyan? Kung nagpapaupa ka na diyan, nawala na ang ADE (actually, directly and exclusively used for educational purpose). Kaya hindi na siya pwede ma-exempt. Income from tuition fee The school realizes income-tuition fee, income? YES. Subject to tax? Nonstock non-profit educational institution realizing income from tuition fees paid by students. Ang San Beda ba ay exempt from income tax for the tuition fees that you pay? Yes or no? YES. Basis? Syempre ang una niyong titingnan ay Constitution. Base sa Constitution, ‘pag kayo nagbayad ng tuition fee sa akin (San Beda), exempt na ba yun? Hindi. Kasi ang sabi sa konstitusyon ay, “revenues, assets, actually directly and exclusively used.” Kasi pag revenues ang pinagusapan, tandaan ninyo, either the source of the revenues dictate the exemption or the use of the revenues. Nevertheless, according to Sec. 30 (e), exempt yung tuition fees na binabayaran. “Tuition fee income of a non-stock, non-profit educational institution shall be exempt from payment of income tax.” Basis? Sec. 30 (e).

Interest income of the school If you put the income in a financial institution with interest, the interest is income but taxable. Basis again? Sec. 30, last paragraph, not the Constitution. Always go back to that.

Kanina real property tax ang pinag-uusapan, dorm and canteen maintained and operated by the school. Yung binabayad ninyo sa dorm and canteen pag kumakain kayo, income? Yes. Taxable income on the part of the school? Yes. Exempt o taxable? TAXABLE. Basis? Last paragraph of Sec. 30. You will imagine ha, na lahat ng bagay doon umiikot. Kasi nandun lang eh. Taxable? OO. Ano sabi ng batas? Notwithstanding the provisions, income of whatever kind and character from real or personal properties, or activity conducted for profit comma regardless of disposition comma shall no longer be exempt from payment of tax. Payment of concessionaire to the school Now, let’s change the scenario. Dorm and canteen operated by a concessionaire. The payment of the concessionaire, income? YES. Subject to tax? YES! Basis? Last paragraph of Sec. 30. That is already income from an activity conducted for profit. Income paid to dorm and canteen outside campus Dorm 2, canteen 2, operated and maintained by the school. Payment for the dorm and canteen food, income on the part of the school? YES. Subject to income tax? YES. Basis? Last paragraph of Sec. 30. Amount paid by concessionaire for income from dorm and canteen outside campus Outside of the campus, operated and maintained by a concessionaire, the amount paid by the concessionaire, income? YES. Subject to tax? YES. Basis? Last paragraph of Sec. 30. Hindi siya mahirap. Kailangan lang alamin niyo ang sitwasyon para alam ninyo kung ano ang ia-apply in relation to the Constitution.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

13

Donation given to school, not subject to income tax X gives P500,000 to the school, income? YES. Is it taxable income on the part of the school? NO. Because gifts, bequests and devises are items of exclusions from the computation of the gross income of the school. Donation not subject to estate or donor’s tax Subject to estate or donor’s tax? NO, provided, not more than 30% is used for administration purposes.

Properties inside the campus of the PEI exempt from real property tax Portion rented out to KFC, McDo, Jollibee Building 1 K

Building 2 A

L

Y

Park

Dorm 1

Canteen 1

E

Canteen 2

Dorm 2

Gift as a deduction from gross income of donor When X gives P500,000 to the non-stock non-profit school, can X claim as deduction the P500,000 gift? If X were a purely compensation income earner? NO. Not a single centavo. That’s not Personal Exemption, that’s not Additional Exemption, that’s not PHHI. Now if X were a business income earner, can X claim as deduction the amount given to the non-stock non-profit school? YES, but with limitation. If X were a corporation, up to 5% of his taxable income prior to deduction. And if an individual, then up to 10% of the taxable income prior to deduction of the donation. Determination whether school is a Proprietary Educational Institution (PEI)

So how do we treat the assets and the revenues of a PEI? Let’s talk about RPT. Building 1, building 2, park, dorm1, canteen 1, canteen and dorm operated by the school, are these subject to real property tax or exempt? Can you use as basis the Constitution? NO. Sabi nga nila taxable eh. So dapat raw taxable yan unless there is a law exempting them. So anong babalikan nating batas? Local Government Code of 1991 which states that, “All real properties actually, directly and exclusively used for charitable, religious and educational purpose shall be exempt from tax.” So ano ang kongklusyon natin? Basta ginagamit sa pagaaral, kahit ang gumagamit o ang mayari ay non-stock non-profit or proprietary educational institution, EXEMPT. Reason for exemption from real estate tax of properties used for education

Next, Proprietary Educational Institutions. Sa madaling sabi, what are the indicators that the school is a proprietary educational institution? It is a stock corporation, governed by a board of directors, profits and surpluses are distributed as dividends to the stockholders. But whether PEI or non-stock non-profit, dapat pareho yan registered sa DepEd or sa CHED if you’re maintaining a tertiary level educational institution. Kasi hindi naman pwede magkaron ng eskwelahan na walang permiso. So these are the indicators.

Kasi nire-recognize ng batas ang kontribusyon ng pag-aaral ng edukasyon sa development ng bansa. So there’s no distinction. For real property tax purposes, whether the educational institution is non-stock non-profit or a PEI, EXEMPT ang real property actually, directly and exclusively used for educational purpose. So here, dorm1 and canteen1 are exempt whether operated by the school or a concessionaire.

Paragraph 2 of Constitutional Provision No. 2

Dorm and canteen outside the PEI

Now, parehong pareho. RDL School of Cosmetology. Yan ang skwelahan ko, parehong pareho ang physical set-up. What are the rules that we’ll apply if it is a PEI? Sabi sa konstitusyon, yung No.2 na constitutional provision, meron yang second paragraph. “Subject to the limitations provided for by law, proprietary educational institutions may likewise be exempt from payment of tax”. Ano ang ibig sabihin niyan? Ibig sabihin niyan, ang PEI ay hindi exempt. Mae-exempt lang siya kung merong batas na nage-exempt. In short, they are not exempt. They’ll only be exempt if there is a law exempting them.

Dorm2 and canteen2 if operated by the school exclusively and we can establish that this is actually, directly and exclusively used for educational purpose, then it may be exempt. But in general, since it is outside of the campus, we cannot establish the exclusivity of the use for educational purpose and therefore these dorm2, canteen2 will not be exempt from real property tax.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

14

Portion rented to KFC, McDo, and Jollibee So the portion rented to KFC, McDo, Jollibee will not be exempt because it is not actually, directly and exclusively used for educational purpose. Preferential tax rate of 10% for proprietary educational institutions Tuition fee income and rental income. Is tution fee an income? YES. Rental, income? YES. Subject to income tax? Can you use as basis the constitution? NO. What will be the basis of our answer? Sec. 27 (b). Sabi diyan sa Sec. 27(b), ang PEI plus proprietary hospitals ay isa-subject sa tax at a rate of 10%. Ang regular rate ng corporate tax ay 30%, so hindi itong 30% kundi 10% kung ang kinikita nila sa unrelated trade or activity ay mas mababa sa singkwenta porsyento (50%) ng suma total na kita. ‘Pag naman mas mataas ang kinita sa unrelated trade or activity, sobra ng singkwenta porsyento sa suma total na kita, hindi siya bibigyan ng preferential tax treatment. In English, the PEI/ PH shall be subjected to a preferential tax rate of 10% only if the income from unrelated trade or activity does not exceed 50% of its total income. Conversely, if the income from unrelated trade or activity exceeds 50% of its total income, then the 10% tax will not be applied, regular tax will be applied. Unrelated Trade or Activity (UTA) So let’s take our example, income from tuition fee is P50,000. What is an unrelated trade or activity? Unrelated trade or activity is an activity pursued by the PEI which is not in accordance with its primary purpose. So yung tuition fee ay related trade or activity. Kaya nagbabayad ng tuition fee ay para sa pag-aaral, yung rental income unrelated trade yon.

Income from tuition fee

P 50,000

Income from unrelated trade

P100.000

Total

P150,000

50% of P150,000 is P75,000- 30% rate applies

If the income from unrelated trade or activity exceeds 50% of the entire income, the entire income is taxed at the regular rate of 30%. If it’s the other way around: Income from tuition fee

P100,000

Income from unrelated trade

P 50,000

Total

P150,000

P50,000 does not exceed 50% of P150,000 which is P75,000. The entire income shall be taxed at the preferential rate of 10%. PEIs distinguished from charitable, religious and non-stock non-profit cducational Institutions Unlike in charitable, religious and non-stock non-profit, you segregate. You take the income independently of each other and then you apply the rules independently. If you’re talking about PEIs, the income is grouped together and it’s either taxed at 10% (all) or all at 30%. Now the preferential tax treatment will be allowed only if the income from unrelated trade or activity does not exceed 50% of its total income. Otherwise if it exceeds, the P150,000 will be subjected to tax at 30%. Just like an ordinary domestic corporation. So the exemption is not full, this is only partial exemption. That’s what we are saying. Interest income of PEI from lending institution Now what if the school decided to put the money in a lending institution earning income of P15,000. Interest, income? YES. Is the interest of P15,000 in our example subject to income tax? Pano na naman gagawin diyan? Isasama yan as UTA (Unrelated Trade or Activity). Mababago ngayon yung sum total. You don’t take the income independently of each other. You just group them into either Unrelated Trade or Activity (UTA) or RTA (Related Trade or Activity) and then you get the sum. Income from tuition fee (RTA)

P100,000

Income from interest (UTA)

P 15,000

Income from unrelated trade

P 50,000

Total

P165,000

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If the income from unrelated trade or activity does not exceed 50% of its total, then the total is taxed at 10%. If it exceeds 50%, the total is taxed at 30%. Hindi ‘to full exemption, partial only. Ok?

Charitable Hospital

Proprietary Hospital

Incorporated as a charitable institution

Not a charitable institution even if it has a charity ward

Non-stock, non-profit (even if it accepts paying patients)

Stock corporation

Governed by board of trustees

Governed by a board of directors

Donation given to PEI, not subject to income tax X gives P500,000 to the school (PEI). Income on the part of the school? YES! Is it subject to income tax? NO! Because gifts, bequests and devises are items of exclusions from the computation of the gross income of the school. ‘Pag tumanggap ka ng regalo, yan ay income pero hindi taxable. Bakit? Ang sabi ng batas excluded. Donation given to PEI, not subject to estate or donor’s tax Now, is it subject to estate or donor’s tax ‘pag nagbigay ka sa PEI? ‘Pag ikaw ay nagbigay para sa edukasyon, ano ang primary consideration natin kung bakit ine-exempt? Kasi pag ikaw ay nagbigay para sa edukasyon, ang edukasyon ay nagdudulot ng kaunlaran ng bansa at dahil diyan ay hindi yan isa-subject sa estate or donor’s tax, Provided, that not more than 30% is used for administration purposes. Gift given to PEI may be claimed as a deduction Next, can X claim the same as deduction from gross income? Kung nagbigay ako sa San Beda, PEI, pwede pa ba yun i-claim as deduction? YES. Pero subject to the 10% (for individuals) and 5% (corporations) restriction.

Determination whether institution is a charitable or proprietary hospital Balikan natin, Proprietary Hospital (PH), versus a Charitable Hospital (CH). Ang isang ospital ay charitable kung ayon sa kanyang articles of incorporation, ang purpose ay charity, non-stock non-profit at ang purpose is for charity. Kahit pa yan ay may paying clients and patients. Let’s make a distinction. What is a charitable hospital versus a proprietary hospital?

All real properties of proprietary hospital subject to real property tax SCHOOL

BUILDING 1

BUILDING 2

CHARITY WARD

CANTEEN

LABORATORY

PHARMACY

DORM

OFFICE

MEDICAL ARTS BUILDING

FLOWER SHOP

PORTION RENTED TO KFC, McDo, Jollibee

Ano ang set up ng ospital? Lagyan natin ng school, “complete with nursing school!” Parang St. Luke’s katabi ang Trinity College of Asia. Ang studyante ng Trinity College dun nagpa-practice sa St. Luke’s. Pero ang school hindi part ng ospital, separately incorporated. So pag eskwelahan ang pinaguusapan, ano ang ia-apply? Ang itatanong niyo, charitable or proprietary? YAN. Titignan, stock ba? STOCK. Non-stock? NON-STOCK. Yan ang mga rules. O meron ditong ward. So proprietary hospital with charity ward. May laboratory, canteen, may KFC, McDo, Jollibee, may flower shop at may medical arts building. Yan, let’s take the very simple case of a proprietary hospital with this layout. Ang tanong natin, yan bang ospital ay exempt from real property tax for all the real properties? NO. Not a single square inch of the hospital will be exempt. Bakit? Because it is a proprietary hospital at ang nakalagay sa Local Government Code ay, “Only those properties which are actually, directly and exclusively used

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for charitable, religious and educational purpose,” so hindi yan nagfo-fall doon. Everything will be subjected to real property tax. Income of hospital

portion ha. Yung charity ward portion, that portion can be treated as devoted for charitable purpose and therefore may be exempt from the payment of real estate tax. Charitable hospital

SCHOOL

BUILDING 1

BUILDING 2

CHARITY WARD

CANTEEN

LABORATORY

PHARMACY

DORM

OFFICE

MEDICAL ARTS BUILDING

FLOWER SHOP

PORTION RENTED TO KFC, McDo, Jollibee

Kumikita ang ospital saan? Bayad ng pasyente, board and lodging, laboratory fees, professional fees paid to the doctors and rentals of doctors in the medical arts building. What will be the tax treatment of these income of the proprietary hospital? You apply Sec. 27 (b). Hahanapin ang unrelated trade or activity at ang related trade or activity. At ano ang unrelated? UTA: Rental income from KFC, McDo, Jollibee Rental income from doctors in medical arts building So these two will be the income from unrelated trade or activity. Go back to the computation. If the UTA does not exceed 50% of its total income, then taxed at 10%. If it exceeds, everything is 30%. What about income from laboratory fees? X-ray, HIV test, lahat, stool test, urinalysis. Income yan, related yan. So therefore, dun siya sa related trade or activity. Charity ward of proprietary hospital exempt from real property tax Eh papano kung may charity ward? The fact that there is a charity ward and it accepts patients without paying board and lodging, does it mean that the hospital is no longer a proprietary hospital and already non-stock non-profit? NO. It doesn’t change the nature of the organization. But what is the effect of the charity ward? In the famous case of Lung Center of the Philippines, yung portion na may charity ward, iyon ang pwedeng ma-exempt from real property tax. Portion by

Pano naman kung charitable hospital? Eh di palitan natin. It will be treated purely as a charitable institution and all the rules applicable to a charitable institution except the physical hospital will be applied. SCHOOL

BUILDING 1

BUILDING 2

CHARITY WARD

CANTEEN

LABORATORY

PHARMACY

DORM

OFFICE

MEDICAL ARTS BUILDING

FLOWER SHOP

PORTION RENTED TO KFC, McDo, Jollibee

Let’s have a run down. So dito, lahat ng yan ay exempt from real property tax, pero itong medical arts building portion, hindi exempt. Bakit? Because this is not actually, directly and exclusively used for charitable purpose. Ang hindi lang exempt ay ang Medical Arts Building and the portion rented to KFC, McDo, Jollibee because this is not actually, directly and exclusively used for charitable purpose. But the rest will be exempt from RPT. Basis? Constitution and Local Government Code of 1991. Other income What about the income from board and lodging, laboratory fees, examinations, rental income from medical arts building, from the pharmacy, from the canteen, how do we treat these income? Very simple. Income as such, EXEMPT. But the rental income from the medical arts building and rental income from KFC, McDo, Jollibee, according to last paragraph of Sec. 30, “income of whatever kind and character from real or personal properties or from an activity conducted for trade or profit, regardless of the disposition, shall no longer be exempt from payment of tax.”

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Donation given to charitable hospital, not taxable income Now if there’s a donation in favor of the charitable hospital, is it income? YES. Is it taxable income? NO. Because gifts, bequests and devises are items of exclusion from the computation of the gross income. Donation to charitable hospital, not subject to estate or donor’s tax Is it subject to estate or donor’s tax? NO, provided, not more than 30% is used for administration purposes. Gift to charitable hospital claimed as a deduction Can X, the donor, claim the same as a deduction? We apply the same rules. It is subject to the 10% (for individuals) and 5% (corporations) restriction. KINDS OF TAXPAYERS

corporate taxpayers. So putting up of branches here in the Philippines, engaging in commercial transactions on a habitual basis, hiring of employees, employment of agents, these are indicators that a foreign corporation is a resident foreign corporation. But the 180-day period of course will never apply to a corporate taxpayer. It is not a criterion in determining whether or not a foreign corporation is a resident foreign corporation or a non-resident foreign corporation. C. Partnerships General Professional Partnerships (GPPs) are those partnerships which are established solely for the exercise of a common profession and no part of the income of which is derived from trade or business. These are treated as corporate taxpayers. So for partnership, there are two kinds: General co-partnership (GCP) and General Professional Partnership. Defined under the law, GPP is one established for the sole purpose of the exercise of a common profession of the partners and no part of the income of which is derived from trade or business. Very important yan. A GPP is exempt from income tax.

A. Estate and trust Estate and trust are treated as individual taxpayers for purposes of taxation. TRUST, from the time of the creation and while the property is in the possession of the trustee prior to distribution to the beneficiary. This transitory period, the trust is an income tax payer classified as an individual taxpayer.

GCP. What is a General Co-Partnership? Sa civil law ang dami-daming klase. Sa tax dalawa lang. GCP is any partnership other than the GPP. Any partnership which is not a GCP is a GPP. A GCP is treated as an ordinary domestic corporation and therefore subject to tax. It’s like an ordinary domestic corporation.

B. Corporations

Things to know in income tax

Now let’s go to corporations. A domestic corporation is one organized in accordance with Philippine law even if there is foreign equity. A resident foreign corporation (RFC) is one which is incorporated in accordance with a law other than the Philippines which is engaged in trade or business in the Philippines. RFC is a foreign corporation engaged in trade or business. Ang counterpart niya is non-resident alien engaged in trade or business (NRAETB). A non-resident foreign corporation (NRFC) is a corporation even with Philippine equity but not engaged in trade or business and the counterpart in individuals is a non-resident alien not engaged in trade or business (NRANETB). Yan yung magkakatambal. When Corporation is deemed engaged in trade or business Now how do we know if a corporation is engaged in trade or business or not? We have the same criteria except the 180-day period. It does not apply to

1. 2. 3. 4. 5. 6. 7.

Did you receive anything? If wala, forget it. Is it income? Who am I as a taxpayer? What is the source of the income? Is it taxable? What kind of income tax do we impose? What rate of tax do we apply?

So ang una niyong gagawin, “Sino ba kayo bilang taxpayer?” “May tinanggap kayo?” Pag sagot niyo ay OO, “yun bang tinanggap niyo eh income?”” OO. Susunod niyong gagawin, “Sino ba ako?” Hanapin ninyo ang sarili ninyo. “San ba ako diyan?” At pag nakita na kung sino ka, ang susunod mong itatanong, “San ba galing yang income?” Is it within or without? Because among the kinds of taxpayers, when we determine the source of the income, only a resident citizen

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and a domestic corporation are taxable for income within and outside of the Philippines.

tax system is based on international taxation. Pare-pareho lang yan. Same banana, same concept. May konting variations lang.

Income within and income without

Tax credit

What is the meaning of income within? Galing sa Pilipinas. What is the meaning of income without? Galing sa labas ng Pilipinas. Only a resident citizen and a domestic corporation are subject to income tax for income within and outside of the Philippines. The rest of the kinds of taxpayers are taxable only for income within, but not for income outside of the Philippines. From the table itself, you will be able to determine and see already double taxation in the broad sense because the income of a resident citizen from outside of the Philippines is taxable in the Philippines and that income may also be taxed in the country where it is derived from. That’s double taxation in the broad sense.

So yung income ng resident citizen sa labas ng Pilipinas, kung saan nanggaling yon, taxable din yun doon. So ang remedy natin para hindi masyadong mabigat sa taxpayer, meron tayong tinatawag na tax credit. I will teach you how to do it but not in computation form. Tignan lang natin yung konsepto but you can see immediately from the table alone. When income is from within or without Now, paano mo malalaman kung galing sa Pilipinas o sa labas ng Pilipinas ang isang income? Sinong nagsasabi na ang income ay within at without? Sec. 42 of the Tax Code. Yung Sec. 42 when you read it, napakahaba. Paragraph (a): income within; paragraph (b): income without; paragraph (c): income partly within, partly without. Huwag nang basahin yung (b) and (c), kasi yung b and c pag binasa mo at pinag-compare mo, pareho rin lang, baliktad lang nung (a). So pag binasa mo yung isa, alam mo din yung iba, pinagbaliktad lang. Pag wala sa a, nasa b. Pag wala sa b and c, nasa a. So isa lang ang alamin. Pag alam mo ang within, alam mo rin ang without. So let’s concentrate only on one so that you will know both. Interest income

The income of whatever kind of alien from the Philippines is taxable here. And because they are citizens of another country, they are also subjected to tax in the country wherein they are citizens. That’s double taxation in the broad sense. Corporations, the same thing. This is a clear case of taxation in the broad sense, not prohibited under the Constitution, not encouraged but not illegal. The law recognizes the harsh effects of taxation in the broad sense and therefore the law also in income taxation provides for the remedies to reduce the harsh effects of double taxation such as: 1) tax credit; and 2) tax sparing rule. For branch profit remittances, these are the two means on how to reduce the harsh effects of double taxation in the broad sense kasi doon ita-tax din yan. Remember that our

Ang mga nakalista diyan ay una: (1) interest. Ano ang interest? One is interest on bank deposits and two, interest on loans. How will you know if the interest paid and received, syempre ang point-of-view dito ay sino ang nagbayad o binayaran? Ang binayaran. Kayo ang pinaguusapan. Hindi ako na nagbayad. So kaninong point-of-view dito sa interest, yung tumanggap ng bayad o yung nagbayad? Yung binayaran! Ano ang sabi ng batas? Ang importante diyan ay, “of residents, corporate or otherwise.” So resident corporations which may be either resident foreign corporations or domestic corporations, or when we talk about individuals, resident citizens and resident aliens. Derived from Philippine sources. Interest income from bank deposit in the Philippines Bangko. May deposito ka sa bangko ko, nandito sa Alabang. Binigyan kita ng P10 na interest on bank deposits. Income? Yes. Within or without? Within. Bakit? Ang bangko ay nasa Alabang. Nasa loob ng mapa ng Pilipinas in

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accordance sa archipelagic doctrine. Sino ka? Resident ka ba o hindi? Resident ka. So yan ay within. Interest income paid by non-resident citizen to another non-resident citizen, both in US, but paid in Philippine Bank Utang. Kapwa Pilipino, pareho tayong nasa US. Nag-utangan tayo. Pareho tayong non-resident citizens. Agreement? Bayaran mo ako ng utang mo ang interest i-deposito mo nga sa bangko sa Pilipinas. The debtor and creditor are both non-resident citizens. The interest was deposited in a bank in the Philippines. Income within or without? Without. Kasi parehas tayong non-resident citizen. Diba ang nakasulat sa batas, “of residents, corporate or otherwise”. Ano ka, nonresident citizen ka ba? Oo. Ako non-resident citizen din. Maga-apply ba yan sa atin? Hindi. Kaya yan income without. Interest paid to resident citizen in Philippines Pero kung ikaw ay nasa Pilipinas, binayaran kita ng interest, pinadala ko sa Pilipinas. Resident citizen ka. Yung interest ba ng utang ko sa iyo within or without? WITHIN. Interest income in US bank paid to resident citizen Let’s take it a little further. Creditor, nasa Pilipinas ka. Resident citizen ka. Debtor, nasa labas ako ng Pilipinas, non-resident citizen. Binayaran kita ng interest sa utang ko sa iyo. Dineposito ko ito sa bangko sa USA. Within or without? WITHIN. Bakit? Resident eh. Nasusundan? You just have to be particular about what the law states. No gray area, no dirty white. It’s there.You’re surprised now because all the while you’re thinking na everything na dito binayaran ay within and everything na sa labas binayaran ay without. WRONG. Services Services rendered. Kung sa loob ng Pilipinas naggupit ng buhok, archipelagic doctrine, kahit saan nagbayad, walang pakialam. Income derived from services rendered is dependent on where the service was rendered, not where the payment is made. Even if ginupitan kita ngayon dito sa Pilipinas, nagbayaran tayo sa States, hindi magma-matter. Where are the services rendered? Whether the payment is within or outside of the Philippines is not material. Such that, if, let us say you are working for a Philippine company which has a branch outside of the Philippines, you’re arrangement is, “Sige padadala kita sa branch, you perform your work there but your salary will be deposited in the

bank in the Philippines so that your family can benefit.” Within or without? WITHOUT. Kahit ang bayad eh nasa loob ng Pilipinas. Bakit? Because the services were rendered outside of the Philippines. Sale of real or personal property Let’s summarize the income from sale of real property or personal property. Location is the rule. If you’re talking about income realized from sale of property, the rule is where the property is located. Kahit pa tayo ay nagbayaran sa labas ng bansa, wala tayong pakialam. Nasaan ang real property? Nasa mapa ba ng Pilipinas? OHO. Kahit ang bayaran natin ay doon sa Paris, dineposito sa Hong Kong, Pilipinas ba ang real property? Oo. WITHIN. Tangible personal properties Ganun din . Where it is located. Location is the rule. Intangible personal properties What about intangible personal properties? Where is their location? If you sell shares of stocks, credits, debentures, notes, promissory notes, these are intangible personal properties. You don’t look at the paper. NO. The certificate of stock, hindi yan ang tinitignan. Ano ang magde-determine ng location ng shares of stock, debentures, notes, promissory notes? Yung bang papel na lumalakad, bitbit? Hindi. What is the location of intangible personal properties? DOMICILE OF THE OWNER. That’s the rule. So hindi pinag-uusapan kung nasan ang papel. ‘Pag ang binenta ay intangible personal property, the intangible personal property follows the domicile of the owner. Shares of stocks in a foreign corporation, ang may-ari ay Pilipino. Eh yung shares of stocks na yun pag binenta kahit san ibenta, ang lokasyon nun ay Pilipinas. Bakit? Susunod yun sa ating buntot! Domicile. Let’s be very, very careful. So sale of property, LOCATION. Kahit anung klase, real property or personal property, tangible personal property, you can see, location. Intangible personal property, DOMICILE OF THE OWNER is the rule. The only time that we don’t follow the domicile of the owner is in estate or donor’s tax under Sec. 104. That’s a specific law. So that’s not a general rule.

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Dividends issued by domestic corporation Let’s go to dividends. Ano ba ang dividends? Meron kang shares of stock in a corporation. Meron profits and tubo ang corporation. Ang profits at tubo, ididistribute sa stockholders in the form of dividends. So sino ang taxpayer na pinaguusapan? Yung may-ari ng shares of stocks na tumubo sa isang korporasyon. Binigay ng korporasyon si profits. Ang sabi ng Code, ‘pag ang nagissue na korporasyon ay domestic corporation, income within or without? WITHIN. Basta ang nag-issue ng shares of stock ay domestic corporation, WITHIN YAN LAHAT. Kahit sino ang tumanggap. Kahit ikaw ay resident citizen, non-resident citizen, resident alien, kahit anung klase ka doon. ‘Pag ikaw ay tumanggap at nanggaling sa domestic corporation, yan ay within. Dividends issued by foreign corporations What about foreign corporations? Let us assume that the corporation issued P100,000 worth of dividends to stockholders. If domestic corporation, the entire P100,000 is within. Paano kung foreign corporation ang nag-issue? Within or without? Nasa codal. Hindi yan “it depends”. Ang sabi ng batas, within lahat SUBALIT kung tatlong taon bago binigay ang dibidendo, ang kinita ng foreign corporation sa Pilipinas ay mababa sa singkwenta porsyento (50%) ng suma total na kinita, hindi lahat ay within. Conversely, if the income derived from the Philippines three (3) years prior to the declaration of dividends is more than fifty percent (50%), everything is within. Do not be confused. Our thinking is always, “if it’s a foreign corporation which issued the dividends, we always think that it’s not in the Philippines”. Hindi pinag-uusapan ang lokasyon. Ang pinaguusapan ay magkano ang kinita ng foreign corporation sa Pilipinas? Kapag ang kinita niya sa Pilipinas tatlong taon bago niya ibigay ang dibidendo ay mas mababa ng singkwenta porsyento (50%) ng suma total na kinita, hindi lahat ay within. Kaunti lamang. Ano yung kaunti? In proportion to the income derived from Philippine sources. Dividends issued by foreign corporation with no Philippine branch The foreign corporation is incorporated in a foreign country. The main office is in USA. It so happened that the foreign corporation does not have a branch in the Philippines, but has income from Philippines. Pwede rin may branch. In which case, the foreign corporation is a resident foreign corporation. Or walang branch but may kinita sa Pilipinas, in which case, the foreign cororation is a nonresident foreign corporation. Basta may kinita sa Pilipinas. Nagbigay ng dibidendo noong 2011 ng P100,000. Nung 2010, ang kinita sa US ay P1,000,000; sa

Pilipinas ay P500,000. In 2009, ang kinita sa US ay P2,000,000; sa Philippines ay P700,000. In 2008, kinita sa Pilipinas ay P2,000,000; kinita sa US ay P3,000,000. Ang kinita sa States, may office is P6,000,000; ang kinita sa Pilipinas ay P3,200,000. Pagsamahin, ang suma total na kinita ay P9,200,000. Kunin ang 50%, it’s P4,600,000.

US income

RP income

2010

P1,000,000

P500,000

2009

P2,000,000

P700,000

2008

P3,000,00

P2,000,000

TOTAL= P6M

TOTAL=P3.2M

Three years prior to the declaration of the dividends, the income from the Philippines is P3.2M which is less than 50% of its total income (P9.2M). Then the entire P100,000 is not from within. Only a portion is from within. How do you get the portion? Income from Philippines (P3.2M)

X P100K (dividends distributed)

Total income (P9.2M) P3.2 M is around 1/3 of total income of P9.2M. 1/3 of P100K is about P33,333 and 2/3 is P66,666. Pag ganyan ang sitwasyon ng korporasyon, sabi ng rules lahat ng inissue na dividends ay within. So ang P100,000 dapat lahat ay within. SUBALIT, kung tatlong taon bago binigay ang dibidendo, ang kinita sa Pilipinas ay mas mababa sa 50% ng suma total na kinita, hindi lahat ng P100,000 ay within, kaunti lamang. Ano yung kaunti? Eto 33%. So using that as basis, when you look at the table, if we are talking about a non-resident citizen and the situation is like that of a foreign corporation, only the P33,333 is taxable. The P66,666 is not. In the same manner as a corporation, if we apply the rules, pagdating sa domestic, buong P100,000 taxable. Pagdating dito (Table), only 33% is taxable, 66% is without and not subject to tax.

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The correct rule is when it comes to foreign corporations, everything is within, unless three years prior to declaration of dividends, less than 50% of the entire income is derived from the Philippines, only a portion is from within. The rest are from without. Domestic and foreign, both are from within, subject to that exception.

Gross income

Income tax liability of resident citizen

x

Let’s talk about a resident citizen. So we are sure about who the taxpayers are, then from the source of income alam natin ang taxability. Now let’s go to the third factor, that is, the kind of income they receive so that we will be able to know kung taxable ba o hindi at kung taxable, anung klaseng buwis ang babayaran. I’ll give you the description of the kinds of taxes para isang bagsakan tayo later.

Net income tax due

Individual taxpayers’ liabilities Net income tax Withholding tax

Less: allowable deductions Taxable net income tax rate

Less: tax credit (if any) Merong schedular. Yung if the net income is not more than P500,000 the tax shall be blah blah blah plus 4% of excess over blah. Yung bracketing, yan ang net income tax table. Ano ang ibig sabihin niyan? Sa loob ng isang taon, pagsasama-samahin mo lang ang gross income mo tapos you will be allowed to claim deductions na nakalagay din sa batas kung ano, and that will be your taxable net income multiplied by the rate and is equal to the net income tax due less tax credit, if any. Yan ang sinusundang proseso.

Final withholding tax (FWT)

Withholding tax

Creditable withholding tax (CWT)

What is withholding tax? When income is realized and received, the payor of the income is under the obligation to withhold the corresponding tax due and remit the same to BIR. There are two kinds: 1) final withholding tax (FWT); and 2) creditable withholding tax (CWT). If the income is subjected to final withholding, your income is taxed with finality and no other tax can be collected. And your income subjected to FWT will not be included anymore in the gross income. Kunwari sa prizes and winnings, pag nanalo ka sa Willing Willie at binigay sayo ang premyo, meron yung withholding tax na 20%. The income, the prize and the winnings are subjected to final tax. I (the payor of the winnings) am under the obligation to deduct the withholding tax and the tong, equivalent to tax, will be remitted to the BIR by me (the payor). Whatever prizes and winning realized or earned, you will not be taxed anymore forever for that and you will not add that income to your gross income for purposes of Net Income Tax (NIT).

Gross income tax Fringe benefits Tax So let’s discuss first, individuals. For individual taxpayers simple ang rules. Anu-ano ang klase ng taxes na pwedeng maging liable ang individual taxpayers? Net income tax, withholding tax (final withholding tax and creditable withholding tax), and then we have the Gross Income Tax (GIT). Fringe Benefit Tax is a form of final withholding tax. Net income tax Net income tax is a form of income tax imposed on all items of gross income less the allowable deductions provided by law. So here, individual taxpayers kukuha ng calculator, add, add, add, add, gross income. And then you will be entitled to some deductions. The formula here for clarification is: Gross income less allowable deductions is equal to the taxable net income, multiplied by the tax rate provided in the table.

Creditable withholding tax Now let’s compare it with an income subject to creditable withholding tax. Example: sweldo. Ikaw ay tagagupit ko sa parlor, swinelduhan kita, P10,000. Again, as you receive the income, I withhold the tax. I remit to BIR. I give you a certificate of withholding tax as proof that this one has been withheld from you and remitted to BIR and that income is not taxed with finality and your income from

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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panggugupit as my employee, which is subjected to creditable withholding tax, you will add that in your gross income so you will arrive at your net income tax due, and whatever tax withheld, that is tax credit, if any. The system is in both FWT and CWT, the tax is withheld at the time the income is received or given, but the difference is, the income subjected to FWT is taxed with finality and no other tax can be collected. Income subjected to CWT would still be subjected to NIT and you credit the CWT against the tax due. Kaya tinawag na withholding tax, CREDITABLE. You credit it later against the other tax. Final withholding tax, no other tax. Final. ‘Pag sinabing final, tapos na di ba? That is the difference but the system is the same. The tax is withheld at the time the income is received. Who withholds it? The PAYOR.

Kinds of taxpayers and their tax liabilities

Kind

(A)

(B)

(C)

(D)

Income within

Income without

Net income tax

Passive income

Capital gains on shares of stock not traded in local stock exchange

Capital gains on sale of real property located in Philippines

RC

/

/

NIT

FWT

FWT

FWT

RA

/

x

NIT

FWT

FWT

FWT

NRA-ETB

/

x

NIT

FWT

FWT

FWT

NRANETB

/

x

GIT 25%

GIT 25%

FWT

FWT

DC

/

/

NIT 30%

FWT

FWT

FWT

RFC

/

x

NIT 30%

FWT

FWT

X

NRFC

/

x

GIT 30%

GIT 30%

FWT

X

of taxpayer

Gross income tax GIT. Gross Income Tax. Ibig sabihin nito, the tax is on the gross income. Iipunin lahat ng income from beginning to end of the taxable period, walang deductions allowed, multiplied by the rate, that’s the gross income tax due. So those are the kinds of income taxes for individuals. Let’s do some exercises, let’s concentrate on the resident citizen. I want you to look at Sec. 24 (a) (1) (a) on resident citizens. Kasi tumatawid yan dun sa malaking letter b. Yung (B) passive income, yung (C) capital gains on sale of shares of stocks not traded through the local stock exchange. (D) Capital Gains Tax (CGT) on sale of real property located in the Philippines. This is the technique, marunong kayo mag-alpabeto? Ang sabi diyan, a resident citizen is taxable for all income within and without the Philippines. What kind of tax, if the income is falling under letter B, passive income, that’s FWT, if falling under C that’s FWT as well. And if letter D, FWT. Pag wala sa B, C or D, nasa A, catch-all provision. Ibig sabihin, ang tax naman dito ay NIT.

Income of Lumbera from teaching Si Lumbera nagtuturo sa inyo, pagod na pagod na. Sinwelduhan ako ng San Beda, income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Income from employment in private company

PASSIVE INCOME

Si Lumbera empleyado sa kumpanya, isang private company, sinuswelduhan ako, income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? Net Income Tax (NIT).

Passive income on interest deposited in Philippine bank

Income from services rendered outside the country Ibig sabihin ganito ang proseso. Pagsasama-samahin simula January hanggang December. Si Lumbera, habang nagbabakasyon sa States, nagkulot. Binayaran ako. Income? YES. Within or without? WITHOUT. Subject to tax? YES! What kind of tax? NIT. All income within or without, NIT. Income from business Si Lumbera, may tindahan sa tabi ng bahay, sari-sari store. Kumita si tindahan. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT. Income from sale of goods in foreign country by resident citizen Si Lumbera, habang nasa States, ang laman ng bag ay cellphone card, alahas, relo, nagbebenta sa mga Pilipino. Kumita, business. Income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Income from stolen newelry in Philippines Si Lumbera nagnakaw ng alahas sa Pilipinas. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT. Income from stolen items outside Philippines Si Lumbera nagnakaw sa States. Income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Rate of net income tax Yung rate, depende sa taxable net income. Ang rate diyan ranging from 2% to 32%. Kahit anong income sa Pilipinas o sa labas ng Pilipinas, kung resident citizen ako, taxable ako, anong tax? NIT.

Now let’s go to letter (B), look at the provisions of the law. 1) Passive income, interest on bank deposit. Si Lumbera may peso bank account sa China Bank, Alabang. Kumita ng interest, P100. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What is the rate? 20%. Interest income from dollar account in Philippine bank Si Lumbera may dollar account sa China Bank, Alabang, kumita ng interest $10. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What rate? 7 ½%. Under the Expanded Foreign Currency Deposit Act, it’s 7.5%. Interest income from time deposit in Philippine bank is exempt Si Lumbera, may peso time deposit account. I did not pre-terminate for five years. Interest is P3,000. Income? Yes. Within or without? WITHIN. Subject to tax? NO. EXEMPT. Interest income from peso account in US bank Si Lumbera ay may peso account sa isang US Bank. Kumita ng interest P100. Income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Bakit hindi FWT? Kasi yung letter B sa interest ay dapat interest sa Pilipinas. So lahat ng interest na wala sa B dahil nasa ibang bansa ay nasa A. ‘Pag wala sa B, nasa A. ‘Pag wala sa C, nasa A. Pag wala sa D, nasa A. So dapat alam mo si B, C, and D para alam mo kung nasaan siya. Interest income from dollar account in US Si Lumbera may dollar account sa States, kumita ng interest, $100. Income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Interest income from peso and dollar account in US Bank Si Lumbera merong peso and dollar account sa States. Time deposit. Kumita ng interest, hindi ko prine-terminate for 5 years. Income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Bakit, anong rason? Hindi kasi natin pwedeng utusan ang ibang bansa na maging withholding

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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agent natin. “Hoy Barack Obama! Make sure that all the taxes will be remitted to me!” sabi ni PNoy. In the same manner na sabi ni Barack kay PNoy, “PNoy, remit also the withholding taxes due from citizens of the United States derived from the Philippines.” You cannot do that. There’s no such thing as a withholding tax agreement among nations. So anung gagawin? Balik ka sa NIT, without prejudice to the taxes to be paid in the United States of America where these income are derived from. That’s tax credit again.

Jueteng won outside Philippines

Royalties

Lotto sa Pilipinas, income? YES. Within or without? WITHIN. Subject to tax? NO. EXEMPT. Nakasulat sa batas.

Let’s go to the next kind of passive income. Royalties. Si Lumbera gumawa ng kanta. Ni-record ni Ogie Alcasid, dinistribute sa Pilipinas. Dinistribute din sa States, binenta doon. I earned royalties from both. Pilipinas, income? Within or without? Within. Subject to tax? YES. What kind of tax? FWT. What rate? 10%. Or royalties on literary and musical compositions.

Lumbera nagpapa-jueteng ng mga Pilipino sa States. Yung jueteng sa labas ng Pilipinas, income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Lotto in Philippines

Lotto in US Lotto sa States, exempt sa States, income? YES. Within or without? WITHOUT. Subject to tax? YES. Even if exempt outside of the Philippines. What kind of tax? NIT.

Musical composition recorded in Philippines, sold in foreign countries

Lotto won in Philippines by an immigrant

Yung musical composition ko ni-record sa Philippines, binenta sa ibang bansa, I earned royalties, income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Balik ka sa A. Bakit? Wala sa B. Nasa A ka dapat.

Baliktarin natin. Naalala niyo yung nanalo ng Lotto na US immigrant sa Olongapo ng P700M? Lotto winnings, income? YES. Within or without? WITHIN. Subject to tax in the Philippines? NO. EXEMPT. In the States, subject to tax? YES. Subject to tax, 30%. Because he is a non-resident citizen there and being a non-resident citizen there in the states, taxable ang income outside. Hindi yun tinax sa Pilipinas, sa States tinax yun because the winner is a non-resident citizen in the States and in the States lahat ng lotto winnings of a non-resident citizen, kahit saan nakuha, taxable.

Prizes and winnings Prizes and winnings. Si Lumbera nanalo sa Willing Willie, P1,000,000. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What rate? 20%. Prizes won outside the country Si Lumbera nanalo sa Price is Right sa US, income? YES. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT. Isasama sa gross income. Amount derived from illegal gambling in Philippines Si Lumbera nanalo sa Jueteng sa Pilipinas P100,000. Yung jueteng sa Pilipinas, income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What rate? 20%.

Shares of stock in domestic corporation Dividends. Si Lumbera may shares of stock in a domestic corporation, P100,000. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What rate? 10%. Dividends received by resident citizen from foreign corporation Si Lumbera resident citizen, tumanggap ng dividends from a foreign corporation, P100,000. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT. If 3 years prior to the declaration of dividends, the income from the Philippines is less than 50% of its total income, then only 33% is within. 66% is without. Is P100,000 income? How much is within, how much is without? P33K is within, P66K is without. Am I subject to tax for both? YES. Because within and without ang nakasulat for resident citizens. What kind of tax?

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Sa P33K, NIT. Sa P66K, NIT. Lahat ng yan NIT kasi ang nakasulat diyan dividends subject to FWT are dividends issued by a domestic corporation. Basahin niyo. Nakalagay diyan, “derived from domestic sources.”

CAPITAL GAINS AND LOSSES

Dividends received by resident citizen from domestic corporation

What are capital assets and what are ordinary assets? When a problem involves an asset, an asset will remain just an asset and without tax effect if you do not move the asset. Movement in the sense that there is transfer of ownership. You will not be able to realize gains and losses without movement of asset.

Si Lumbera resident citizen, tumanggap ng dividends from a domestic corporation, P100,000. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? FWT. What rate? 10%. Dividends received by resident citizen from foreign Corporation with income less than 50% is derived from Philippine sources for the last three years prior to declaration of dividends Si Lumbera tumanggap ng P100,000 dividends from a foreign corporation whose income from the Philippines three (3) years prior to declaration of dividends is less than 50% of its total income. Is P100,000 income? YES. Within or without? 33% is within, 66% is without. Subject to tax? YES. All? YES. What kind of tax? NIT. Everything, 100% is income taxable, because si Lumbera being a resident citizen and the kind of tax is always NIT. Hindi mo sine-segregate. For passive income to be subjected to FWT, it should be derived from Philippine sources. Isang sentence lang yun. All passive income derived from Philippine sources is FWT. All passive income from outside the Philippines is NIT kapag resident citizen ka. Capital gains on sale of shares of stock not traded through the local stock exchange So let’s go to letter C, Capital Gains on Sale of Shares of Stock Not Traded through the Local Stock Exchange. Ang sabi natin, if shares of stock in a domestic corporation are capital in character, sold, not traded through the local stock exchange. First P100,000 of the gains realized, the rate is 5%. The gain realized in excess of P100,000 is subject to tax at the rate of 10%.

Capital and ordinary assets

I’ll give you an example. I have a watch which I bought at P20,000 10 years ago. I’m using it everyday of my life. Today, the value of my watch is only P2,000. Did I incur a loss, or meron ba akong gain? WALA. Hindi natin masasabi unless I move the asset. If I sell my asset, magkano ang fair market value ngayon? P2,000. If I sell it to you at P3,500, what do I get? GAINS. How much? P1,500 even though P3,500 is lower than P20,000 purchase price. If I sell the watch now at P10, what do I get? LOSS. How much? P1,990. This is how we recognize gains and losses when we talk about assets. Classification of assets Assets are classified into two: ordinary and capital. Pag sinabing capital assets, these are defined in Sec. 39 of the NIRC. Unfortunately, Sec. 39 defines it in the negative. The heading is capital assets but when you look at the definition, every asset listed is ordinary, everything other than those listed is capital asset. Ang nakalista iyong ordinary; ang hindi nakalista yun ang capital. So paano natin made-determine? Ang ordinary ay ginagamit sa trade or business. Ang capital ay hindi ginagamit sa trade or business. So kung si Lumbera ang pinag-usapan mula ulo hanggang paa, wala akong business, lahat ng pagaari ko mula ulo hanggang paa ay capital asset. It may be capital asset which is real property, capital asset which is tangible personal property or capital asset which is intangible personal property. If Lumbera is in trade or business, I may have both capital and ordinary asset, for example, this is my business, pre-bar review. That aircon is ordinary but my aircon in the house is capital. The clock there is ordinary, but my clock in the house is capital. So first thing you do when you are faced with a problem with an asset is ask, capital or ordinary? Second, is there movement of the asset? Movement in the sense that is there a transfer of ownership? If there’s a transfer of ownership, that’s the only time you say that you realize gain or loss. Doon ka lang makakapagsabi na nalugi ka o tumubo ka. Kasi pag hindi mo tina-transfer ang ownership, hindi mo malalaman kung tumubu o nalugi ka. Parang relo, lugi ako

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

26

kung ang pinaguusapan eh ang pagkakabili ko at the budget amount pero wala talaga akong pagkakalugi. Bakit? Yung alleged devaluation ginagamit ko. That’s equivalent to use so wala akong lugi. Shares of stock not traded in local stock exchange So let’s go back to letter C. Capital Gain on Sale of Shares of Stock in a Domestic Corporation. In other words, yung shares of stock mo sa isang domestic corporation ay capital. Hindi mo ginagamit. Let us say I purchased the shares of stock at P1,000. The fair market value now is P500. I sell it now at P800, may income ako? How much? P300. Within or without? WITHIN. Subject to tax? YES. What kind of tax? Letter C, Capital Gains on Shares of Stock in a Domestic Corporation, if not traded in the local stock exchange, at the rate of 5% for the first P100,000 then 10% for the amount in excess of P100,000. When shares of stock are traded in local stock exchange If traded in the local stock exchange, magkano ang gain ko? P300. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? Percentage tax equivalent to ½ of 1% of the gross selling price under Sec. 127 of the NIRC. If traded, it is not income tax, it is always percentage tax equivalent to ½ of 1% of the gross selling price. Transfer for less than adequate and full consideration Let’s take the other side of the coin. Same shares of stock in a domestic corporation not traded through the local stock exchange. The purchase price is P1,000. The current fair market value is P500. I sell it at P10. Income? No. LOSS. May income tax? WALA. May tax? MERON. Donor’s tax. That’s Sec. 100. If you sell an asset other than real property under Sec. 24 (d) for an insufficient consideration, the difference between the consideration and the fair market value at the time of sale will be treated as a gift subject to donor’s tax.

Shares of stock traded in local stock exchange sold at a loss Now, another example. Same scenario, bought at P1,000. The fair market value now is P500. I sold at a loss, P10, but traded through the local stock exchange. May income ako? WALA. May income tax ako? WALA. May tax? OO. Ano? Dalawa. 1) Percentage tax equivalent to ½ of 1% of the gross selling price; and of course 2) Donor’s tax under Sec. 100. Tandaan ninyo taxes are the lifeblood of the government, hindi pwedeng nalulugi ang gobyerno. Kaya kung nalugi gobyerno sa isa, babawiin niya sa isa. Yun ang nakasaad sa batas. Shares of stock in foreign corporation, not traded through local stock exchange and sold outside the country Sa kabilang ibayo, si Lumbera may shares of stock in a foreign corporation na nasa USA, same amount purchased at P1,000. The fair market value is P500. Ibinenta ko sa States not traded through the local stock exchange, binenta ko ng P800. May income? YES. Magkano? P300. Within or without? Without. Subject to tax? YES. What kind of tax? NIT. Shares of stock in foreign corporation traded or not traded through local stock exchange, sold outside the country at a loss What if binenta ko at a loss, P10. Traded or not traded doon sa States. Binenta ko at a loss. May income? WALA. May income tax? Wala. Walang income eh. May tax? YES. Donor’s tax, Sec. 100 of the Tax Code. Where property other than real property described under Sec. 24 (b) is sold for insufficient consideration, the difference between the consideration and the fair market value at the time of transfer shall be subject to donor’s tax. Capital gains tax on sale of real property Lumbera’s Properties in US

Lumbera’s Properties in RP

Reason for imposition of donor’s tax Anong rason? Sabi ng gobyerno simple, “Eh sira ulo ka nagbebenta ka ng lugi, sino bang normal na tao ang magbebenta ng lugi? Ginagawa mo yan siguro ng sadya. Whatever is your purpose, lugi ako-gobyerno. Nalugi ka? Wala akong pakialam sa lugi mo! Ako ang gobyerno ah, nalugi rin ako kasi binenta mo ng lugi. Hindi uubra yun, ikaw lang ang nalugi, ako tutubo.” Bakit? Donor’s tax yan eh, Sec. 100. Whatever I lost because of tax due because you sold at a loss, I will make bawi from you, Sec.100, if it is a transfer for insufficient consideration.

Purchase Price- P1,000,000 House in US

House in RP

FMV-P500,000 Purchase Price- P1,000,000

Parlor in US

Parlor in RP

FMV-P500,000 Gross Selling Price- P800,000

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

27

Capital Gains Tax on Sale of Real Property. The asset is real property, located in the Philippines, capital. Yun ang requirement. Si Lumbera may bahay sa Pilipinas, bahay sa States, parlor sa Pilipinas, parlor sa States, purchased at P1,000,000 each. The fair market value now is P500,000. I sold each one of them at P800,000. Bahay sa Pilipinas, may income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? Capital gains tax (CGT) equivalent to 6% of the fair market value or gross selling price, whichever is higher. House in US, sold at a gain Bahay sa States, may income? Yes. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT.

Vehicles KOTSE. Kotse sa bahay sa Pilipinas for personal use. Kotse sa bahay sa States for personal use. Kotse sa parlor sa Pilipinas, ginagamit as service. Kotse sa parlor sa States, ginagamit as service. Apat na kotse worth P1M each, fair market value now is P500K, sold at P800K with a gain of P300K. Lumbera’s US cars

Lumbera’s RP cars

Car in US (personal use)

Car in RP (personal use)

Purchase Price- 1M FMV-P500,000

Car in US (for business)

Car in RP (for business)

Purchase Price- 1M FMV-P500,000

Parlor in RP, sold at a gain

GSP-P800,000

Parlor sa Pilipinas, P300,000 ang base. Income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT. Parlor in US, sold at a gain

Car in the Philippines, sold at a gain

Parlor sa States, may income? YES. Magkano? P300,000. Within or without? WITHOUT. Subject to tax? YES. What kind of tax? NIT.

Kotse sa Pilipinas, may income? YES. Within or without? WITHIN. Subject to tax? YES. What kind of tax? NIT. Ano yung D? Real Property. So wala sa B, C at D. So, A. NIT.

House in RP, sold at a loss

Car in the US, sold at a gain

I sold at a loss, P10 each. Bahay sa Pilipinas, may income? YES. PRESUMED. Subject to tax? YES. Capital Gains Tax on Sale of Real Property equivalent to 6% of the fair market value or gross selling price, whichever is higher.

Kotse sa States, ganun din. Wala sa D, nasa A siya, NIT.

House in US, sold at a loss

‘Pag wala sa B, C, D, nasa A kahit anong mangyari. Because A refers to all income other than B, C, D. NIT.

Bahay sa States, sold at a loss. May income? WALA. May income tax? WALA. May tax? OO. Sec. 100, donor’s tax. Parlor in RP, sold at a loss Parlor sa Pilipinas, sold at a loss, may income? Wala. May income tax? WALA. May tax? Oo, donor’s tax, Sec. 100.

Kotse sa Pilipinas for business use, wala rin sa D. Sa A siya. Kotse sa US for business use, wala rin sa D. A siya.

Cars, sold at a loss I sold the car at P10 each, at a loss. Anong mangyayari, may income ba ako? WALA. Subject to income tax? HINDI. Subject to tax? YES. Lugi si gobyerno. Donor’s tax, Sec. 100.

Parlor in US, sold at a loss Parlor sa States, sold at a loss, may income? WALA. May income tax? WALA. May tax? Oo. Donor’s tax. Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

28

Requirements for exemption from payment of capital gains tax

Exemption from CGT in case of co-ownership of property

Can you be exempt from the payment of CGT of 6%? YES, if what you sell is the actual principal residence. Actual principal residence does not require absolute, continuous, uninterrupted stay. The stay may be interrupted by temporary absence due to work, studies and similar circumstances. So the requisites are:

If we are co-owners of a property, house and lot, but I am the only one staying there, when we sell the house and lot, I am the only one entitled to claim the exemption in proportion to my share in the co-ownership. You cannot claim because you are not actually residing in the house and lot.

1) you sell your actual principal residence; 2) you inform BIR within 30 days from the sale that you are availing of the exemption; 3) you use the proceeds to build or purchase another actual principal residence within a period of 18 months from the date of sale; 4) you avail of the exemption once every 10 years; and 5) the historical cost of the property sold shall be considered in determining the application of the exemption.

Payment of CGT in case of expropriation and foreclosure of mortgage In case of involuntary transfers of property such as foreclosures of mortgage and expropriation proceedings, when is capital gains tax due? CGT for expropriation proceedings is due at the time of full payment of just compensation, that’s the only time that we pay the CGT. Pag kinuha ang property mo at hindi ka pa binabayaran ng gobyerno, aba’y luging-lugi ka naman kung ngayon pa lang eh magbabayad ka na ng CGT, wala pa ngang binayad sa iyo eh. So hindi pa. Kapag binayaran ka na ng just compensation, that’s the only time that CGT becomes due.

If these requisites are present, then the taxpayer may be exempt from the 6% CGT. The exemption, however, requires the deposit in an escrow agreement in a bank. The amount of 6% CGT will be deposited in a bank, escrow agreement, signed by BIR, taxpayer and the bank. If you comply with the requisites for exemption, you may require the bank to release to you the deposit but without interest income because that belongs to the government. If you fail to comply, the amount deposited will be released to BIR and you are presumed not to have paid the tax. Therefore, penalties and surcharges will be collected from you.

In foreclosures of mortgage, the CGT is due after the expiration of the redemption period when there is no redemptioner. It is sold in public auction, the certificate of sale is registered and then one year after and there is no redemption, the title will be consolidated. It will be given to the buyer in the public auction. That’s the only time that CGT is due. Why? Because that’s the only time that there is transfer of ownership. When mortgage is foreclosed, there is no transfer of ownership. There is transfer of ownership only after the expiration of the redemption period and there is no redemptioner. The title of the property will be consolidated in the name of the buyer in the public auction who will be held liable for the CGT.

Exemption from CGT if land and house are not owned by same person

Tax liability of non-resident citizen

There are instances when the land is owned by a different owner from the house. Iba ang may-ari ng lupa, iba ang may-ari ng bahay. Ang nakatira dito sa lupa eh yung may-ari ng bahay. Ibinenta pareho. Sino ang entitled sa exemption? The owner of the house in proportion to the value of the house. The owner of the land cannot avail the exemption because it is not his actual principal residence.

The non-resident table is very easy because all you have to do is take out the income outside of the Philippines. Any income outside of the Philippines will not be subjected to tax in the Philippines. But those income may be subjected to tax in the country where the income is derived. So it’s the same banana, Net Income Tax, FWT, FWT, FWT, FWT but only for the income realized within the Philippines. All income outside of the Philippines will no longer be subjected to tax. This is found in Section 32, par. A, No. 1. There is no fringe benefits tax as far as a non-resident is concerned because he cannot be an employee in the Philippines. Once he becomes an employee in the Philippines, he is automatically considered as a resident citizen.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

29

Non-resident citizen may be entitled to exemption from capital gains tax

Resident alien may be entitled to exemption from payment of CGT

In case of capital gains tax on sale of real property and the taxpayer is a non-resident citizen, can he claim for the exemption for the 6% capital gains tax? The requisites for exemption for the 6% CGT are : 1) that it must be his actual principal residence; 2) within 30 days he informs BIR; and 3) he uses the proceeds to buy or build another principal residence. Among all these requisites which among them should be present so that the exception will or will not be applied? It is the fact of residence. Ang tanong natin dito ay anong ibig sabihin ng actual principal residence because a non-resident citizen is not residing in the Philippines. Because if he has actual principal residence in the Philippines, he will not be a non-resident citizen. Ang ibig sabihin ng actual principal residence is the place where one has the intention of returning to whenever one is absent. It does not require absolute, continuous, uninterrupted stay. It may be interrupted by temporary absence due to work or similar status or similar circumstances.

Can we apply the exemption from the 6% capital gains tax? Again we go back to the requisites:

Perfect example nito ang mga OFW. Nagta-trabaho sa ibang bansa. They go home once in a while. Their families are here. They have their homes here. So the concept of actual principal residence can still be applied to a non-resident citizen specially if he were an OFW. Even an immigrant, pwede pa rin siya. Bakit? Because Philippines is his domicile. The residence is outside the Philippines but his domicile/permanent residence is still in the Philippines. The exemption can still be applied. Resident alien (RA) Let’s talk about resident aliens. A resident alien is taxed in the same manner as a non-resident citizen. Parehong-pareho. So ibig sabihin, the same rule applies for all income derived from the Philippines other than B, C, D. So lets have a rundown. Resident Alien- all income derived within the Philippines--NIT. All passive income within the Philippines--FWT. Same rates, same tax. Capital gains on sale of shares of stock of a domestic corporation-same. Capital gains on sale or real property located in the Philippines--same. But everything located outside of the Philippines will not be subjected to tax if we are talking about a resident alien. So parehong-pareho siya ng non-resident citizen.

1) That it must be his actual principal residence – so pwede kasi he is a resident alien. Can he sell? Before the alien can sell, he has to own right? Can an alien own so that he can sell? Yes. But he cannot buy a residential lot. So papaano siya magkakaroon ng residential lot? Minana niya yung property, dun siya nakatira, dito siya nagta-trabaho, ibinenta niya then he bought a condominium unit. He cannot buy a residential lot, but he can build a house. And he can sell the house. Wala naman yang prohibition eh. Ang prohibition lang ay bumili ng lupa. Pero pwedeng ikaw ang may-ari ng lupa. Ako magtatayo ng bahay, alien ako. Pwede ba? Pwede. Can I sell the house? Yes, because I own the house. And if I buy another house without the land, pwede ba? Pwede. Pwede ba akong mag-build uli ng panibagong bahay sa isang lupang hindi akin? Pwede. So the possibility is still there. Exemption from CGT in case owner is an alien who is a former Filipino citizen Pwede rin na alien ka, foreigner ka, ang ninuno mo ay Pilipino pinamanahan ka ng lolo’t lola mo and then you head back to the Philippines to work here. You live in your house inherited from your lola, you sell the same and use proceeds to build another one on a lot which is not owned by you. Pwede? Pwede. Or kung ayaw mo na mag-build bumili ka ng condominium unit, pwede? Pwede. So you can still claim the exemption. So meron pa ring posibilidad ito. Non-resident alien engaged in trade or business (NRA-ETB) If you know the first table, you will definitely know this. It’s the same. So itong tatlong ‘to you will notice, are taxed similarly. The only difference is that the non-resident alien engaged in trade or business is subject to 20% tax on dividends received from a domestic corporation, not 10%. You will find this in the codal provision.

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Non-resident alien engaged in trade or business (NRA-ETB) may be exempt from CGT Can non-resident aliens engaged in trade or business be exempt from 6% capital gains tax? Yes, same scenario as resident alien. Because there is a possilibility that he is actually residing in the Philippines and he established a residence in the Philippines. Pero ako sasabihin ko sa inyo, among these kinds of taxpayers, the least possibility of the exemption is a non-resident alien engaged in trade or business because of the fact that he is a non-resident alien. Hindi nga yan nakatira sa Pilipinas. Kung yan ay may bahay sa Pilipinas na actual principal residence eh di ibig sabihin resident alien siya. But the law says there is a possibility for the exemption from the 6% CGT if we are talking about a nonresident alien engaged in trade or business. Non-resident alien not engaged in trade or business (NRA-NETB) The easiest among the kinds individual of taxpayers of course is nonresident alien not engaged in trade or business. This time he will be taxed on the gross and withheld. Peculiar ang circumstance niya because: 1) he is not residing in the Philippines; 2) he is an alien; and 3) he is not engaged in trade or business. The tax is on the gross but withheld. Withholding tax. And the tax is on the gross, but without deductions. Tax rate on all passive income of non-resident not engaged in trade or business All passive income of a non-resident alien not engaged in trade or business. What are these passive income? Interest on bank deposits, royalties, prizes and winnings, as well as dividends shall be subject also to GIT (gross income tax), not to final withholding tax. It is taxed on the gross. At what rate? 25%. The rate is even higher at 25%. If you compare this one against all the individual taxpayers, this is found in Sec. 26, you will find out that all the income from the Philippines of a non-resident alien not engaged in trade or business is taxed higher, much higher, than the ordinary taxpayer. The rate is 25% and it covers all income, including passive income. So interest on bank deposits, royalties, prizes and winnings, dividends these are not taxed at the regular rate, but at 25% on the gross.

Capital gains tax rate for non-resident not engaged in trade or business But of course, capital gains tax on sale of shares of stock is constant for all kinds of individual taxpayers. Capital gains tax on sale of real property is also applicable. Non-resident not engaged in trade or business working in Philippines If you look at Sec. 25 par. B, C, and D, makikita ninyo dyan naka-specify na aliens. Those who are employed in offshore banking units, multinational companies, and those employed by oil petroleum service contractors. Very peculiar yung parteng yan. These are aliens who are working in the Philippines in those three companies and because of their work here, definitely they must be residing in the Philippines. Hindi naman pwedeng ‘pag alas siete ng umaga andito sa Pilipinas at pagka alas siete ng gabi magpe-plane out of the Philippines. They are working here, but the law classifies them as non-resident aliens not engaged in trade or business. These three, while working here and presumably residing here, are taxed on 25% on the gross. But if there is a Filipino counterpart in the same company, performing the same functions and duties as the alien, and the Filipino counterpart is given by the company the option to be taxed at the rate of 15% on the gross, then the alien will also be entitled to claim 15% on the gross instead of 25%. When alien may choose GIT of 15% Is there a need for the Filipino to choose GIT of 15% before the alien can choose GIT 15%? No. As long as the option is available to the Filipino, the alien can avail of the GIT 15% rate. So what are those situations? I am the alien, you are the Filipino counterpart. We are performing the same functions. The presumption here is that we are occupying key and valuable positions in the company, otherwise the company would not uproot you from another country. We do not uproot a janitor from another country. In other words, we are very in demand as far as our skills, experience are concerned. Walang ibang available sa Pilipinas. But in our company ikaw ay Pilipino same ang function mo sa akin. Ang presumption here is that, because I am uprooted from another country, I must be getting a very high salary. Who would want to work in another country and leave it? Bayaran mo ang aking board and lodging, bigyan mo ako ng sasakyan, ang pamilya ko most likely kasama ko, plus malaking-malaki ang sweldo ko. Ikaw na Pilipino ka magrereklamo ka pag ang sweldo mo mas mababa sa sweldo ko.

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So pareho kami ng sweldo. All the benefits that are given to me as a consequence of being uprooted will be given to you also. Magrereklamo ka kasi bawal din yan sa Labor Code. So yan ang sitwasyon natin. Possible tax rates as to non-resident not engaged in trade or business, but working in Philippines First, our company does not give us an option. So you as a resident citizen, your tax will be NIT, and me, non-resident alien is GIT of 25%. Second, our company gives us an option to be taxed at GIT of 15%. So the possible scenarios are: a. GIT 15% ka (resident citizen), GIT 15% ako (non-resident alien) b. NIT ka (resident citizen), GIT 15% ako (non-resident alien) Whether you choose to be taxed at GIT 15% will not matter. The option is available. Then NIT ka or GIT 15%. Ako syempre pipiliin ko GIT 15% kasi it is a lot lower than GIT 25%. Why would you choose GIT 15% instead of NIT? Because most likely because of your very high salary or remuneration, mas maliit ang tax mong babayaran ‘pag nag GIT 15% ka kesa sa mag NIT ka. Advantage of GIT of 15% Inuproot ako papunta sa Pilipinas. Magkano kaya magiging sweldo ko? Lets say P1,000,000 a month. In a year, my basic pay is P12,000,000. So you, the Filipino should get P12,000,000 also. So P12,000,000 ka, ako P12,000,000 Gross Income. Anong deductions mo? Maximum of P150,000: P50,000 for personal exemption and 100,000 for four children assuming that you have 4 so P150,000. So your taxable net income is P11,850,000. Magkano ang rate niyan pag NIT? The tax shall be P125,000+32% excess over P500,000. Compare mo yan sa 15% ng P11,850,000. Kaya ikaw mamimili ka ng GIT 15% most likely kasi mas malaki pa ang babayaran mo pag nag NIT ka. But the option is given to you, if you want the government to earn more from you, good, fine. Non-resident not engaged in trade or business (NRA-NETB) may be entitled to exemption from CGT Is a non-resident alien not engaged in trade or business entitled to claim exemption from the 6% capital gains tax on sale of real property? Yes, specially those three aliens above-mentioned. Because they are perfect examples of non-

resident alien not engaged in trade or business, pero nakatira sa Pilipinas dahil sa kanilang trabaho. At saan siya nakatira? Pwede nagpagawa siya ng bahay sa lupa ng kaibigan niya, pwedeng condominium siya at ibinenta niya at bumili siya ng bagong condominium. Pwede naman siya ay dating Pilipino o pinamanahan ng ninuno niyang Pilipino at dun siya tumira habang nagtatrabaho dito sa Pilipinas at inayawan niya at binenta niya at bumili siyang muli ng kanyang bagong titirahan. So the possibility of exemption is still there. Fringe benefits given to non-resident not engaged in trade or business (NRA-NETB), part of gross income and not subject to fringe benefit tax Take note, a non-resident alien not engaged in trade or business may receive employer-employee benefits which are in the nature of fringe benefits when you compare it with ordinary resident citizen. These are fringe benefits received from multinational companies, oil petroleum service contractor, offshore banking units. How will the fringe benefits of a non-resident alien not engaged in trade or business be subjected to tax? May it be subjected to fringe benefit tax? NO. Everything will be part of all income subjected to gross income tax at 25% or GIT 15%. All income including the fringe benefits received by a non-resident alien not engaged in trade or business under Sec. 25, par. B, C, and D will not be subjected to fringe benefits tax but to GIT gross income tax at the rate of 25%. Sasabihin niyo, eh lugi ang gobyerno dun kasi the 32% is higher than 25%. Hindi, because the 32% is based on the grossed up monetary value. The 25% is based on the gross, so mas malaki pa rin ang tax na babayaran because this is 25% of the total income that you realize. DOMESTIC AND FOREIGN CORPORATIONS Corporations Kinds of taxes collected from a corporation: 1) 2) 3) 4) 5) 6) 7) 8)

Net Income Tax (NIT) Withholding Tax (WT) Gross Income Tax (GIT) Minimum Corporate Income Tax (MCIT) Improperly Accumulated Earnings Tax (IAET) Intercorporate Dividends Tax Branch Profits Remittance Tax Gross Philippine Billings Tax (2 ½ %)

Nos. 1 to 7 are most commonly used forms of tax for corporations.

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Please take note that except for MCIT and NIT, which are in lieu of each other, everything will be collected from the corporation all at the same time. So makikita ninyo ang mga negosyo napakaraming taxes na binabayaran iba-iba sa loob ng isang buwan, sa loob ng isang taon. In addition of course, because they are engaged in trade or business, the corporation will be subjected to value-added tax. NIT: So we know NIT, it’s the same concept as in an individual taxpayer. WT: Withholding tax same concept. Just to refresh your memory there are two kinds, final withholding tax wherein the income is no longer subjected to any other kind of tax and the income is not included in the gross income from NIT. But if the income is subjected to creditable withholding tax the income will have to be included in the gross income for the purposes of computing the NIT because of the nature of the withholding tax. It will however be credited against the tax due. Kaya ang tawag dun ay creditable withholding tax. GIT: the tax is on the gross income Minimum Corporate Income Tax (MCIT) Now let’s discuss MCIT. MCIT is minimum corporate income tax imposed at the rate of 2% of the gross income beginning the fourth year following the commencement of its operations, provided, that the 2% is higher than the net income tax. What is the regular net income tax rate for corporations? 30%. MCIT is a kind of tax which is in lieu of NIT. This is collected at the rate of 2% of the gross income and beginning the fourth year following the commencement of its operations provided that the 2% is higher than the 30% NIT. When MCIT was introduced, a lot of people thought it was sort of a privilege or a reprieve since 2% lang ang rate but in reality it is not. This is one way of increasing the collection from the corporate taxpayers. Let us say in the year 2011, you started your business. It’s pretty normal for a corporate taxpayer or for anybody, specially in business, to have losses. Namumuhunan ka talaga sa business so normal na may losses ka at normal din na sa unang taon or the first few years of your operations hindi ka kumikita. Kaya di ba naririnig niyo ang ROI, return of investment, in other words what’s the period you can honestly say that you are earning. Kasi kung magbi-business ka at palugi ay manahimik ka na lang sa bahay mo at manood ng TV. Syempre nakakapagod yung mag-business ka nang lugi.

Let us say in the year 2011, you started your business. First year of operation, everything palabas ang pera mo. Let us say that your revenue is P500,000 but because this is your first year of operations your expenses amounted to P600,000. So lugi ka ng P100,000. ‘Pag nalugi ka ng P100,000 lugi ang gobyerno kasi kahit i-multiply mo yan ng one million percent, it is zero. Zero tax yan. In other words you are operating at a loss. When your expenses or deductions are more than your revenues, you are operating at a loss you call it-Net Operating Loss, which may be carried over to the succeeding year. This is only applicable to a corporate taxpayer. How many years can we carry over a net operating loss? Three. Versus Net Capital Loss Carry Over which is carried over one year lang and applicable only to individuals. Net Operating Loss Carry Over Example

Revenues Expenses Net Operating Loss

1st 2011 500,000 600,000 (100,000)

2nd 2012 700,000 800,000 (100,000)

3rd 2013 700,000 800,000 (100,000)

4th 2014 1,000,000 1,100,000 (100,000)

2015 1,000,000 1,100,000 (100,000)

Let us say 2012, aba nag-increase revenues, pero lugi na naman ako, zero tax na naman. 2013 zero tax na naman. 2014 nag-one million mark ako because I inputted additional capital, pero lugi na naman ako zero tax na naman. Lugi na naman ang gobyerno sa akin. Sabi ng gobyerno, dito sa 2015 pag ikaw ganyan pa din, niloloko mo na ako. Walang normal na tao na nagbi-business ng 5 taon, lugi at magtutuloy. Kasi hindi yan natural sa taong nagbi-business. There is something wrong with you or your business. You better forget it, otherwise you will be incurring more losses. If you want to continue there is no problem with me, sabi ng gobyerno, anyway whatever loss you sustain is yours, not mine. Because beginning the 4th year following the commencement of its operations, beginning 2015, if you continue this financial statement, I will collect P1,000,000 x 2% which is P20,000. Bayaran mo yan, that is your MCIT. From 2015 onwards, until such time that your net income tax is higher than the 2% of the gross, you will continuously pay.

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MCIT also applicable to corporations under rehabilitation, insolvency and receivership MCIT is also applicable to corporations being rehabilitated, corporations under insolvency and those under receivership. There is receivership beginning the date of approval of receivership. It is treated as newly-created ordinary corporation. Therefore MCIT concept will apply. What happens if a corporation is under receivership? That means it has been in existence for a long period of time, and at one point its liability is greater than its assets, it cannot satisfy its liabilities. It doesn’t mean that the corporation is not earning. That corporation is still earning except that all earnings are used to pay for the liabilities. Therefore, as far as the corporation is concerned, it is operating at a loss because even though it has revenues, all of the revenues are used to pay the liabilities. So Net Loss pa rin siya. Therefore--not taxable, no income tax. So each corporation which is under receivership shall be treated as a newly created corporation subject to the concept of MCIT.

the corporation. In other words, corporate taxpayers will now be forced to distribute dividends to stockholders. But whether they distribute or they retain, the government earns. If they distribute, the government earns from the stockholders. If they don’t distribute, government earns Improperly Accumulated Earnings Tax from the corporation. Corporations not subject to Improperly Accumulated Earnings Tax There following are corporations which are not subject to Improperly Accumulated Earnings Tax: 1) Government 2) Banks and financial institutions, because they are allowed to retain earnings. Why? In case of bank run 3) Insurance companies to support all insurance claims assuming that the risk insured against happened at the same time.

Improperly Accumulated Earnings Tax (IAET)

Holding company

What is IAET? This is paid on top of other corporate taxes. It is a tax equivalent to 10% collected from the corporation because of earnings retained beyond its reasonable business means. According to the Corporation Code, when a corporation realizes profits, it should be distributed as dividends. Sabi each corporation is only allowed to retain a certain percentage of its surplus profits. ‘Pag sinabing surplus profits--tubo, kinita ng corporation. All of the profits should be apportioned, retained according to the Corporation Code. It can retain a certain percentage and the rest should be distributed as dividends.

What is a holding company? Diba naririnig niyo na ang holding company ng Lopez Group of Companies is First Philippine Holding Company Inc. Lahat ng companies/ corporations held by the Lopez Group like Meralco, ABS CBN, yan yung holding company. Anyway, ang trabaho ng holding company if these are the corporations owned by C stockholder, interlocking directors, interlocking stockholders.

Recipient of dividends, liable for final withholding tax If profits are distributed as dividends, the stockholders, if individuals, will be held liable for FWT at the rate of 10% but 20% for non-resident alien engaged in trade or business. But the rest in general at 10%. Improperly Accumulated Earnings Tax, taxed at 10% So if the corporation will not distribute dividends, the government loses 10%. Kaya babawiin ng gobyerno. Saan babawiin? Sa corporation na ayaw magbigay ng dividends. The corporation will now be held liable for IAET at the rate of 10%. The same 10% that the government loses when the corporation does not distribute the dividends to stockholders. It will have to be covered, but this time, not from the stockholders (because it will become his dividend income), but from

Ang ginagawa nila, yung profits nila ilalagay sa isang company. This is a separate corporation which holds the assets of XYZ. In other words, jina-juggle niya yung mga pondo. May banks, may food, this one has assets this one lends from this. Makikita mo yung fiduciary relationship among the corporations with the holding company. This is one way in which the company’s profits are being spent by another corporation. Kasi pwedeng pabilhin nila ito ng isang asset tapos sila ang gagamit. One way of diverting the funds here papunta doon and not be distributed as profits in the form of dividends, dito ililipat. Putting up of holding company is a prima facie presumption that corporation is trying to avoid payment of 10% tax on dividends Mere putting up of a holding company is a prima facie presumption, disputable however, that the corporation is trying to avoid, hindi evade, the payment of 10% tax on dividends that are supposed to be distributed to stockholders. Makikita nyo yan sa codal provision. Because this is disputable, the

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burden of proof is on the corporation. Otherwise, the corporation will be subjected to Improperly Accumulated Earnings Tax of 10%. Intercorporate dividends In the case of individuals, when a corporation issues dividends on individuals, the dividends are classified as passive income subject to FWT of 10% or 20% or GIT. Kitang-kita sa table hindi ba? So a corporation is a stockholder, and the corporation receives dividends, we don’t consider it as passive income. There’s a separate category, the law will refer to it as intercorporate dividends. And there’s a tax on the intercorporate dividends, the rate is at 15%. Withholding pa rin siya, its also in the nature of final withholding tax but we call it intercorporate dividends tax. And the rate is not 10%, not 20% or not GIT 15% or 25% but at the rate of 15%. Branch Profit Remittance Tax only applies to RFCs Of course, this is applicable only to a resident foreign corporation (RFC). Here is X, a US corporation principal place of business is USA, puts up a branch X Phils. in the Philippines. If you are the branch hindi mo patitigilin dito ang lahat ng kinikita mo, normal yon. Ayaw mo nasa Pilipinas ang pondo mo. So when X Phils. earns income from the Philippines, it is a resident foreign corporation. The income derived from the Philippines shall be subjected to tax from the moment it received the income. In addition to that, when X Phils. remits its income to the USA, the act of remittance is again subjected to tax. That’s double taxation in the broad sense and we call the tax BPRT at the rate of 15% for the amount applied for regardless of the amount approved by the Bangko Sentral for remittance. We remit and apply for the approval of the BSP because you are remitting currencies. Hindi pwedeng mag- remit lang nang remit at ‘pag inapply mo ma-aaprove, no. Because the Central Bank regulates all currencies circulating within the Philippines. And it maintains a certain circulation of both peso and foreign currencies. Sila nag momonitor kaya pag nag-apply ka for remittance outside of the Philippines, hindi normally pinapayagan agad yung buong account na inapplyan mo because the Central Bank considers that circulation of currencies in the Philippines. So once the income is remitted to the principal place of business at the rate of 15% subject to the rule tax sparing.

Tax sparing rule What is this tax sparing rule? Ang sabi dyan we will collect tax branch profit remittance tax of 15% only instead of 30% provided that in the country where it is remitted, the same income shall be taxed in the minimum of 15%, to cover 30%15% = 15%. So ano ang taxes dito? 1) Right to receive income 2) right to remit. And you pay branch profit remittance tax on top of the income tax at the rate of 15% provided that, under the tax sparing rule, the same income remitted shall be taxed in the minimum of 15% outside of the Philippines. What happens if in the USA the rate of income tax is 40%? How much is the branch profit remittance tax? 15%. If in the US it is 25%, tayo 15%. If in the US 2%, tayo 30%. In the minimum 15%. Gross Philippine Billings Tax (GPBT) Dito nagkaka-lituhan ang dami-daming kaso, BOAC case, ang haba-haba, ang dami-dami. Meron pa akong estudyante, nagdi-diskusyon nag-aaway away dun sa facts of the case, mga landing rights. Ngayon may settled case na, napakadali. Gross Philippine billings ano ibig sabihin ng Gross Philippine Billings? Tao, goods, at mail matter na nag-originate sa Pilipinas. Syempre ang tao, goods at mail matter ‘di naman pwedeng lilipad sa hangin. Iyan ay papunta sa ibang bansa originating either by air, by land, wala namang by land papuntang ibang bansa tama? or by sea. Tingnan mo naman ang mapa ng Pilipinas ‘pag papunta sa ibang bansa--by air and by sea lang yan. Ang issue dito paano mo mata-taxan? Galing sa Pilipinas ang mail matter papuntang South Africa. Ang tao papuntang South Africa. Kung eroplano South African Airlines bumababa ng Pilipinas, hindi naman tayo bumibili ng ticket sa South Africa kasi ‘di ka makakapunta dun kung wala kang ticket. Pano ka bibili ng tickets? So yung mga tickets binibenta through agencies here in the Philippines. So bili ka ng ticket from Philippines to USA probably, then from US to another country before you fly to South Africa using South African Airlines. Ang tanong dito, yun bang ticket na binenta na hindi binili sa Pilipinas dahil ang eroplano ay walang landing rights, paano kaya tina-tax? Because the corporation is earning income from the Philippines but it doesn’t have any landing rights, wala ring sales office sa Pilipinas. Ibang usapan kung merong sales office, ibig sabihin, resident foreign corporation siya. Eh pano kung wala at binibili mo sa internet ang ticket? Paano itax yun? Simple ang rule, ‘pag walang landing rights sa Pilipinas, lahat ng income na kinita sa Pilipinas out of the sales of the tickets ang tawag dun Gross Philippine Billings (GPB). Ang tax nun ay NIT, net income tax. Pag may landing rights, yun

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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ang Gross Philippine Billings Tax at 2 ½ %. Meron nang decided case ibibigay ko sa inyo para hindi na kayo mahirapan. Sinettle na. Kasi nga nagkaka-lituhan. (See South African Airways vs. CIR, GR No. 180356, February 16, 2010) So these are the kinds of taxes of a corporation. Let’s go back to the first table. Domestic corporations are subject to tax for all income within and without. We follow the same rules. All income from within and outside of the PhilippinesNet Income Tax at the rate of 30%.

Royalties na kinikita ng corporation. Bakit? Sila ang exclusive distributor ng shampoo na ito with all natural ingredients. Royalties na kinita sa Pilipinas: Income? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? FWT. What rate? 20%. Yung same shampoo dinistribute sa USA kumita ng royalties si parlor corporation. Income? Yes. Within or without? Without. Subject to tax? Yes. What kind of tax? NIT.

PASSIVE INCOME OF CORPORATIONS

Prizes and winnings

Passive income, what are the passive income of a corporation? Interest on bank deposits, royalties, prizes and winnings and dividends.

The corporation was given an award the Best Parlor in Muntinlupa. Kasama sa award ay ang check drawn in the name of the corporation P10,000. In the USA, it was also awarded as the Best Foreign Parlor in the USA. May plaque, may check $10,000. What will be the treatment of the winnings of the corporation. Yung award sa Muntinlupa: Income? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? Basahin ninyo sa codal, missing dyan ang prizes and winnings pagdating sa corporation tinanggal. The words prizes and winnings from the passive income of the corporation is missing. It was deleted purposely. Bakit wala? Because all prizes and winnings earned and realized by the corporation are prizes and winnings realized in the pursuit of its ordinary trade or business. Therefore, ordinary income, kaya NIT. NIT yan pareho. Wala namang corporation na nanalo sa lotto at sa jueteng. Assuming that they earned winnings because of an award, then these are winnings received through a corporation, not through the stockholders or to the directors of a corporation but through the juridical entity. Therefore these are treated as ordinary income subject to NIT not FWT.

Balikan natin ang individual taxpayer review natin. Si Lumbera may time deposit peso account sa Pilipinas. Taxable? What kind of tax on interest? FWT. Sa labas ng Pilipinas meron akong bank deposit peso and dollar account its NIT. Si Lumbera merong librong ginawa, ibenenta sa Pilipinas. FWT-10%. Pag binenta sa labas NIT. Prizes and winnings sa Pilipinas-20% of the winnings. Nanalo ako sa Price is Right sa US, it is NIT. Dividends received from a domestic corporation FWT at the rate of 10%. Dividends received from a foreign corporation is NIT. Madali lang naman siya eh. Balikan natin yan using a corporation. Parlor with branch in Philippines and branch outside Philippines Halimbawa ang business ko parlor. May branch sa Pilipinas, may branch sa labas ng Pilipinas. Ang kanyang income ay talagang business lang. Income from the parlor in the Philippines all income NIT 30%. Income from outside of the Philippines of the parlor- NIT. Passive income Peso and dollar account in the Philippines- income ba yon? Yes. Within the Philippines? Yes. Anong klaseng tax? FWT. For peso account, 20% FWT and for the dollar account it is 7 ½ %. My bank account outside of the Philippines kumita ng interest peso and dollar account. Income? Yes. Within or without? Without. Subject to tax? Yes. What kind of tax? NIT.

So all passive income are the same as individuals except for prizes and winnings. ‘Pag individual prizes and winnings are FWT. Pag corporation prizes and winnings are NIT. Dividends If the recipient of dividends is also a domestic corporation, this shall be exempt. Intercorporate dividends received by a domestic corporation from another domestic corporation shall be exempt. Capital gains on sale of shares of stock Now as to capital gains tax on sale of shares of stock, it stays constant. Ito ang hinding hindi nagbabago on all kinds of taxpayers. It is always FWT ‘pag not

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traded 5% and 10%. ‘Pag it is traded ½ of 1% of the gross selling price. You will notice this, yan ang pinaka constant sa lahat. Capital gains on sale of real property The previous rule or conduct is that a corporation is not subjected to 6% Capital Gains Tax because ang presumption natin ay all corporate taxpayers owned these properties in the course of its ordinary trade or business. But later on however, mapapansin ninyo if you read the newspapers sa business section ang non-performing assets (NPA). Ang bangko, ang kanyang primary function ay tumanggap ng deposito at magbigay ng dineposito. Incidental thereto, it is allowed by the Central Bank to extend loan facilities. So this is not the primary business of banks. When you extend loan facilities at hindi nagbabayad ng utang magfoforeclose ka ng mortgage. Ikaw nag-mortgage ka ng property mo inutang mo 1M, ang worth ng property ay P1.5M. Laging mas malaki yung value ng property kesa dun sa inutang mo. Normally it is up to 75% of the assessed value of the property. The loan is definitely lower than the value of the property. So kung ikaw ang debtor at hindi ka nakabayad, ang utang mo P1M ang hindi mo binayaran P600,000 pag finorclose mo ang property na P1.5M tubo ka na. Kasi P600,000 na utang tapos 1.5M na property. In foreclosure of mortgage, the petition for foreclosure will state P600,000 hindi P1.5M the value of the property. So when it is foreclosed by the bank, and the bank is normally the highest bidder in the auction, the bank satisfies the loan of P600,000 for a consideration of P1.5 M worth of property. That property is acquired by the bank not in the ordinary course of its trade or business. Hindi nga yan ginagamit ng bangko eh naka-tengga lang. Kaya nga maraming bentahan ng foreclosed properties because these are not used by the bank in its ordinary course of trade or business. Ang tawag natin diyan kung titingnan talaga ang realidad ay capital asset ng bangko. Pero dati lahat ng asset na yan ang classification ay ordinary kasi daw finoreclose ng bangko. So dati nung ordinary yan, P1.5M ang value ng property, binili mo ng P600,000 to satisfy the loan, eh hindi naman nagbabalik ng sobra ang bangko. So P600,000 ang utang, that’s why the bank can re-sell the property at a much lower price, but not lower than P600,000. So it will resell the property at P1M, when it acquired the book value declared is P1.5M, when it will re-sell at P1M, the bank loses, P1.5 minus P1M, loss, no tax. But in truth, tumubo si bangko because the loan is P600,000. But on paper the bank loses P500,000 because the book value is P1.5 sold at P1M. Lugi P500,000. Pag lugi, may income? Wala. May kinita ang gobyerno? Wala. Sabi ngayon ng lehislatura, di pu-pwede yun. Those assets, while it’s true that they are not directly used in the operations of the bank and those are formerly

treated as ordinary assets, now domestic corporations will be held liable on 6% capital gains tax on sale of real property on all lands and buildings not directly used in the operations of the business. And therefore the 6% capital gains tax is to be collected on all lands and buildings and improvements not directly used in the operations of the business. Employer-employee benefits Syempre walang employer-employee benefits dyan. Minimum Corporate Income Tax applied to DCs Is MCIT applicable in domestic corporations? Yes, provided that the 2% is higher than the net income tax due on the corporation. Branch Profit Remittance Tax not applicable to DCs Is a domestic corporation subject to branch profit remittance tax? No. Improperly Accumulated Earnings Tax applied to DCs Is a domestic corporation subject to Improperly Accumulated Earnings Tax? Yes. Pwede yan. Resident Foreign Corporation Taxable only on all income derived from Philippine sources. As you can see from the table, this is from Sec. 27. All income from the Philippines is the same. Net income tax is 30%. Passive income, interest on bank deposits, royalties, prizes and winnings derived from Philippine sources shall be taxed at the same rate of FWT as individuals. For interest on bank deposits its 20%, for royalties 20%.. Intercorporate dividends Domestic corporation giving dividends to a resident foreign corporationexempt. Dividends received by a resident foreign corporation from a domestic corporation shall be exempt. Prizes and winnings (Net Income Tax) NIT

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Minimum Corporate Income Tax applied to RFCs

Capital gains tax on sale of real property by NRFC

Is this available to a resident foreign corporation? Yes. What is your basis? Why is it that it is applicable to a resident foreign corporation. Before you say yes, tell me why. Where in the codal? Nandyan lang yan eh. “Minimum corporate income tax on a resident foreign corporation” [Section 28 (A) (2)] Anong page yan para Makita nung iba, 49, page 49 hanapin.

Employer-employee benefits

Branch Profit Remittance Tax on FCs

Prizes and winnings of NRFC

Is branch profit remittance tax imposed on a foreign corporation? Of course. Capital gains tax on sale of shares of Stock Same yan, constant.

This does not apply to a corporate taxpayer of course.

This is not applicable.

(Gross Income Tax) GIT. Intercorporate dividends of NRFC Intercorporate dividends if received by a non-resident foreign corporation it is no longer exempt. It is subject to what rate? 15% final withholding tax.

Capital gains tax on sale of real property

Minimum Corporate Income Tax in NRFC

Not applicable, because all foreign corporations are not allowed to own real properties in the Philippines. All corporate taxpayers also not allowed to claim the exemption from the 6% capital gains tax.

MCIT will it be applicable to a non-resident foreign corporation? Even if you do not read the law. 2% of the gross income provided that the 2% is higher than the net income tax. Eh wala namang net income tax due. Kaya MCIT is not applicable to a non-resident foreign corporation.

NON-RESIDENT FOREIGN CORPORATIONS Tax liability of non-resident foreign corporation (NRFC) Ito ang pinakamadali. Non-resident foreign corporation shall be taxed only for all income derived in the Philippines, GIT what is the rate? Hindi nagbabago ang rate. Hindi katulad doon sa individuals nagbabago, dito hindi. GIT 30% pa rin. All passive income 30% except intercorporate dividends and prizes and winnings. Prizes and winnings of NRFC Prizes and winnings will be GIT also. Capital gains tax on sale of shares of stock It is always constant 5% and 10% if not traded through the local stock exchange. If traded through the local stock exchange, it is not income tax but percentage tax of ½ of 1% of the gross selling price.

Improperly Accumulated Earnings Tax, not applicable Is it applicable to a foreign corporation, whether resident or non-resident? Applicable ba yan? Sa tingin niyo. This is how you think. Ano ba yung improperly accumulated earnings tax, ito yung tax pag ang korporasyon ay hindi nagbigay ng tubo. ‘Pag resident foreign corporation, ang kinita sa Pilipinas ay ibabato sa kabilang bansa. Ang tubo niyan ay wala sa Pilipinas. Hindi naman natin pwedeng sabihin na “Hoy, USA X, magkano ang tinubo niyo sa inyong kumpanya? Idistribute niyo nga papunta sa amin.” Hindi pwede, because we don’t have jurisdiction. In the same manner as a non-resident foreign corporation, lalo na yan hindi nga sila engaged sa trade or business sa Pilipinas. So hindi natin sila pwede pwersahin na i-declare kung magkano ang kinita at tinubo ng korporasyon. At pag di niyo dineclare, ay tataxan naming kayo. Papano tayo magtatax sa kabilang bansa? That’s why this is not applicable to either a resident foreign corporation or a non-resident foreign corporation because of the nature of the business.

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Branch Profit Remittance Tax This is not applicable here. Dividends in NRFC This is the summary, if the issuing corporation is a domestic corporation, these are the recipients of the dividends, the tax is FWT. If 1-3 10%. If nonresident alien engaged in trade or business 20% and non-resident alien nonresident alien not engaged in trade or business GIT 25% or 15% depending kung may counterpart. If the recipient is a domestic corporation and a resident foreign corporation, these taxpayers are exempt from payment of FWT. But if this (non-resident foreign corporation) is the recipient it is subject to 15% FWT on intercorporate dividends. What about if the issuing corporation is a foreign corporation and the recipients are these. What will be the tax treatment of the dividends received by these individual taxpayers and these corporations from a foreign corporation? Sige nga, inaral na natin yan, binabaliktad ko lang ang point of view. What do you think. The table states these rules. Paano kung ang nag-issue ay foreign corporation. Isa-isahin natin, rundown.

INDIVIDUAL TAXPAYERS Resident Citizen Recipient is a resident citizen, foreign corporation is the issuing corporation. Income? Yes. Within or without? Sec.42 kahapon. (see previous discussion) Within. May exception to the rule ka. So pag sinabing general rule, buong P100,000 kahapon within. Pag exception to the rule, 33% ang within, 67% ang without para hindi na tayo bumalik sa computation. Subject to tax? Yes. What kind of tax? NIT. Ulit. Resident citizen receiving dividends from a foreign corporation. Income? Yes. Within or without? General rule lahat within. Taxable? Yes. What kind of tax? NIT. Exception to the rule, 33 within, 67 without. Taxable? Yes. Lahat? Yes. What kind of tax? NIT lahat.

Non-resident Citizen Recipient is a non-resident citizen, ang nagbigay ng 100 foreign corporation. Income? Yes. Within or without? General rule 100 within. Pag ang general rule ang sinabi natin at within lahat, subject to tax? Yes. What kind of tax? NIT. ‘Pag ka exception to the rule, 33 within, 67 without. Subject to tax? Yes. How much? Only 33 is subject to NIT, 67 is not subject to NIT. Resident Alien Resident alien, income-100. Income? Yes. Within or without? General rule 100 within. Exception to the rule, 33 within, 67 without. Kung general rule, taxable? Yes. Anong klaseng tax? NIT. Exception to the rule, 33 taxable NIT, 66 not subject to tax. Non-resident alien engaged in trade or business, dividends Non-resident alien engaged in trade or business- 100,000 dividends from a foreign corporation. Income? Yes. Lahat ng yun, income. Within or without? General rule buong 100 income. Subject to tax? Oo. Anong klaseng tax? NIT. Exception to the rule, lahat ay income, but only 33 is within, 66 without. Therefore only 33 is subject to tax, anong klaseng tax? NIT. Non-resident alien not engaged in trade or business Non-resident alien not engaged in trade or business. Income ba lahat? Oo. Eto magtataka kayo, eh foreign corporation yun, non-resident alien not engaged in trade or business ang tumanggap, nasa labas ng Pilipinas meron pa pala tayong tax? Yan ang nakakapagtaka diyan, di ba? This is our typical thinking. Foreign corporation, nasa labas, ang tumanggap, alien. Eh pano magkakaron ng tax? The reason for the tax is very simple. Because the foreign corporation for that matter, whatever kind, is deriving income from the Philippines. And when it derives income from the Philippines, this income contributes to the general income of the corporation wherever it is located. And when it distributes its profits, part of the profits distributed is derived from the Philippines. That’s why may collection. So don’t tell me that just because the issuing corporation is a foreign corporation and the recipient is also an alien, it will not be subjected to tax. No. As long as income is derived from the Philippines by the foreign corporation then whenever it distributes dividends to whomever among these types of taxpayers, we are going to collect tax.

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Non-resident alien not engaged in trade or business - 100,000, income? Yes. Within or without? Everything is within, general rule. If everything is within, subject to tax? Yes. What kind of tax? GIT. What rate? Either 25 or 15% depending on the situation. If only 33 is within exception to the rule, then only is within then only 33 is subject to tax. What kind of tax? GIT. Corporations, dividends If a foreign corporation issues dividends in favor of a domestic corporationincome? Yes. Within or without? General rule, lahat ay within. Subject to tax? Yes. What kind of tax? NIT. Not FWT. Kasi ang dividends pag ang recipient ay corporation is not subjected to FWT. Pag ang dividends ang nag-issue ay domestic corporation, exempt. Pag nag-issue ay foreign corporation, NIT siya. Hindi siya exempt. NIT. ‘Pag ang tumanggap ay resident foreign corporation sa Pilipinas. Within or without? Within pa rin lahat according to Section 42 general rule. Income? Yes entire 100 within. Subject to tax? Oo taxable pag within eh. Anong klaseng tax? NIT. Non-resident foreign corporation ayan na naman kayo sasabihin na naman eh parehong nasa labas ng bansa, di dapat yan ay without, without na. Aba’y hindi eh sabi ng Section 42. Non-resident foreign corporation tumanggap galing sa isang foreign corporation, income ba yan? Oo. Its either the entire 100 is subject to tax or only 33 is subject to tax, but either way, it is GIT. ITEMS OF INCLUSION The items of inclusions in the gross income of a taxpayer of whatever kind is covered in Section 32 (A): (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gains derived from dealings in property; (3) Gross income derived from the conduct of trade or business or the exercise of a profession; (4) Dividends; (5) Interests; (6) Rents; (7) Royalties;

(8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. Do you have to memorize them? No. Do not memorize them. Because ang sabi ng batas: “Gross income refers to all kinds of income from whatever source derived, meaning from legitimate or illegitimate sources, of whatever kind, whether in cash or in kind, such as but not limited to the following.” In other words, the list is not exclusive. Wala sa listahan na ‘pag nagnakaw ka ay part ng gross income. ‘Pag nagbenta ka ng shabu ay kasama sa gross income. It will definitely be part of the computation of the gross income of a taxpayer. In fact class, we’ll discuss how these kinds of income will be subjected to tax. Compensation or gross income from exercise of profession Ang alam natin ‘pag compensation ang sitwasyon ay may tao. Compensation for services rendered, meaning that this income is derived from employer-employee relationship. When you speak of services rendered pursuant to an employer-employee relationship, what you receive is particularly referred to as compensation. If you render service and there is no employer-employee relationship, you refer to it as gross income from the exercise of profession which is the “G” (in C-G-GD-I-R-R-A-P-P-P). But when you render service not pursuant to an employer-employee relationship and what you receive is gross income from the exercise of profession, most likely there’s another kind of tax that will be collected: value added tax- because that’s a sale of service. When you sell service and there is no employer-employee relationship, two kinds of taxes are collected 1) income tax for income for rendition of service without employer-employee relationship, 2) for the act of sale of service which is value-added tax. Like for example consultancies, security agencies, it is a sale of service, janitorial, accounting services, these are the sale of services but there’s no employer-employee relationship. So whatever income you will derive will still be subjected to income tax which is the gross income from the exercise of profession but in addition to that, value-added tax will be collected. Gains derived from Dealings in Property Here we will be talking about capital gains on sale of shares of stocks, capital gains on sale of real property, sale of ordinary assets. So these are the transactions wherein you will have gains, either capital gains on sale of shares of

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stocks, capital gains on sale of real property, gains derived from sale of capital assets other than shares of stocks and real property, ordinary gains in sale of ordinary assets. So those are the possibilities. If we sell ordinary assets and you have gains, what do we collect? NIT because that is all income (see Table 1) When you sell assets which is capital but not shares of stocks or real property located in the Philippines and you have gains, where do you fall? (A) sa table- NIT yan. That’s how you apply the table.

Annuities It may be out of a personal contract, similar to an insurance that you took, or because of your employment, whatever, the term annuities, hindi naman siya nasa B, hindi sa C, hindi sa D, kaya nasan siya? (A) (see Table 1). Anong klaseng tax? Doon sa (A). Prizes and winnings

Dividends There’s no other concept of dividends except profits distributed by a corporation. Interest There are two kinds of interest: 1) interest on loans 2) interest on bank deposits. When we talk about bank deposits then where will we fall? Its on passive income (see Table 1) (B). But when we talk about interest on loans, that means you are extending loans and that is engaging in trade or business. Whether it is isolated or habitual, where will you fall? (A) (see Table 1). So that’s all income net income tax ka.

Of course sabi natin passive income ito. So general rule, passive income. Final withholding tax yan. Except when the prizes and winnings are outside of the Philippines in which case NIT ka. And prizes and winnings which are exempt: 1) PCSO and lotto winnings exempt 2) prizes and winnings in sports competitions sanctioned by the national sports commission 3) exempt prizes and winnings awarded pursuant to educational, scientific, cultural, charitable, literary and so forth, provided the winner is not required to render future service and that the winner did not actively participate to join the contest. All prizes and winnings derived therefrom are income but exempt. And then prizes and winnings of corporations are always treated as ordinary income. Therefore saan siya magfafall? Tingnan mo lang dun sa unang table letter (A) (see Table 1). Partners’ distributive share in general professional partnership

Rentals Pag nagpaparenta ka, meron kang properties, di ba? When you receive rentals the rentals are income from engaging in trade or business. Kasi di ka naman magpaparenta ng wala kang business. Or assuming that it is isolated, whether it is isolated or regular ang business mo renting out properties, real, personal, tangible or intangible, whatever kind of property, what kind of income do you receive? Where will you fall? Sa (A) (see Table 1). Bakit? Wala siya sa (B), (C), or (D) kaya dun siya babagsak. Titingnan mo ngayon kung sino ka sa table. Ganun lang yun very easy. When we talk about the sale of property being rented out, pag binenta mo na si property na pinarerentahan mo, anong unang tatanungin mo, anong klaseng asset yun ordinary or capital? Syempre pinarerentahan mo, business yun, ordinary. So when you sell, and you gain profits, you realize gains where will you fall? (A). Choose. Kaya sabi ko sa inyo yang boxes na yan, these are very helpful. If you have that in your vision, hindi na kayo mawawala.

Yesterday I told you that there are two kinds of partnership, GCP and GPP. A GPP is exempt as an entity from income tax. But whether GCP or GPP pag dinistribute na ang profits di ba partnership is a contract wherein partners contribute money, property or industry to a common fund and then divide the profits among themselves. once the profits are distributed to the partners, the partners will be reclassified into an individual. And then every profit distributed to you as a partner will be treated as a part of gross income of the partner subject to tax. What kind of tax? Wala siya sa B, C, D nasa (A). Pensions When we talk about pensions we are talking about employer-employee relationship. But of course yung pensions kasi na salita is a general term. So let’s look at retirement benefits which are treated also as pensions. As a general rule, all pensions and retirement benefits are income. They are considered as compensation, therefore taxable. Except for the following: 1) all pensions which are also treated in general terminology as retirement benefits, these are “compensation” because they have been received pursuant to an employer-

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employee relationship, they are income and taxable. But the following shall not be considered as subject to tax: 1) SSS retirement benefits 2) GSIS 3) pensions under US Veterans Act are income but exempt from tax 4) retirement benefits under RA 7641 provided, that the employee is at least 50 years of age, the employee renders continuous service for 10 years and he availed of retirement once as far as the employer is concerned and a reasonable retirement plan is maintained by the employer, approved by the BIR and no part of the fund is used by the employer other than for the benefit of the employee. These are the requisites under RA 7641 to be exempted from the payment of income tax. All other retirement benefits will be income subject to tax. What about benefits due to death of an employee which shall be treated also as forming part of retirement and pension? Income but exempt. Because there is death, please be very careful, pag may nakita mong namatay laging dalawa ang point of view, isa income, isa estate tax. When you die and retirement benefits are given because of your death, of course it is not you who are receiving the benefits, it is your family. That is income but that is exempt from income tax. The next question is, are these same benefits received by your heirs part of your gross estate subject to estate tax? Yan ang tanong, kasi namatay ka, dapat ikaw ang tatanggap, kaso namatay ka. So hindi mo matatanggap, dahil namatay ka, ang tanong naman sa kabilang side ay, is the retirement benefit due to you were it not for your death, part of your gross estate subject to estate tax? The rule is: Yes. But your gross estate is entitled to claim the same amount as a deduction. Add to the gross estate, claim as a deduction. If your estate does not want to it as a deduction, good on the part of the government. But the rule is, add-deduct. Sasabihin ninyo eh sira-ulo ang batas. Idadagdag saka aawasin. Huwag na lang idagdag at huwag na lang magbawas. Bawal. Bakit? Because gross estate as defined under Section 85 is the value of all properties, real or personal, tangible or intangible, and your retirement benefits are therefore part of your gross estate. So they should be, they must be included in the gross estate. If you don’t want to claim it as a deduction, fine. The requirement is add, before you deduct. Otherwise, it will result to double deduction if you don’t add and you deduct. Ano ang first deduction? When you don’t include in the gross estate that’s already a deduction, and if you claim the deduction that’s double deduction, if you don’t add and you only deduct. Ang sabi nga ng batas, Section 85 you must add because that is part of the gross estate.

Compensation for services rendered including fees, commissions and other similar items The concept is limited to an employer-employee relationship. Let’s not memorize the enumeration. Let’s do it this way: Phase 1- Hiring - What can I give you when I hire you? I can give you a hiring or signing bonus when I recruit you from another employer because I want your service. You are the best janitor in Manila. Therefore, your expertise as a janitor is very crucial to my office. I will recruit you and give you a signing bonus. Phase 2 - Employment Proper - Dito napakaraming pwede nating ibigay at napakaraming tawag, designation of the benefit. Of course you will have your basic pay, overtime pay, holiday pay, hazard pay, night shift differential when you’re working during nighttime. You may have all kinds of bonuses, 13th month, 14th, 15th, productivity bonus, medical bonus, educational bonus, quarterly bonus, mid-year bonus, kahit ano pa yan diyan siya maka-classify. Meron pa tayong Christmas basket pag ka Pasko, meron pang pa-bahay, pa-kotse, meron ka pang equipment tulad ng cellphone, laptop. Bukod dyan, pwede ko pa kayong bigyan ng representation and transportation allowance. I can also give you scholarships, lahat ng gusto ninyo, clothing allowance, manicure allowance, pedicure allowance, bigyan kita ng security guard, medical allowance, toothache allowance, dental allowance, food allowance, bukod sa medical may medicine allowance pa, meron pang laundry allowance, meron pang travel allowance, shares, golf course shares, or playing rights, meron pa kayong insurance na ako ang magbabayad, health card, only in the Philippines. Meron pa kayong vacation leave, sick leave, ang mga lalaki may paternity leave, ang mga babae maternity leave, birthday leave, lahat isipin niyo nay an. Cellphone load, I will pay for your telephone bill ano pa sige mauubos ang board. These are the benefits that you will receive from an employer because of your employment. Phase 3- Post Employment- Una muna is resignation. Syempre wala kang retirement pay, bibigyan lang kita ng financial assistance for the services that you have rendered in the office, let’s say seven years ka, very crucial ang ginagawa mo. Terminal leave, retirement, o di kaya namatay ka, or ang office may redundancy, retrenchment at saka installation of labor-saving device o kaya dinismiss kita for a cause dahil naawa ako sayo binigyan kita ng financial assistance. Dinismiss kita without cause, nagdemandahan and all, reinstatement plus backwages. Or in lieu of reinstatement, separation pay plus backwages plus moral damages plus exemplary damages plus attorney’s fees plus costs of suit. Yan ang mga posibilidad. Meron pa tayong tinatawag na permanent physical

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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disability naputol ang katawan, babayaran. On top of all of this, in case of physical disability, meron pang binabayaran sa’yo pwede ka pa mag-claim either sa SSS or sa GSIS di ba? Pwede kang bayaran. Or kung wala ka naman binayaran ka ng company. So these are the possibilities of employer-employee benefits that an employer may give to an employee. It may be all or some or whatever. How do we treat them, from the point of view of the employee or from the point of view of the employer? Do we need to memorize these? No. There are three kinds of employees for taxation purposes: 1) managerial or supervisory 2) rank and file 3) and what we have now minimum wage earners. Isama na natin ang de minimis benefits, again napakahaba. Ilan lang naman ang may amount na memorize mo, subsidy, clothing allowance, medical expenses, laundry allowance, di ba? Do we need to memorize the fringe benefits listed? No need. Kasi lahat yan pwede mo nang i-classify. These are employer-employee benefits period. Whether managerial, rank and file or minimum wage earner, he receives a basic pay, of course. It may be paid monthly, weekly, quarterly, whatever, regardless of the frequency of payment, a taxpayer employee is given a basic pay of the employer. What will be the tax treatment? It is treated as compensation subject to net income tax because it is letter (A) (see Table 1). Rank and File you call it also compensation, net income tax is the consequence. Minimum wage earner who earns statutory minimum wage as defined under the law depending on where the services rendered and the amount promised magkano na ngayon after May 1? It’s the same P404, but the COLA is increased to P22. Additional P22 for COLA. The statutory minimum wage is technically compensation as well but there is a different term, statutory minimum wage, but this is exempt from tax. On top of this, an employee may render additional service beyond working hours; they also receive overtime pay, holiday pay when he works during holidays as provided by law, they also may claim hazard pay and night shift differential. Pag ka managerial and supervisory employee is not entitled to this. But happens if he is paid? I will deal with that later. If a rank and file receive these payments, this will form part of compensation, ginugrupo yan and it forms part of the NIT.

De minimis benefits If a minimum wage earner receives these benefits, these are exempt. On top of this, an employer may also give de minimis benefits, privileges of small value, which under the law are treated as income but not subject to tax provided, the limitations as to the amount are complied with. So clothing or uniform allowance is P4,000, medical is P10,000, laundry allowance P300 per month, rice subsidy P1,500 per month or an equivalent of one sack of rice in the amount of P1,500 per month, small gifts for anniversaries, birthdays and whatever, these are de minimis benefits privileges of small value. When these are given to a managerial or supervisory employee, not exceeding the amount fixed by law, these are income, but exempt. If a rank and file receives these benefits not exceeding the amount provided for by law, these are also income but exempt. If a minimum wage earner receives de minimis benefits within the limit, not exceeding the amount provided for by law these are exempt. So a minimum wage earner, exempt for statutory minimum wage, exempt for the overtime pay, holiday pay, night shift differential and for the de minimis benefits not exceeding the limits provided for by law, the same shall also be exempt from payment of tax. What if the de minimis benefits given to are in excess of the limits, what happens? Dito tayo magkakagulo. Lahat ng excess, tagalugin natin ha. The excess will be transferred to another box (see Table 2) which is called “Other Benefits”. If the excess here together with the other benefits do not exceed the P30,000 limit, remember? Then the excess together the other benefits not exceeding P30,000 are exempt. But if the de minimis benefits exceed the limits provided for by law and when they are transferred and grouped as Other Benefits they exceed the limit of P30,000, the excess, if you are a managerial or supervisory employee, will be treated as fringe benefits, subject to fringe benefits tax of 32% based on the grossed-up monetary value. If a rank and file receives de minimis benefits in excess of the limit, the excess will be transferred to “Other benefits” if not exceeding P30,000 together with all, exempt. But if it exceeds, the excess will be treated as compensation subject to net income tax. Isasama siya igu-grupo grupo mo. Now if a minimum wage earner is in the same situation, exceeding de minimis benefits, the excess shall be transferred here in “Other benefits”. If they don’t exceed, exempt, but if they exceed, the excess shall be treated as compensation and this time, they will stop being considered as a minimum wage earner and they will be treated as an ordinary rank and file therefore everything will be subjected to tax. Naintindihan?

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Now a minimum wage earner with statutory minimum wage- exempt, here exempt, here exempt, here exempt, and does not have other benefits exceeding the limits, but on the side, has a business. Minimum wage earner ka pero alam mo naman entrepreneurial tayong mga Pilipino, to augment the income nagbebenta ng cellphone load, nagpapautang ng kung anu-ano may business on the side, but they receive de minimis here, they will still be considered as minimum wage earner all income here from employment will be exempt but all income from business will be taxed just like an ordinary business income. So yung business income lang niya ang tina-tax, the rest of the employer-employee benefits exempt pa rin, kung hindi mag-exceed sa P30,000. Pag nag-exceed ka ng P30,000 yun ang triggering point nun pag nag-exceed ka ng P30,000 sa other benefits, ibig sabihin tigil ka na as minimum wage earner ang treatment mo will be like an ordinary rank and file. All the tax treatment will be that of an ordinary rank and file. This is the summary. Now we’re going to apply this table to all of this regardless of how you call the benefit. We don’t have to distinguish if it is a fringe benefit, de minimis benefit. What kind of benefit are you talking about? Nandito lahat. (See Table 2) This table, however, will never be applied at all if the benefit given to the employee is:

Kinds of Employees

Basic Pay

Overtime Pay Holiday Pay, Hazard, NSD

De Minimis within limit

In case excess is < P30,000

Other Benefits in case excess is >P30,000

1) Managerial

Compensation - NIT

Not Entitled

Exempt

Exempt

Fringe Benefits 32% Grossed Up Monetary Value

2) Rank and File

Compensation - NIT

NIT

Exempt

Exempt

NIT

3) Minimum Wage Earner

Statutory Minimum Wage-

Exempt

NIT; will now be considere d as Rank and File & everythin g will be taxed

a) furnished by the employer for the convenience of the employer, or b) necessary in the trade or business of the employer. In other words, if any of the two situations is present, when a benefit is given to you, disregard the table, that is not even income from your end, because there is no increase of your net worth. I repeat, if any of these two is present in a situation when a benefit is given to you, disregard the table completely, this is not income at all. Therefore, no tax from your end. Ok let’s do exercises by applying the table here. Kasi ‘yang table na ‘yan, ang background n’yan ay dapat makita niyo in the light of the kind of business of that the employer is engaged in. That’s the premise. The premise always is: the benefits given are to be taken in relation with the kind of business that the employer is engaged in so that you will know whether the benefit given to you is related to the trade or business or not. ‘Yan ang premise lagi, no two businesses are exactly the same. Particular ito sa kind of business na involved ang employer. Wala namang employer na walang business, kaya ka nga nakakapag-hire ng empleyado, ‘di ba? So ang tanong natin diyan ay, ‘Paano natin ma-aaply ang table na ‘yan ng simple dito sa lahat ng klase ng benefits na inyong matatanggap?’

Exempt

Exempt

Exempt

Hiring or signing bonus O simulan na natin hiring or signing bonus. I have a parlor business. I hired you. I recruited you as the best janitor in Metro Manila giving you a signing bonus of P3,000. Kayo si janitor, kayo ang empleyado. Income? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Pero kung ikaw ay hinire ko at binigyan kita ng signing bonus dahil ikaw ay high-ranking officer. Kaya kita ire-recruit because of your knowledge, skills and all, and I give you a signing bonus of P200,000. Income from your end? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? Basic pay ba siya? Hindi. Eto ba siya? (Overtime Pay, Holiday Pay, Hazard, NSD) Hindi. Eto ba siya? (De minimis) Hindi. Eh ‘di dun siya babagsak (Other Benefits). Apat lang yan eh. Exceeding P30,000 sigurado. Sa dulo ng taon, since in excess of P30,000, fringe benefit ‘yun (32% of the Grossed up monetary value). Eh kung ikaw ay MWE, janitor, P100,000 ang signing bonus mo, NIT na siya (under the last column). Basic pay Next, basic pay, holiday pay, hazard pay, night shift differential, its there. Bonuses whatever you call them, 13th, 14th, 15th, 16th, 17th, 18th hanggang 50th month bonus, mid-year bonus, productivity bonus, incentive bonus, Christmas bonus lahat ng klase ng bonus whatever you call them. Income ba yan sa inyo? Yes. Is it necessary for the trade or business? Ay, no, no, no. no. Is it for your convenience? No, no, no, no. So, ang tanong natin, income ba yan sa inyo? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? Ay depende. If you are a managerial or supervisory employee, that will be treated as coming from other benefits and other benefits exceeding P30,000- fringe benefits ang katapat mo. Kung ikaw ay rank and file, NIT ka. Siguradong kung ikaw ay minimum-wage earner, tanggal ka na sa classification, balik ka na dun sa rank and file. Christmas basket, basket of fruits, may santol, mangga, grapes, orange. Meron ‘yang amount, meron bang income? Yes. Within or without? Within. Subject to tax? Ay depende. Pag nandito titingnan mo ngayon, de minimis ba siya? Nakasulat ba sa batas na de minimis ang Christmas basket? Wala. Kayo naman. So how do you treat that? Very simple (See Table 2). Nasa dulo siya, dun siya sa Other Benefits together with Other Benefits not exceeding thirty. Exempt. Exempt. Exempt. If exceeding thirty, the excess shall be treated as pag managerial- fringe benefits, rank and file- NIT. Housing Pa-bahay, pa-kotse. Housing in English. Housing privileges and car privileges. Sa madaling salita sa Tagalog, may pa-bahay ka na, pa-kotse ka pa. Pagsasama-samahin natin ‘yan, house, board and lodging, kotse, other privileges. What will be the tax treatment? Are these benefits given to you because they are

furnished a) for my convenience? If the answer is yes, not income exempt; b)necessary to the trade or business? Example you are our head cutter who services clients, I give you kotse, parlor ang business ko eh. Pero kung binigyan ko ang janitor ko, binigyan ko ng kotse, bahay, at pa-kain ko. Aba, those are not necessary for my trade or business. Those are not for my convenience. Therefore, income, taxable sa inyo. Pero kung kayo ay head barber ko at nagse-service ka sa mga kliyenete natin at ang ating business ay 24 hours. Kaya kelangan bigyan kita ng bahay sa gilid ng parlor na binabayaran ko para ang kliyente pag dumating ng alas-dos ng umaga, pwede kang gisingin para gupitan ang kliyente. These are absurd situations, but the reason I am pointing this out to you is para makita ninyo kung ano kaya yung “for the convenience of the employer,” ano kaya ang ibig sabihin ng, “necessary for the employer’s trade or business.” If those benefits are given to you for my conveniece or necessary for my trade or business, so be it. But that’s not income from your end, not taxable, not income. But if they are not furnished for my convenience nor are they necessary for my trade or business, where will they fall? Last column. (See Table 2) Other Benefits. Then, titingnan mo kung sino ka, rank and file, minimum wage earner ka, managerial or supervisory. Titingin lang, ang utak susunod agad. Hindi niyo kelangan memoryahin ang batas. Equipment Cellphone, laptop, personal computers, ‘yan, equipment that I furnish you. Ang tanong: are these necessary in carrying on your trade or business? If you are a janitor, do you need a laptop? That’s income from your end. But if you are my cashier or accountant, then those are necessary for your trade or business and those are not income from your end. Otherwise, if the benefits such as these do not apply, then you go back to the table. Representation and transportation allowance Parlor - I give you P100, go to Divisoria, buy pangkulot. Ginawa mo sa P100, ipinangkain mo, nabusog ka. May income ka? Oo, nabusog ka eh. Pero kung pinambili mo ng pangkulot at ginastos mo ang P100 sa pamasahe, at pagbalik mo sa akin. Sinabi mo, “Ma’am, eto ang resibo, eto ang pangkulot.” Liquidated. That’s not income from your end. Pero pag ipinangkain mo, whether liquidated or not, that’s income from your end. Taxable. Anong klaseng tax? Eh titingnan muna natin kung ikaw ba eh managerial, rank and file or minimimum wage earner. Titingnan mo lang, wala siya sa una, pangalawa, pangatlo. Pangapat siya (See Table 2). Oh ha? Ganyan magbasa, hindi naman siya BP (basic

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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pay), OP (overtime pay), hindi siya DMB (de minimis benefits). Other Benefits siya. Yun lang naman ang qualification ng benefits that you will receive.

Food allowance Andito na siya na-discuss na natin ‘yan.

Scholarships Medicine I send you to law school in San Beda Alabang as my head cutter so that you’ll study law. Tuition fee, allowance, book allowance, baon, I give you all, income on your end? Yes. Taxable? Yes. What kind of tax? (See Table 2) One, two, three, andun siya sa Other Benefits na naman. But if I send you to Ricky Reyes Haircutters Academy, I’ll pay for all expenses, that will benefit me so that is not income from your end. This is the thought: very simple naman eh, hindi naman siya mahirap. Wala ditong mga preference of credits, wala. Titingnan mo lang ang sitwasyon, kasi talagang ang tax is situational, so you have to relate to the reality of the situation. Clothing allowance De minimis benefits, in excess, kitang-kita (See Table 2). Alangan naman sabihin mo sa yong boss, “Pag di mo ako binigyan ng clothing allowance, papasok ako ng hubo’t hubad.” Medical allowance May limit din, P10,000.

Part na ng medical allowance. Laundry allowance P300. Kapag nag-exceed, doon (Other Benefits). Travels You are my head cutter in the parlor, go to Hong Kong and attend seminars for the latest haircuts. Income from your end? Hindi. I will give you allowances paid by the office. Income from your end? Yes. What kind of tax do you pay? Depende kung sino ka. Country club shares If shares are given to you because of your employment, how do you treat that? Hindi yan basic pay. Dun siya magfa-fall sa Other Benefits. Eh, milyunmilyon yan eh. Janitor binigyan mo ng shares sa Tagaytay Highlands, san ka babagsak? Rank and file ka? Other Benefits ka.

Manicure/ pedicure allowance Playing rights Dun siya sa Other Benefits.

Security guard If I give you a personnel, assigned personnel, a security or a physical being. You are my janitor, I give you security. Income from your end. But if you were the president of the company or my comptroller, or my chief accountant or financial officer, or treasurer of the company and I give you a security officer, that is necessary in trade or business. Therefore, not income from your end. Dental allowance Itong dental kino-consider din sa medical allowance so P10,000 ang limit.

Playing rights in a club, sports club, will that be a benefit to you? Is that income from your end? Playing rights, pag naglaro ka binabayaran ka, income ‘yan. ‘Di ba maglalaro ka lang dun, charge sa company kasi company share ‘yon and then you are given the right to play, paid for by the company. Of course, may income ka. Bakit? Sa halip na pera mo ibabayad mo eh hindi ka maglalabas ng pera, company magbabayad. Is there income from your end? Yes. How do you treat that? Other Benefits sa dulo (see Table 2). Health cards Now the trend is: health cards are treated as ordinary and necessary expense on the part of the employer. Syempre, ayaw kasi na mamomroblema kayo pag may sakit kayo, hindi ka rin makakapagtrabaho dahil wala ka ring pera

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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pampagamot. At pag wala kayong pera pampagamot, mangungutang kayo sa akin, ‘di ba? O ‘di kaya wala kang pambayad, lalo kayong magkakasakit sa kakaisip ng pambayad. So ang effect nito ay sa ating opisina. Kaya ngayon, ang trend is: health cards will not be treated as income because necessary na ‘yun.

taxable because you are as if rendering service and you are working. So what you receive is your basic pay, ‘di ba? Pero kung ang iyong terminal leave, ay converted into cash because you are retiring and converted it to cash, that will form part of retirement benefits, income but not taxable.

Vacation leave and sick leave

Birthday leave

10 days or less commutation of vacation leave. De minimis benefitsincome but not taxable. In excess of ten days, that's already taxable. What kind of tax? (see Table 2) ‘Yun, timingin lang kayo sa dulo (Other Benefits).

Birthday leave. Nag-leave ka, para kang nagtatrabaho pero bayad ka. O eh ‘di basic pay. Part ng basic pay mo. ‘Di ka naman nag bibirthday ng tatlong beses isang taon eh.

Commutation of sick leave

Utilities

Kalahating araw, 1/4 day kinompute and converted into cash-income, taxable. Bakit mas favorable sa employee pag vacation leave kesa sick leave? Syempre ang binibiyayaan ng batas ay ang masisipag pumasok. Kaya marami kang vacation leave na converted into cash, hindi ka tamad, ‘di ba? Pag ikaw ay may sakit, hindi pinaguusapan dito ang kasipagan or katamaran. Ang pinaguusapan dito ay, “Dapat ka bang pumasok o hindi?” Dahil kung may sakit ka, hindi ka dapat pumasok dahil baka makahawa ka pa sa opisina, kaya hindi kita bibigyan ng reward. Kaya isang araw lang na ma-convert into cash, income taxable. Pero ang vacation leave, sampung araw, pababa, ikinonvert into cash, income, but not taxable. De minimis benefits ‘yan. Pero pag nag-exceed, the excess will be falling under Other Benefits.

Cellphone load, telephone bill- these are utilities paid for by your office. Of course, it can never be necessary in your trade or necessary or for my convenience that I pay for your utilities. Therefore, these are automatically income, taxable. What kind of tax? Other Benefits. As you can see, you don't have to memorize the rules. Tingnan, sino ba ako? Ano ba ako?

Maternity leave

Retirement

Maternity leave, pag nag maternity leave ka, paid for ka. Eh ‘di income. Basic pay ang matatanggap mo eh. Ngayon, sino ang nagbabayad sa’yo? Ang kompanya mo ba o SSS? SSS. Kung binayaran ka ng kompanya mo, income yan, at taxable kasi compensation ‘yan. Pag binayaran ka ng SSS, ano ang binayad sa’yo? Compensation mo. Kaya ‘yan ay taxable pa rin, di ba? Mga lalaki, hindi niyo naiintindihan ito. Kaming mga babae naiintindihan namin ‘yan.

Of course, as I mentioned to you kanina, these are income but not subject to tax. Retirement/death benefits, income, not taxable.

Financial assistance/Resignation Kung ako ay nag-resign at binigyan ng financial assistance? Sino ka ba? Hindi ‘yan sigurado dito. Bakit? Pano magiging financial assistance ay necessary for trade or business, ay no way. Dun siya magfa-fall.

Redundancy, retrenchment, installation of labor-saving device Income but not taxable because these are for causes beyond the control of the employee.

Terminal leave Dismissal for cause Terminal leave. Ibig sabihin nito, you're about to retire and whatever leave credits that you have earned and accumulated will be either converted into cash or i-aapeal mo at hindi ka na papasok and you are paid. ‘Yan ang sitwasyon. If you avail of the terminal leave and you don't go to office and you are paid, then that is

Dismissed for cause and you were given financial assistance. Of course, whatever financial assistance you will receive will fall under Other Benefits.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Dismissed without cause Final judgment ruling: reinstatement plus backwages, plus damages, moral damages, exemplary damages, attorney's fees, and costs of suit. How do we treat them? When you are reinstated, you're back to work. Whatever you receive is basic pay and all other benefits. Backwages is income, taxable because these are supposed to be the income while you were working were it not for the fact that you were dismissed without cause. So income, taxable. Moral damages and exemplary damages are income, taxable. Isang sentence lang pagdating sa damages. The only damage exempt from income tax are actual damages. Kahit anong klaseng pinagmulan ng damages, the only damage na income but not taxable ay actual damages. Kaya yung damages for loss of earning capacity these are actual damages, right? Income, not taxable. So para hindi kayo nalilito, kahit anong klaseng damages, isa lang ang sentence: actual damages lang ang income at hindi taxable. The rest of the kinds of damages are income, taxable. Attorney's fees and costs of suit assuming nagdemandahan kayo at binayaran ka, what is in excess of what you actually spent is income and taxable. But commensurate to what you spent and incurred is not income because it’s just a reimbursement of your expense.

reimbursement given by your employer kung meron kang private insurance plan. ‘Yan ang mga posibilidad dito. Physical disability-- naputol ang kamay, naaksidente ka, nabali ang katawan mo. So ano ang mga posibilidad mong matanggap? Either your employer may reimburse it to you and/or your own private insurance covering the damage. Either way, whichever or both ang bigay sa’yo ang rules ay very simple. Lahat ng gastos for actual damages - not income, not taxable. Pero kung moral, exemplary damages, these are income, taxable. Loss of earning capacity: ni-reimburse ka, binayaran ka in the form of damages, income, not taxable kasi actual damages ‘yun. Attorney’s fees and costs of suit assuming na nagdemandahan kayo para mabayaran ka for the physical disability. These are all in excess of actual expense, income and taxable. As you can see, hindi siya mahirap aralin. ‘Yun lang ang tingnan kahit anong tawag, may honey, sweetheart, whatever, kahit anong pangalan ng benefits, these are the rules. SSS, GSIS benefits or costs as I mentioned to you are all income but not subject to tax. Ano pa? PAGIBIG, Philhealth benefits of course these are all income but not taxable as far as the employee is concerned.

EXCLUSIONS Ito talaga mememoryahin niyo. Items of exclusions are:

Separation pay plus backwages Separation pay is income but not taxable because this is for a cause beyond the control of the employee. The rest here we apply the same rules. Backwages, income, taxable. What kind of tax? Basic pay. Kasi ito, plus all other benefits that you receive ‘yan, iaapply ang table. Damages as a rule: income, taxable. Attorney's fees, costs of suit in excess of what you have spent is income, taxable. And what you spent in commensurate to what you incurred as expense will just be reimbursed as expense therefore, not income, not taxable. Reimbursements for physical disability including damages What will be the tax treatment? Naputol si katawan ko, ni-reimburse ka ng nagastos mo, that’s not income, because it is just a reimbursement of your actual expense. Pero if you’re awarded, if you’re given moral damages, exemplary damages, ‘yan ay income taxable.

1) items of income; 2) they have the effect of decreasing the tax due; 3) they are treated as exemptions and therefore they are strictly construed against the taxpayers/claimants. You have to memorize these items of exclusions because the list is exclusive. If you do not fall within any of those enumerated items, as far as the income is concerned, then collect tax. Whatever is not in the list of exclusions will be in the inclusions, even though the inclusion is not in the list. ‘Yan ang rule, pag ‘di sinabi na ang bangus ay exempt, ay siya. ‘Wag i-exempt si bangus. Pero kung nakalagay na si bangus ay exempt at ‘wag tayong mag-impose ng tax. What are the items of exclusions? As I discuss these items, I will correlate them with the other kinds of taxes.

Loss of earning capacity. Kasi yung physical disability, pwede ‘yang Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Section 32 (B), 1) Proceeds of a life insurance policy, received by the insured or his heirs. If such amounts are held by the insurer under an agreement to pay interest, the interest shall form part of the gross income of the taxpayer. X is an employer, Y is an employee. Y took a life insurance over his life, paying premiums of P5,000 annually. Proceeds of the insurance-- P1M, interest of 10% will be paid if Y survives over the paying period of 20 years. Plus, there will be a return of premium if Y survives the paying period. Ganyan ‘yan eh iba-iba ang stipulations and paying periods pero pag buhay ka pa, hindi ka na magbabayad after 20 years, kanya-kanya ‘yang diskarte. Stipulation ‘yan sa kontrata. Designated beneficiaries- the wife and children of Y. Question: 1) When Y is alive and paying for the premium of P5,000 presumably derived from his compensation income, can Y claim the P5,000 premium as a deduction from his gross income? Yes or no? No. Why? Because the only allowable deductions for compensation income earners are PE (Personal exemption), AE (additional exemption), and PHHI. Ano yung PHHI? Premiums for health and/or hospitalization, hindi life insurance. Y dies. Tigok these three (P1M, 10% and return of premium) received by the wife and the children, income on the part of the wife and children? Yes. Included, excluded? Excluded. Item of exclusion no. 1. Everything is excluded? No. P1M is excluded, 10% is income, included in the gross income, the return of premium is excluded, that’s Section 32 B (2). Now since there is death, there is a question about estate tax, are these three received by the wife and children part of the gross estate of Mr. Y and therefore subject to estate tax? Section 85 (E), meron kayong makikita items of exclusion in the gross estate, proceeds of life insurance policy. Nakita? So according to the law, Section 85 (E), when a person dies part of his estate include proceeds of his life insurance policy, tama? So alin d’yan at alin ang hindi at bakit isasali. What are the rules under Sec. 85? There are two kinds of life insurance policy proceeds under Sec. 85: 1) life insurance taken by the deceased during his lifetime, insuring his life, designating himself, his estate, his executor, administrator as the beneficiary, whether designation is revocable or irrevocable- include in gross estate. 2) the second type of proceeds of life insurance under Sec. 85 which are included in the gross estate of Mr. Y, is when Mr. Y takes a life insurance, insuring himself, designating as beneficiary any person other than these: himself, his estate, his executor, administrator. When the designation is revocable, include but if the designation is irrevocable, exclude in the gross estate.

So if you’re asked, P1M 10% interest and return of premium, are these included in the gross estate of Mr. Y? Very simple, if the wife and the children were the designated executors or administrators, whether the designation is revocable or irrevocable, include. But if they are not the designated executors or administrators, if the designation is irrevocable exclude from the gross estate of Mr. Y. What is the reason? I have only one sentence even if you don’t read estate taxation, Section 85. The rule found in estate tax on when youre going to include or exclude is very simple: If at the time of death, the decedent has interest or control over the property or any portion or interest of the property, include. If he designates himself, his estate, his executor, administrator, pag namatay siya may control siya, na hindi niya ‘to ginawa tama? At kahit namatay siya ang magbebenefit hindi siya, pero meron pa rin na kanyang kadugo na magbe-benefit kaya meron siyang degree of control or interest, included kahit non-revocable eh. Dun sa pangalawa, pag dinesginate naman niya hindi niya kamag-anak o di kaya wala siyang relasyon, pag revocable, included. Bakit? Kasi kung hindi siya namatay, may posibilidad na ni-revoke niya at pinalitan niya ng somebody na may relasyon sa kanya. Because of that degree of control, included. Pero yung from the start isa hindi related sa kanya yung beneficiary, irrevocable pa, mamatay o mabuhay man si Y, wala siyang mapapakinabangan diyan. Kaya excluded. That’s rule found in estate tax. So if last year, tinanong ‘to, naka-enumerate lahat-lahat kung included or excluded, sa gross estate. Takang-taka ako bakit nahihirapan. Eh simple, meron ka bang degree of control? Meron ka bang relasyon sa beneficiary in such a way na pwede kang magbenefit kahit patay ka na? ‘Yung pamilya mo? Pag oo ang sagot include mo. So these are the rules. Lets have a variation from income tax point of view. X is the employer, Y is the employee. Y insured his life, same scenario designating as beneficiary his wife and children. Sabi ni X, “You are my treasured employee. You work 24 hours a day. Kawawa ka naman, kumuha ka ng life insurance. Let me pay and let me shoulder the P5,000 premium that you are paying.” What is the effect of X, the employer, shouldering the P5,000 premium on the part of Y? Income on the part of Y? Yes. Taxable? Yes. What kind of tax do we pay? Depende. Andun sa pang-apat na box, (See Table 2) Other Benefits ‘yan. Y dies, benefits go to the wife and the children, income on the part of the wife and the children. Included? excluded? P1M is excluded. 10% is income taxable. ROP, not income, excluded. Dahil namatay, may estate tax. Ano na naman ang sagot kung may estate tax? ‘Yan ang rules, kung si wife at si children ay mga executors or administrators,

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revocable or irrevocable, include in the gross estate of Mr. Y. Kung ito naman ang case, pag revocable, include. Pag irrevocable, exclude. Now third variation, X insured the life of Y, designating as beneficiary, X and his business. X pays P5,000 premium, proceeds P1M 10% interest and ROP. Y dies, proceeds go to X. Question: When X is paying for the premium, can X claim as deduction from his gross income from business the P5,000 premium? No. 1) that’s not a necessary expense. 2) Section 36 (A) (4) nakasulat. ‘Wag n’yong mememoryahin ang mga numero ha? Kaya ko lang na memorize sa tagal ko nang pagtuturo. Pangalawa, kelangan kong sabihin kung nasaan. X, the employer, cannot claim as deduction the premiums paid on life insurance taken by him over the life of his employees and designating as beneficiaries the employer or his business directly or indirectly. ‘Yun ang scenario niyan.

Gifts, bequests, devises Number 3: Gifts, bequests, devices (my favorite), provided however, that if the property received as a gift realizes income, the income shall form part of the gross income of the taxpayer-recipient. Pinamanahan ka ng tatay mo, sampung apartments na pinarerentahan, yung value ng apartment, income excluded, not subject to tax. Pero yung renta ng apartment, income at taxable. Natural, alangan naman pati income eh kasali pa. Syempre hindi. The income of the property received as a gift will be treated as forming part of the gross income of the recipient-donee, whether the mode of transfer is succession or simple gift, taking effect upon death or during lifetime, it does not matter. Property received as a gift is income but not taxable because it is an item of exclusion. If it realizes income, the income is treated included and taxable. Treaty

Y dies, proceeds go to X and his business. P1M: included, excluded? Excluded. May distinction ba yung Section 32 B (1)? May distinction ba na, if the life insurance is taken by the deceased? Wala. So excluded. Yun ang sinasabi ng batas. 10% interest. Included? Excluded? Included. ROP- excluded. Nakasulat ‘di ba? Ang hilig niyong mag-amendya ng batas eh, ‘yan ang nakasulat kaya ngayon nakikita ninyo yung importansya ng codal. Kasi nakasulat eh.

Hay darlings, hindi na tayo magdi-discuss because a treaty is treated as forming part of the law of the land and therefore we respect. If a treaty signed by PNoy or whoever the president is, exempts certain income from the payment of tax, then so be it, we shall comply.

Dahil namatay si Y, kasama ba itong tatlong ito sa gross estate niya? Namatay si Y, ininsure ni X ang buhay ni Y ang proceeds ng life insurance napunta kay X. ‘Yun ang scenario. Tigok si Y, dahil tigok, ang tanong, kasama ba ‘yan sa gross estate ni Mr. Y? Yes or no? Sasabihin niyo, “Ah, the life insurance is taken by not by Y, but X. So, hindi mag-aaply no. 1.” This is how you eliminate, and life insurance is taken again by X. So hindi mag-aapply ‘yan. What will it be? Included or excluded? Excluded. Bakit? Anong partisipasyon ni Y? Mabuhay, mamatay. Ganun lang. He does not have any interest at all whether he is alive or dead. Right? Because it is X who took the life insurance over the life of his employee. Therefore, Y, alive or dead, does not have any benefit out of these proceeds. Whether the designation is revocable or irrevocable, wala tayong pakialam because Y does not have any benefit out of the proceeds whether alive or dead. These are items of exclusions no. 1 and 2. Ang number 2 likewise, is not limited to life insurance. It may cover other types of insurance like motor vehicle insurance. If there is a provision for return of premium, if the property is not exposed to the risk insured against, as long as there is return of premium that is not even income at all.

Pag binasa ninyo ‘yan ano ang pwedeng coverage niyan? 1) Compensation for injuries and sickness because of employment. That’s a possibility. 2) Compensation for injuries and sickness because of an accident and you are compensated for an accident, or you may not be compensated for the accident. Nagdemanda ka, whatever is the source of the compensation, if it is accident or injury, excluded from the gross income, not subject to tax. What is excluded? As I’ve told you, only the reimbursement for the actual damage shall be excluded and not subject to tax. But all other kinds of damages such as moral, exemplary, attorney’s fees, costs of suit, ‘yan ay income, taxable.

Compensation for injuries and sickness

Actual damages, damages for loss of earning capacity, these are income but not taxable because they are items of exclusion from the computation of the gross income of the taxpayer. Prizes and winnings Prizes and Winnings and other miscellaneous items nadiscuss na natin ito. Prizes and winnings in sports competitions sanctioned by the national sports commission -excluded.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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As you can see, in our formula, Net Income Tax the formula is: th

13 month pay and other benefits in an amount not exceeding P30,000 – Excluded Nadiscuss na natin ito, umiikot na tayo in circles. So these are the items of exclusions. ‘Wag na ‘wag kalilimutan. San siya importante? Sa pagco-compute ng gross income ninyo. What is the effect? The effect is reduced taxable income. Therefore, reduced tax due. Because of that, this is in the nature of exemption, strictly construed against the taxpayers. DEDUCTIONS Ang haba ng deductions, dalawa lang naman yan, Section 34 and 35 pero ang haba ng pahina. Actually this is the simplest concept in income tax. Isa lang ang sasabihin ko sa deduction: deductions are allowed only in income subject to NIT. Yun lang, wala na. Following that rule, if your income is subject to FWT, concept of deduction does not apply. If the taxpayer’s income is subject to GIT, the concept of deduction does not apply, as well. If the taxpayer is a non-resident alien not engaged in trade or business, concept of deduction does not apply. If the taxpayer is a non-resident foreign corporation, the concept of deduction does not apply. Whatever kind of taxpayer we’re talking about, if your income is letters B, C, D (see Table 1) doon, the concept of deductions will not apply. I’ll give you a summary on how deductions will apply. Pag ikaw ay tao, at compensation income earner, ito lang ang deductions mo: PE, AE, PHHI under Section 34 (M). Pag ikaw ay tao, compensation income plus business income or purely business income earner ka, ang deductions mo ay PE, AE, buong Sec. 34 or OSD (Optional Standard Deduction). So when you read it, PE+AE+34 or PE+AE+OSD. Pag naman ikaw ay korporasyon, 34 or OSD. Ano yung 34? Itemized deductions. And this table applies only if taxpayer’s income is subject to NIT. Income subject to FWT, no deductions. Taxpayers non-resident alien not engaged in trade or business and non-resident foreign corporation- no deduction.

Gross Income less: Allowable deductions Taxable Net Income x Rate Tax Due less: Tax Credit Net Income Tax Thus, if the income of the taxpayer is subject to creditable withholding tax, that income will first be included here (Gross Income). At the end of the day, the creditable withholding tax will be credited. But if the income is subjected to FWT, I mentioned this to you yesterday: like interest, dividends, royalties, prizes and winnings, if your income consists of that, your income, prizes and winnings, lahat ng passive income, capital gains on sales of shares of stocks, and capital gains on sales of real property, falling in B, C, D (see Table 1) as we describe them, will be subjected to FWT. Therefore, not included here anymore. Kaya walang deductions na allowed. But if your income is passive income outside of the Philippines, resident citizen ka, taxable ka ba do’n? Yes. What kind of tax? NIT. Kaya ‘yon, although passive income ‘yon, but that passive income will be subjected to NIT, deductions will be applied. Royalties outside of the Philippines of a resident citizen. What kind of tax? NIT. Hindi ‘yun FWT, and the concept of deductions will be applied. But if we talk about passive income in the Philippines, the passive income is subject to what kind of tax? FWT. The concept of deductions will not be applied. Nakuha ang picture in relation to the table? Very simple ito, tao, compensation earner lang, PE, AE, PHHI. Pag ikaw ay tao, compensation income plus business income or purely business, ang deductions mo ay PE, AE kasi tao, buong Sec. 34 or OSD. Korporasyon anong klaseng deductions? Itemized deductions under Sec. 34 or OSD. Distinctions between deductions and exclusions By the way, how do we distinguish deductions from exclusions? 1)

Exclusions are items of income, deductions are items of expense.

2)

Exclusions and deductions are both treated as exemptions, and therefore, strictly construed against the taxpayer.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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3)

In exclusions, the gross income is reduced, therefore the tax is reduced; in deductions, the expenses are weighed against the gross income.

Therefore, they both have the effect of reducing the tax due. That’s why they are both treated as items of exemptions. Those are the points of comparisons between exclusions and deductions. Personal and additional exemptions Personal exemption, P50,000 per person on the assumption that the person is earning income and the income is purely compensation income. Without the income, hindi pwedeng magpa-refund sa BIR. Additional exemption of P25,000 per child maximum of four. Let us do some examples. Ikaw at ako. You’re my boyfriend. We have one child, without marriage, both are working. PE- P50,000 (ikaw) PE-P50,000 (ako). Sinong may karapatan sa P25,000? Okay, additional exemption refers only to children ha? Wala ditong parents, brothers and sisters. Dependents for purposes of claiming additional exemption refer only to children of whatever status and kind, not more than 21 years of age, not married, not gainfully employed, living with and dependent for chief support upon the taxpayer and regardless of age, if incapable of self-support by reason physical or mental disability. Not married with one child, the child is living with me and dependent upon me for chief support. So P50,000 + P25,000, then P50,000 ka. What is the meaning of “living with”? Does it mean that the child does not go to the father? That the child does not stay in the father’s house? No. Ang ibig sabihin ng “living with,” is majority of the time is spent with the parent claiming the exemption. Ano naman yung ‘chief support”? Ibig sabihin is that, the parent claiming for additional exemption should be providing for the basic needs of the child at saka education. It does not mean that the other parent is not supporting the child, it may be joint support. So that’s the meaning of “living with and dependent upon the taxpayer for chief support”. So, 2 ang anak natin, nasa iyo ang isa, nasa akin ang isa. P50,000+P25,000 (sa akin), P50,000+P25,000 (sa’yo). Pwede ko bang kunin? Non-transferrable ang PE at AE. Pwede ko bang sabihin: “Ako naman ang babae, inanakan mo ako ng inanakan eh. Ako na lang ang P50,000+P50,000 ikaw P50,000+0. No pwede. Kelangan ma-comply natin yung not more than 21 years of

age, not married, not gainfully employed, living with and dependent upon the parent for chief support of the child and regardless of age, if incapable of selfsupport by reason physical or mental disability. 5 ang anak natin, 3 sa akin, 2 sa’yo. P50,000 (sa akin), P50,000 (sa’yo). Additional exemption- I claim for P75,000 that’s alright, but you will be claiming only P25,000. Pwede ka bang mag-P50,000 plus P50,000? Hindi, kasi pag tumingin ako sa’yo, lima. Ang sabi ng batas maximum of four. Clear? Okay. Now, marami kang babae, kaming anim, tig-i-tig-isang anak sa amin, wala kang pinakasalan, lahat ng tig-i-tig-isang anak nasa amin. P50,000+P25,000 (ako) ganun din kayo. Ikaw, P50,000 ka lang. Pano kung may anak ka pa sa ibang babae? Anak sa’yo lima. May anak ka sa amin tig-i-tig-isa, may anak ka sa ibang babae na lima nasa ‘yo lahat. How much can you claim for additional exemption? P50,000+P25,000 ako. Ikaw? Maximum of four, eh. How many can you still claim? 3 only. Tatlo na lang siya. Pwede ba siyang mag-apat? ‘Di ba anim ang anak niya, nasa amin tig-i-tig-isa, wala sa kanya. ‘Di tayo kasal eh. Pero meron siyang limang anak sa isang babae na nasa kanya. Labing isa ang anak niya, lima buo, anim hindi. So, ano ang pwede nating i-claim na exemption? Tayong anim P50,000+P25,000 sigurado. Ikaw, additional exemption. Tatlo ka lang. Ang tanong ni’yo, bakit ganun? Eh hindi naman anak ni Lumbera ‘yan. Anak niya sa ibang babae. Bakit kanya tatlo lang? Bakit siya hindi pwedeng mag-apat? Kasi pag tumingin ako sa’yo ilan na pag nag-apat ka? Lima na. Bawal sabi ng batas. Hanggang apat lang. Walang sinabi ang batas na, ‘the four children should be our common children.’ Nakalagay ba? Wala. Basahin ninyo. Because if you allow that to happen, you will be encouraging an illegitimate relationship. You are favoring more ‘yung hindi kasal kesa sa kasal. Next kasal, magpakasal tayo. Ang kasal wala kang anak sa iba. Puro legitimate, nagsasama tayo. Iba ang rules pag kasal, P50,000 plus P50,000 but the husband has the right to claim for the additional exemption, maximum of four children. Madali pag kasal. Ngayon pano kung kasal at may anak ka sa iba either prior or during the marriage? Ayan, complications. Whether prior to marriage or during the marriage, ang requirement, pwede mo bang ma-claim as dependents ‘yung mga anak mong illegitimate? Pwede. May bawal ba? Wala. Ano lang ang repercussions? Pag-aawayan natin ‘yan. Its either you claim for our children, you prioritize our legitimate children as dependents. But I cannot require you to get our legitimate children as our only dependents to the exclusion of your illegitimate children. The assumption here is that: the illegitimate children are living with you

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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and dependent upon you for chief support and because they are living with you, they must be living with me as well. Kasi mag-asawa tayo eh. ‘Di ba? Okay, so kung sila ay nakatira sa atin, the prerogative is on you. Choose among our illegitimate children or our legitimate children, but maximum of four. Pero iisipin niyo, “Teka muna, ‘di ba dapat maximum of four pag legitimate plus illegitimate?” Wala namang sinabi ang batas, maximum of four lang ang nakasulat. Pag tumingin ako sa’yo apat lang at hanggang apat ke ‘yan ay legitimate, illegitimate. Basta tayo magtapat, wala kaming partner na partner tayo ngayon bukas hindi. Basta may anak, forever tayong partner in the eyes of the law. The fact that we are separated later on or we are not married do not matter as far as the exemptions are concerned. Now, as a husband, can you waive the additional exemption? Yes. In writing. But if the husband is a non-resident citizen, whose income is purely outside of the Philippines and therefore not subject to tax, then there is no need for your waiver. Automatically the spouse, wife, will be allowed to claim the additional exemption. Another instance where the wife can automatically claim for the additional exemption is when the wife is tamad, without income. You don’t have anything to waive in my favor. Anong effect ng legal separation sa exemption? Wala, kasal tayo. Para tayong mag-asawa. Annulled, eh single. But that doesn’t mean that because we are single again iibahin natin ang rules, back to being single, maximum of four pag nakatingin ako sa’yo. Ke magka-anak ka sa iba o hindi, magkaroon ka ng illegitimate children sa iba, wala akong pakialam. Pag tumingin ako sa’yo ilan na? Kelangan ba yung apat na yun ay anak natin? Oo, sinabi ng batas. Otherwise, if we do that then there’s a possibility na each person may have more than when you look at them together. Kasi pag ganun, pwede mangyari, pwede ka mag-claim ng apat, apat din ako, eh di walo. Walo is certainly more than four. What happens in case of change of status among the dependents, children. Parang FIFO, first in first out. Change of status within the year is treated as change of status at the end of the year. So kung namatay ang dependent mo, nag-asawa, nagkaroon ng trabaho, or umalis sa’yo or no longer dependent upon you for chief support within the year, it is as if at the end of the year. So during the year, pwede mo pa s’yang i-claim as dependent. But after the taxable year, no more. So ano naman ang mangyayari pag may nagbagong ganon, sa susunod na taon? ‘Di ba nag first-in first out ka, eh kung may susunod na pumapasok naman meron namang pwedeng kapalit, basta related sa’yo. Children kasi ang requirement.

Premiums on Health and Hospitalization insurance (PHHI) Section 34. Premiums on health and hospitalization insurance in the amount of P2,400 per family, provided, that the gross annual income does not exceed P250,000. Sino kaya ang pwedeng mag-avail nito? Minimum wage earner pwede mag-avail nito. Optional Standard Deduction Ano naman ang OSD? Optional Standard Deduction. This used to be available only to individuals. But now, both corporations and individual taxpayers are entitled to claim for OSD. The rate before is 10% now its 40%. How do we distinguish OSD from itemized deductions under Sec. 34? In itemized deductions under Sec. 34, require supporting documents. Resibo to support the expense. ‘Yung OSD, there is no need for receipts to support the expense. But there is a need for receipts of your gross income so that you can arrive at 40% of your gross income as a deduction. You cannot just change from OSD to itemized, and itemized to OSD, hindi pwede. You need special permission from the Bureau of Internal Revenue before you can change. And as a general rule, if you’re starting out your business and there’s no specification on what kind of deductions you will be availing of, it’s always itemized. Absolutely, BIR will not allow you to change deductions from OSD to itemized, or itemized to OSD in one taxable period. Applicability of itemized deductions We are now going to continue with our discussion with deductions. Yesterday, we finished with personal exemptions, additional exemptions and optional standard deductions. And now we are going to start and finish with Section 34, which is a long provision of the Tax Code and our itemized deductions, as I’ve mentioned to you yesterday. The itemized deductions are available only to taxpayers engaged in trade or business. It either applies to an individual taxpayer or a corporation. It is does not apply to non-resident aliens engaged in trade or business and non-resident foreign corporation. Criteria for deductibility Now, masyadong mahaba ang codal provision ng Section 34. But take note that the criteria in the deductibility of Section 34 of the items listed under Section 34 are based on the following: 1. It must be actually paid or incurred. In other words, dapat nagastos. Kapag hindi mo nabayaran, hindi mo pwedeng i-claim as a deduction.

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2. It must be necessary in the trade or business, and 3. It must be reasonable in amount. Meaning of “necessarily incurred in trade or business” What is the meaning of “necessarily incurred in trade or business?” It means that, the expenses claimed as deductible should be related to the particular kind of business that you are engaged in. Dapat related talaga doon sa klase ng business na ikaw ay meron. Example: Ang suka, patis, toyo ay expenses sa restaurant. Ang suka, patis, toyo ay hindi expenses sa parlor. So ito ang ibig sabihin ng “related to the kind of business you are engaged in.” We always corelate all these deductions to the kind of business you are engaged in, such that pag hindi talaga related sa business mo, it will be disallowed by the Bureau of Internal Revenue. And lastly of course, it should be reasonable in amount. Standard of reasonableness What is the standard of the reasonableness of the amount? There is no specific standard by the Bureau of Internal Revenue. Neither does the Code provide kung ano ba ng ibig sahibin ng “reasonableness” of the amount. But this has something to do with the physical set-up of your business. We have to look into the things that the BIR considers to determine whether or not the expense is reasonable in amount. Of course, we have to look at the number of the employees that you have, the land area of the business, ‘yung ino-occupy ninyo. Ano bang klaseng business? Example, ha? Nagke-claim ka ng kuryente, utiliy, bills, telephone, electricity, water. Nagke-claim ka ng water na P50,000.00 a month as deductible expense, but it turns out that your business has a 4-square meter area. Where did you get the P50K expense? Eh 4-square meter lang ang location ng business mo. All considering, wala ka man lang aircon. So these are the things the BIR will look into. Determination of reasonableness of amount Pupunta ba ang BIR para tingnan ang business mo? Take note that the BIR conducts tax mapping. Ano ‘yang tax mapping? Ano ‘yong minamapa? Every BIR office, Regional Office, Revenue District Office has a territorial jurisdiction. So every year, the BIR nagmamapa. Ang tawag dun tax mapping. It goes into every office, every commercial or area na meron sa kanyang jurisdiction. So doon pa lang, nakikita na nila. Kitang-kita kung anong klaseng business meron ka. Number two, take note that in the financial statements of the taxpayer nakalagay doon how much are the equiptment, assets. Naka-indicate ‘yun hindi ba? Nakalagay

doon. Networth. Assests and liabilites. Lahat are assets. Although, hindi siya nakaspecifiy, nandoon yung amount. General restrictions kung ano ‘yung assest mo. Eh kung ‘yung asset mo is worth P20,000.00, ano ‘yang assets ang makakapag produce, makakagamit ng P50K worth na kuryente? These are the things the BIR will look into, but the BIR need not go into your place of business and see kung ilan ba ang electric fans. No need for the BIR to visit your place because from the financial documents submitted to the BIR, meron na silang idea kung ano yung asset, kung ano ang pinagkakagastusan mo. The BIR is not blind. Kahit pa ‘yan audited financial statements na nakalagay eh number value, peso value. There is a history behind the number, and the history is precisely the business operations that you are having everyday in one taxable review. So we know kung anong klaseng asset mo ang pe-pwede sa claim for deduction, depende kung anong klaseng business meron ka. So that’s how it is determined. These 3 are: a) actually paid or incurred; b) reasosnable in amount; and c) incurred in trade or business. These are the standards viewed by the BIR in allowing or disallowing any item of deduction that you claim as a deduction from your gross income. Itemized deductions limited to those liable for Net Income Tax We are now going to discuss each one of them and how relevant for the computation of the tax due of a particular taxpayer. So I’ll give you an example para mas mabilis. Please take note ‘yung limitations. The taxpayer’s income is subject to NIT because if the income is subject to FWT, there is no applicaton of this table. If you are talking about a non-resident alien not engaged in trade or business or a non-resident foreign corporation, this concept will not also be applicable. And this is where it is applied. The taxpayer whose income is subject to NIT, will have to compute for his gross income and then the allowable deductions. We will be talking about Section 34 although all of them are items of deductions from the gross income of the taxpayer. What kind of business does X have? Let’s say a parlor. Y is an empoyee of X. X hires Y as an employee and pays Y P20,000.00 monthly as basic pay. Income on the part of Y? Yes. Assume the parlor is in the Philippines, in Muntinlupa. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Is Y entitiled to claim deductions? Yes! Ulit. X is the employer. X pays Y a basic pay of P20,000.00. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Is Y entitled to deductions? Yes. What are the deductions available to Y? Ayun o. Personal exemption of P20,000.00, additional exemption of P25,000.00 per child maximum of 4, and premium for health and hospitalization insurance.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Itemized deductions Let’s talk about Section 34. E-I-T-L-B-D-D-C-P-H. These are the itemized deductions. EXPENSES, INTEREST, TAXES, LOSSES, BAD DEBTS, DEPRECIATION, DEPLETION, CHARITABLE CONTRIBUTIONS, PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE and RESEARCH AND DEVELOPMENT. These are the items provided for under Section 34 of the itemized deductions. E-I-T-L-B-D-D-C-P-H. ‘Yan ang Section 34. I.

Expenses

A. Reasonable allowance for wages and salaries Let’s start with letter E. EXPENSES.What are the expenses which are available as deductions to a taxpayer who is engaged in trade or business? Reasonable allowance ito ‘yung mga examples. Reasonable allowance for wages and salaries including fees, commissions, and other similar items paid by an employer to an employee. ‘Yan ang example n’yan. What are the possible business expenses? What are the examples of business expenses that are allowed as deductions? Number 1, reasonable allowance for wages, salaries, commissions, fees, and other similar items. Now we are going back to what we had yesterday. X pays Y salary, basic pay of P20,000.00. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Is Y entitled to claim for deductions? Yes, because Y is a tao. On the part of X, the question is: Can X claim the pay as deduction from his gross income realized from business? Yes. That is an example of a deductible business expense. Now, X gives Y overtime pay and nightshift differential. Y receives overtime pay and nightshift differential. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? Yes. Y cannot be a minimum wage earner, right? P20,000.00 certainly is more that the P404 per day given to a minimum wage earner. Is this income on the part of Y? Yes. Subject to tax? Yes. What kind of tax? NIT. Ay, sandali muna. If Y were a managerial employee and he is not entitled to overtime pay and nightshift differential and yet he is paid by the employer, this will belong to the last column of Other Benefits. And together with other benefits, if it exceeds P30,000, that will be treated as a fringe benefit subject to Fringe Benefit Tax of 32% based on the Grossed- Up monetary value. Will he be entitled to claim as deduction for the overtime pay he was paid if he was a managerial employee? No. That is tax to his income subject to final withholding tax. Right? But if Y were an ordinary rank and file employee of X, then this will be subject to NIT and Y will be entitled to claim deductions of personal exemption, additional exemption, and premium for health and hospitalization insurance. On the part of X, can X claim these as deductible business expenses? Yes, because these are necessary in

carrying on the trade or business, provided that, he really proves that Y rendered work nighttime and overtime work rendered. OK? So far so good? Uulitin ko ‘yung examples na binura natin kahapon. X gives Y de minimis benefit within the limits provided for by law. I-group na natin. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? No. Exempt whatever the kind of employee Y is. On the part of X, can X claim the same as deductible expense? ‘Yan ha? Titingnan ninyo, may demarcation line ‘yan ha? Diyan makikita ninyo na whatever it is, taxable or not, the question as to deductibility is not answered automatically, it does not follow that if it is taxable here (on the part of the employee), it is deductible (as an expense on the part of the employer). Can X claim the de miniminis benefits he gave to Y within the limits provided for by law as deductible business expense? Yes. This is considered as a reasonable business expense. What if X gives Y de minimis benefits in the amount of P300,000.00? Income on the part of Y? Yes. Within or without? Within. Subject to tax? Yes. The exception of the limit, if beyond the limit it shall be treated as Other Benefits right? Subject to tax? Yes. What kind of tax? If Y were a managerial/supervisory employee, that will be treated as a fringe benefit subject to 32% Fringe Benefit Tax. If Y were a rank and file, he will be subjected to NIT. On the part of X, can X claim the same as deductible expense? Yes or no? No. If you are the BIR, would you allow the P300,000 de minimis benefits paid by X to Y considering that Y merely receives P20,000 monthly basic pay? Certainly not, because this time you will have to consider the reasonableness of the amount as the criterion in determining whether it is allowable or it will be disallowed. Can you imagine you have a parlor, binigyan mo, halimbawa ng de minimis benefits na medical expenses of P100,000. Sinong normal na tao na parlor ang iyong business, hindi naman multi-national company? You are probably a 10-employee parlor and are going to give each of them P300,000. This time you will have to disallow it. Your employee is receiving P20,000.00. Who on earth would give his employee P300,000 worth of de minimis benefit? You mut be out of your mind. This is the standard that we follow. Kailangan kasi titingnan niyo ‘yung physical set up ng inyong business before the claim will be allowed. What else? Binigyan kita ng kotse, ginagamit ni Y para magservice ng mga customers. Income on the part of Y? No, because it is necessary in carrying on the trade or business of the employer. When X gives the car to Y, ginagamit ba ni Y saan? Sa business ni X. It is necessary to the trade or business ni X therefore, income on the part of Y? No, certainly. When X buys the car, for P500,000, can X claim the value of the car as deductible expense? No. Bakit? Kasi capital expenditure. The pera of P500,000 is converted into kotse. It is as if hindi niya nagastos si P500,000. Tandaan ninyo ito: when an expense is capital expenditure, hindi capital asset, ha? Capital expenditure, meaning an expense is used to acquire asset or to improve an

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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exisiting asset, or to increase the economic or beneficial life of an existing asset, we call this capital expenditure, which is not a deductible expense on the part of the taxpayer. Si taxpayer X naglabas ng limang daanlibong piso pero ang P500,000 is no longer P500,000 but a car. May nawala ba kay X? Wala. What happened to the car? When X purchased the car, it is in the nature of a capital expenditure. Now, here is the car. How do you classify the car as an asset? On the part of X? Ulit. P500,000, ibinili mo ng kotse sa Nissan Westgate. Inilabas mo ang P500,000. Ikaw si X. Si P500,000 naging kotse na may apat na gulong. When X spends P500,000 that is in the nature of a capital expenditure because you acquire an asset used in the trade or business. When the car is now present, how do you classify the car as an asset? It is called an ordinary asset. Depreciation Now on the part of X. While it is true that he cannot claim the P500,000 as a business expense deduction, X, however, can claim depreciation of the ordinary asset, the car, as a deduction. That is the counterpart. On the part of Y, the value of the car is not an income and is not taxable. On the part of X, he cannot claim as business expense deduction of P500,000. But because it is now an ordinary asset, meaning the asset is used in trade or business and in the nature of a capaital expenditure, the car will now be subjected to depreciation as a deduction. So every year, if X purchased the car in the year 2011, every year the P500,000 book value is reduced this way: X will now report his asset in the book of assets: car, date of purchase, 2011; magkano? P500,000 and every year he will have to claim depreciation in the amount of P100,000. Depreciation for tangible personal property is 5 years. Pag nangutang kayo ng kotse, maximum payment period is 5 years because it is reasonable period of time of whole depreciation of car. Real property, it is between 15-25 years. So, kung real property naman ang binili mo, the amount that you spend for the real property is not a deductible business expense, but every year you can depreciate the property for 15 years. It is referred to as a non-cash expense. Depreciation is not cash. Bakit? Kasi every year, the taxpayer X can claim the P100,000 as depreciation expense deduction pero wala siyang ginagastos na P100,000 kasi nagastos na niya ‘yan noong binili si kotse. So this is how it is done. So by the year 2016, P100,000 na lang ang book value. You call it book value. When you hear book value, it is the value you declare in the book of assets of a taxpayer who is engaged in trade or business. When you are not engaged in trade or business, you do not record purchases. Ako, wala akong business. Noong bumili ako ng relo, nirecord ko at every year nadedepreciate? Walang basis sa akin ‘yan. Kayo ay bili nang bili and all our assets are capital and not used in trade or business. So, we don’t do this. But if we are engaged in trade or business, this is important because every year, in the

determination of your net worth you will have to declare your net worth, you will have to declare the book value of an asset. So by the year 2016, the car is zero book value. But it does not mean that it has no value. At the end of 2016, the book value is zero but it may have salvage value or it may have fair market value by the year 2016. Alam naman natin yan. Pag bumili ka ng kotse, hindi ba 5 years ang payment period? Full devaluation but that’s the book value. But when you sell your car after 5 years, you realize money, right? So, when X decides to sell the car in 2016 at P60,000, the taxpayer incurs a loss of P250,000. But if X sells it at P450,000, gains ang tawag dun. Anong tawag dun? Ordinary gains. ‘Yung ordinary gains ba, idadagdag niyo agad sa gross income niyo? Hindi. Mamaya tuturuan ko kayo kung papaano. Paano ang ordinary loss pag binenta ng 2013 nabenta ng P100,000 ang kotse? Eh anong tawag mo doon? Ordinary loss ako. Magkano? P200,000. ‘Yun bang ordinary loss dinideduct sa gross income? Hindi. Mamaya maiintindihan natin kung saan napupunta ang orinary loss at ordinary gains. Ituturo ko ‘yan sa inyo. Let’s continue. Ano pa ang ibang benefits? Bonuses. 13th, 14th, 15th bonuses. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? If Y were a managerial employee, anong mangyayari sa excess? Treated as Other Benefits. If Y were rank and file, then NIT. On the part of X, can X claim the same as deduction? Yes, provided, reasosnable in amount. Empleyado mo P20,000 ang suweldo. And kinikita mo sa isang taon ay isang milyon. Nagbigay ka ng 13th, 14th, 15th, 16th, 17th, 18th month pay bonuses, you must be out of your mind. The reasonableness of the amount will be very, very important. All of the things mentioned yesterday, we’ve enumerated, are these allowed as deductible expense on the part of X? Yes, provided, they are necessary in carrying on the trade or business, and they are reasonable in amount. Now, let’s continue. B. Reasonable allowance for utility Anong example ng “deductible business expense?” Reasonable allowance for utility. Utility. X has a parlor. X pays PLDT, Meralco and MWSS. Y has a house. Y pays PLDT, Meralco and MWSS monthly. When Y pays PLDT, these institutions, for ultity, income on the part of these utility companies? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax on these companies? Corporations ‘yan siguro. NIT ‘yan. Anong rate? 30%. When Y pays the utility companies monthly, can Y claim as deduction this utility payment? No. Why? Because it is not one of the personal exemption, additional exemption, and premium for health and hospitalization insurance. X pays these utility companies. Income on these companies? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. What rate? 30%.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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Can X claim those utility payments as deductible business expense? Yes. Pero si Y hindi pwede. Bakit? Because it is not personal exemption, additional exemption, and premium for health and hospitalization insurance. Number three on business expense. C. Reasonable allowance for rentals Reasonable allowance for rentals, provided, the lessee does not acquire any interest other than as a mere possessor. Y rents from A this house, paying A P5,000 monthly. A also owns the land and the building occupied by X and used as a parlor, paying rentals of P10,000 mothly. When Y pays A P5,000, income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax on the part of A? NIT. Is A entitled to claim deductions? Yes. Is A entitled to claim deductions from the gross income from the rentals? Yes. What kind of deductions can A avail of? Ano? Kung kayo si A na nagpaparenta kay Y, ano ang pwedeng deductions kay A? Kung si A ay tao, personal exemption, additional exemption, and premium for health and hospitalization insurance, Section 34 or OSD. Kung si A ay korporasyon, Section 34 or OSD lang. Bakit hindi yung una? Kasi engaged in trade or business ng pagpaparenta. Si A ang may-ari ng bahay. Ikaw si A, may-ari ng bahay. Nagpaparenta ka sa akin. Kumikita ka. Ang tanong sa iyo, kapag binayaran kita ng limang libo, income? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT sa iyo. Ano ang pwede mong dedudcitons? Yun ang tanong. Hindi yung renta. Lahat ng rent mong kinikita hindi lang yung galing kay Y kasi kumikita ka from your properties in the form of rentals. Para hindi kayo nalilito, ganito yung technique: source, you pay. When you pay, the payment becomes the source of the payee who would also spend. That’s the source for another taxpayer who will spend. When that taxpayer spends, there’s another source who will spend. It’s like that. So everybody becomes a taxpayer, pero hindi ‘yun circle. Everybody becomes a taxpayer kasi nagmomove yung pera. Pag nagmove, umiiikot yung pera. Habang umiikot yung pera may tumatanggap at may pinanggagalingan. So the source becomes a taxpayer. When he spends the income that he derives, then there’s a recipient of the income who will eventually become the source who will use that money to pay another person. And when he pays, that person becomes the source. The procedure is the same for everybody depending on who you are as a source and as a recipient. Because when you receive, alangan naman na ‘yung pera mo hindi gagalaw. Hindi ka na kakain? Of course you have to spend. And when you spend, what you have spent becomes income doon sa payee. And when that becomes an income on the part of the payee, that is expense from your end. Naintindihan nyo na? So ang tanong kanina, “Can Y claim the rental fee given to A as deduction?” On the part of Y, can Y claim the P5,000 as a deduction? No, because Y being a tao, purely

compensation income earner, is only entitlted to personal exemption, additional exemption, and premium for health and hospitalization insurance. Hindi ba? X paid P10,000 for the parlor. Income of the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Is A entitled to claim deductions? Yes, if A were here (individual), ‘yan ang deductions nya (personal exemption, additional exemption, and premium for health and hospitalization insurance, Section 34 or OSD). Ito (korporasyon), ‘yan ang deductions nya (Section 34 or OSD). On the part of X, can X claim the P10,000 payment to A in the form of rentals as deductible business expense? Yes, because that is actually incurred necessary on the trade or buiness and is reasonable in amount and the lessor does not acquire any interest other than that as a mere possessor. Let’s have a variation. The parties agree that after the contract of lease, all the improvements introduced by X and Y to the property shall be for the lessor. Lahat ng major improvements introduced by X and Y to the house and to the parlor will belong to the lessor. While the lease is ongoing and X and Y are paying A, is A entitled to claim depreciation on the house and the parlor as deduction? A is the owner of the house and the parlor rented out to X and Y. Is A entitled to claim depreciation of the parlor and the house as deduction? Yes, because A is the owner of the house and the parlor who is engaged in trade in buiness. The parlor and the house, in so far as A is concerned, are both ordinary assets. Therefore, A is entitled to claim depreciation of assets of the house and the parlor. Habang nagbabayad si X and Y kay A, si A ay entitled to claim as deduction of the house and the parlor. X and Y, on the other hand, introduced improvements on the parlor and the house. For the improvements introduced by X and Y, question: Can A claim depreciation for those improvements? No. Not yet, because A is not the owner of the improvements. According to the contract, the improvement will only belong to A after the contract of lease. Therefore, who is entited to claim as depreciation of the improvments? Only X. Why? Can Y claim depreciation on the improvement introduced to the house? No. Why? Bakit? Bacause Y is only entitled to personal exemption, additional exemption, and premium for health and hospitalization insurance. Kailangnan kasi alam mo yung sitwasyon. Naiintindihan ‘nyo yung tinatanong ko? Naintindihan din kung bakit ganun ang sagot? Bakit si Y ay hindi pwede mag-claim ng depreciation ng improvement? Kasi si Y ay hindi engaged in trade or business. Bakit naman si A ay hindi pwedeng mag-claim as depreciation dun sa improvement introduced by Y? Kasi hindi siya ang may-ari. Magiging may-ari lang siya pagkatapos ng kontrata. Dito naman kay X: Can X claim depreciation on the improvements introduced by him? Yes. Can A claim depreciation on the improvement introduced by X? No, because he is not yet the owner. But can A claim depreciation on the parlor? Yes, because that is his

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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property. But can X claim depreciation on the parlor? No, because he is not the owner of the parlor. He is merely leasing and renting. Natapos si contract of lease. Kanino napunta ang improvements? Kay A. Who owns the improvements? A. Can A claim depreciation for the improvements? Yes, both in the house and the parlor because now A owns everything, the home including the improvement introduced by Y, and the parlor including the improvements introduced by X. The agreement in the contract of lease between X and Y further states that: X and Y shoulder the Real Property Tax (RPT) for the house and the parlor. Agreement: during the contract of lease, the lessee shoulders the RPT. What is the effect of X and Y shouldering the RPT? Is that income on the part of A? Yes, because income is anything that flows to the wealth of the taxpayer other than the mere return of capital. Can Y claim the payment of the RPT as deductible expense? No, because Y is not engaged in trade or business and tax paid is not an item of deduction. On the part of X, can X claim the RPT as deductible business expense? No, because under the law, it should be the owner who pays the tax. Now, can A claim the RPT as deductible expense? No, he was not the one who incurred the expense. Tama? Nasususndan? Naaappreciate nyo ba? Paiba-iba ang sagot depende sa sitwasyon. Hindi minimemorya. Kailang isipin mo ano ba ang sitwasyon, ano ba ang sinasabi ng batas. Tatlo lang naman ang criteria eh: 1) necessary; 2) actually paid or incurred and; 3) reasonable in amount. Sa taxpayer, ‘yun lang. Kapag marunong ka nun mag-apply, wala tayong pakialam sa rules. Hindi nyo kailangan memoryahin. Titingnan lamang kung ano ang sitwasyon. So when X and Y shoulder the RPT, A realizes income. Within or without? Within. Subject to tax? Yes. What kind of income on the part of A? NIT, because that’s part of Other Income, hindi ba? Nasa letter A. Lagyan natin ng improvement itong lease. Lease to own agreement. X and Y instead of paying P5,000 and P10,000 respectively, now pays A P20,000 and here P25,000 on the condition that after 5 or 10 years of payment, the parlor and the house will belong to X and Y, respectively. Lease to own agreement. When X and Y pay A, P20,000 and P25,000, income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can Y claim the P20,000 payment as deduction? No, that’s not personal exemption, additional exemption, and premium for health and hospitalization insurance. Can X claim the P25,000 as deduction? No, because this time, while he is paying the rentals, he acquires interest other than as a mere possessor. Therefore, this is now a capital expenditure and not a deductible expense. But while it is true that it is a capital expenditure, can X claim depreciation by paying rent under a lease to own agreement? No. Not yet, because the only time that he will be allowed

depreciation is after the expiration of the lease to own agreement. That’s the only time that he will be able to determine that he is the owner of the property. OK? So far so good? Let us go a little further. X and Y decided to buy the parlor and the house from A. X and Y bought the property from A. Here, X pays A P10,000,000 and P4,000,000. When X and Y pay A P10M and P4M pesos respectively, is there income on the part of A? Yes. What kind of income does A realize? Ordinary income. So the ordinary income is subjected to tax? Yes. What kind of tax, P10M and P4M na binayaran ni X and Y? Si A ba magkakaroon ng taxable income assuming na may income? Yes. What kind of tax? NIT. ‘Yun ‘yong letter A doon. Wala siya sa B, wala siya sa C, wala siya sa D. Is A liable for the 6% Capital Gains Tax (CGT)? No. Never, because the house and parlor from the point of view of A are both ordinary assets. Tingnan niyo ha? From the point of view ni Y, the house is a capital asset. But from the point of view ni A, the house is an ordinary asset. As far as the parlor is concerned, both from the point of view of X and A, the parlor is an ordinary asset. Whether from X or from A’s point of view, hindi magiging subject ‘yun sa capital gains tax. Bakit? Because you are not selling real property, capital in nature, located in the Philippines. Real property located in the Philippines but not capital in nature, 6% CGT will not be applied. Can Y claim P4M as deductible expense? No, because Y is entitled only to personal exemption, additional exemption, and premium for health and hospitalization insurance. Can X claim P10M as deductible expense? No, because that is a capital expenditure. Can X claim depreciation for the parlor when he purchased it? Yes, because he is entitled to depreciation. Can Y claim depreciation for the house? Never, because Y is not engaged in trade or business and it is not personal exemption, additional exemption, and premium for health and hospitalization insurance. D. Expense which is not contrary to law, morals, public policy, customs and traditions Another example of deductible business expense is an expense which is not contrary to law, morals, public policy, customs and traditions, whether the business is legal or illegal, are allowed as deductions. Illegitimate expenses or expenses contrary to law, morals, public policy, customs and traditions, whether the business is legal or illegal will not be allowed as a deduction. Let me give you an example. Si Y nagyoyosi sa public place. Hinuli. Magbayad ka ng limang daan. Walang pambayad. Magko-community service ng walong oras. Sabi niya, “ayoko mag-community service. Mr. Officer (B), can I just give you P200?” “OK!” Income on the part of B? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can Y claim as a deductible expense? No, that’s not personal

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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exemption, additional exemption, and premium for health and hospitalization insurance plus it is an illegal expense. Baliktarin natin. Let us say, si Y empleyado ni X sa pagbebenta ng shabu. Pusher si Y. Gawin nating illegal ang business ni X. Pusher si Y, but a legitimate employee as a pusher. X pays Y P20,000 per week as salary. Income on the part of Y? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can X claim the P20,000 pesos weekly basic pay paid to Y as a deductible business? Can X claim the P20,000 salary paid by X to Y as an employee pusher? Yes, that is a legitimate expense in an illegitimate business. Nahuli si Y as a pusher, nagbayad sa officer ng P30,000 si X. When a bribe is paid to B, income on the part of B? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can X claim the bribe paid to be as a deductible business expense? No. That is an illegitimate expense in an illegitimate business. The rule is: legitimate expenses, whether the business is legal or illegal, are allowed as a deduction. Illegitimate expenses, whether the business is legal or illegal are not allowed as a deduction. So these are the examples of business expenses that are allowed as a deduction from the gross income of a taxpayer who is engaged in trade or business. II. Interest Let us go to “I”. INTEREST. Interest on loans incurred in connection with trade or business. Y borrowed from X P100,000 to be used by Y for the tuition fee of his children. X borrowed from Y the same amount of P100,000 pesos to be used by X as additional capital for the parlor. Interest is 10%. Y pays X P110,000. Is there income on the part of X? Yes. How much? P10,000. P100,000 is just a return of capital. Subject to tax on the part of X? Yes. What kind of tax? NIT. Is X entitled to claim for deduction for the income from lending? Yes. What are the possible deductions on the part of X? E-I-T-M-V-P-P-R (Section 34) or OSD. Can Y claim as deduction the interest on the loan by him to X? No, because according to the law, Y, being a mere compensation earner, is entitled only to personal exemption, additional exemption, and premium for health and hospitalization insurance. Let’s go to the side of X. X pays Y P110,000. Is there income on the part of Y? Yes. How much? P10,000 because the P100,000 is just a return of capital. Subject to tax on the part of Y? Yes. What kind of tax? NIT. Is he entitled to claim for deduction? What are the kind of deductions? Ayun ulit (Section 34 or OSD). Kung korporasyon or personal exemption, additional exemption, and premium for health and hospitalization insurance, Section 34 or OSD kung tao. On the part of Y, can Y claim the 10% interest paid to X as deductible interest on the loan? Clear

sa “I”? Yes or no? Yes, because the loan is incurred, the interest is paid in connection with the trade or business of X. If X uses the P110,000 loan para magshopping sa Hong Kong, can X claim as a deduction? No, because that is not incurred in connection with his trade or business. If the creditor and the debtor are related to each other according to Section 36, paragraph D, X will never be allowed to claim the interest as deductible expense. Section 36 (B). Related debtors and creditors under Section 36 (B) Who are related debtors and creditors? 36(B). Disregarding the title, ang pinag-uusapan ‘yung mga tao. Who are these related debtors and creditors? 1) Between or among family member; 2) Between the stockholder and the corporation, wherein the stockholder owns more than 50% of the authorized capital stock of the corporation; 3) Between two corporations, where there is common stockholder owning more than 50% of the authorized of each corporation;

capital stocks

4) Between fiduciary and a beneficiary; between a grantor and a fiduciary of trust; and lastly, between two fiduciary of different trust created by the same creditor. Kapag ang nag-utangnan is ang mga ‘yan, kahit pa related sa trade or business ay hindi pwedeng i-caim ni X as deduction ‘yung interest na binayaran. ‘Yan ang inasabi ng batas. Bakit? Because of the fiduciary relationship among these persons and entitites, which can create the situation of kunwari meron utang wala naman pala. Limitations on interest Ang interest on loan is allowed on the part of X but the same is limited to the following: 1. If the interest is paid in advance. Tuso si C. Noong pinautang ng P100,000, ang interest na 10% na binigay kay X ay paid in advance. Binawasan ng interest. The only time that C will be allowed to the interest on loan as a deduction is upon full payment of the loan.

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2. If X and C, for both bad debt and interest, are related to each other, according to Section 36 (B) of the Code, no interest on loan or bad debt will be allowed as a deduction on the part of X and C.

bad debts, provided that the financial status of X and Y shows incapacity to pay the obligation to C, which means that the debts are completely written off or charged off. ‘Yan ang technical term.

3. On interest on loan, if X, payor of interest, realizes income, the deductible interest shall be restricted by 33% of the interest income.

Written-off or charged-off

Tax arbitrage Anong ibig sabihin ng pangatlo? Hindi ba si X nagbabayad ng 10% interest? Sampung libong piso (P10,000). Kumita ng isang libo sa bangko. May utang siya, nagbayad siya ng interest. Sa kabilang side, meron naman siyang kinitang interest (kasi nilagay sa bangko yung inutang at kumita ng interest on loan). Ang rule ay: dahil mayroon kang binayaran na interest at may kinita ka, hindi mo deduction lahat ang sampong libo. Kasi may kinita ka parang walang nawala sa iyo. Yun ang logic. Ang logic ay nagbayad ka ng interest sa utang, sa kabilang side naman may kinita ka na interest. So technically, wala kang binayaran kapag inoff-set mo yung dalawa. Tama? So sabi ng batas, yung interest na ide-deduct ni X kapag ganito ang sitwasyon ay limited ng 33% ng kanyang interest na kinita. Anong ibig sabihin? One thousand pesos times 33%; 67% lang nito (P1,000 na kinita sa deposito sa bangko) ang pwede niyang ideduct. Bakit? Kasi kumita siya ng isang libong interest. Kaya kapag pinag-ganun mo ‘yung dalawa, ‘yung kanyang ginastos ay na-ooff-set ng nabayaran sa kanya.

III. Bad debts X and Y borrowed from C respectively, P100,000 plus interest of 10%. X and Y failed to pay C. Hindi nakabayad si X and Y. Is there a possibility of deduction on the part of Y? Never. On the part of X, can X claim as deduction the interest? No, because of missing requirement number 1 (actually paid or incurred). Ano ba naman eh. Tatlo lang ang requirement. Bakit hindi pwede i-deduct ni X ang 10% interest? Ay, hindi naman siya nagbayad. Ay, anong pag-uusapan pa? Kung walang ginastos, bawal magdeduct. On the part of C, what is the tax consequence? C will now be able to claim “B”, BAD DEBTS. That’s what you call bad debts. Masamang utang. Hindi nababayaran. That is bad debt on the part of C. The utang of Y which was not paid to C is considered as bad debt on the part of C. C can claim P100,000 utang ni Y. Likewise C can claim P110,000 utang of X as bad debt. So C, when X and Y failed to pay him, is allowed to claim P220,000 as

Anong ibig sabihin ng “written off” or “charged off?” Hindi binubura, literally. Metaphorically, sa libro ni C binubura. Bakit? Paano ba mag write off? Literal. Binubura. ‘Yan. Anong ibig sabihin ng written off or charged off? Pag may utang ang ibang tao at hindi nakakabayad. Paano mo sasabihin na hindi ka nababayaran? Ikaw ay naniningil, nag exert ka ng effort na maningil at kahit anong effort mo ng paniningil, walang maibayad. ‘Yan ang sinasabing written off. Without effort extended to make singil, you cannot say the loan is written off. X and Y are incapable of paying the loan. Kailangan na singilin mo. There is effort to collect and despite the effort exerted, for a long period of time of exerting the effort, X and Y did not pay. So, ‘yun ang sinasabing written off. Hindi pwede basta na lang, ‘yung due date ng utang ay December 25. Eh January 1 na ngayon i-write off na lang natin. Ay, hindi pe-pwede. Kailangan mo muna ipakita na ikaw ay naningil. Eh wala ka naman yata paniningil na ginawa. Sa batas nga, kung hindi ka nagdedemand, walang delay hindi ba? So kailangn maningil ka. Naningil ka ba? Hindi. Ay hindi pwedeng mag-claim si C ng bad debt. Requirement kasi ito. Kailanan ba ng insolvency proceedings against X and Y para masabi ni C na pwede na siya mag-claim ng bad debt? Hindi. Ang sinasabi lang ng batas ay kailangan nag exert ka ng effort and despite the effort, hindi nagbabayad at ayaw magbayad dahil ang kanyang financial status ay nagpapakita na walang pambayad. ‘Yon. Now that’s the time that he can claim the bad debt as deduction from the gross income of Mr. C. Kapag nagbayad naman si X and Y, ang 10% interest on loan ay pwede i-deduct ni X; declared naman siya as income ni C. Nakikita naman ang point of view from A? Nag-iiba ‘yan. Now, pwede nating gawing buhay. Buhay si debtor, buhay si creditor. By the way, ‘yung Section 36 (B), ‘yung mga tao doon are also applicable to bad debts. Interest on loans and bad debts. Kapag yan ang nag-utangnan, hindi pwede i-claim as bad debts at interest on loans.

Tax benefit rule Paano kung X and Y failed to pay C and C claimed bad debts as deductions? 5 years later, here comes X and Y at nagbayad ng utang kay C. What is the effect of the subsequent payment of a bad debt which has been previously claimed by the creditor as a deduction from the gross income? Tax benefit rule

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applies. It should be declared, the entire amount paid should be declared as income by C in the year of the recovery to the extent of the income tax benefit received when he was allowed to claim bad debts as deductions and now satisfied by X and Y. That is tax benefit rule. Sa madaling sabi, kung hindi nakabayad si X and Y at dineduct ni C as bad debts, after madeduct ni C, nagzero out na yung utang, nagkaroon siya ng benefit kasi nabawasan ang kanyang gross income kasi deduction yun. Zero-out. Ngayon, si X and Y nagbabayad. Tatangappain ba niya? Oo, tanggapin niya. Anong gagawin? Bayad si utang pero nagkaroon siya ng benepisyo as far as tax is concerned, because he was previously allowed to claim the same as deduction. Ngayon meron siyang “Other Income”. Now, is that income? Yes. Subject to Tax? Yes. What kind of tax? NIT. ‘Yung buong utang na binayaran will be treated as other income kasi si X and Y hindi nabayaran ‘yung P110,000 each. So si C, anong pwede kay C na deduction? P220,000 bad debts. Tama? 5 years later, dumating si X and Y nagbabayad ng P220,000. Anong magiging treatment sa P220,000 na binayad? Under the tax benefit rule, this will be treated as Other Income. Subject to tax? Yes. What kind of tax on the part of C? NIT. ‘Yan kapag buhay. Bad debts in case of death of debtor Patayin natin. Si Y nangutang kay C ng P100,000, interest is 10%, total of P110,000. X borrowed from C same amount with 10% interest. Hindi nakabayad si X and Y kay C. Namatay si X and Y. X and Y died without paying P110,000 each to C. What are the tax consequences of the debts of X and Y from income tax and estate tax purposes? That’s the question. Huwag malilito. One at a time. Isaisahin. Namatay si Y hindi nabayaran si C. May income si C? Wala. Hindi nabayaran. So walang income tax consequence. Can the estate of Y claim the same as deduction, interest on loans? Hindi. Bakit? Hindi nagbayad, eh. Can C claim bad debt, the unpaid loan of Y? Yes. That is bad debt. How much? P110,000. From the point of view of estate tax, can the estate of Y claim P110,000 as claims against the estate? Section 86. Claims against the estate. Kapag namatay si Y na hindi nababayaran, saan maniningil si C? Sa estate ni Y. Tama? ‘Yan ang proseso, Special Procedure. Hindi ba? Hindi naman pwede mag-extra judicial settlement of estate ang kay Y dahil may utang siya na naiwan. Anong gagawin ni C? Doon sa judicial settlement of estate magpa-file ng claim as a creditor. ‘Yan ang Special Procedure side. Sa estate tax side, anong gagawin sa estate ni Y? Ang estate ni Y ay pwedeng mag-deduct ng claims against the estate. How much? P110,000 ang claims against the estate. Naiintindihan? Isa-isa. Simpleng problema, ha? Namatay si Y. May utang. Hindi nabayaran si C. Anu-ano ang titingnang mga angulo? ‘Yung bang estate ni Y ay pwedeng magdeduct ng 10% interest on loan? No, because unang-una hindi nga nabayaran. Pangalawa,

because Y is a compensation income earner and he is not entitled sa interest on loan. Sa point of view ni C, ano naman ang income tax consequence? That is bad debt on the part of C. And C is entitled to claim how much? P110,000 as bad debt. Special Procedure side, ano ang gagawin ni C? Si C ay magpa-file ng claim as a creditor doon sa judicial proceedings sa estate ni Y. Bakit hindi pwede magextra judicial settlement si Y? Kasi si Y namatay na may utang. Estate tax point of view. Namatay si Y, hindi nakabayad ng utang. Ano ang mangyayari doon sa namatay? Pwede bang mag-claim ang estate ni Y ng claims against the estate? Nakasulat sa Section 86. Magkano? P110,000 kasi ‘yun ang hindi nabayaran. Balik tayo kay X naman. Si X namatay. Ganun din, hindi nabayaran si C na pinagkautangan. Una, income ba? Can X claim the amount borrowed as a deduction? No, kasi X did not incur any expense. On the part of C, bad debt. Magkano? P110,000. Special Procedure side. C filed a claim against the estate of X. The estate of X will now be entitled to claim as deduction the claim against the estate. Section 86. Deductions from the gross estate. After the judicial settlement of the estate, the estates of X and Y pay C. What is the effect of the subsequent payment of the estates of X and Y to C? Tax benefit rule applies. C will now have to declare the same as part of his gross income in the year of recovery to the extent of the income tax benefit he received when he was allowed to claim bad debt as a deduction. But never will there be an instance that C will be allowed to claim bad debt whether X and Y are dead or alive if C and X, and C and Y are related to each other according to Section 36 (B).

Bad debt in case of death of creditor Baliktarin natin. Ang namatay ay si C. Buhay si X and Y na hindi makabayad kay C. What are the tax consequences? Isa-isa. Income tax. Hindi mabayaran si C. May income consequence kay Y? Wala ngang nilabas na pera, eh. Eh, si C na namatay, anong mangyayari? Meron sa income tax. The estate of C is an income taxpayer. Agree? Therefore, bad debts will be allowed as a deduction. ‘Di ba sinasabi ko sa inyo? Nasaan ba ‘yan? Nandito ah. Estate. Now, anong mangyayari sa estate tax? Si C namatay at hindi nabayaran ang utang. Claims against insolvent persons

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Eto, ha? This are claims against insolvent persons. Claims against insolvent persons. Section 86. Anong mangyayari dyan? ‘Yung estate ni C ay magdadagdag muna ng P110,000 from Y at P110,000 from X, so P220,000. Add to the gross estate and claim as deduction claims against insolvent persons. Nabasa n’yo ‘yan? Add first to the gross estate. How much? P110,000 from Y and P110,000 from X. The estate will now be allowed to claim P220,000 as a deduction. Add first before you deduct. Add before deduction because gross estate is defined as the value of all the properties whether real or personal, tangible or intangible. Credit is an intangible personal property, therefore part of the gross estate of Mr. C. Naintinidian? Hindi ba pag nag-settle ng estate si Mr. C naka-enumerate naman kung sinu-sino ang mga may utang? So sa estate proceedings, maniningil na ngayon ng utang. After the settlement proceedings, nagbayad ngyon si X at si Y sa estate ni Mr. C. What is the effect of the subsequent payment of X and Y to the estate of Mr. C.? Tax benefit rule applies. The estate will have to declare it as part of its gross income. No longer Mr. C because he is already dead, 6 feet under the ground. The estate will now realize other income. And that is income on the part of the estate subject to income tax. Paano kung settled na ang estate? Fully settled na at saka nagbayad. What happens to the payment of X and Y? It will be divided proportionately among the heirs and the heirs will now have to shoulder the income tax. Kung na-settle na, andun na sa heirs. ‘Yung P220,000 i-divide mo sa heirs. Who will shoulder? The heirs in proportion to the amount of the income they realized. ‘Eto yung mga konsepto na wala sa codal.

IV. Taxes Now let’s continue. We are through with E, I, B. Now let’s talk about T. TAXES. What are the requisites for taxes to be deductible? 1. Actually paid or inccured; 2. Necessary in carrying on the trade or business; and 3. Reasonable in amount. Wala namang pinagbago eh. Balikan natin ang example. A is the owner of the house leased out to Y. Agreement: Y shoulders the Real Property Tax (RPT). X rents from A the parlor. Agreement is X shoulders the RPT for the parlor. When Y pays A, Y pays the RPT to whom? Local government Unit (LGU). When Y pays the LGU RPT for the property owned by A, income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can A claim as

deduction the RPT? No, because even though it is related to his trade or business leasing, he was not the one who incurred the expense. Can Y claim the RPT shouldered by him on behalf of A? No, because Y, as a purely compensation income earner, is not entitled to any deductions of taxes. His deductions are limited to personal exemption, additional exemption, and premium for health and hospitalization insurance. Let’s go to X. When X pays the LGU RPT, is there income on the part of A? Yes. Within or without? Within. Subject to Tax? Yes. What kind of tax? NIT. Can X claim the RPT he paid as a deductible expense? Yes or no? No, because even though he was the one who incurred it, he is not supposed to pay for it. Therefore, X is not allowed to claim the RPT as a deduction. Now, Y imported gunting para gamitin sa bahay niya. Si X nag-import ng gunting, ginagamit sa parlor. Nagbayad ng P10,000 for the gunting. Upon importation, nagbayad ng tariff and customs duties na P200 si Y. When Y buys the gunting and imports the gunting, can Y claim P10,000 as deductible expense? No, because Y is not entitled to that. Y is only entitled to personal exemption, additional exemption, and premium for health and hospitalization insurance. X, same scenario. Can X claim the P10,000 as business expense? No, because it is a capital expenditure. Can X claim depreciation of the gunting as a deductible expense? Yes, because X is engaged in trade or business. Can X claim the tariff and customs duties of P100 paid for the gunting used in trade or business? Yes, because the tax is actually paid or incurred in connection with his trade or business. After payment, X and Y realized that they overpaid the tariff and customs duties by P50. They filed a claim for refund. In 2016, the refund was approved, returned 50 pesos to Y and to X 50 pesos. Effect of subsequent refund of tax previously paid What is the effect of the subsequent refund of a tax which has been previously claimed as a deduction from the gross income? On the part of Y, what is the effect of the refund of P50? Income? No. That is a return of the expense. Tama? May income ba siya? Wala. Binalik lang sa kanya yung P50 eh. On the part of X, what is the effect? Tax benefit rule applies. P50 will be considered a part of the gross income in the year of the refund. Why? Because the amount of tax of P200 he claimed as a deduction is refunded, he will have to

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declare the amount refunded as part of his gross income in the year money is received. But from Y, no income. Bakit? Sinauli lang sa kanya ang pera niya. Wala namang benefit sa kanya noong binayaran nya ang tax due, hindi ba? Wala. So sinauli lang sa kanya. That’s just a return of his capital. Clear? Distinction between tax as deduction from gross income and tax as deduction from gross estate Now, what is the distinction between tax as a deduction from the gross income and tax as a deduction from the gross estate? Section 86. ‘Yang para isang bagsakan tayo. Makikita niyo diyan sa Section 86. Taxes. So makikita niyo diyan taxes as deduction din sa gross estate. ‘Yung ‘T’ sa gross income ay ‘tax’. So what is the distinction? When is the tax deductible for income tax purposes and estate tax purposes? 1. Sa income tax, dapat ang tax ay paid. Sa estate tax, ang tax ay hindi paid. Unpaid and due sa estate tax. 2. Sa income tax, paid and incurred in connection with trade and business. In estate tax, unpaid whether the tax is due in connection with trade or business or not yet. ‘Yun ang disitinctions. Pag namatay ang isang tao, hindi tinatanong, “Oh, ‘yan bang tax na yan related sa business or not? Walang ganun. Ang ating lang qualification sa tax for estate tax purposes is not paid and due and whether or not related to trade or business. Sa income tax, mas particular ang requirement. The tax must be paid and in relation to trade or business para maging deductible. V. Casualty loss From the provisions of Section 34, there are many kinds of losses. We have wagering losses, loss from wash sales, capital losses, ordinary losses, casualty loss. There are many kinds. For the purpose of our discussion now, I will only discuss casualty loss. I will discuss capital loss, ordinary loss, wagering losses, loss from wash sales separately later para hindi kayo nalilito. So, dito muna tayo sa casualty loss. Y bought gunting worth P10,000. Imported. Ninakaw ang gunting ni B. X bought gunting for P10,000. B stole the gunting of X. When B stole the gunting, income on the part of B? Yes. Within or without? Within. Subject to tax? Yes. What

kind of tax? NIT. Is Y entitled to claim casualty loss as deduction from gross income? No, because Y is not engaged in trade or business and he is allowed only personal exemption, additional exemption, and premium for health and hospitalization insurance as deductions. After nakaw, B returned the gunting to Y. Return of the income. The value of the gunting 3 years after is P2,000. When B returned the P2,000 worth of kalawagnin na gunting na ninakaw niya kay Y, income on the part of Y? No. That’s just a return of the gunting. When B steals the gunting from X, may income on the part of B? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. What is the effect of pagnanakaw ni B ng gunting kay X? X can now claim casualty loss as a deduction from his gross income. 3 years after, B returns the gunting, kalawangin. The value of the gunting at the time of the return is P2,000. What is the effect of the subsequent return of the property which has been previously claimed as a casualty loss? Tax benefit rule again applies. And X will declare P2,000 the value of the recovered property as part of his gross income subject to NIT. Tax benefit rule applies. Requisites for deductibility of casualty loss What are the requisites for casualty loss? 1. The asset must be used in trade or business; 2. The loss must have arisen out of theft, robbery, embezzlement, fire, storm, earthquake or any other natural calamity, provided, the same is not compensated by insurance. If partly compensated by insurance, the only amount that can be claimed is that portion not compensated by the insurance; 3. It must be determined by B as unrecoverable at the time that the loss is claimed. Dapat may proof ka na unrecoverable. Hindi pwede na basta ka na lang magsasabi na nawala ni Mr. B. Anong mga possibleng proof? Police report na nananakaw si gunting. Pag walang police report, paano ka magke-claim? Distinction between casualty loss as deduction from gross income and as deduction from gross estate Now, you look at Section 86. Estate tax. Casualty loss is again another form of deduction from the estate. What is the distinction between the two? So you will see there casualty loss. The same requisites. The loss must have arisen out of theft, robbery, embezzlement, or from fire, shipwreck, natural or any other natural

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calamity. Anong distinction? You will see na pare-pareho lang. Si X and Y nanakawan ng gunting. Nanakaw si gunting. Nanakaw si gunting at namatay kinabukasan si X and Y. Ano ang posibilidad na deduction? Si Y hindi pwedeng mag-claim ng deduction for income tax purposes. Sa estate pwede siya magclaim. Si X pwedeng mag-claim either income or estate. Pero kapag nag-claim siya ng income, hindi na pwede sa estate tax. Kung sa estate tax nagclaim, hindi pwede sa income tax. Nakuha? You can only claim casualty loss either from income or estate tax. Period. Kapag na-claim mo na sa isa, hindi na pwede sa isa. But the requisites are all the same. Another distinction is in estate tax. Even if the loss is sustained after death but within 6 months after death, pwede pa i-claim ang casualty loss. Kasi bakit 6 months? Kasi ang payment ng estate tax is 6 months after death. So kahit na namatay today, nawala kinabukasan, 6 months pwede pa if casualty loss is incurred after death, but within a period of 6 months from death. That casualty loss can still be claimed as deduction for purposes of estate tax.

VI. Depreciation

walang makita. Eh kung meron man makita, naubos. Kaya nagdedeplete. Kaya ang tawag diyan depletion.

VII. Charitable and other contributions Charitable contributions. X and Y donated P500 to: 1) the government; 2) charitable institutions; 3) religious institutions; 4) non-stock, non-profit educational institutions; 5) proprietary educational institutions; 6) proprietary hospital; 7) charitable hospital. X gives to the same institutions 500. Mga katanungan: When Y gives P500 each to these institutions, income on the part of these institutions? Yes. Taxable income? No, because they are excluded from the computation. These are not taxable income because they are excluded from the computation of the gross income of the recipients of X and Y. Are they subject to estate and donor’s tax? When Y gives to these institutions, subject to estate or donor’s tax. Oh, walang sasagot ng ano ha? Paisa-isa lang. Gobyerno? Exempt.

Depreciation. Capital expenditures. We are talking here of depreciation of ordinary assets. Assets which are used in trade or business. If you are not using the asset for trade or business, you cannot claim depreciation as a deduction.

Charitable institutions? Exempt, provided, not more than 30% is used for administration purposes.

VI. Depletion

Charitable institutions? Same answer (exempt provided not more than 30% is used for administration purposes).

Now, depletion. This is a very unique kind of deduction. It is allowed only to businesses that are engaged in exploration of natural resource. Depletion. Bakit “depletion?” Anong ibig sabihin ng “depletion?” Naubos. Kaya natural resources kasi if you’re engaged in mining, you’re not even sure if masu-sustain mo ‘yung business dahil baka wala kang mahukay. Or, assuming na may mahukay, kinabukasan naubos. This is precisely the reason why ‘yung depletion, unlike depreciation, ang depreciation ini-staggered. Ang depletion hindi. You claim depletion one time because of the nature of the business the taxpayer is engaged in, provided, of course, that the depletion claimed as a deduction is reasonable in amount. What will constitute depletion? You have equipment sa paghuhuhkay para makakita ng mineral. Eh, iyon milyon-milyon. Hindi ka naman naghuhukay na ginastos mo isang libong piso. Mahal ang equipment. Then meron possibility na

Religious institutions? Same answer (exempt, provided, not more than 30% is used for administration purposes).

Proprietary educational institutions? Yes. Subject to tax? Donor’s or estate tax? Yes, wala ditong qualification. Charitable hospital. Subject to donor’s or estate tax? No, provided, not more than 30% is used for administration purposes. Isa pang tanong: Can Y claim the P500,000 given to these institutions as deduction? No, because that’s not personal exemption, additional exemption, and premium for health and hospitalization insurance. Let’s go to X. X gave to these institutions? Income? Yes. Taxable income? No, because these are gifts, and gifts are items of exclusion on the computation of

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the gross income on these institutions. Subject to estate or donor’s tax? Ito nanaman. So the government? Exempt. Charitable institutions? No, provided, not more than 30% is used for gifts purposes. Religious institutions and non-stock, non-profit, itong tatlo? Not subject to estate or donor’s tax, provided, not more than 30% is used for administration purposes. Proprietary educational institutions? Include. 30% rule applies. Proprietary hospital? Taxable. Include. Charitable hospital? No, provided, not more than 30% is used for administration purposes. Can X claim the P500,000 as deduction from the gross income from the parlor of X? Donation in favor of the government? Yes. Charitable institutions? Yes or no? Yes, but up to the extent of 10% of the gross income of X. If X were a tao, and 5% if X were a corporation. Hindi ba? Binaliktad ko lang. Proprietary educational institutions and hospital? Allowable deductions? Yes? Proprietary educational institution and hospital? Allowed as a deduction from the gross income? Tingnan nyo ang Section 34 (H). Do we apply the 5% and 10% also? Sa proprietary educational institutions, applicable. Sa proprietary hospital, hindi. Proprietary educational institutions, 5% and 10 % apply.

IX. Research and development Research and development. Si Y nagpa-feasibility study kung pwede siyang lumipat ng bahay from Muntinlupa to Quezon City. Nagbayad kay E ng limang libong piso. Income sa part ni E? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. Can the amount paid to E be claimed as deductible expense? No, because Y is not entitled to that. Deduction of Y is limited to personal exemption, additional exemption, and premium for health and hospitalization insurance. X paid E the same amount of P5,000 for feasibility study on whether he can put up a branch of his parlor in Quezon City. Income on the part of E? Yes. Within or without? Within. Subject to tax? Yes. What kind of tax? NIT. On the part of X, can X claim the research and development as a deduction? Yes, because that is actually paid or incurred in relation to the trade or business of Mr. X. X commissioned E to make a feasibility study of whether or not he can put up Taho business. Binayaran niya si E. Can X claim research and development as deduction from income from the parlor? No, because that is not related to his trade or business that he is engaged in. Items that may NOT be allowed as deduction from gross income Now, what are the items that can never be allowed as deduction at all times? Section 36 (A). 1. Personal, family and living expenses. Hindi pwede i-claim as deduction. Pambili ng damit, sapatos, gasoline, sariling kotse, kuryente sa bahay, pambili ng pagkain, alahas, relo, sapatos, pang tuition ng mga anak. Hindi pwede iclaim as deduction. Bakit? You are already entitled to personal exemption of P50,000, additional exemption of P25,000 per child, maximum of 4. 2. Expenses for minor repairs.

VIII. Premium for health and hospitalization insuarance PHHI. Premium for health and hospitalization insuarance. Nadiscuss na natin nag marming beses.

3. Making good an existing asset. Bakit? Because these are in the nature of capital expenditures. How do we distinguish major from minor repairs? Let’s look at this room. We don’t like the color of this room. We change it to red. That’s major repair. But when, ano bang mga dumi na ‘yan, pinastahan lang natin ng kapiraso, pininturahan. It is minor repair. Nasira si bombilya- minor repair. Ayaw ko ng ilaw na ganyan. Pinalitan lahat ng bombilya ginawang bilog- major repair. Table. I don’t like this table anymore. This is so small. Change all tables- major kasi capital expenditure. Nabali doon. Pinukpok,

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pininturahan- minor repair. Deductible kapag minor repair. Major repair ay hindi deductible because major repairs and the application of assets are capital expenditures. Because you are not allowed as deduction for the capital expenditure, you will be entitled to depreciation of the asset, or the application of the asset, or the cost of the major repair. ‘Yun ang kapalit nya. 4. And lastly, of course, which we discussed yesterday, Premium on life insurance taken by the employer on the life of his employee when the beneficiary, directly or indirectly, is the business of the employer or himself. Let us give an example. Y insures his life paying P5,000. Premium proceeds: 10% interest, P1M, and return of premium (ROP), designating as beneficiary the wife and children. X insured his life same amount, insuring his life, 10% interest, P1M, and ROP, designating his wife and children as beneficiary paying P5,000 as premium. While X and Y are alive, can X and Y claim deduction from their gross income? Y cannot because he is only entitled to personal exemption, additional exemption, and premium for health and hospitalization insurance. What about X? X cannot also claim P5,000 as deduction from gross income because it is not related to his trade or business. When X and Y die, the proceeds go to their respective wife and children. Income? Pagdating kay Y, P1M is income, but excluded. That’s an item of exclusion number 1. The 10% interest is income that is taxable. What kind of tax? NIT. ROP is not income. On the part of X, ganun din. The 10% interest is income taxable. P1M is income but excluded and not subject to tax. ROP is not even income. Clear? X insured the life of Y. Proceeds of 10% interest, P1M, and ROP to designated beneficiary X. Y dies. What is the effect of the death of Y, in so far as income taxation is concerned from the point of view of X? While paying the premium, X cannot claim as deduction from the gross income the P5,000. That’s Section 36, paragraph A, number 4. When Y dies, 10% interest goes to X and a taxable income. P1M goes to X. Income, but excluded. ROP is not even an income because that’s return of capital. On the part of Y, there is no tax consequence, whether from income or estate tax point of view because his only participation is to live and die. Open and close the eyes for X. Concept of gains and losses So we are going to teach you the concept of ordinary loss, ordinary gain, capital loss, capital gain, net capital loss carry over, net operating loss carry over, which is technically under Section 34, pero hindi ko pa talaga diniscuss para maintindihan natin because this is of different treatment. When we talk about loss

and gains, we are talking of assets. Meron tayong binibiling assets. Wala namang business na walang assets eh. Hindi ba? If you are not engaged in trade or business, lahat ng assets mo capital. At kapag ikaw ay hindi engaged in trade or business, ‘yung assets mo na capital, kapag nagbenta ka ng real property na capital asset located in the Philippines ang katapat mo agad ay Final Withholding Tax (FWT) or Capital Gains Tax (CGT) na 6%. Anu-ano yung mga assets mo, ha? Real property, tangible personal property, intangible personal property, right? Habang binibili mo ‘yung asset mo, walang effect sa income tax. Walang epekto. Ang effect ay sa net worth mo which has nothing to do with taxation. ‘Yung net worth mo, ‘yung assets minus liabilities, kung gusto mong malaman kung gaano ka kayaman, doon importante siya. Pero kung gusto mo malaman kung magkano ang babayaran mong buwis, hindi magma-matter yung assets. Bakit? Kasi the time you realize gains or income or loss is when you move the asset. Movement of assets When we say you “move,” it is a technical term. “Movement of asset” is the transfer of ownership. Transfer of ownership, hindi physical movement. You move the asset in such a way that there is transfer of ownership. That’s the only time that you’ll realize gains or losses. Now, what will be the basis of the gains or the loss if you are not a business income earner? It is always the fair market value at the time of sale, at the time of the transaction. What could be the movement? It is not donation, certainly. There is transfer of ownership and there is consideration because if you donate something, you do not realize gain. You do not realize loss. Right? You do not consider gain or loss, because you gave it. Now, if you move the asset and there is consideration because there is transfer of ownership, that’s the time that you will realize gain or loss. Ordinary gains So, kayo nagtatrabaho lang, walang business. Relo. Kapag binenta mo ang relo na binili mo ng P20,000 na ngayon ay P5,000 na lang, kapag benenta ko ng P6,000 kikita ka. Yes? Magkano? Isang libo. What happens to the P1,000? Remember the items of inclusion: C-G-R-D-Y-R-A. Ang isang ‘G’ diyan ay, “gains derived from dealings with property.” So you classify the P1,000 as gains derived from dealings with property. Right? But since it is a capital asset but not real property, it does not fall under letter B right? It does not fall under letter C, it does not fall under letter D. Therefore, it falls under letter A. The P1,000 is gross income, but subject to tax (NIT). Ordinary loss

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If you incur a loss, P5,000 ang Fair Market Value (FMV) and I sold it at P10. I lost. How much? P4990. ‘Yung P4990 isasama ko sa letter F, losses. Hind ba? At ike-claim ko as deduction? No. In the first place, that ‘L’ is not part of the personal exemption, additional exemption, and premium for health and hospitalization insurance. I am not affected by F, by the loss, because I am not engaged in trade or business.

Transfer for insufficient consideration

‘Yung bang loss ko na P4990 may effect sa income ko? Wala. May effect ba sa tax due? Wala. Bakit? Hindi kasi siya pwede i-claim as a deduction. Bakit? Unang-una, hindi ako engaged in trade or business and because I am not engaged in trade or business, and losses is not one of the three. So what happens to the loss? Nothing. It will not affect my income tax. It has nothing to do with income taxation. But since there is no income tax due, the government losses, and when the government losses, it will have to recover the loss. How? Section 100. Transfer for Less than Adequate and Full Consideration.

Kotse. Car. I purchased at P1M. Now the FMV is P500,000. I sell it at P800,000. May income? Yes. Magkano? P300,000. Anong gagawin ko sa P300,000? Ibato mo sa gross income, because you are not engaged in trade or business, at wala kang ibang gagawin kundi ‘yung P300,000 ay ibato sa gross income. Subject to deductions? Yes. What kind of deductions? Personal exemption, additional exemption, and premium for health and hospitalization insurance because you are not engaged in trade or business.

Capital Gains Tax

How about a loss? P50,000. May income ako? Wala. Wala akong ibabato sa gross income kasi at a loss. Magkano loss ko? P450,000. What is the effect of the loss of P450,000 and I am not engaged in trade in business? Simple. Nothing when it comes to income taxation. But is there tax consequence? Yes. Section 100 applies.

Lumbera is a purely compensation income earner. I have a house worth, I purchased it for P3M. I sold it in 2005, now the FMV is P4M and I sold it for P7M. What kind of asset? Capital. Located in the Philippines, right? When I sold it at P7M, is there a tax consequence? Yes, because it is letter B. Capital Gains from Sale of Real Property located in the Philippines. I am Lumbera, resident citizen, the tax due is 6% of the FMV or the gross selling price, whichever is higher. Now, what if I have a house worth P4M and I sold it for P50,000. May income ako? Wala. What is the nature of the asset? Real property. Capital. Is there tax consequence, income tax? Yes, because according to the law, gains from sale of real property is 6% of the fair market value, P4M or the gross selling price, P50,000, whichever is higher. Gains in sale of real property not located in Philippines I have a house located in the USA. The same, P4M ‘yung FMV now. I sold it at P7M. I have gains of P3M. How do you call the gains? Capital gains. But the property is located outside of the Philippines. Is there income? Yes. What happens to the income of P3M? Ibabato mo siya sa gross income. That will form part of gross income and the gross income together with the P3M gains will be subjected to NIT after taking the deductions of personal exemption, additional exemption, and premium for health and hospitalization insurance. Why are we not collecting 6% CGT? Because the 6% is allowed only if the property is located in the Philippines.

If I sell at a loss at P50,000, may income ako? Wala. May income tax consequence? Wala. Loss, eh. May tax due? Oo. Section 100 again. Ordinary gains in sale of personal property

Ordinary loss in sale of personal property

Depreciation of real and personal properties Now let’s change the scenario. Lumbera is engaged in trade or business. Situation number 2 is that Lumbera is engaged in trade or business. Same assets and you are engaged in trade or business. Bumili ka ng parlor. Purchase price is P2M. Can I claim as deduction the purchase price of P2M? Yes or no? No. Why? Because this is capital expenditure. When I bought this parlor, what do I do with the books of asset? Real property bought in 2011 for P2M. Depreciation period? I presume that this is bagong-bago, the economic use is 20 years. So magkano ang bawas sa isang taon sa P2M? P100,000. So 2012: P1.9M; 2013: P1.8M; 2014: P1.7M and then 2015: P1.6M; 2014: P1.5M; 2015: P1.4M and so on and so forth, hanggang maubos, hanggang maging zero book value. Kung tangible personal property, car, iba naman. Iba’t ibang date yan eh. Alangan naman sa isang taon bibilhin mo lahat. In 2012, bumili ng kotse worth P1M. Depreciation period? 5 years (P1,000,000/5= P200,000. So P800,000; P600,000; P400,000; P200,000; P0 book value by 2017. Ano pa? Intangible personal property. Ano kaya? Shares of stocks. Magkano bili natin? P1M. 2014, nag-invest. Shares of stocks. Capital in character, eh. Ginagamit sa trade or business. P200,000 ang depreciation. Nagdedepreciate din ‘yan. IIang taon? Limang taon. Bawal i-deduct ang business

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expense? Yes, pero allowed mag-depreciate. So kapag tinanong kayo nandito sa 2014, magkano ang deduction in the form of depreciation ng 2014? P100,000, plus P100,000, plus P40,000, equals P240,000 ang depreciation expense as of 2014 as a deduction. Pagdating ng 2015, ganun din ‘yan. Depende kung ano ang binili mo kung paano ito dinedepreciate. Let’s say 2012: P20,000. Depreciation magkano? 16-12-8-4-0. Ok. In 2013, mahal ang gunting na panggupit (binili ng P10,000). 8-6-4-2-0. Isususlat mo lahat ‘yan. Nung 2014, si aircon na nabili ko naging obsolete. Nag issue ng regulation ang DENR: “All aircons of this size destroy the environment.” Mahal. P80,000. Na-phase out. So the asset na nabili ko at ginagamit at that time was ordinary. Na phase-out. Ano ang gagawin ko doon? Illagay ko sa stock room. Bumili ngayon ako ng bagong aircon na ganyang klase. Aircon 2 noong 2014. Magkano? P50,000. 40-30-20-10-0 book value. Ganyan ako magdepreciate. Si gunting, hindi na uso o hindi kaya nasira na. Inilagay nanaman sa bodega. Gunting 2. Bumili nanaman ako noong 2015. Binili ko ng P15,000, nasira si gunting. Magkano? P20,000. 16-12-8-4-0 book value. Habang hawak ko si asset, ang effect sa akin ay depreciation lang. ‘Yun lang ang pwede mong gawin. I-dedepreciate yung asset and claim depreciation as deduction. When I purchase the asset, no deduction will be allowed, but depreciation will be allowed. That will already have an effect on the tax due because depreciation is a form of deduction for the gross income. Recognition of gains and losses in sale of ordinary assets But what happens when you move these assets? So kanina, si Lumbera ay purely compensation income earner and I moved the asset. I should know that gains and losses affect income tax. Now, I am engaged in trade or business. What are the effects of the recognition of the gains and losses on ordinary and capital assets? The rule is: all gains and losses are recognized. The term is recognition of gains and losses. How do you recognize gains and losses? Very simple. Let’s take the case of aircon 1 and aircon 2 and gunting 1 and gunting 2. Ordinary asset. When aircon 1 in the year 2014 has book value of P12,000 and still being used in trade or business, the asset is ordinary. When aircon 1 in 2014 became obsolete and you transferred it to the bodega, the asset is converted from ordinary to capital. When gunting 1 is being used in trade or business, ordinary asset. But when gunting 1 became kalawangin at hindi mo na ginagamit, it can be converted into capital asset. The only time that an asset is not converted from ordinary to capital is, if the business is real estate development and it involves land. When lands are in a taxpayer who is engaged in real estate and development and sale of real property, all lands are treated forever as ordinary asset even if the land become idle land. It doesn’t change its classification from ordinary to capital, or from ordinary to capital, depending on the current use of the taxpayer at any

particular time. So let us look at aircon 2 because it was bought in the year 2014. In the year 2016, aircon 2 is an ordinary asset. Let’s look at 2016. Assuming that we are now in 2016. Aircon 2 is an ordinary asset. Now (after 2 years), what is the book value of aircon 2? P30,000 (depreciation is P10,000 each year). Sabi ko, book value of P30,000. Nabenta ng P35,000. What do I realize? P5,000 ordinary gain. Ang income na ordinary gain na ‘yan, ay ibabato mo dito para maging part of the gross income? Hindi. You recognize the gain but only to the extent of the losses. How does it work? So for aircon 2, ‘yung ordinary gain is P5,000. Ito (P5,000), hindi isasaksak doon (Letter A) katulad ni Lumbera na hindi engaged in trade or business. I call this, personal terminology ko ‘to, “side stepping”. The “sidestepping” refers to the recognition of gains up to extent of the losses. We recognize gains up to the extent of the losses. That’s under Section 39 (C) of the Tax Code. So here you gain P5,000 for the same year of 2016. Gunting 2. Magkano ang book value? P16,000. Ibenenta mo si gunting 2, ordinary asset. Nabenta mo ng P10,000. Lugi. Loss. Magkano? P6,000. How do you call that? Ordinary loss. For the year 2016, assuming these are the two transactions involving movements of assets. Then for the year 2016, year end, I have ordinary gains of P5,000 and ordinary loss of P6,000. Therefore, what I arrived at the end of the year is net ordinary loss of P1,000. What happens to the loss? Ito ba isasama mo sa allowable decoctions para lumiit ‘yung gross income mo? No! According to Section 39, you only recognize gains up to the extent of the losses. You are allowed 1 benefit. Your gain of P5,000, which could have been easily added to your gross income, and if added will of course increase your tax due. But because of recognition of gains versus losses, the loss has the effect of reducing your gains and therefore you don’t have anything to add here. Therefore, the effect to you is reduced tax as well. But when you arrive at the end of the year at an ordinary loss, wala nang mangyayari because the net ordinary loss is not the “L” here. Tapos na ang usapan. Now, kasi take note: lugi naman ako kasi loss sa dulo. Hindi ka lugi kahit loss sa dulo kasi nagbenefit ka naman ng isang beses. Ano? Noong nag-gain ka ng P5,000 at nabawasan ng P6,000. Ang effect noon ay sa halip na maglagay ka ng gross income na limang libo, wala kang sinama sa gross income kaya ka nagbenefit ng isang beses. Now, when at the end of the year you realize net ordinary gains, pwede mangyari ‘yun. Baliktarin natin. Ang gunting ay nabenta mo ng P8,000. So P8,000 versus loss, na 6K. Ang mangyayari sa ‘iyo ay may ordinary gain na P2,000. Ano ang gagawin mo diyan? Eto ibabato mo dun (gross income). In which case, lalaki ang tax due mo. Pero, lugi ka pa ba? Hindi. Bakit? Nagbenepisyo ka na. Ano? Noon ang loss ay nirecognize versus the gains of P8,000 kasi kung walang loss, kung hindi ka inallow na i-offset ‘yung loss versus the gains, P8,000 sana ang napasama roon at nag-increase ang tax due mo. There is no such thing as

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NOLCO na net ordinary loss carry over. Walang NOLCO na net ordinary loss carry over. Ang NOLCO ay NET OPERATING LOSS CARRY OVER. So, this is how you recognize gains and losses of ordinary assets. All ordinary gains, i-grupo. All ordinary loss, i-grupo. Then i-offset. If at the end of the year you have net ordinary gains, ibato mo sa gross income, and that’s the only time that it will have an effect. But on transaction basis, no effect yet. If at the end of the year, you realize net ordinary loss, manahimik ka na. Wala nang mangyayari. Bakit? Meron ng benepisyong nangyari sa iyo nang inoff-set si loss against the gains? Tigil na. Wala ka nang magagawa. Recognition of gains and losses in sale of capital assets Now, let’s go to capital assets. Aircon 1. Binili rin noong 2014. Aircon 1 became obsolete in 2014. So kung 2016, the book value is at P4,000 each. So aircon 1, which is a capital asset has a book value of P1,000. Nasa bodega. Hindi mo maipakilo. Somebody, a collector of that kind of aircon, found out and purchased the aircon. Collection item daw niya. Binili si aircon. Binenta. Magkano? P6,000. Anong tawag mo diyan? Capital gains. In capital assets, you apply the holding period if the individual is engaged in business. So, if the asset is held, nakasulat diyan, Section 39 (B). If the asset is held for not more than 12 months, ano ang percentage ng recognition? 100%. More than 12 months? 50%. Kapag mahaba ang panahon na hinawakan, kalahati lang daw ang marerecognize. Simply, Aircon 1, kailan ba binili? 2014. Kelan binenta? 2016. More than 12 months? Oo. So anong sabi? Irecognize mo yung 50%. Sa halip na P6,000, P3,000 ang capital gains. OK? Gunting 1. Kalian binili? 2013. Ibenenta ng 2016. Capital asset. Magkano? P2,000. Anong tawag dito? Capital loss. Ilang taon hinawakan ang gunting? More than 12 months. So 50% ng P2,000 ay P1,000. That’s capital loss. Anong gagawin nanaman diyan? O, sa loob ng isang taon capital gains. Magkano? Hindi anim na libo. You apply the holding period so P3,000. Capital loss, magkano? P2,000, kapag ang asset is not held for more than 12 months. P1,000, sa loob ng isang taon. Ang net capital gains P2,000. Anong gagawin? Ito ba ay ita-tax sa Letter B doon? Hindi. Hindi naman real property ‘yan. Ordinary pa. So anong gagawin? Ibato mo sa A and it will have an effect on the tax due (NIT). Net Capital Loss Carry-over Eh, paano kung may capital loss sa dulo? Meron tayong tinatawag na Net Capital Loss Carry Over (Section 39 [D]). We can carry it over in the succeeding year. Net capital loss carry over can be carried only by an individual taxpayer engaged in trade or business, and the carrying over is for the succeeding year only. What is the effect of the net capital loss carry over? This is year 2016. Sa

2017, ganun din an proseso mo: recognition of gains and losses. So kung sa 2017, nag-arrive ka ng gross capital loss na P3,000; net capital gains for the succeeding year is P6,000. You can carry over P3,000. So next year, sa halip na ita-tax ka ng P6,000 sa gross income, ang ibabato mo lang ay P3,000, because you have a net capital loss carry over. What happens if in the year 2017, net capital loss ka? Loss. It can happen. Anything can happen. Succeeding year, net capital loss ka ng P2,000. Itong 2017, ito ‘yung net capital loss mo. Are you still allowed to carry over? Yes. The net capital loss, magkano? P5,000. Anong effect ‘nyan? Wala. The net capital loss walang effect dito. Now, ang tanong: sa 2018, pwede pa bang mag-carry over? Oo. Isang libo lang. Bakit? Yung P2,000 mo for the coming year ay ‘yung net carry over mo na P3,000. Ang charge sa P3,000 carry over is P2,000 kaya P1,000 na lang. ‘Yun na lang ang pwede mo i-carry over. Isang libo lang ang carry over. Ulit. Walang problema pag net capital gain ka sa 2017 kasi kitang-kita mo ang effect ng net capital loss carry over, eh. It reduces in otherwise, at the end of the year, you sustained capital loss, and you will be carrying it for the succeeding year, and for the succeeding year, gain ka, you will not feel the effect. The net capital gain is reduced by the net capital loss carry over. Kapag sa succeeding year net capital loss ka, will you still be allowed to carry over? Of course, walang problema. But, katulad dito for the current year, P2,000 na loss sinundan mo ng P3,000 na loss rin. Ang sabi i-carry over ang net capital loss na P5,000. Pagdating ng 2018, hindi mo pwede i-carry over yung P2,000 dito. Bakit? Kasi nacharge mo na sa capital loss for the year 2011, kaya isang libo na lang. Baliktarin natin ang sitwasyon. Sa susunod, 2017 net capital gain mo ay P2,000. Meron kang net capital loss sa susunod na taon (2018) na ike-carry over na P3,000. So at the end of the year, the taxpayer sustained net capital loss na P1,000. Pwede mo ba i-carry over yung P1,000? Hindi na. Kasi isang taon ka lang pwede mag-carry over. Naiintindihan? Sa second year ka na, kasi pwede magcarry over, eh. Kasi nagbenepisyo ka na. Ano yung benefit mo? ‘Yung gain mo nareduce ng loss. Number 4, inallow ka ng holding period. Number 3, nag net capital loss carry over ka pa. Sobra-sobra na benepisyo mo, manahimik kayo. ‘Yan ang sabi ng gobyerno. The government recognizes that you incurred losses and it will have an effect on you. But it has to be within a certain limit. What is the limit? Inallow na kita na may holding period ka pa nga. Benefit na ‘yan sa iyo. Pangalawa, ‘yan gains mo nareduce ng loss like the loss was charged against the gains. Number 3, kapag sa dulo may capital loss ka pa, pwedeng i-carry over. Ay, sobra naman kung loss na hindi mo na carry over, eh ike-carry over mo pa sa susunod na taon. Ay, luging-lugi na ang gobyerno sa inyo. Tama na. So these are

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the benefits. This is how you recognize gains and losses. All assets, whether ordinary or capital. This is how you recognize. Holding Period and NOLCO not allowed if taxpayer is a Corporation What are the modes? Holding period is allowed only if the taxpayer is individual. NOLCO is allowed only, again, if the taxpayer is an individual, and the net capital loss may be carried over to the succeeding year only. Such that if the taxpayer is a company, no holding period is allowed. Therefore, all gains and losses are recognized at 100%. There is no such thing as NOLCO (corporate taxpayer), and therefore, if the company sustained a capital loss at a given period, no more benefit for the succeeding year. This is how it’s done. Now you see the relationship of ordinary gains, ordinary loss, capital gains and capital loss. With this computation. Now, kitang-kita n’yo yan. Hindi ka kasi n’yan nagpi-physical labor. Nagmomove ka ng asset. So what is the effect of the movement of the asset? Recognition of gains and losses, which will have either, a direct effect on the gross income, or indirect effect on the gross income, but never on the issue of deductibility. What will be the effect is that, the tax due will either increase or decrease because of the recognition of gains and losses. That is the general rule. Instances when gains and losses are not recognized When are gains and losses not recognized? Kailan naman tayo hindi dumadaan sa ganung proseso ng recognition of gains and losses? When are gains and losses not recognized? Section 40, (C)[2]. 1. When you are selling real property located in the Philippines, capital in character. The gains and losses are not recognized in that manner because the tax due is 6% capital gains tax. 2. When shares of stocks in a domestic corporation, capital in character, sold and traded. Ngayon, no recognition of gains and losses, because the tax is 5% for the first 100K and 10% in excess of 100K. 3. If there is a valid merger or consolidation of two corporations and shares of stocks are exchanged for shares, or shares are exchanged for property, or property is exchanged for property, or property is exchanged for stocks. Whatever gains or losses, no gain, no loss recognized. Example: Corporation X, Corporation Y. Corporation X has a car worth P1M. Corporation Y has a painting worth P2M. They merged. XY Corporation is born. There are shares of stocks of P500,000. Car is exchanged for P500,000 shares of stocks to XY merged corporation. X incurred a loss of P500,000. Do not recognize the loss.

Y has a painting worth P2M. Exchanged for shraes of stock in XY merged corporation worth P3M. Gains? P1M. Do not recognize. Why do you not recognize gains and losses in the merger or consolidation? The answer is simple: Because X and Y own XY merged corporation. Whatever assets or liabilities XY will have will be incurred by X and Y separate corporation. Therefore, no gains or losses sustained. No gains realized. No loss sustained. Kasi sila din ang may-ari. 4. When an individual, together with others, not exceeding 4 (he plus 3), exchanges property for shares of stocks in a corporation and he, alone or together with others not exceeding four, gains control of the corporation. Whatever gain or losses sustained by the individual when the property is exchanged for shares, do not recognize. Example: Car worth P1M, pinagpalit ng shares na P1.5M. Whatever gain or loss sustained, do not recognize. Bakit? Siya ang may control ng korporasyon at habang siya ang may control, kaya niyang pakitain. So ngayon, kumita ang korporasyon, ang loss ay matatakpan. Kapag may gains, ang kanilang kinita ay siya ang magbebenefit kasi sa kanya ang korporasyon. Kaya walang gains, walang loss. OK? 5. Wash sales. Naglaba. Kapag naglalaba ka, ano ang natatanggal? Dumi. Kapag naglalaba ka, naglilinis ka. So shares of stocks owned if at any given point in time ‘yung shares of stocks, let us say P1M, and then you sell it today at P300,000, you sustain loss. Right? P700,000. That loss will not be recognized in wash sales if 30 days prior to the sale today or 30 days after the sale today, you acquire similar shares of stocks as those ones that you sold and you incurred loss. It is as if you did not lose at all and therefore the loss of P700,000 is not recognized. But if you sell the shares of stocks at P1.4M, you have gained P400,000 and 30 days prior to or 30 days after you purchased similar shares of stocks as the ones sold, ALL gains recognized. In wash sales, gains are recognized, loss are not recognized. All gains are recognized in wash sales. Losses are not recognized because it is as if no loss was sustained.

Under Number 4, an individual exchanges property for shares of stocks in a corporation and he, together with others not exceeding four, gains control of the corporation. Whatever gains or loss, whatever gains he realizes or loss he sustains, do not recognize. Ang tawag dito sa Numbers 3 and 4, ‘yung terminology ay tax-efficient transfers. Kapag naintindihan n’yo ‘yan when you become lawyers, transactions tax efficient transfers, hindi ba naririnig nyo ‘to: “Naku meron akong mga properties, ililipat ko na lang sa korporasyon”. ‘Yan ‘yon, ha? Because your property is used to buy shares in a corporation. And when you buy shares, that is, na-exchange and when you buy shares, you gain control of the corporation, no

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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tax. No tax ang effect. Nothing. Kasi no gain, no loss recognized. Tax efficient transfer of property. Number 1. Valid merger or consolidation wherein shares are exchanged for property, shares are exchanged for stocks, property for stocks, property for property. These are tax-efficient exchanges of property. No gain, no loss recognized and therefore no tax consequence. Number 2. When an individual exchanges property for shares and he alone, or together with others not exceeding four, gains control of the corporation, no gain or loss recognized. Therefore, no tax consequence as well. Ito yung mga naririnig n’yo. Tax efficient transfer of property. So the reason why I took this out of Section 34 and did not discuss in Section 34 ay para hindi magulo. Now you see these effects. These are not deductions. X. Losses LOSSES. The only loss that effectively reduces your gross income is casualty loss. That’s the only loss. Then you will have to recognize casualty losses together with gains and all losses, as a general rule, are recognized up to the extent of the gain only. Such that, if at the end of the year the taxpayer realizes gains, that’s the time na ibabato mo sa gross income which will have an effect on the tax due. But if at the end of the year you incur loss, manahimik ka na. Wala na. Wala nang mangyayari. You are not allowed to deduct that loss whether ordinary or capital loss from the gross income. You cannot claim the same as deduction from your gross income. Why? Because you have already been benefited: (1) When the gains are reduced by the loss because the los are recognized up to the extent of the gain; (2) Holding periods, in case of individual taxpayer, has the effect of reducing the gains and losses; (3) When a taxpayer is an individual and net capital loss is allowed to be carried over for the succeeding year only. These are your benefits already. These benefits have the effect of reducing your gross income because hindi mo na isasama sa gross income, or the gain is completely eaten up by the loss and therefore, the effect at the end of the day is the tax is reduced. Ang administrative provision ng income tax ay idi-discuss with remedies. Doon ko siya idi-discuss para kita niyo kung saan ginagamit ang administrative provisions. Ha? Doon ko idi-didscuss when I take up remedies. Question on foreign currency account: Liwanagin natin. Pag ika’y may bank account na dollar account, foreign currency account. I-distinguish natin. If the foreign currency account is at the same time a remittance account, the code says that the account is exempt from payment

of the 7 ½% tax. Example. OFW ka. Nagtatrabaho ka sa States. Ang pamilya mo ay nasa Pilipinas. Kapag nagremit ka ng iyong kinita, hindi ka pwede basta magremit na nagdedeposit ka ng account mo doon at iwi-withdraw dito. Meron tayong tinatawag na remittance account na kini-create para lahat ng remittances doon papasok. Parang Western Union din ‘yan except dito bangko. OK? ‘Yung account mo na foreign currency but a remittance account is exempt from tax in recognition of the principle that: All non-residents are not subject to income tax for income outside. And they remit it, the benefit of the government is in lieu of the tax to be earned out of the bank account, it is exempt now. Bakit ini-exempt? Kasi nagbebenefit ‘yung gobyerno dahil ang foreign currency natin dumadami. So the remittance account, na-withdraw mo. Siyempre remittance account ‘yan, hindi ka pwede magsave. Walang remittance na nag-stay ang pera kasi ginastos mo kaya nga pinadala. Si dollar, inilipat mo sa ordinary dollar account. This is no longer a remittance account. This is expanded foreign currency deposit and therefore, no longer exempt. Another situation: Resident Citizen. Ang bangko mo ay nasa labas ng Pilipinas. Kapag foreign currency deposit doon, ‘yon ang current currency doon. Pero ang peso ko ay foreign currency doon. Tama? ‘Yung peso account ko sa ibang bansa ang foreign currency account doon. At ang dollar account ko sa kanilang bansa is ordinary currency account doon. So kung resident citizen ako at may peso account ako sa ibang bansa, that is a foreign currency account sa ibang bansa. Anong posibleng tax doon pag nagbigay ng interest? Kapag nagbigay ng interest, ita-tax iyon. It may be either in the form of FWT, kasi parepareho lang ang tax system natin, eh or treated as foreign currency account. Dito sa Pilipinas, may tax ba ‘yung interest? Oo. Anong tax natin? NIT. ‘Yung foreign currency doon, peso account at ang dollar account doon, ordinary. Pagdating doon, ordinary ‘yon. ‘Yung peso account na ‘yun ang foreign currency account doon. May interest P100. Anong mangyayari sa akin? Resident citizen ako. NIT pereho. Peso and dollar account outside. Resident citizen ako. NIT. Pareho. Eh, ano ang tawag nya doon? Pero ‘pag ang pera mo ay pumasok sa Pilipinas na remittance, ibang usapan. Codal ‘yan. Remittance account, makikita n’yo sa bangko, this requires kasi special permit from the Bangko Sentral ng Pilipinas for a bank. May authority dito to accept remittances. OFW nasa Saudi ka. Magbubukas ka doon ng remittance account sa PNB. Naka-match agad ‘yan. So lahat ng pera mo mamamatch sa account na ‘yan. Ire-remit sa account mo sa Pilipinas, lahat ng pera na pumapasok sa Pilipinas walang tax. Lahat ng earning nila, money in the foreign country, walang tax kasi non-resident citizen ka. Kapag pumasok sa remittance account sa Pilipinas, walang tax. Pero pag ginastos mo, may tax na ‘yan. Kasi kapag ginastos mo, anong consequence? May kikita. Alangan naman saan mo gagastusin? Palabas ng Pilipinas ulit? Hindi. ‘Yung inward remittance account,

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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nandito ngayon sa isang account. Kapag ikaw, ordinary account lahat ng kinita n’yan passive income. Pag winithdraw mo, ginastos mo, may kinikita na, may tax doon. ‘Yon ang pinagbabawian ng gobyerno. Now you see and you will realize tax is a very dynamic topic and subject. Kelangan lang talaga alam na alam mo yung step-by-step ng transaction kasi in every step of the way may pagbabagong mangyayari. At depende sa tax. Hindi ka pwede mag-generalize. Kailangan hihimayin mo unti-unti because every step of the transaction you will have to think about what is the tax consequence. That is why avoidance is really an art. Because every step of the way may tax due eh. You can see from our example. So how will you avoid? There are many ways of avoiding. I will not teach you yet. Not yet. But there are so many ways that are legitimate manner of reducing your tax due. If nasa business ka, lalong maganda ‘yan. But when you become lawyers, come to mama. But not now, because you have to learn the basic of what is right and what is wrong. VALUE ADDED TAX (VAT) VAT is the easiest tax under the NIRC but the most technically worded provision of the law. Admitted ‘yan. Walang kokontra d’yan. Napakadali lang. Marunong kayong mag-add, mag-multiply? Walang division. Addition and multiplication at subtraction. Wala ditong division. Value added tax (VAT) is value added tax. Tax is added to the value. It is a form of indirect tax which is collected or imposed for: 1. Every/each sale of goods in the course of trade or business; 2. For each sale of service in the course of trade or business; and 3. For each importation of goods. Walang service ha. This time whether trade or business related or not. It is a form of tax imposed on each sale of goods in connection with the trade or business, or each sale of service in connection with trade or business, or each importation of goods whether related to trade or business or not. These are the only three transactions covered by VAT. Meaning of sale What is the meaning of sale? Sale may refer to actual sale or barter or exchange. There is transfer of ownership. Sale of goods. Goods will even cover

real property. If you are engaged in development and sale of property, each sale of real property is considered sale of goods. Sale of service. There is no employer-employee relationship involved. Services are rendered and for the services, you are paid. Sale of service may cover lease, rentals. When there is a lease, there is sale of service. Importation of goods. Galing sa ibang bansa at dadalhin sa loob ng Pilipinas. Kung gagamitin mo sa bahay mo ang iyong inimport, walang pakialam. Pagdating sa Pilipinas, importation of goods. Paano ini-import? Walang land. By air and sea. Pagdating niyan sa Bureau of Customs sa Pilipinas, that’s importation. Bago mo ilabas sa warehouse ng Bureau of Customs, magbabayad ka ng VAT. Kapag inilabas mo, kapag binenta mo, each sale, VATable. Kung kakainin mo, walang VAT. Pero may VAT ang importation. Transactions deemed sale Now, in sale of goods we have Transactions Deemed Sale (TDS). Transactions deemed sale is found in Section 106 (B). There is no actual sale but the goods are being sold and subjected to value added tax: 1. Transfer, use, consumption of goods intended originally for sale in the ordinary course of trade or business. Meron kang restaurant. Ang binebenta mo ay tapsilog. Araw-ayaw mong niluluto sa bahay mo. Kumuha ka ng tapsilog na stock. Deemed sold. Because the tapsilog is sold in the ordinary course of trade or business. Kinain mo, nilamon mo. Deemed sold. Period. 2. Transfer in favor of creditors. May utang ka na isang libong piso kay Mr. X. Wala kang pangbayad. Sabi mo kay Mr. X, “Kumain ka ng tapsilog arawaraw.” Ok sige kasi walang pambayad. Kumain si Mr. X. Bawat tapsilog na kinakain, deemed sold. 3. Transfer in favor of investors. Hindi mo maisauli ang investment at tubo. Ang sabi mo, “Kumain ka ng tapsilog equivalent to investment”. “Agree.” Everyday kumakain ng tapsilog. All tapsilogs eaten by the investor deemed sold. 4. Consignment of goods. Goods not sold within 60 days from the consignment, all are deemed sold on the 61st day.

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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5. Closure of establishment and all stocks remaining shall be deemed sold. Tapsilogan sinara mo. Titingnan ngayon kung ilang kilo ng baka ang nasa refrigerator. Ilang tapsilog ang kayang gawin para doon sa kilo ng baka? All are deemed sold. Transactions deemed sale, not applicable in sale of service and importation This is how it’s done: Whatever kind of business that you have, if you have these five transactions, these are all deemed sold. VATable. Subjected to VAT. There are no transactions deemed sold in sale of service and importation. Ang importation kasi, ay either imported or hindi. Pag hindi ko dinala sa Pilipinas walang importation. Kapag nasa gitna pa ng dagat, wala pang importation. Kapag dumating sa Pilipinas, importation na ang tawag diyan. Kahit tumalon sa barko at nasa gitna pa lamang ang barko, imporatation. Importation starts from there. Now, what is the rate? 12% tax added to the value. Basis? Gross selling price for sale of goods. For the sale of service, the gross receipts. For importation of goods, the value or the amount determined by the Bureau of Customs. Output and input tax In addition to the 12%, we have what we call zero-rated and exempt. Sasabihin n’yo, ang tanga naman ng batas. I-multiply mo ang zero sa limang milyong piso, zero. Ang exempt wala ring VAT. So what is the difference? Later, I’ll inform you of the distinction between the two and which is more beneficial to the tax payer. So, you multiply by 12% and the buyer pays. So ito ang magandang sample: Tapsilog P100. Ibenenta mo sa iyong tindahan. Magkano selling price mo after adding the cost? P100. Buy tapsilog. Ikaw nagbayad ka ng P100 na selling price plus 12%, bigyan mo siya ng P112. The P12 is called the output tax from your end. And he (buyer), calls it input tax. Output tax is the value added tax on sales and input tax is the value added tax on purchases. OS-IP. Output for sales. Input for purchases. Ikaw naman may output kang P12, ano naman ang posibleng mong input? Bumili ka ng gasolina, nagbayad ka ng kuryente. Pag naggagasolina ka, may tax dun. Bumili ka ng gasul may VAT. Nagbayad ka ng kuryente may VAT. May telepono ka, may VAT. Lahat ng purchases mo, 12% ang binabayad mo. Ang tawag doon sa 12% na binayaran mo ay ‘Input’. Ang tawag doon sa binenta mo, ‘Output.’ So ikaw may output na 12%, ikaw ay may input na 12%. Kinain mo si tapsilog. Walang silbi sa iyo si Input. Bakit? Nilamon mo. Walang silbi sa iyo because you are not engaged in trade or business. And being an end-user, it is

not applicable to you except that it adds up your expense. Let us assume that you are engaged in delivery of tapsilog to government offices. So you ordered for 1 tapsilog. My business is delivery of tapsilog. Anong mga purchases mo? Gasoline pag ikaw ay naglalakbay. Maraming purchases. Tama? So itong tapsilog na binili nya ng P112 at nagcompute ka. Per tapsilog is now P150, cost pa lang sa iyo. Kayo namili ng tapsilog sa kanya, ikaw nagparasyon ka. P150 may tubo na siya diyan. Binenta sa iyo plus 12%. Magkano? P150 x 12% = P168. P168 ang tapsilog. Magkano output mo? P18. Output is P18. Magkano input mo? P12. P18 output less input of P12 is P6. Go to BIR remit the P6 that is VAT payable. Remedy in case input tax is more than output tax If marami kang purchases, ibig sabihin your input is more that your sales, if your input is more than your output, marami kang pinamili kesa nabenta, what will happen? The excess input you go to BIR, ask for refund. But of course, money will not be given to you. It will form part of credit, either tax credit for the succeeding quarter because VAT is computed on a quarterly basis but paid on a monthly basis. Computed quarterly but remitted to BIR monthly. Ganun ‘yan. So ikaw, if you have excess input, you may credit for the succeeding quarter, or if at the end of the year, if you still have excess input, you will credit it with your other obligations such as income tax due from your business. Excess output is VAT payable This is how you do it. Input-output, input-output. Ganun lang ito nang ganun. And then you remit monthly to BIR. If you have excess output, that is VAT payable. Pay to BIR. Hindi ka nagbabayad sa BIR bawat benta. Kokompyutin mo ‘yan on a quarterly basis and you remit on a monthly basis, and if at the end of the year you have excess output, meaning, you have more sales than purchases, then pay to BIR. But if you have excess input, meaning you have more purchases than sales, then you also go to BIR and request for refund or credit, the same with your other tax obligations. So as you are moving along the taxable period, you may credit it for the succeeding quarter. Very simple and Value Added Tax. Kaya sabi ko sa inyo, multiplication, addition, subtraction. Walang division na ginagamit. So ‘yan ang ginagawa n’yo. Relevance of input and output tax to income tax How relevant is this to income tax? Very relevant! When you compute for your gross income, the gross income of the taxpayer who is engaged in trade or business reflects your revenue from your operation. Your output tax represents the 12% of your sales, and therefore, that should jive with gross income. Pag iyan ay

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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hindi nag-match with the gross income doon sa output tax mo, you are doing something. Now, your input tax represents your expenses, purchases in your trade or business, and therefore, the 12% input tax should also coincide with your allowable deductions in the form of expenses. Anu-ano ‘yung mga expenses mo? Reasonable allowance for wages. Wala ‘yan VAT. Pag nagbayad ka ng wage, walang VAT. Reasonable allowance for utility: PLDT, Merealco, MWSS, gasolina. Kapag bumili ka ng may VAT, may input tax ka na 12%. Dapat ‘yun mag-match sa deduction mo. Nagbayad ka ng renta sa lupa doon sa parlor. That’s a sale of service. So there’s VAT. Input tax ang binayaran mo. Purchases mo ‘yan eh. So dapat ang input tax mo na kini-claim versus the output tax, mag-match doon sa expenses mo. Tinitingnan ‘yan ng BIR. Income tax is paid the following year. Ang bayaran is the following year. The requirement for VAT is quarterly. You compute but you remit monthly. So from January to December, if you remit in January, BIR has advance notice of how much your sales are for the month of January. When you remit in February, March, April, May hanggang December, BIR has an idea how much your gross sales are, which will represent your gross income. Advance notice ‘yan sa BIR. Such that, kapag nagbayad ka the following year ng income tax mo at hindi nag-match doon sa na-file mo sa VAT return, patay ka. You are doing something. ‘Yan ang relationship niyan. Hindi pwedeng maghiwalay. Kailangan laging magkabuntot. VAT is a tax on business. So this will match up with your gross income on the business that you have. ‘Yun ang sinasabi nating relationship ng income and VAT. Excess input tax may be credited and applied to VAT liabilites in succeeding quarter or to other tax liabilities

Zero-rated transactions Zero-rated transactions. Anong nakasulat? Section 106. What are the zerorated transactions? ‘Yan ay hindi ko ini-expect na memoryahin ninyo. Ano ba ang “zero–rated transaction?” Tingnan ninyo ang mga examples diyan. Export sale Kapag ikaw ay nag-iimport, times 12%. Kapag ikaw ay naglabas, times 0%. Niloloko tayo. Ay, bakit imumultiply pa ng 0%? Kapag zero-rated kasi, kaya ginagawang zero-rated, may benepisyo kasi ang gobyerno. Kapag nag-export ka ng tubig, ang bayad niya padadaanin sa foreign currency ang bayad at pinadadaan sa bangko. Wala namang nagbabayad na pinadadala sa LBC. So it goes through the bank and it is in foreign currency. Benefits of exportation As you bring water outside, there are two benefits to the government. 1. foreing currency reserve is increased; and 2. we promote locally manufactured products Comparing it to an importation wherein we destroy locally manufactured products because of the dating ng mga produktong imported. And secondly, kapag tayo ay nagbabayad, ang ating foreign currency reserve ay nababawasan. Sale of gold bars

Now, output less input. Grugrupuhin mo sa isang quarter, ano ba ng aking nabenta na may VAT? Kunin sa isang quarter diyan, ano ba ang pinamili ko na may VAT? Kunin. I-match n’yo. Pag sobra ang output, go to BIR, VAT payable. Pag ang sobra ay input, punta ka sa BIR, refund. Miss Kim Ynarez. Or hindi kaya as you are moving along the quarters of the year, i-credit mo na agad ang excess input. Pwede. Kapag sa dulo nag-excess ka, “Oi Ms. Kim Ynarez, i-aaplly ko po ito sa aking income tax due. Sayang naman. Pwede ba?” Pwede! ‘Yun ang tax credit. ‘Yan ang mga pwedeng mangyari sa inyo. Mahirap ba ang VAT? Hindi. Napakadali.

Nagbenta ng ginto sa Bangko Sentral ng Pilipinas. Dumadami ang ating reserve para sa paglililok ng salapi. Kailangan natin ‘yan. So kapag nagbenta ka, may benepisyo ang gobyerno. Dahil nagbigay ka ng benepisyo sa gobyerno, sa halip na times 12%, times 0%.

VAT on sale of service Now we go to Section 108. Sale of service. Madami din ‘yan. Sample na lang natin. Walang zero-rated sa importation, ha? Wala. Zero-rated lang sa sale of goods and service. Sa sale of service. Noong unang panahon, 10 years ago, ‘yung repacking, ‘yung sachet, dito ‘yun nauso sa Asia. So mga 10-15 years ago, meron

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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bagong industriya sa Pilipinas. Ang kanyang ginagawa ay mag-repack. Sa ibang bansa, sa US halimbawa, mahal ang service na iyan. So ang ginagawa ng mga producer ng toothpaste sa US, ipadadala sa Pilipinas ng naka balde-balde na toothpaste. Ang trabaho sa Pilipinas mag-repack. Pagka-repack, naka-sachet, ibabalot sa kahon ilalabas ulit ng bansa. Ang bayad sa Pilipinas for the service ay foreign currency coursed through the BSP. ‘Yun nanaman. Nakinabang nanaman ang Pilipinas. ‘Yan nanaman ang halimbawa ng times 0%. Effectively zero-rated sales Ang isang effectively zero-rated ay hindi talaga zero-rated. Kaya lang, upon the recommendation of the Secretary of Finance, the President may declare a particular transaction as effectively zero-rated. Perfect example are the industries within the economic zones. The transations therein are not exactly zerorated. If you look at the Code, they are treated as effectively zero-rated because of certain conditions. Distinctions between zero-rated transactions and exempt transactions Now, how do we distinguish zero-rated from exempt. These are the distinctions: In zero-rated, the transaction is not subject to VAT at all stages and the input tax is allowed to be credited against the output tax. Exempt transactions are not subject to VAT only at a particular stage and the input tax is not allowed to be credited. Let us look at Section 109. ‘Yan ang mga exempt. These transactions are not subject to VAT. Only at a particular stage. After that stage, provided in the law, VATable na. Unlike zero-rated na kahit anong stage, times 0%. Tingnan natin ang Section 109. I. Sale or importation of agricultural and marine food products in their original state Number 1. Mr. A. May baboy siya sa bakuran. Binili ito ng alive. VATable? Exempt. Si baboy na oink-oink kinatay niya. Itininda niya sa palengke. Pork chop, liempo laman-loob, pigi, ulo. Nakalatag. Binili. Si dead na baboy na chop-chop na. VATable? Exempt. Ang natira na part ng baboy na hindi nabenta, ginawa niyang tocino, BBQ flavor at longganisa. Isinabit sa palengke. Binili ang longganisa. VATable? No. Exempt. Nakasulat. Binili ang porkchop, prinito at sinerve with itlog and kamatis, porksilog. Kinain mo sa restaurant niya. VATable. Kapag niluto mo, VATable. Si longganisa ganun din. Binili mo sa kanya. Exempt. Kapag niluto mo si longganisa, binenta mo sa restaurant. Binili mo, kinain mo. VATable.

II. Sale of residential unit, low-cost housing unit Real estate developer. Low-cost housing unit. You buy from him. VATable? Exempt. Ikaw, bumili ka ng lima sa kanya. Buy and sell ka of low-cost housing unit. Ikaw tumira ka. When you buy from him 5 units, VATable? Exempt. Now the housing units are in your possession. Tinirahan mo. Binenta mo kay Mr. Blue. VATable? No. You are not engaged in trade or business. May tax ka? 6% CGT. Can you be exempt? Yes, if all the requisites for exemption are present. Ikaw naman bumili ka ng lima sa kanya all low-cost housing units, VATable? Exempt. 109. You sell the 5 units. VATable? Yes. Subject to CGT? No, because this is an ordinary asset from your end. III. Rentals of residential unit Lease of residential units when the rental do not exceed P10,000. Owner of 10 units leases to 10 lessees. Rental from each is P9,999.99. VATable? Exempt. This is exempt under the Tax Code. When you sell the apartment units, VATable? Yes. If the rent is P10,500. VATable? Yes. Nandoon kasi ‘yan sa mga examples niya. Kaya kailangan basahin ninyo para lang alam ninyo kung hanggang saan ba ang exempt at ang hindi. Pwede din kuwentong kutsero katulad ng ginagawa natin kasi pagminemorize, masisisra ang ulo natin. Kasi yung example ko, kuwento ‘yan ng codal para makita niyo. Hindi yung codal lang ang iniintindi. So ano pa ang stage ang exempt? Let’s go to Letter V. Basahin ninyo ang letter V. Ito ang example niyan, ha? Ang tindahan ko ay tindahan ng kandila. Ang gross sales ko ay P1,000,000. VATable? Hindi. Kasi ang nakasulat diyan, wala sa listahahn at hindi nag-exceed sa P1,500,000 ang gross sales. Exempt. Am I liable for tax? Yes. If you are exempt under letter V, exempt ka sa VAT pero ang ii-impose sa iyo ay percentage tax equivalent to 3% of your gross sales. Ang tindahan ko ay tindahan ng kandila. Ang gross sales ko ay P1,600,000. VATable? Yes. Hindi na ako exempt. Uulitin natin para makita ninyo ang Letter V. Unang sinabi ko ay ang tindahan ko ay tindahan ng kandila. Ang gross sales ko walang P1,500,000. VATable? Exempt. ‘Yan ang letter V. Sumunod, ang tindahahn ko ay tindahan ng kandila. Ang gross sales ko ay P3,000,000. VATable? Oo. Hndi na exempt. May piggery ako. Baboy. Ang baboy ko 20,000. I sold the 20,000 baboy at P10,000 each. Magkano yan? P2,000,000. VATable? Yes or no? Nakalagay sa

Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

75

109. Kanina, kapag nagbaneta ka ng baboy, exempt. Ngayon gawin nating 20,000 baboy, isang libo bawat isa. Magkano yun? P2,000,000. Lagpas P1,500,000. VATable? Yes or no? Bakit ‘No’? Mentioned in the preceeding paragraph. So kung nasa listahan ng A-U, exempt. Basta ‘yan ang dinidescribbe niyong sale. Kapag wala sa listahahn ng A-U at hindi nag-exceed ng P1,500,000, exempt. Ano ang konklusyon? Pag wala sa listahan ng A-U at nagexceed ng P1,500,000, VATable. Kaya ang tindahahn ko ng kandila ng P3,000,000 ang gross sales ay VATable. Naiintindihan? Another distinction transactions

between

zero-rated

transactions

and

exempt

The other disitinction is in zero rated transaction. The input tax is allowed to be credited against the output tax. In exempt transaction, the input tax is not allowed to be credited against the output tax. Anong ibig sabihin noon? Alin ang may benepisyo ang gobyerno? Zero rated. Ang exempt walang benepisyo ang gobyerno. Sa zero-rated may benepisyo ang gobyerno kaya binibigyan din ng benepisyo ang taxpayer. Ito lagi ang example ko. Napakasimple pero nakakatawa. In exempt transactions, input tax is not allowed to be credited against output tax We have 3 baboys. For the 3 baboys, inalagaan mo, pinakain mo, gumastos ka. Bumili ka ng tubig. Magkano? P500. VATable? VAtable ng 12%. Nagbayad ka ng input tax. Magkano? P60. Bumili ka ng kuryente. Magkano? P1,000 X 12%. Input tax mo ay P120. Ano pa ang gusto niyo? Nagbayad ka ng telepono kasi nag-oorder ka. Telephone expense P100 X 12% is equal to P12. Total na binayaran mong input tax is P192 for the 3 baboys, so P64 per baboy. Si baboy 1, ibenenta mo ng oink-oink alive ng P5,000. Exempt. Zero output. Baboy 2 ibenenta mo rin pero kinatay mo, niluto mo at ibenenta mo sa restaurant mo. Nakabenta ka ng P10,000 X 12%. VATable output is P1,200. So sa isang taon sa lahat ng trasaction mo, output less input. Output is P1,200 less input of magkano? P192? NO! The input tax attributable to baboy 1 is an exempt transaction, is not allowed to be credited against the output tax therefore P64 X 2 = P128. Kaya ang VAT payable is P1,072. Pay to BIR. VAT payable. That’s exempt transaction. Input tax is not allowed to be credited against output tax. In zero-rated transactions, input tax is allowed to be credited against output tax

tax. But there is a big difference. P1,200 is the output but in zero-rated transactions, the input tax attributable to the zero-rated transaction is allowed to be credited against the output tax. Therefore, your total input tax is P192. So P1,200 – P192 = P1,008. Your VAT payable is lower because you were allowed to credit the input tax atttributable to the zero-rated transaction. Since the government benefited from your zero-rated transaction, the government gives you something in return by allowing you to credit the input tax attributable to the zero-rated transaction against the output tax. ‘Yan ang ibig sabihin ng distinctions. The example is very simple para lang makita ninyo but whatever kind the transaction we have, this is the procedure. Ang difference lang ay hundred of thousands. Sa malalaking businesses, billions of pesos ang pinag-uusapan. But everything follows the same procedure. Effect of failure to register for VAT when registration is required What is the effect of registration for VAT? Hindi ba kapag nakakita kayo ng business establishments, may mga diploma sa business? Makikita niyo doon ‘VAT exempt.’ Meron din ‘VAT-registered.’ Anong effect? Kapag ikaw ay required na magrehistro for VAT purposes and you do not register, that is the worst scenario. Because if you are required to register and you failed to register, you cannot collect the 12% output. Hindi ka pwede magpatong ng 12%. And your input tax from your purchases will not be allowed as a credit. In the end you shoulder the 12% from your own project. That’s the worst scenario. Effect of registration for VAT when registration is not required Now, what if you are not required to register at nagpabibo ka? I want to register for VAT. Ide-deny ba ng BIR? No! Now if you are not required and you register, then you must collect the 12% for every sale. At hindi pwedeng sabihin ng mga bumibili sa iyo na, “Hoy, hindi ka naman dapat nagparehistro, hindi na ako magbabayad ng 12%”. Hindi pwede because you are registered, you will be treated as a regular VAT-registered taxpayer. Now, what happes to your input tax? Then you can credit. So para kang rehistrado talaga. So kung gusto mong magpabibo, eh ‘di magparehistro ka. Basta hindi pwede na since hindi ka naman dapat magparehistro eh percentage tax na lang ang babayaran mo. Hindi pwede, registered ka eh. Yun ang requirements ha? Now, kapag hindi ka rehistrado at kailangan mo magparehistro, then ikaw ang magbabayad from your own pocket kasi you failed to collect the output. So you shoulder the output. And secondly, yung input naman na nagasto mo, hindi mo pwede i-credit.

Let us presume the same scenario but this time you exported the baboy. Binili ng Japanese. Pinadala mo si baboy 1. P5,000 X 0% is equal to P0 output Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

76

Best proof for purposes of tax credit Now, what is the best proof of crediting input with the output? ‘Yung mga resibo to show your purchases na naka-indicate yung 12% VAT as your input. So ‘yun ang mga supporting documents for crediting of input against output. Without those receipts, sorry hindi kayo pwede mag-credit. Input and output tax, not material to an end-user Kapag ikaw ang end-user, lugi ka talaga. If you are not engaged in trade or business, end-user ka lang, lugi ka kasi walang bisa ang input na binabayaran mo. Ito ang nature ng VAT: indirect tax kasi ito. So it does not matter whether nagpurchase ka from VAT or non-VAT registered entity because end-user ka. Magmamatter ‘yun kung ikaw ay hindi end-user. So input tax is only material to a taxpayer who is also engaged in trade or business. But if you are not, sorry. Parang tayo. Kapag nag-gagasolina tayo, walang bisa ang 12% nating binabayaran. Bakit? Eh hindi tayo VAT-registered eh. x------------------------------------------------------------------------------------x

God may be Glorified!

Lead Transcriptionist : Michael Quesada Transcriptionists

: Patricia David and Amerissa Base

Technical Logistics

: Miguel Llave

Lay-out

: Carlo Tibayan1 and Michiko Cosico

Over-all Chairman Vice-Chairpersons for Academics Vice-Chairperson for Logistics Vice-Chairperson for Finance Vice-Chairperson for Secretariat Vice-Chairperson for Recruitment

That in all things,

Jan Raphael Salud Jonalyn Porquez Michael Quesada Cristina Elaine Mangrobang Amerissa Base Patricia David Kathleen May Clareza

Unauthorized reproduction and distribution of this material is strictly prohibited.

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The Red Chronicles, Lay-out Artist Over-All Chairman: Jan Raphael Salud | Vice-Chairperson for Academics: Jonalyn Porquez and Michael Quesada | Vice-Chairperson for Logistics: Cristina Elaine Mangrobang Vice-Chairperson for Finance: Amerissa Base | Vice-Chairperson for Secretariat: Patricia David | Vice-Chairperson for Recruitment: Kathleen May Clareza

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