Spectra-Notes-Tax-Law-1-Compilation_updated.pdf

Taxation Law 1 Compilation Based on the outlined discussion of Atty. Kim Aranas. Compiled by: MFLH Updated as of: AY: 2014 - 2015

Societas Spectra Legis

Societas Spectra Legis Taxation Law 1 Compilation

TABLE OF CONTENTS INTRODUCTION ............................................................................................................................................................. 3 I. HISTORY OF TAXATION ........................................................................................................................................................................................................... 3 II. DEFINITION OF TAXATION ..................................................................................................................................................................................................... 5 III. NATURE OF POWER OF TAXATION ...................................................................................................................................................................................... 6 IV. BASIS OF TAXATION .............................................................................................................................................................................................................. 7 V. IMPORTANCE OF TAXES (Lifeblood Doctrine) ...................................................................................................................................................................... 7 VI. THEORIES OF TAXATION ....................................................................................................................................................................................................... 7 VII. PURPOSE AND OBJECTIVE OF TAXATION ........................................................................................................................................................................... 8 VIII. SCOPE OF TAXATION........................................................................................................................................................................................................... 9 IX. ASPECT OF TAXATION ........................................................................................................................................................................................................... 9 X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) ....................................................................................................................................................... 10 XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN ................................................................................................................. 10 XII. TAXES, DEFINED.................................................................................................................................................................................................................. 14 XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize) ........................................................................................................... 14 XIV. CLASSIFICATION OF TAXES ............................................................................................................................................................................................... 15 XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) ......................................................................................................................... 16 XVI. LIMITATION OF THE POWER OF TAXATION .................................................................................................................................................................... 18 XVII. SITUS OF TAXATION ......................................................................................................................................................................................................... 29 XVIII. DOUBLE TAXATION ......................................................................................................................................................................................................... 30 XIX. FORMS OF ESCAPE FROM TAXATION .............................................................................................................................................................................. 32 XX. EXEMPTION FROM TAXATION .......................................................................................................................................................................................... 33 XXI. NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS ........................................................................................................................................ 36 XXII. SOURCES OF TAX LAWS ................................................................................................................................................................................................... 39

REVENUE REGULATIONS ...............................................................................................................................................39 TAXABLE INDIVIDUALS .................................................................................................................................................60 INCOME TAX RATES .................................................................................................................................................................................................................. 62 INCLUSIONS (GROSS INCOME FOR INDIVIDUALS) ................................................................................................................................................................. 62

CORPORATE INCOME TAXATION ..................................................................................................................................68 I. INTRODUCTION AND DEFINITION OF TERMS ...................................................................................................................................................................... 68 II. TAXABLE CORPORATIONS .................................................................................................................................................................................................... 68 III. PARTNERSHIPS AND CO-OWNERSHIPS .............................................................................................................................................................................. 69 IV. CORPORATE INCOME TAX EXEMPT ENTITIES ................................................................................................................................................................... 71 V. TYPES/CLASSIFICATIONS OF INCOME FOR A CORPORATION ........................................................................................................................................... 73 VI. DEDUCTIONS ....................................................................................................................................................................................................................... 78 VII. ITEMIZED DEDUCTIONS (EX-IN-TA-LO-BA-CHA-RE-PEN-PRE-DEP-DEP) ......................................................................................................................... 79 TAX RATES ............................................................................................................................................................................................................................... 106

ACCOUNTING PERIOD; METHODS OF ACCOUNTING; TAX RETURNS AND PAYMENT OF TAX ......................................118 FILING OF TAX RETURN AND PAYMENT OF THE TAX ........................................................................................................................................................... 120

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Societas Spectra Legis Taxation Law 1 Compilation

INTRODUCTION I. HISTORY OF TAXATION EGYPT During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil. It started in a place back taxation in Egypt, in Ancient Egypt – where tax collectors were known as scribes and even impost taxes on cooking oil. Because it was even said that during this period this people even make audit if people are using the cooking oil na girasyon ug gihatag sa ilaha. So that’s the base form of tax/ taxation. GREECE In times of war the Athenians imposed a tax referred to aseisphora. No one was exempt from the tax which was used to pay for special wartime expenditures. The Greeks are one of the few societies that were able to rescind the tax once the emergency was over. When additional resources were gained by the war effort the resources were used to refund the tax. In this also, taxation/tax is referred to as aseisphora which is used to pay for special war time expenditure. Different ang rates because during this time they engage in different wars so the tax, if they engage in war they will have to collect the tax, if they have a loot in a while then the loot will also be used, iuli ang gi.collect the tax to their citizens. So when additional resources were gained by the war, the resources were used to refund the taxes to the people so sila ang nakauna sa concept of tax refund/credit/carry-over. Athenians imposed a monthly poll tax on foreigners, people who did not have both an Athenian Mother and Father, of one drachma for men and a half drachma for women. The tax was referred to as metoikion Athenians imposed a monthly poll tax on foreigners. Poll/community tax imposed by the Atheneans were poll tax on foreigners lang. In Philippines, poll taxes are applied to residents. ROMAN EMPIRE The earliest taxes in Rome were customs duties on imports and exports calledportoria. In Roman Empire, they usually use the taxation-- they applied it in collecting for customs duties on their imports and exports. They call it the portoria. What is the good thing in this Roman Empire is sila nakauna sa what you call Tax Haven, in every area there is a tax but for this particular area there is no tax. So what they did is that there was this specific canal where there will be no taxes. Why? So that they can use it during war para dali ang pagsulod ug gawas sa resources. Caesar Augustus was consider by many to be the most brilliant tax strategist of the Roman Empire. During his reign as "First Citizen" the publicani were virtually eliminated as tax collectors for the central government. During this period cities were given the responsibility for collecting taxes. Caesar Augustus instituted an inheritance tax to provide retirement funds for the military. The tax was 5 percent on all inheritances except gifts to children and spouses. The English and Dutch referred to the inheritance tax of Augustus in developing their own inheritance taxes. During the time of Julius Caesar a 1 percent sales tax was imposed. During the time of Caesar Augustus the sales tax was 4 percent for slaves and 1 percent for everything else.1 Saint Matthew was a publican (tax collector) from Capernaum during Caesar Augustus reign. He was not of the old publicani but hired by the local government to collect taxes. Also during this period Caesar Augustus was considered by many as most brilliant tax strategist of the Roman Empire. For us Catholics we know Caesar Augustus, “give to Caesar what is to Caesar, and give to God what is to God”. So they implemented 5% inheritance tax and 1% sales tax. So what is the purpose for the 5% inheritance tax? For retirement plan for his soldiers. Tax collectors in this time were known as publican, example of it is Saint Matthew (apostle of Christ).

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Societas Spectra Legis Taxation Law 1 Compilation

GREAT BRITAIN The first tax assessed in England was during occupation by the Roman Empire. Lady Godiva was an Anglo-Saxon woman who lived in England during the 11th century. According to legend, Lady Godiva's husband Leofric, Earl of Mercia, promised to reduce the high taxes he levied on the residents of Coventry when she agreed to ride naked through the streets of the town. In Great Britain, the first tax was during the occupation of the Spanish Empire so, basically it the Roman Empire who brings the tax to Great Britain. The tax in the United States was brought by the English. The legend of Lady Godiva, Lady Godiva is the wife of an Earl or Duke in an area in Great Britain (you will have this area, manage this area and collect taxes in this area). The earl/duke imposes very high taxes. Now Lady Godiva is for the people man daw, so nihangyo si Lady Godiva to her husband na i.demise ang tax. So and condition sa iyang husband was he will minimize the tax if Lady Godiva will roam the town naked riding a horse. Lady Godiva roamed around the town naked riding a horse, the tax then was minimized. PHILIPPINES In the Philippines of course we trace our taxation during the Spanish Era or during the Spanish Regime where several taxes and monopolies were established. Tribute It was the resident tax during the Spanish times. It may be paid in cash or kind, partly, or wholly. But in 1884, the tribute was replaced by the cedula personal or personal identity paper, equivalent to the present community tax certificate. In our case the tribute/buwis/dugyot during that Spanish period basically can still be paid in kind and in cash. It can be paid using chicken, goose, wool blanket, cotton, rice or any other products depending of on the region. Bandala System It is a form of direct taxes that the Spaniards implemented in which the natives were coerced to ell their products to the government at very low prices. It comes from the tagalog word mandala, which is a round stock of rice stalks to be threshed. We also had what we call as the bandala. It is an annual forced sale and requisitioning of goods such as rice, customs duties and income tax were also collected. During the Spanish period, the collecting of taxes was specific in a particular area nga rebellious to the Spaniard. Basil(wine made with rice) Revolt, the source is the bandala. People in there were already making the Basil, when the Spaniards knew about it, they wanted to centralized everything daw they implemented the bandala. What they did was there is this forced sale of the raw materials for the making of the Basil to the government in the North Luzon. Then the North Luzon government gisugo nasad nila balik ang mga namaligya to it process to basil and then they will have to resend the basil to the same people who sold to them the raw materials at a much higher price. Cedula Personal In 19th century, the cedula served as an identification card that had to be carried at all times. A person who could not present his or her cedula to a guardia civil could then be detained for being indocumentado. A legal identity document issued by cities and municipalities to all persons that have reached the age of majority and upon payment of a community tax, it is considered as a primary form of identification in the Philippines and is one of the closest single document the Philippines has to a national system od identification, akin to a driver’s license and a passport. Andres Bonifacio and other Katipuneros tore their cedulas in August 1896, signalling the start of the Philippine Revolution.   

Everyone over 18 yrs., but not more than 60 yrs. old, were required to pay for personal identification. Tax payers were responsible for Spanish authorities for payment for the tax. If you cannot present the cedula receipt, the authorities can immediately arrest you. Play a very important part in the Philippine history involving our hero Andres Bonifacio in a particular event—Pugad Lawin, where the Filipinos tore their cedula as a sign that they are not anymore adhering to the policies of the Spaniads. Still existing until up to now, community tax certificate is still called cedula. Technically it is not anymore the same cedula that was implemented during the Spanish period.

DEVELOPMENT OF THE COMMUNITY TAX The cedula was imposed by the Americans on January 1, 1940, when Commonwealth Act. No. 465 went into effect, mandating the imposition of a base residence tax of 50 centavos and an additional tax of one peso based on factors such as income and real estate holdings. The pyment of this tax would merit the issue of residence certificate. Corporations were also subject to the resident tax. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 

Implemented to all the Indios. Eventually, it was abolished during the American regime. But it was reinstated under CA 465. Proof of payment is the residence tax. From cedula it was changed from residence tax. Eventually, when we had our independence we passed our local government code. The local government code mandated for the payment of Community Tax and proof of entries is the community tax certificate but it has one root source which is the cedula.

Polo Y Servicio It was the forced labor for 40 days, of men ranging from 16 to 60 years of age who were obligated to give personal services to community projects. One could be exempted from the polo by paying a fee called falla (wich is worth one and a half real)  

forced labor; explains why in the Philippines we have so many churches; all male are required at least 40-days/ 15days(reduced) of work in one year for a ration of rice only. To be exempted from work, payment of falla must be made. Falla - sum of money for exemption from polo y servicio.

Different taxes UNDER THE NATIONAL INTERNAL REVENUE CODE: 1. Income tax - FOCUS FOR THIS SEMETER a. Individuals b. Corporation c. Other persons 2. Business Taxes – different from income tax a. Value-added tax b. Other percentage taxes 3. Transfer taxes a. Donor’s tax b. Estate tax Atty. A’s discussion:  Taxation is a destructive power of the state which interferes with personal and property rights of the people and takes a portion of their property from them for the support of the government. Being a destructive power, it can be used to kill an activity or business if it wants to. Thus it must be exercised with caution.  And among the three inherent power of the state, the most powerful is? It is a battle between police power and taxation. Both are supreme.  Taxation is more powerful if we are looking at coverage because taxation is plenary and unlimited. So if we’re looking at object/subject to which we impose the power of taxation, then taxation is more powerful  But if we look at vested rights not being impaired, then police power is more powerful. Because taxation cannot impair vested rights but police power can impair.

II. DEFINITION OF TAXATION i. Taxation vis-à-vis Tax Taxation Power wherein the sovereign raise revenue to defray the necessary expenses of the government from among those who in some measure are privileged to enjoy its benefits and, therefore, must bear its burdens. Primary purpose is to raise revenue. If the primary purpose of imposition by the government is to raise revenue, the power exercised by the government is the power of taxation. But if that amount imposed by the government is not primarily for revenue purposes like for example if it is for regulation purposes, it may be police power. In police power, the primary purpose is for regulation. Idea that taxation must be progressive Tax -

Enforced proportional contributions from proeprerties and persons levied by the state by virtue of its sovereignty for the support of th govt and public needs made by the legislative body in order to raise revenue despite the absence of constitutional provisions (inherent nature)

*Taxation is broader. Q: If the local government of cebu imposed amusement tax on local swimming pools, not provided for in the local govt code or other laws. Can it validly enact law imposing such tax?

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Societas Spectra Legis Taxation Law 1 Compilation A: No. they cannot. Although it is an inherent power, for local government units, there must be a delegation. Cebu city is not sovereign thus there is no inherent power of taxation. Thus it cannot impose any tax only those delegated to it by the legislative branch of the government. *Only the legislative branch (Congress) have an unlimited power to exercise the power to tax Paseo Realty vs CA Pelizloy Realty vs Province of Benguet

III. NATURE OF POWER OF TAXATION i. Inherent prerogative of the sovereignty a. Basis: Lifeblood theory The existence of the state is necessary If the government will not collect tax it becomes useless because it wont have any money to finance its own operations b.

Manifestations Tax can be imposed even absence of constitutional provision The state can select the object and subject matter of taxation thus unlimited No injunction in the collection of taxes, as a general rule, unless you have a pending case filed in the CTA to enjoin the collection of tax. Taxation is not subject to set-off or off-set. (Domingo vs Cardigon: although general rule in taxation there is no off-setting, but when it is due and demandable and has been fully liquidated, there can be offsetting. Will be discussed later) As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to its constituency who are to pay it. Nevertheless, it is circumscribed by constitutional limitations. Concurring and Dissenting Opinion of Justice Leonen (Manila Memorial Park)

ii. Legislative in Character a. Basis Taxes are a grant of the people who are taxed and the grant must be made by the immediate rep of the people It should be our representatives who must levy and impose the tax All revenue appropriations must originate in the house of representatives (constitutional provision) General Rule: cannot be delegated Exception: o Local taxes by Local Government Units thru the Local government code (Actually the constitution provides that taxation must be delegated to LGUs but the congress merely set out the limitations) o Flexible tariff clause o Administrative regulation (assessment and collection) b.

Scope: To determine— 1. Purpose(s) must be for a public purpose The courts can inquire into whether the purpose is really public or private. Judicial action is limited only to a review where it involves: (a) the determination of the validity of the tax in relation to constitutional precepts or provisions; or (b) the determination in an appropriate case of the application of a tax law. 2.

Subjects and objects of taxation (within its jurisdiction) refer to the coverage and the kind or nature of the tax. They may be persons, (natural/juridical); property (real/personal, tangible/intangible); businesses, transactions, rights, or privileges. Inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation so long as such exemption is reasonable and not arbitrary.

3.

Amount and rate of tax

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As a general rule, the legislature may levy a tax of any amount or rate it sees fit. If the taxes are oppressive or unjust, the only remedy is the ballot box and the election of new representatives. Constitutionally, “the rule of taxation shall be uniform and equitable.”

4.

Kind of tax to be collected

5.

Apportionment of the tax

6.

Manner and mode of enforcement and collection

7.

8.

Situs of taxation you have to consider the nature of the taxes. Example: Community tax - Residence of the taxpayer; Real property tax - Location of the property. We can only impose property tax on the properties of a person whose residence is in the Philippines. Grant tax exemption or condonation

9.

Provision of administrative and judicial remedies that may be availed by the taxpayers and government

Q: Can the mayor impose tax? A: No. only the sangunian. In short in so far as local government units are concerned, imposition of taxes are still made by the legislative branch—sangunians. iii. Subject to constitutional and inherent limitations

IV. BASIS OF TAXATION -

Necessity Theory: existence of state is a necessity therefore there is a need to levy and impose taxes for the countenance of the state, to defray the expenses. i. Necessity to serve the people ii. Necessity to protect the people

V. IMPORTANCE OF TAXES (Lifeblood Doctrine) VI. THEORIES OF TAXATION i. Lifeblood Theory Taxes are lifeblood of the government and should be collected without hindrance. It is said that taxes are what we pay for a civilized society, without taxes, the government will be paralyzed for the lack of motive to operate. CIR vs Metro Star Superama Inc. But even if we concede as to the indispensability of taxation, it is a requirement in all democratic regime that it be exercised reasonably and in accordance with the prescribed procedure. (Prescriptive Periods to assess/collect) ii. Necessity Theory iii. Benefits received Theory/Reciprocity Theory/Symbiotic Theory (Doctrine of Symbiotic Relationship) a. Support by the taxpayers b. Protection and benefits by the government Atty. A: Mutual Benefits; There exist reciprocal duties of protection and support between the state and its inhabitants. TAKE NOTE: state and inhabitants, not citizens, because even if you’re an alien and an inhabitant here, you are still taxed. The protection is in the form of security (either tangible/intangible aspects)

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Societas Spectra Legis Taxation Law 1 Compilation VII. PURPOSE AND OBJECTIVE OF TAXATION i. 4 R’s of Taxation a. Revenue b. Redistribution c. Re-pricing—i.e. sin taxes, as a way to change behavior d. Representation—demand for accountability from the government on taxes collected ii. Primary: Revenue Raising iii. Secondary: Non-revenue Raising a. Regulation—e.g. to protect local industries against unfair competition Holmes Dictum: McCulloch vs Maryland  The power of taxation involves the power to destroy Marshall Dictum: Panhandle Oil vs Mississippi  The power of taxation does not involve the power to destroy as long as this (SC) court sits How are they reconciled? Reyes vs Almanzor  The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights, both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to destroy while this Court sits.” So it is in the Philippines.  In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That would be a clear abuse of power.  The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different both in the privileges conferred and the liabilities imposed.  Verily, taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxations, which is the promotion of the common good, may be achieved. Consequently, it stands to reason that petitioners who are burdened by the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of social justice should not now be penalized by the same government by the imposition of excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties. b.

Promotion of general welfare—implementation of the police power - primary purpose is police power; secondary purpose is power of taxation - power of taxation can be a tool in exercising police power

c.

Reduction of social inequalities (redistribution) progressive system of taxation prevents the undue concentration of wealth in the hands of a few individuals. Progressivity is the keystone on the principle that those who are able to pay, shoulders the bigger portion of the tax burden.

d.

Encourage economic growth by granting incentives and exemptions, giving lower taxes encourage business investments; i.e. PEZA, IT Park, Cebu Business Park – given lower tax rates

e.

Protectionism to protect local industries from foreign competition.

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Societas Spectra Legis Taxation Law 1 Compilation VIII. SCOPE OF TAXATION i. Unlimited unlimited with regards to the object or subject of the power of taxation subject to the inherent limitations ii. Comprehensive iii. Plenary iv. Supreme Pepsi Cola vs Municipality of Tanauan  The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent government, without being expressly conferred by the people. It is a power that is purely legislative and which the central legislative body cannot delegate either to the executive or judicial department of the government without infringing upon the theory of separation of powers.  The exception, however, lies in the case of municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in respect of matters of local concern. This is sanctioned by immemorial practice. By necessary implication, the legislative power to create political corporations for purposes of local self-government carries with it the power to confer on such local governmental agencies the power to tax.  Under the New Constitution, local governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local taxation. Tio vs Videogram Regulatory Board  a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. The power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation.  The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization that earnings of videogram establishments of around P600 million per annum have not been subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers for every videogram they make available for public viewing. It is similar to the 30% amusement tax imposed or borne by the movie industry which the theater-owners pay to the government, but which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly on all videogram operators.  The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry, the tax remains a valid imposition.  The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the tax was to favor one industry over another. It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation". Taxation has been made the implement of the state's police power.  At bottom, the rate of tax is a matter better addressed to the taxing legislature.

IX. ASPECT OF TAXATION i. Levy or Imposition (Legislation) refers to the enactment of a law by Congress, imposing a tax Need to determine who will be taxed, how much will be taxed, the manner of collecting the tax, who has the responsibility in the levy or imposition of the tax ii. Assessment applying the law passed by congress to the specific person, property or activity covered by it. Assess/compute how much is the tax iii. Collection  Agencies Involved: -

BIR

-

BOC

-

Provincial, City, and Municipal Assessor and Treasurers

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Societas Spectra Legis Taxation Law 1 Compilation *In Assessment and Collection, it is considered the administration of tax wherein the administration and implementation of the tax law by the executive department through administrative agencies; assessment and collection. * Only Levy must be done by the legislative. The other may be delegated to others like BIR and Bureau of Customs. iv. Payment Taxpayer’s responsibility

X. BASIC PRINCIPLE OF A SOUND TAX SYSTEM (F-A-T-E) i. Fiscal Adequacy means that the sources of revenue, that is, receipts therefrom, taken as whole, should be sufficient to meet the demands of public expenditure. It means also that the revenues should be elastic or capable of expanding or contracting annually in response to variations in public expenditures. ii. Theoretical Justice or Equity – Ability to pay doctrine (Sec. 28(1), Art. VI, 1987 Consti) means that the tax burden should be distributed in proportion to the taxpayer’s ability to pay. Similarly situated taxpayers should pay equal taxes, while those who have more should pay more. Taxation should be uniform as well as equitable. Most important principle; if tax law does not adhere to theoretical justice it is defective and void; without fiscal adequacy, administrative feasibility and economic efficiency the tax law is merely defective but does not make it void. iii. Administrative Feasibility means that tax laws should be capable of conveniently, effectively enforced by the government a question of cost-benefit assessment and collection must not be more costly than what can be collected and assessed (i.e. if all taxpayer’s will be audited, it will be costly. Thus, taxpayer’s are grouped into big and (small) taxpayers; it is not feasible for the government to audit all taxpayers) iv. Economic Efficiency combination of fiscal adequacy and administrative feasibility to make sure that the economy will be stable.

XI. TAXATION DISTINGUISHED FROM POLICE POWER AND EMINENT DOMAIN As to purpose

Taxation The property (generally money) is taken for the support of the government.

Eminent Domain The property is “taken” for public use; it must be compensated

-to raise revenue

-facilitate the state’s need for property for public purpose -none; there is just compensation

Amount of exaction

-unlimited

As to benefits

-direct/indirect benefit; tangible or intangible -cannot impair existing contracts

-there is direct benefit in the form of just compensation; - cannot impair existing contracts

It is assumed that the individual receives the equivalent of the tax in the form of protection and

He receives the market value of the property taken from him.

As to nonimpairment of contracts As to compensation (benefits)

Police Power The use of the property is “regulated” for the purpose of promoting the general welfare; it is not compensable.

-limited to the cost of rendering the service (license-payment must only cover the cost) -GR:no direct benefit

-can impair existing contracts The person affected receives indirect benefits as may arise from the maintenance of a

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Societas Spectra Legis Taxation Law 1 Compilation

As to persons affected

As to the authority which exercises the power

benefits he receives from the government. Operates upon (1) A community; or (2) Class of individuals. May be exercised only by the government or its political subdivisions.

As to the amount of imposition (amount of exaction)

Generally, there is no limit on the amount of tax that may be imposed.

As to the relationship to the Constitution

Is subject to certain constitutional limitations. -inherent

Effect

Including the prohibition against impairment of the obligation of contracts.

Operates on an individual as the owner of a particular property. May be: (1) Exercised by the government or its political subdivisions; (2) Granted to public service companies or public utilities. No amount imposed but rather the owner is paid the market value of property taken. Inferior to the impairment prohibition; government cannot expropriate private property, which under a contract it had previously bound itself to purchase from the other contracting party. -inherent There is a transfer of the right to property.

healthy economic standard of society. Operates upon (1) A community; or (2)Class of individuals. May be exercised only by the government or its political subdivisions.

Amount imposed should not be more than sufficient to cover the cost of the license and necessary expenses. Relatively free from constitutional limitations. -inherent

Is superior to the impairment of contract provision.

Planters Products vs FertiPhil  The LOI is still unconstitutional even if enacted under the police power; it did not promote public interest.  Taxes are exacted only for a public purpose. The P10 levy is unconstitutional because it was not for a public purpose. The levy was imposed to give undue benefit to PPI.  An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. 46 The reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose. As an old United States case bluntly put it: "To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation."47  The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, lowcost housing and urban or agrarian reform. Atty. A: there is also a discussion here on the use of the power of taxation to implement the police power.  Police power and the power of taxation are inherent powers of the State. These powers are distinct and have different tests for validity. Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order 39 to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose. The University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation. The "lawful 40 subjects" and "lawful means" tests are used to determine the validity of a law enacted under the police power. The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.  We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation power. While it is true that the power of taxation can be used as an implement of police power,41 the primary purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Atty. A: there is also a discussion here class on Motor Vehicle registration fee and chauffeur’s license fee. Pwede bya ni mugawas sa MCQ, dba?  Taxation may be made the implement of the state's police power. If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motor vehicle as a "tax or fee." x x x Simply put, if the exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to be revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration fee and chauffeurs’ license fee. Such fees are to go into the expenditures of the Land Transportation Commission as provided for in the last proviso of Sec. 61. Atty. A: Motor vehicle registration fee and chauffeur’s license fee are power of taxation, whereas the special permit fee and additional fee for change of registration, because it’s just minimal, hence an example of exercise of police power. These are some things class that you have to remember. CIR vs Central Luzon  the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.  The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public 78 interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit.  As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs 79 to cope with the reduction in its revenues. 80  Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are 81 82 but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. Atty. A: who won in this case? Central Luzon. In short, Central Luzon was given the refund. Just a quick background, the last 3 cases— Central Luzon, Superdrug and Manila Memorial park—are inter-related cases. For the Central Luzon case, this happened when the Senior Citizens Act was not yet expanded and it provided that the discount can still be claimed as tax credit. But later on (referring to the 2 later cases), we will realize that Congress change it. Instead as tax credit, the tax deduction scheme is changed and the discount was deducted to the gross sales as part of the COS (Cost of Sales). In short, this case (Central Luzon) is already not controlling. Carlos Superdrug Corp. vs DSWD (expanded Seniors Citizen Act)  the law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax deduction.  The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to underscore its University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible response to conditions and 22 circumstances, thus assuring the greatest benefits. Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs." 23 It is "[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of the commonwealth, 24 and of the subjects of the same."  For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the primacy of police power because property rights, though sheltered by due process, must yield to general welfare.  The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of the business. While the Constitution protects property rights, petitioners must accept the realities of business and the State, in the exercise of police power, can intervene in the operations of a business which may result in an impairment of property rights in the process. Atty. A: Ingun sila (Superdrug Corp.) nga alkansi mi because there is no just compensation of the discount we give to the senior’s citizen kay dili peso-to-peso deduction. But then in this case the SC declared that the basic reason of the passage of the Senior Citizens Act is social justice, general welfare of the senior citizens. And the power that is actually exercised is not the power of eminent domain but it’s the police power. But it was not reconciled in this case, conflicting ang decision sa Central Luzon and Superdrug. So take note ha? In the Central Luzon, it was declared eminent domain and the existing law there was tax credit pa tu. Here in this case, it was declared police power and the existing law is that the 20% discount will be deducted as part of the cost. Do you follow? So SC reconciled these 2 cases in Manila Memorial Park case. Manila Memorial Park vs Sec. of DSWD  A fair reading of Carlos Superdrug Corporation52 would show that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted.  In the exercise of police power (as distinguished from eminent domain), although the regulation affects the right of ownership, none of the bundle of rights which constitute ownership is appropriated for use by or for the benefit of the public. On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied to some public purpose which necessitates the payment of just compensation therefor. Normally, the title to and possession of the property are transferred to the expropriating authority. Examples include the acquisition of lands for the construction of public highways as well as agricultural lands acquired by the government under the agrarian reform law for redistribution to qualified farmer beneficiaries.  We now look at the nature and effects of the 20% discount to determine if it constitutes an exercise of police power or eminent domain. The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably spent the productive years of their lives on contributing to the development and progress of the nation. As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords preferential concern. 76  In turn, this affects the amount of profits or income/gross sales that a private establishment can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability of a private establishment. However, it does not purport to appropriate or burden specific properties, used in the operation or conduct of the business of private establishments, for the use or benefit of the public, or senior citizens for that matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or income/gross sales that such private establishments may derive from, senior citizens.  The 20% discount may be properly viewed as belonging to the category of price regulatory measures which affect the profitability of establishments subjected thereto. On its face, therefore, the subject regulation is a police power measure.  we find that there are at least two conceivable bases to sustain the subject regulation’s validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress may have legitimately concluded that business establishments have the capacity to absorb a decrease in profits or income/gross sales due to the 20% discount without substantially affecting the reasonable rate of return on their investments considering (1) not all customers of a business establishment are senior citizens and (2) the level of its profit margins on goods and services offered to the general public.  Concurrently, Congress may have, likewise, legitimately concluded that the establishments, which will be required to extend the 20% discount, have the capacity to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may sustain because of sales to senior citizens, can be recouped through higher mark-ups or from other products not subject of discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or unduly oppressive. In sum, we sustain our ruling in Carlos Superdrug Corporation 88 that the 20% senior citizen discount and tax deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary, oppressive or confiscatory. Atty. A: How did SC settled the arguments of the petitioners? Nagpalaban lng ang SC sa nature of taxation that its plenary in nature. So the SC said that you cannot do anything about it because that’s the decision of the legislative in exercising the power of taxation. Such that, being plenary, they can decide what tax deduction scheme they want to adapt. Dba? And in this case, it was cleared out University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation that the 20% senior citizen discount was an exercise of police power. Unsa pa man imu nakat-unan in this case? The central Luzon case was a mere obiter dictum.

XII. TAXES, DEFINED TAX enforced proportional contributions from persons and property levied by the lawmaking body of the State by virtue of its sovereignty for the support of government and for all public needs. DIFFERENT KINDS OF TAXES i. INTERNAL REVENUE TAXES (provided under NIRC) Income tax Business tax Transfer tax Donors and estate tax Percentage tax Excise tax Documentary stampt tax ii. LOCAL/MUNICIPAL TAXES provided under the LGC iii. TARIFF AND CUSTOMS DUTIES provided under the TCC iv. TAXES AND TAX INCENTIVES UNDER SPECIAL LAWS common example: PEZA law which provides 5% tax in lieu of all taxed for businesses catered within its territory.

XIII. ESSENTIAL CHARACTERISTICS AND ATTRIBUTES OF TAXES (please memorize)  for a tax to be valid, it must have all these essential characteristics i. ENFORCED CONTRIBUTION A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent, open or implied, or the person taxed. ii. GENERALLY PAYABLE IN MONEY  can you go the BIR and pay tax in kind? NO. GR: it must be payable in money. Exception: Backpay Certificate; Tax Credit Certificate iii. PROPORTIONATE IN CHARACTER Taxpayer’s ability to pay (the more you have, the more you should pay) Take note: proportionate is not progressive (we will discuss this later on) iv. LEVIED ON PERSON, PROPERTY OR THE EXERCISE OF A RIGHT OR PRIVILEGE v. LEVIED BY THE STATE WHICH HAS JURISDICTION OVER THE SUBJECT OR OBJECT OF TAXATION vi. LEVIED BY THE LAWMAKING BODY OF THE STATE vii. LEVIED FOR PUBLIC PURPOSE/S Requisites of a Valid tax (PUJ-DL / ang ma.jeep ma-dean’s lister) a) it must be for public purpose b) the rule on taxation should be uniform when we talk about uniform, it should be for the same tax, same subject or object, and should belong to the same class. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation c) d) e)

Either the person the property taxed must be within the jurisdiction of the taxing authority That the assessment and collection be in consonance with the due process clause The tax must not fringed the inherent and constitutional limitations of the power of taxation

XIV. CLASSIFICATION OF TAXES i. AS TO SUBJECT MATTER OR OBJECT 1) Personal, poll or Capitation tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation of business which they may be engaged. Being personal, you cannot shift the burden to another person. Ex. Community tax 2) Property Levied on the property. Ex. Real property tax 3) Excise A charge imposed upon the performance of an act for the enjoyment of the privilege or the engagement in an occupation. ii. AS TO WHO BEARS THE BURDEN 1) Direct tax for which the taxpayer is directly or primarily liable or which he cannot shift to another. 2) Indirect tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another iii. AS TO DETERMINATE OF AMOUNT 1) Specific tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement so long as the item falls within the classification being taxed then it is subject to that particular tax; no need for an appraisal 2) Ad valorem tax of a fixed proportion of the value of the property with respect to which the tax is assessed since this involves the value of the property, it needs an appraisal by appraisers iv. AS TO PURPOSE 1) General, fiscal or revenue tax imposed for the general purposes of the government and to raise revenue for governmental needs. 2) Specific or regulatory tax imposed for a special purpose. To achieve some social or economic and irrespective of whether revenue is actually generated raised or not. v. AS TO THE SCOPE OR AUTHORITY IMPOSING THE TAX 1) National Imposed by the national government. To be specific, it is imposed by the legislative department and implemented by the executive department through the BIR. 2) Municipal or local It must be provided in the LGC and is imposed by the local executive body, Sangguniang Panglungsod or Panlalawigan. vi. AS TO GRADUATE OR RATE 1) Proportion Tax is based on a fixed percentage of the amount of the property, receipts, or other basis to be taxed. Ex: real estate tax 2) Progressive The tax rate increases as the tax base or bracket increases 3) Regressive The tax rate decreases as the tax base or bracket increases

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Societas Spectra Legis Taxation Law 1 Compilation XV. TAXES DISTINGUISHED FROM OTHER IMPOSITIONS (From Tiu Notes) i. LICENSE OR PERMIT FEE

Purpose Basis Amount

Time of payment Effect of nonpayment Surrender

Tax Imposed for revenue purposes Imposed under the power of taxation No limit as to the amount of tax

Normally paid after the start of business Failure to pay the tax does not make the business illegal

License Fee Imposed for regulatory purposes Imposed under the police power of the State Amount of license fee that can be collected is limited to the cost of the license and the expenses of police surveillance and regulation Normally paid before the commencement of the business Failure to pay a license fee makes the business illegal

Taxes, being the lifeblood of the State, cannot be surrendered excepts for lawful considerations

License fee may with or without consideration

Tax Enforced proportional contributions from persons and property

Toll A sum of money for the use of something, a consideration which is paid for the use of a property which is of a public nature; e.g., road, bridge A demand of proprietorship Amount of toll depends upon the cost of construction or maintenance of the public improvement used May be imposed by the government or private individuals or entities

ii. TOLL FEE

Definition

Basis Amount

A demand of sovereignty No limit as to the amount

Authority

May imposed only by the government

iii. COMPROMISE PENALTY

Definition

Purpose Authority

Tax Enforced proportional contributions from persons and property Intended to raise revenue May be imposed only by the government

Penalty Sanction imposed as a punishment for violation of a law or acts deemed injurious; violation of tax laws may give rise to imposition of penalty Designed to regulate conduct May be imposed by: (a) Government; or (b) Private individuals or entities

iv. SPECIAL ASSESSMENT

Definition

Basis Subject

Tax Enforced proportional contributions from persons and property Based on necessity Levied on:

Special Assessment An enforced proportional contribution from owners of lands especially benefited by public improvements Based wholly on benefits Levied only on land

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Societas Spectra Legis Taxation Law 1 Compilation

Scope

(a) Persons; (b) Property; or (c) Acts. Has general application

Person Liable

It is a personal liability of the taxpayer

It is exceptional both to the time and place Not a personal liability of the person assessed; his liability is limited only to the land involved

Republic vs Bacolod  The purpose of s special assessment is to finance the improvement of particular properties, with the benefits of the improvement accruing or inuring to the owners thereof who, after all, pay the assessment. The purpose of an ordinary tax, on the other hand, is to provide the Government with revenues needed for the financing of state affairs. Thus, while the refusal of a citizen to pay his ordinary taxes may not indeed be sanctioned because it would impair government functions, the same would not hold true in the case of a refusal to comply with a special assessment. v. DEBT

Basis Effect of nonpayment

Mode of payment Assignability

Interest Authority Prescription

Tax Based on law Taxpayer may be imprisoned for his failure to pay the tax (except poll tax) Generally payable in money Not assignable

Does not draw interest unless delinquent Imposed by public authority Prescriptive periods for tax are determined under the NIRC

Debt Based on contract or judgement No imprisonment for failure to pay a debt

May be payable in money, property or services Can be assigned (you can let the other person pay the debt on your behalf) Draws interest if stipulated or delayed Can be imposed by private individuals Civil code governs the prescriptive period of debts

vi. SUBSIDY A sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive. a pecuniary aid or directly granted by the government to an individual or private commercial enterprise deemed beneficial to the public. Tax, on the other hand, not given or granted by the government, rather, it is collected by the government form its inhabitants. vii. REVENUE refers to all the funds or income derived by the government, whether from tax or from whatever source and whatever manner viii. INTERNAL REVENUE taxes imposed by the legislature other than duties on imports and exports. ix. CUSTOMS DUTIES taxes imposed on goods exported from or imported into a country. x. TARIFF customs duties, toll, or tributes payable upon a merchandise to the government. Atty. A: what is important here, from no. 1 to no. 10, of the things enumerated is that all are not considered taxes. If they are not considered taxes then it is not a requirement that those enumerated should be for PUJ-DL (the requirements for a valid tax).

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Societas Spectra Legis Taxation Law 1 Compilation XVI. LIMITATION OF THE POWER OF TAXATION i. INHERENT LIMITATIONS 1. Public purpose The term "public purpose" is not defined. It is an elastic concept that can be hammered to fit modern standards. Jurisprudence states that "public purpose" should be given a broad interpretation. It does not only pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform. Planters vs Fertiphil General rule, public money can only be spent for a public purpose. Although private individuals are directly benefited, the tax would still be valid provided that such benefit is only incidental. Pascual vs Sec. of Public Works Determination that tax is for a public purpose:  Proceeds of the tax must be use for the support of the government, specifically on its governmental function  Proceeds of the tax must be for any of the recognized objects of the government  Proceeds of the tax must be to promote the welfare of the community Atty. A: As long as there is still link to the public welfare, the purpose is still public. The test is not as to who receives the money but the character of the purpose of which it is expected and not the immediate result of the expenditure but rather the ultimate result. For you to determine if its public purpose, it must be reckoned on the date when the law is passed. CASES: (for public purpose although it is for a specific industry) Lutz vs Araneta  Analysis of the Act will show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the police power.  sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain.  the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power.  it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation". Atty. A: Why only those people engaged in the sugar industry business will be the one to carry the burden of paying the tax? So long as there is valid classification, even if it would result to inequality to some people or affect individuals, the law cannot be considered invalid per se. These people in the sugar industry business are the ones who will directly benefit from the said imposition of tax. Ormoc Sugar Co. vs Conejos  The point remains to be determined, however, whether constitutional limits on the power of taxation, specifically the equal protection clause and rule of uniformity of taxation, were infringed.  The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause applies only to persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2) these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to future conditions which are University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation substantially identical to those of the present; (4) the classification applies only to those who belong to the same class.  A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon. Caltex vs COA  money due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to collect petitioner's indebtedness to the Oil Price Stabilization Fund (OPSF).  Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police power of the state.  There can be no doubt that the oil industry is greatly imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may properly address.  Also, a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Atty. A: As a general rule, there can be no offsetting of tax payables, unlike debts. We will discuss this more as we go forward. Aside from this, the SC discussed whether OPSF is a public purpose or not, it ruled that it is still for public purpose (ang reason kay highlighted above). Lastly, you have to remember on the Consti provision Art. 6, Sec. 29(3). TAKE NOTE: Art. VI, Sec. 29 (3) of the Consti: All money collected on any tax levied for a special purpose shall be treated as a special fund and paid out for such purpose only. If the purpose for which a special fund was created has been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the Government.

1) 2) 3) 4)

CONCEPTS RELATIVE TO PUBLIC PURPOSE Inequalities resulting from the singling out of one particular class for taxation or exemption must infringe no constitutional limitation An individual taxpayer need not derive direct benefits from tax Public purpose is continually expanding, areas formerly left to private initiative are now maybe undertaken by the government, if it is to meet the increasing social challenges of the time. Ex: Senior Citizens discount Public pupose is determined at the time of the enactment of the tax law and not at the time its implementation.

What is a TAXPAYER’S SUIT? Basically, you’re questioning whether the public money is used for public purpose or not. It’s a case where the act complained of is directly involved in the illegal disbursement of public funds. However, the public funds must be derived from taxation. Taxpayers have sufficient interest of preventing the illegal expenditures of money raised by taxation, although this does not apply to donations and contributions made by public individuals or private entities. A taxpayer is not relieved from the obligation of paying tax because for his belief that it is being misappropriated by certain officials. A taxpayer has no legal standing to question executive acts that do not involve the use of public funds. Gonzales vs Marcos Lozada vs COMELEC  As taxpayers, petitioners may not file the instant petition, for nowhere therein is it alleged that tax money is being illegally spent. The act complained of is the inaction of the COMELEC to call a special election, as is allegedly its ministerial duty under the constitutional provision above cited, and therefore, involves no expenditure of public funds. It is only when an act complained of, which may include a legislative enactment or statute, involves the illegal expenditure of public money that the so-called taxpayer suit may be allowed. Q: If the government receives a donation from Henry See and Henry See specified that his donation will be used for the University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation construction of a hospital named after him. Can you file a taxpayer’s suit questioning why the hospital should be named in favor of the Donor? A: No, because although the donation became a public fund, the source of it is not from taxation but rather from donation. 2.

Non-delegation of the legislative power to tax the power of taxation is peculiarly and exclusively belongs to the legislative, therefore it may not be delegated, as a rule. General Rule: the power of taxation is vested to the legislative branch of the government and it cannot be delegated to other branches of government. Exception:  President  LGU  Administrative units Powers which cannot be delegated: (these powers lies exclusively under the legislative department) o the determination of the subject to be taxed o purpose the tax o amount of rate of the tax o manner, means and agencies of collection o prescription of the necessary rules with respect thereto TAKE NOTE: what cannot be delegated strictly is the imposition or the levy of tax. While administration, collection and regulation can be delegated by the legislature. And in the Phis., it is already been delegated to the BIR. EXCEPTIONS: 1) Delegation to the President Flexible Tariff clause provided under Sec. 401(a) of TCC which states that:  In the interest of national economy, general welfare and/or national security, and subject to the limitations herein prescribed, the President, upon recommendation of the National Economic and Development Authority (hereinafter referred to as N EDA), is hereby empowered: (1) to increase, reduce or remove existing protective rates of import duty (including any necessary change in classification). The existing rates may be increased or decreased to any level, in one or several stages but in no case shall the increased rate of import duty be higher than a maximum of one hundred (100) per cent ad valorem; (2) to establish import quota or to ban imports of any commodity, as may be necessary; and

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2)

(3) to impose an additional duty on all imports not exceeding ten (10) per cent ad valorem whenever necessary: Provided : That upon periodic investigations by the Tariff Commission and recommendation of the NEDA, the President may cause a gradual reduction of protection levels granted in Section One Hundred and Four of this Code, including those subsequently granted pursuant to this section. who passed this TCC? Diba Congress. So the congress even made guidelines for the president in exercising such power.

Delegation to LGU Our Constitution, under Art. X, Sec. 5, provides:  Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. But this provision is not enough so the Congress passed the LGC which embodies the guidelines on how to exercise such power. Basco vs PAGCOR  A mere Municipal corporation has no inherent right to impose taxes. Thus, "the Charter or statute must plainly show an intent to confer that power or the municipality cannot assume it". Its "power to tax" therefore must always yield to a legislative act which is superior having been passed upon by the state itself which has the "inherent power to tax".

University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation  "municipal corporations are mere creatures of Congress" which has the power to "create and abolish municipal corporations" due to its "general legislative powers". Congress, therefore, has the power of control over Local governments. And if Congress can grant the City of Manila the power to tax certain matters, it can also provide for exemptions or even take back the power. 3)

3.

Delegation to the Administrative Bodies BIR and Bureau of Customs

Exemption from taxation of government entities So long as the government is performing its governmental functions, there will be no tax. But if the government is performing a proprietary function, it is taxable. Proprietary function: when the property is rented out to another entity for commercial/business purposes (Phil. Lung Center case). Exemption applies only to governmental entities thru which the government immediately and directly exercises its sovereign power. Meaning those gov’t entities that are exercising governmental functions. NDA vs Cebu City  The Republic, like any individual, may form a corporation with personality and existence distinct from its own. The separate personality allows a GOCC to hold and possess properties in its own name and, thus, permit greater independence and flexibility in its operations. It may, therefore, be stated that tax exemption of property owned by the Republic of the Philippines "refers to properties owned by the Government and by its agencies which do not have separate and distinct personalities (unincorporated entities).  GOCC with original charter (attached to the gov’t; unincorporated) – exempted from tax  GOCC with special charter (personality distinct from the gov’t) – subject to tax  In this case, NDA is exempted from tax because it does not have a separate personality from the gov’t but rather its duty to administer the questioned reserved land, which is owned by the government and thus exempted from tax while the improvements, which were done by NDA, subject to tax. Atty. A: but remember here that what is exempted is real estate tax. So kung sa exam kay income tax ang g.ingun out of the rent of that land, that would be a different a story. GOVERNMENT ENTITIES EXEMPTED FROM INCOME TAX:  GSIS  SSS  PHIC  PCSO  PAGCOR (but not exempted from business tax) REASONS FOR EXEMPTION (why are they exempted):  So that it would not hinder in their operations

4.

International comity The property of a foreign state or government may not be taxed by another under the principle of sovereign equality among states by virtue of which one state cannot exercise its sovereign powers over another. This principle is based on any of the following grounds:  Sovereign equality among states – under international law by virtue of which one state cannot exercise it sovereign powers over another.  Usage among states – when one enters the territory of another, there is an implied understanding that the former does not intend to degrade its dignity by placing itself under the jurisdiction of the latter.  A foreign government may not be sued without its consent – it is useless to assess a tax since anyway it cannot be collected.

5.

Territorial jurisdiction A state may not tax property lying outside its border or lay an excise or privilege tax upon the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised. Persons, properties, businesses, activities, and other transactions within the territorial boundary of the State, which, and persons outside it, who, received benefits and protection from the government, are subject to tax. What about foreign embassy? Not subject to tax because they are considered extension of the sovereign of the foreign country they represent.

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Societas Spectra Legis Taxation Law 1 Compilation -

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PEZA, why give special tax rate when in fact they still within the territorial jurisdiction of the Philippines or the taxing authority? In a case it was explained that since it the legislature who exercises the power of taxation, it could choose to whom it may impose the tax and it can choose also to whom it will exempt or give special incentive insofar as taxation is concern. Property outside one’s jurisdiction does not receive any protection of the State. That’s the reason why these properties (foreign embassies, consulates, etc.) will not be subject to tax anymore in the Philippines. If the law is passed by the Congress, the Congress must see to it that the object or subject of taxation is within the territorial jurisdiction of the taxing authority.  Example: GROSS ORDER DOCTRINE(??? Wa ku sure sa name) which we apply under value-added taxation. Because in VAT, if importation—there will be VAT; if exportation—no VAT;

Atty. A: what will happen if the tax law violates the inherent limitation? What’s the consequence? VOID. Not just mere defective. IT’S VOID. ii. CONSTITUTIONAL LIMITATIONS 1. Direct a. Revenue bill must originate exclusively in the House but the Senate may propose with amendments – lawmaking process This is more on the law making process. To Remember: what will originate from the house is the BILL, not the law or the statute. What is the difference between a bill and a statute? When is it considered as statute? When it is already passed by the congress and bi-cameral committee, and/or approved by the president. The bill is just a proposition then it undergoes three (3) readings. Eventually if it passed in the House of Representative, it will be submitted in the senate. And there, they might have their own version. If they have their own version and if it is different form the one submitted, they will have to combine it and form a committee who will have to resolve it. Then if it passes to the senate, and then signed by the president, senate president and the speaker of the house. Then it became a statute. Tolentino vs Secretary of Finance  to insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same with the house bill would be to deny senate’s power not only to concur with amendments but also to propose amendments  This case involves the question on the validity of the VAT. One of the questions is that the VAT did not originate in the House of Representatives but rather, in the senate. SC explained that it is not the statute that must originate in the house but the BILL. Otherwise if you require that the statute must originate from the house, what would be the purpose for the statement regarding the senate’s power to propose amendments. The Constitution simply requires that there must be that initiative coming from the house of representatives relative to appropriation, revenue and tariff bills. The constitution does not also prohibit the filling in the senate of a substitute bill in anticipation of its receipt of the bill from the house as long as action by the senate is withheld until receipt of the bill coming from the house of representatives b.

Concurrence of a majority of ALL the members of Congress for the passage of a law granting tax exemption What is your idea of tax exemption? Tax exemption is given when the government withholds its power to enforce taxes. It is actually benefit or privilege given to a few. For example, the congress passes a law granting tax exemption and it was voted upon by majority of the members during the quorum (50% plus 1), is it a valid grant of tax exemption? NO, it must be voted by majority of ALL MEMBERS of congress not only of the quorum (actually this is vague because it does not specify whether all the members of both houses vote together or separately). Required for tax exemption is ABSOLUTE majority (majority of all the members) however if it refers to a law withdrawing any tax exemption it only requires RELATIVE majority (majority of the quorum) during the session. Tax exemptions, amnesties and refunds are considered in the nature of tax exemptions, a grant thereof needs the approval of the absolute majority of the members of congress.

c.

Rule of uniformity and equity in taxation Uniformity: it implies that “all taxable articles or properties of the same class shall be taxed at the same rate.” Equity: uniformity in taxation is effected through the apportionment of the tax burden among the taxpayers which under the Constitution must be equitable; based on the ability of the taxpayer to pay the tax.

d.

Progressive system of taxation

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Societas Spectra Legis Taxation Law 1 Compilation e.

tax laws shall place emphasis on direct rather than indirect taxation, with ability to pay as the principal criterion. As income increases, so as the tax rate Is progressive system of taxation directory or mandatory? It is merely directory not mandatory because we even have regressive taxes (ex. VAT) VAT – the lesser money you have the more you can feel the impact impact.

Exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from property taxation covers only property taxes and not other taxes; it is the use of the property that is exempt, not the ownership; property must be used actually, directly, and exclusively for religious, charitable, or educational purposes; exemption extends to facilities which are incidental to or necessary for the accomplishment of said purposes self-executing provision of the Constitution (Art. 6, Sec. 28[3]):  “(3) Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation.” Example: USC School building/area – exempt from property tax Reason: used for educational purpose Area rented by commercial establishments – taxable

Herrera vs QC  the exemption in favor of property used exclusively for charitable or educational purposes is "not limited to property actually indispensable" therefor, but extends to facilities which are "incidental to and reasonably necessary for" the accomplishment of said purposes, such as, in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns and residents", such as "athletic fields," including "a farm used for the inmates of the institution".  Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is, therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who come only for consultation.  "all lands, building and improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation," pursuant to the Constitution, regardless of whether or not material profits are derived from the operation of the institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon such "profits", but said "lands, buildings and improvements" are beyond its taxing power. Atty. A: But take note that this is now not controlling. This case lays down the rule on incidental use but this was decided under the 1935 Constitution which had no provision yet on “actually, directly and exclusively used”. Nganu imu man mi gipabasa ana sir nga di nmn d.i na controlling? Well, what if mugawas sa exam or mubalik? But of course, you base your answer on the recent ruling. Your reason will not be it is exempted because it’s incidental—that’s not anymore subsisting. but rather, you answer using the the Phil. Lung Center ruling. Philippine Lung Center vs QC  As a general principle, a charitable institution does not lose its character as such and its exemption from taxes simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or receives subsidies from the government, so long as the money received is devoted or used altogether to the charitable object which it is intended to achieve; and no money inures to the private benefit of the persons managing or operating the institution.  The fundamental ground upon which all exemptions in favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon the state to care for and advance the interests of its citizens.  Even as we find that the petitioner is a charitable institution, we hold that those portions of its real property that are leased to private entities are not exempt from real property taxes as these are not actually, directly and exclusively used for charitable purposes.  The tax exemption under this (Sec. 28(3), Art. 6) constitutional provision covers property taxes only. “What is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes." University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation  We note that under the 1935 Constitution, "... all lands, buildings, and improvements used ‘exclusively’ for … charitable … purposes shall be exempt from taxation.” However, under the 1973 and the present Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered exempt, the same should not only be "exclusively" used for charitable purposes; it is required that such property be used "actually" and "directly" for such purposes.  Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that: (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.  "Exclusive" is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively" without doing violence to the Constitutions and the law. 42 Solely is synonymous with exclusively.  What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. Atty. A: As you can observe, in the Herrera case, the meaning of “exclusive use” is the “principal” or “dominant” use. So long as it is related to the principal purpose, then it can be exempted. But here in Phil. Lung Center, “exclusively” here means it is synonymous to “solely”. Hence, to be exempted of real property taxation, it should be SOLELY for charitable purpose not just mere incidental to the principal purpose. So we follow the Phil. Lung Center case. Abra Valley College vs Aquino  while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose— educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education.  the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved. City Assessor of Cebu vs Association of Benevola de Cebu  We so hold that CHHMAC is an integral part of CHH.  It is undisputed that the doctors and medical specialists holding clinics in CHHMAC are those duly accredited by CHH, that is, they are consultants of the hospital and the ones who can treat CHH’s patients confined in it. This fact alone takes away CHHMAC from being categorized as "commercial" since a tertiary hospital like CHH is required by law to have a pool of physicians who comprises the required medical departments in various medical fields.  these physicians holding offices or clinics in CHHMAC, duly appointed or accredited by CHH, precisely fulfill and carry out their roles in the hospital’s services for its patients through the CHHMAC. The fact that they are holding office in a separate building, like at CHHMAC, does not take away the essence and nature of their services vis-à-vis the over-all operation of the hospital and the benefits to the hospital’s patients. Their transfer to a more spacious and, perhaps, convenient place and location for the benefit of the hospital’s patients does not remove them from being an integral part of the overall operation of the hospital.  Finally, respondent’s charge of rentals for the offices and clinics its accredited physicians occupy cannot be equated to a commercial venture, which is mainly for profit.  First, CHHMAC is only for its consultants or accredited doctors and medical specialists. Second, the charging of rentals is a practical necessity: (1) to recoup the investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to maintain the CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays the proper taxes for its rental income. And, fourth, if there is indeed any net income from the lease income of CHHMAC, such does not inure to any private or individual person as it will be used for respondent’s other charitable projects. 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Societas Spectra Legis Taxation Law 1 Compilation  Given the foregoing arguments, we fail to see any reason why the CHHMAC building should be classified as "commercial" and be imposed the commercial level of 35% as it is not operated primarily for profit but as an integral part of CHH. The CHHMAC, with operations being devoted for the benefit of the CHH’s patients, should be accorded the 10% special assessment. Atty. A: What is the difference then with the Herrera case and the City Assessor case? One thing is, the former was decided based on the 1935 Consti wherein we adhere to the principle that exclusivity means principal and dominant. That everything incidental to it, whether commercial or not, will be exempted. But in the latter, it was decided under the 1987 Consti wherein exclusivity means sole purpose and not primary purpose which means that even if it is incidental, so long as it is commercial, it is subject to tax. But na-counter lang nila (Chong Hua), they were able to prove that it was no commercial purpose. f.

Exemption of non-stock, non-profit education institution from taxation covers income, property, and donor’s taxes, and customs duties; the revenue, assets, property or donations must be used actually, directly, and exclusively for educational purposes; lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax whether the educational institution is proprietary or non-profit; we’re after of the USE of the property, not the ownership self-executing provision of the Constitution (Art. 14, Sec. 4[3,4])  “(3) Establish and maintain a system of scholarship grants, student loan programs, subsidies, and other incentives which shall be available to deserving students in both public and private schools, especially to the under-privileged; (4) Encourage non-formal, informal, and indigenous learning systems, as well as self-learning, independent, and out-of-school study programs particularly those that respond to community needs;” Example: USC (non-stock, non-profit) Rent income – taxable UC (proprietary) not exempted but given a special rate of 10% School building/area – exempted from property tax (under exemption E) Rent income of UC – taxable @ 30% (normal corporate income tax rate)

Atty. A: where educational institution is private and non-profit but a stock corporation, it is subject to income tax but a preferential rate of 10%. Same thing is true for charitable hospital/institution, it is subject to 10% income tax. Requisite for the application of the 10% preferential rate: 1) It must be private 2) It has permit to operate as an educational institution 3) It is non-profit 4) Its gross income from unrelated trade or business must not exceed 50% of its total gross income from all sources (otherwise, if it will exceed the 50%, it will be subject to the 30% corporate income tax rate) Atty. A: Para dali mahinumduman, for educational institution: (1) For non-stock and non-profit, no tax; (2) Even if it’s for profit, so long as it is an educational institution, preferential/special rate of 10%, provided the less than 50%...etc… However, the 10% preferential tax rate does not apply to the following: 1) The passive income derived by the educational institution, which is subject to final income tax. i.e. rent income or interest income 2) Engaged in unrelated trade or business or other activity with a gross income from such exceeds 50% of the total gross income derive by the school from all sources TAKE NOTE: where a donation is made in favor of an educational institution pursuant to sports competition or tournaments, the donor is also exempted from the payment of donor’s tax. Perpetual Succour Hospital vs CIR, CTA No. 7304, Dec. 1, 2010  when a hospital is proprietary, or private, which is not for profit and its gross income from unrelated trade, business University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation or other activity does not exceed 50% of its total gross income from all sources, it is subject to 10% tax rate. On the other hand, when a hospital is non-stock, meaning, its capital stock is not divided into shares, and is not authorized to distribute to the holders of such shares dividends, operated exclusively for religious or charitable purpose, no part of its net income or asset belong to or inure to the benefit of any specific person, then the hospital will fall under the provision of Section 130(E) of the NIRC of1997, as amended.  It is well settled, in this connection, that the admission of pay-patients does not detract from the charitable character of a hospital, if all its funds are devoted 'exclusively to the maintenance of the institution' as a 'public charity'. In other words, where rendering of charity is its primary object, and the funds derived from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will not deprive the hospital of its benevolent character. CIR vs CA  Is the Rental Income of the YMCA Taxable?  The rent income derived by YMCA from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members are taxable income.  the exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction.  The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes from the property of the organization taxable, regardless of how that income is used — whether for profit or for lofty nonprofit purposes.  For the YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said requisites.  YMCA is not an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution. The term "educational institution" or "institution of learning" has acquired a well-known technical meaning, of which the members of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term refers to schools. The school system is synonymous with formal education, which "refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to the higher levels." The Court has examined the "Amended Articles of Incorporation" and "By-Laws” of the YMCA, but found nothing in them that even hints that it is a school or an educational institution.  It is settled that the term "educational institution," when used in laws granting tax exemptions, refers to a ". . . school seminary, college or educational establishment . . . ." Therefore, the private respondent cannot be deemed one of the educational institutions covered by the constitutional provision under consideration.

2.

g.

Non-impairment from non-payment of a poll tax Sec. 20, Art. III, 1987 Consti: “No person shall be imprisoned for debt or non-payment of a poll tax.”

h.

Non-impairment of the jurisdiction of the SC in tax cases Sec. 5 (2)(b), Art. VIII: “The Supreme Court shall have the following powers: (2) Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of Court may provide, final judgments and orders of lower courts in: (b) All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.”

Indirect a. Due process of law Sec. 1, Art. III, 1987 Consti: “No person shall be deprived of life, liberty, or property without due process of law…” Substantive due process requires that a tax statute must be within the constitutional authority of Congress to pass it must be reasonable, fair and just; i.e. to grant exemption, the constitution mandates that it must be passed by a vote of ALL members of congress (absolute majority; not just those who are present)

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Societas Spectra Legis Taxation Law 1 Compilation Atty. A: therefore, everything nga mu-contradict with the direct constitutional limitations that we have discussed awhile ago, there is now infringement of your substantive due process. Procedural due process requires notice and hearing, or at least, an opportunity to be heard. INSTANCES OF VIOLATION OF DUE PROCESS: (please memorize) 1) Where the law is in violation of the inherent limitations 2) If the tax amounts to a confiscation of property Like if there is no valid classification for imposing the tax for that particular object or subject 3) if the subject of confiscation is outside the jurisdiction of the taxing authority 4) if the law which is applied retroactively imposes unjust and oppressive taxes 5) if the law is imposed for a purpose other than a public purpose POINTS TO REMEMBER WHEN IT COMES TO THE DUE PROCESS CLAUSE: 1) The validity of a statute may be contested only by one who sustained direct injury in consequence of its performance EXCEPT: transcendental importance; taxpayer’s suit 2) There must be proof of arbitrariness, otherwise, apply the presumption of constitutionality 3) Due process requires hearing before adoption of legislative rules by administrative bodies of interpretative rulings 4) Compliance of strict procedural requirements must be followed to avoid a collision course between the state’s power to tax and the individuals’ recognized rights 5) Due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations Chamber of Real Estate and Builder’s Associations vs Romulo  In Sison, Jr. v. Ancheta, et al., we held that the due process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure when it amounts to a confiscation of property. But in the same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer. There must be a factual foundation to such an unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character. b.

Equal protection of the laws Sec. 1, Art. III, 1987 Consti: “…nor shall any person be denied the equal protection of the laws.” All persons, all properties, all businesses should be taxed at the same rate so long as they belong to the same classification. This is where substantial distinction applies: that it must be real and not superficial What is prohibited is class legislation wherein there is no substantial distinction. CRITERIA FOR EQUAL PROTECTION: 1) When the law operates uniformly: on all persons under similar circumstances 2) All persons are treated in the same manner: the conditions not being different both in privileges conferred and the liabilities imposed favoritism and preferences are not allowed

People vs Cayat  Requirements for valid classification: (FC si SG/Feeling Close si Security Guard) 1) There must be a substantial distinction that make a real difference 2) It must be germane or relevant to the purpose of the law 3) It must apply not only to the present but also to future situation 4) the distinction must apply to persons belonging to the same class Chamber of Real Estate and Builder’s Associations vs Romulo University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation  The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like circumstances.”  The taxing power has the authority to make reasonable classifications for purposes of taxation. Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises. Ormoc Sugar vs Cornejos  A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as the entity to be levied upon. Tiu vs CA  Certainly, there are substantial differences between the big investors who are being lured to establish and operate their industries in the so-called "secured area" and the present business operators outside the area. On the one hand, we are talking of billion-peso investments and thousands of new, jobs. On the other hand, definitely none of such magnitude. In the first, the economic impact will be national; in the second, only local. Even more important, at this time the business activities outside the "secured area" are not likely to have any impact in achieving the purpose of the law, which is to turn the former military base to productive use for the benefit of the Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA 7227.  It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. As long as there are actual and material differences between territories, there is no violation of the constitutional clause. c.

Non-impairment of the obligations of contracts Sec. 10, Art. III, 1987 Consti: “No law impairing the obligation of contracts shall be passed.” General Rule: the power of tax is pursuant to law therefore the obligation to pay taxes is imposed by law. Thus, the non-impairment clause does not apply because the non-impairment here refers to obligations brought about by contracts, not law. Exception: the non-impairment clause applies when—  When the law merely provides for the fulfillment of an obligation  When the law merely recognizes or acknowledges the existence of an obligation created by acts(????di masabtan) Atty. A: only when the law establishes the obligation and also provides for its fulfillment that the law is the source of the obligation. TAKE NOTE: the constitutional guarantee of the non-impairment clause can only be invoked in the grant of tax exemption. RULES (para daw masabtan): If the exemption was granted for valuable consideration on the basis of a contract—cannot be revoked by passing another law If the exemption is granted by virtue of a contract between a private corporation and the gov’t—it cannot be revoked unilaterally by the gov’t If the basis of the tax exemption is mere franchise granted by Congress—it can be unilaterally revoked by the gov’t thru Congress

d.

Non-infringement of religious freedom Sec. 5, Art. III, 1987 Consti: “No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship, without discrimination or preference, shall forever be allowed. No religious test shall be required for the exercise of civil or political rights.” This provision has 3 coverage: (1) freedom to choose religion; (2) freedom to exercise one’s religion; (3) Prohibition upon the national government to establish a national religion; In relation to the power of taxation, what is prohibited is no. 3.

Swaggart case (US case)  The free exercise of religion clause does not prohibit imposing a generally applicable sales tax on the sale of religious University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation materials by religious organization.  The sale of religious articles can be subject to VAT, what cannot be taxed is the exercise of religious worship or activity.  The income of the priest from the exercise of a religious activity cannot also be taxed. e.

No appropriation for religious purposes As a general rule, no appropriation, except for salary or payment of priest or minister serving in AFP, penal insitutions, orphanage, and leprosarium. Q: Is the appropriation or budget given for the visit of the pope in the Philippines valid or a violation to the separation of the church and the state? A: It is valid. The Pope is a head of the state. Being a head of the state, the appropriation made by the government for the visit is justified.

f.

Non-infringement of the freedom of the press Sec. 4, Art, III, 1987 Consti: “No law shall be passed abridging the freedom of speech, of expression or of the press.” Focus of press freedom not expression: there is curtailment of press freedom and freedom of thought and expression if a taxed is levied in order to supress this basic right and impose prior restraint. Example: impose a very high tax in order to prevent the press or the freedom of expression – violates the constitutional provision, Non-infringement of the freedom of the press. However it does not mean that the press is exempted to tax. The press is subject to tax but the tax should be reasonable not oppressive, not arbitrary. The sale magazine or newspapers may be subject to taxation. What is not allowed is to impose tax on the exercise of an activity which has a connection with freedom of the press. For example: collection of license fees before one can exercise that freedom.

g.

Power of the President to veto any particular item/s in a revenue or tariff bill Sec. 27(b), Art. 6, 1987 Consti: “The President shall have the power to veto any particular item or items in an appropriate, revenue or tariff bill, but the veto shall not affect the item or items to which he does not object.” What type of veto? Particular or specific veto

XVII. SITUS OF TAXATION -

-

As a rule when it comes to persons , properties or activities it can only be taxed within the place of the taxing authority or within its territorial jurisdiction. Remember: look at the geographical location for jurial concept or nexus or bond between the taxing authority and the tax payer. Example: A Filipino resident citizen earning income abroad can still be a subject of tax in the Philippine not because of geographical location but due to the jural concept or nexus or bond between the taxing authority and the taxpayer. WHY is it important to know the situs/place of taxation? 1. To know it the taxing authority really has the authority to tax. 2. There are exceptions/exemptions which only applies to a specific locality.

Rules that need to be observe: 1. Poll/community tax – situs/place of taxation is the residence of the taxpayer regardless of citizenship. 2.

Property tax - real or personal a. Real property - lex rei sitae/ lex rei situs; levied in the country where the real property is located. b.

Personal property - principle mobilia sequuntur personam; movables follow the person; depends on the domicile of the owner of the property. i. Tangible ii. Intangible 1. EXCEPTION: Actual/Business situs – sec .104, RA 8424 (enumeration under) even if they are located outside of the Philippines, can still be subject to tax; or even if the owner are foreigners but they are located in the Philippines, they can still be subject to tax. Example: a. Franchise exercised in the Philippines even if the franchise owner/ franchise holder is not from the Philippines.

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Societas Spectra Legis Taxation Law 1 Compilation b.

Shares of stocks, obligations, bonds issued by domestic corporations: taxed in the Philippines

c.

Shares of stocks, obligations, bonds issued by the foreign corporation: 85% of its business is located in the Philippines; subject to tax in the Philippines

d.

Shares or right in a partnership business or industry established in the Philippines: taxed in the Philippines even if the holders or owners thereof are not Filipino.

e.

Shares, obligations, bonds issued by foreign corporations used which acquired business situs when sanction in the furtherance of the foreign corporation: taxed in the Philippines

*Even if owners are not domiciled in the Philippines they will still be taxed in the Philippine, subject to Reciprocity Rule (citizen of such country which grants exemption to the intangible personal properties Filipinos in their country will also be exempted). 3.

Business tax - place of business

4.

Excise tax - where the act is performed or the occupation is pursued.

5.

Sales tax – where the ale is consummated. Presumption: sale of personal property

6.

Income tax - to consider: a. Citizenship – the nationality theory b. Residence – the domiciliary theory c. Source – the source rule

7.

Transfer tax – donor’s or estate tax; residence or citizenship of the taxpayer or the location of the property; case to case basis

8.

Franchise tax – the state which granted the franchise

9.

Value- added tax – cross-border doctrine or destination principle - if the good/property is not to be consumed in the Philippines then it should not be taxed in the Philippines; treated differently form business tax and sales tax because it has a specific law applied to it..

10. Interest Income – the domiciliary theory - residence of the borrower who pays the interest irrespective of the place where the obligation was contracted, not the residence of the creditor.

XVIII. DOUBLE TAXATION i. Meaning of double taxation a. Strict Sense (direct duplicate taxation/direct double taxation)— (a) taxing twice, (b) by the same taxing authority, (c) within the same jurisdiction or taxing district, (d) for the same purpose, (e) in the same year [or taxing period], (f) some of the property in the territory. Both taxes must be imposed on the same property or subject matter. b.

Broad Sense (indirect duplicate taxation/indirect double taxation)— taxation other than direct duplicate. It extends to all cases in which there is a burden of two or more pecuniary impositions. Requisites for direct duplicate:  Same subject/ object is taxed twice  same purpose  imposed by the same taxing authority  within the same jurisdiction  within the same period  same kind or character of tax *if one is missing, it is indirect duplicate taxation which is valid.

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Societas Spectra Legis Taxation Law 1 Compilation ii. Instances of double taxation (a) A tax on a mortgage as personal property when the mortgaged property is also taxed at its full value as real estate; (b) A tax upon a corporation for its property and upon its shareholders for their shares; (c) A tax upon a corporation for its capital stock as a whole and upon the shareholders for their shares; (d) A tax upon depositors in a bank for their deposits and a tax upon the bank for the property in which such deposits are invested; (e) An excise tax upon certain use of property and a property tax upon the same property; and (f) A tax upon the same property imposed by two different states. o

Domestic double taxation– arises when the taxes are imposed by the local or the national government

o

International double taxation – imposition of comparable taxes in two or more states on the same taxpayer with respect to the same subject matter and for identical period  Allowed because they are imposed by different taxing authorities (domestic and international)  Measures allowed by the government are refund or credit, but not to declare it invalid. Ex: Manny Pacquiao – subject to income tax by US and Philippines

DOCTRINES of DOUBLE TAXATION:  Only direct double taxation is not allowed because it amounts to confiscation of property without due process of law. It violates the due process clause.  You can question the validity of double taxation if there is a violation of the equal protection clause, or equality or uniformity of taxation.  Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer. Situation: TJ owns a beer house. He pays sales/business tax as well as the local tax (ordinance) imposed on every bottle of beverage to be sold. Is there double taxation? Yes. There is indirect double taxation because it is imposed by different taxing authority and the purpose is different, one is the sales, the other is the fact of selling. Hence, it does not make the local ordinance invalid. Decided cases: there is only indirect double taxation a) Taxpayers with warehousing business although carried on in relation to the operation of its sugar central is a distinct and separate taxable business. –different subject, although the same owner. b) A license tax may be levied upon a business or occupation although the land or the property use in connection therewith is subject to property tax. – license tax applies to the business, property tax is for the land; different subject, object or purpose although the burden is carried by one entity. c) Both a license fee and a tax may be imposed in the same business or occupation for selling the same article. – license fee is not a tax d) When every bottle or container of intoxicating beverages is subject to local tax and at the same time the business of selling such product is also subject to liquor’s license. – different taxing authority and purpose. e) A tax imposed in both the occupation of fishing and the fish pond. – different object and subject. f) A local ordinance imposing a tax in the storage of copra where it appears that the finished products manufactured out of the copra is also subject to VAT. – different subject matter and purpose. To avoid indirect double taxation: Avail of: tax deductions, tax credits tax exemptions provided under the law enter treaties with other states iii. Constitutionality of double taxation a. General Rule: not prohibited by the Constitution, hence, it may not be invoked as a defense against the validity of a tax law. b.

Exemption: though not forbidden, it is not favored. Such taxation, it has been held, should, whenever possible, be avoided and prevented. Doubts as to whether double taxation has been imposed should be resolved in favor of the taxpayer to avoid injustice or unfairness. Where double taxation (in its narrow sense) occurs, the taxpayer may seek relief under the uniformity rule or the equal protection guarantee.

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Societas Spectra Legis Taxation Law 1 Compilation XIX. FORMS OF ESCAPE FROM TAXATION i. 6 Basic Forms (1) shifting (2) capitalization (3) transformation (4) evasion (5) avoidance, and (6) exemption. ii. Definition of Terms a)

Shifting, in general – process where the tax burden is transferred from the statutory taxpayer to another without violation the law; applicable only to indirect taxes like business taxes or percentage taxes. *statutory taxpayer- taxpayer required under the law to pay the tax or to remit the tax to the government. 1.

Impact of taxation– that point on which a tax is originally imposed. In so far as the law is concerned, the taxpayer is the person who must pay the tax to the government; referred to as the statutory taxpayer

2.

Incidence of taxation– that point on which the tax burden finally rests or settles down. It takes place when shifting has been effected from the statutory taxpayer to another or someone else who cannot pass the burden further. But there may be incidence without shifting, as in transformation. In case of business taxes, incidence of taxation falls on the final consumer. *direct taxes cannot be shifted – e.i. income tax

3.

Relations among impact, shifting and incidence – IMPACT- imposition of the tax; contain in the tax law; is the initial phenomenon SHIFTING - Transfer of the tax; is the intermediate process INCIDENCE - Setting or coming to rest of the tax; the burden finally settles down; is the result Thus, the impact of sale tax is on the seller (manufacturer) who shifts the burden to the customer who finally bears the incidence of the tax. Forward shifting – takes place when the burden of the tax is transferred from a factor of production through the factors of distribution until it finally settles on the ultimate purchaser or consumer; from manufacturer/producer to wholesaler, then to the retailer and finally to the consumer. – demand is greater than supply. e.i. VAT Backward shifting– effected when the burden of the tax is transferred from the consumer or purchaser through the factors of distribution to the factor of production. (discounting) –supply is greater than demand Onward shifting – occurs when the tax is shifted two or more time either forward or backward. Thus, a transfer form producer to consumer or from seller to purchaser involves one shift; from producer to wholesaler, then to retailer, we have two shifts; and if the tax is transferred again to the purchaser by the retailer, we have three shifts in all. b)

Capitalization– the reduction in the price of the taxed object equal to the capitalized value of future taxes which the purchaser expects to be called upon to pay; occurs when the tax falls on an income-producing property (e.g., commercial building). The buyer naturally takes into account the taxes that he will be paying on the property when he becomes the owner thereof in determining whether the price is reasonable or not. The burden of the tax rests on the present owner (seller) if he reduces the price because of the tax; may be considered as a special form of backward shifting except that while the latter involves the throwing back of a whole series of taxes (e.g., real estate taxes which are payable every year) and takes place before any of them, with the exception of the first is paid.

c)

Transformation– the method of escape from taxation whereby the manufacturer or producer upon whom the tax has been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax and endeavours to recoup himself by improving his process of production thereby turning out his units of products at a lower cost. In such a case, the loss occasioned by the tax may be offset by the gains resulting from the economics of production; the taxpayer escapes, not by shifting but by transforming the tax into a gain through the medium of production. (supply is greater than demand) illustration: videoke, the greater in number, the lesser is the cost(amot)

d)

Tax avoidance (tax planning or tax minimization) – the use by the taxpayer of legally permissible alternative tax rate or methods of assessing taxable property or income, in order to avoid or reduce tax liability. Here, the taxpayer uses tax saving device or means sanctioned or allowed by law, so no law is violated in any way. (estate planning, the heirs create a corporation and convert their

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Societas Spectra Legis Taxation Law 1 Compilation inheritance to shares to avoid estate tax) e)

Exemption – the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay; an immunity or privilege; freedom from a financial charge or burden to which others are subjected; allowed only when there is a clear provision of the law; *double nexus rule: You must prove that: 1. Law granting the exemption ‘ 2. You fall under within the law or you qualify in the exemption

f)

Tax evasion (tax dodging) – the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax; punishable by law, subjecting the taxpayer to civil and criminal liabilities.---to be dicussed more .

iii. Distinction b/w tax evasion and tax avoidance Tax Evasion Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or lessen the payment of a tax. It is also known as “tax dodging.” It is punishable by law. Tax evasion is a term that connotes fraud through the use of pretenses or forbidden devices to lessen or defeat taxes. [Yutivo v. Court of Tax Appeals, 1 SCRA 160] Example: Deliberate failure to report a taxable income or property; deliberate reduction of income that has been received. Tax Avoidance Tax avoidance is the exploitation by the taxpayer of legally permissible alternative tax rates or methods of assessing taxable property or income in order to avoid or reduce tax liability. It is politely called “tax minimization” and is not punishable by law. In Delphers Traders Corp. v. Intermediate Appellate Court [157 SCRA 349], the Supreme Court upheld the estate planning scheme resorted to by the Pacheco family in converting their property to shares of stock in a corporation which they themselves owned and controlled. By virtue of the deed of exchange, the Pachecho co-owners saved on inheritance taxes. The Supreme Court said the records do not point to anything wrong and objectionable about this estate planning scheme resorted to. The legal right of the taxpayer to decreased the amount of what otherwise could be his taxes or altogether avoid them by means which the law permits cannot be doubted. iv. Elements of tax evasion Tax evasion connotes the integration of three factors: 1. The end to be achieved. Example: the payment of less than that known by the taxpayer to be legally due, or in paying no tax when such is due. 2. An accompanying state of mind described as being “evil,” “in bad faith,” “willful” or “deliberate and not accidental.” 3. A course of action (or failure of action) which is unlawful. v. Evidence to prove tax evasion Since fraud is a state of mind, it need not be proved by direct evidence but may be proved from the circumstances of the case. In Republic v. Gonzales [13 SCRA 633], the Supreme Court affirmed the assessment of a deficiency tax against Gonzales, a private concessionaire engaged in the manufacturer of furniture inside the Clark Air Base, for underdeclaration of his income. SC held that the failure of the taxpayer to declare for taxation purposes his true and actual income derived from his business for two (2) consecutive years is an indication of his fraudulent intent to cheat the government if its due taxes.

XX. EXEMPTION FROM TAXATION i. Exemption, defined It is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which persons and corporations generally within the same state or taxing district are obliged to pay. It is an immunity or privilege; it is freedom from a financial charge or burden to which others are subjected. Exemption is allowed only if there is a clear provision therefor. It is not necessarily discriminatory as long as there is a reasonable foundation or rational basis. ii. Nature of tax exemption University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation a) b)

c)

d)

personal privilege It is a mere personal privilege of the grantee. generally revocable It is generally revocable by the government unless the exemption is founded on a contract which is protected from impairment. waiver on the part of the government It implies a waiver on the part of the government of its right to collect what otherwise would be due to it, and so is prejudicial thereto. not necessarily discriminatory It is not necessarily discriminatory so long as the exemption has a reasonable foundation or rational basis.

iii. Nature of the power to grant tax exemption 1)

National Government The power to grant tax exemptions is an attribute of sovereignty for the power to prescribe who or what persons or property shall be taxed implies the power to prescribe who or what persons or property shall not be taxed. It is inherent in the exercise of the power to tax that the sovereign state be free to select the subjects of taxation and to grant exemptions therefrom. Unless restricted by the Constitution, the legislative power to exempt is as broad as its power to tax.

2)

Local Governments Municipal corporations are clothed with no inherent power to tax or to grant tax exemptions. But the moment the power to impose a particular tax is granted, they also have the power to grant exemption therefrom unless forbidden by some provision of the Constitution or the law. The legislature may delegate its power to grant tax exemptions to the same extent that it may exercise the power to exempt. Basco v. PAGCOR (196 SCRA 52): The power to tax municipal corporations must always yield to a legislative act which is superior, having been passed by the State itself. Municipal corporations are mere creatures of Congress which has the power to create and abolish municipal corporations due to its general legislative powers. If Congress can grant the power to tax, it can also provide for exemptions or even take back the power.

Chavez v. PCGG, G.R. No. 130716, 09 December 1998  In a compromise agreement between the Philippine Government, represented by the PCGG, and the Marcos heirs, the PCGG granted tax exemptions to the assets which will be apportioned to the Marcos heirs. The Supreme Court ruled that the PCGG has absolutely no power to grant tax exemptions, even under the cover of its authority to compromise ill gotten wealth cases. The grant of tax exemptions is the exclusive prerogative of Congress.  In fact, the Supreme Court even stated that Congress itself cannot grant tax exemptions in the case at bar because it will violate the equal protection clause of the Constitution. iv. Rationale of tax exemption Its avowed purpose is some public benefit or interest which the lawmaking body considers sufficient to offset the monetary loss entailed in the grant of the exemption. The theory behind the grant of tax exemptions is that such act will benefit the body of the people. It is not based on the idea of lessening the burden of the individual owners of property. v. Grounds for tax exemption 1) 2) 3)

May be based on contract. In such a case, the public which is represented by the government is supposed to receive a full equivalent therefor, i.e. charter of a corporation. May be based on some ground of public policy, i.e., to encourage new industries or to foster charitable institutions. Here, the government need not receive any consideration in return for the tax exemption. May be based on grounds of reciprocity or to lessen the rigors of international double or multiple taxation.

Note: Equity is not a ground for tax exemption. Exemption is allowed only if there is a clear provision therefor. vi. Kinds of Tax exemption As to manner of creation 1) Express or affirmative exemption When certain persons, property or transactions are, by express provision, exempted from all or certain taxes, either entirely or in part. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 2)

Implied exemption or exemption by omission When a tax is levied on certain classes of persons, properties, or transactions without mentioning the other classes. Every tax statute makes exemptions because of omissions.

As to scope or extent 1) Total When certain persons, property or transactions are exempted, expressly or implied, from all taxes. 2) Partial When certain persons, property or transactions are exempted, expressly or implied, from certain taxes, either entirely or in part. vii. Examples of tax exemption viii. Construction of tax exemption statutes 

General Rule In the construction of tax statutes, exemptions are not favored and are construed strictissimi juris against the taxpayer. The fundamental theory is that all taxable property should bear its share in the cost and expense of the government. Taxation is the rule and exemption is the exemption. He who claims exemption must be able to justify his claim or right thereto by a grant express in terms “too plain to be mistaken and too categorical to be misinterpreted.” If not expressly mentioned in the law, it must be at least within its purview by clear legislative intent.



Exception to Application of Strictssimi Juris (instances where there is liberal construction): 1) If there is an express provision that provides for liberal interpretation 2) If it pertains to special taxes relating to special cases and affecting only special classes of person 3) If exemption refers to public property when it comes to public property, the rule is exemption and taxation is the exemption 4) In cases of exemptions granted to religious, charitable and educational institutions or their property This is provided than no less than the consti itself 5) Exemptions in favor of the government, its political subdivisions or instrumentalities 6) If there is express mention by clear legislative intent

Atty. A: when will you apply the strict construction? You will only apply it if there is doubt as to the interpretation of the law exempting the person or the property. If there is no doubt, no need to apply the strict construction. NOTE: Strict interpretation does not apply to the government and its agencies Petitioner cannot invoke the rule on stritissimi juris with respect to the interpretation of statutes granting tax exemptions to the NPC. The rule on strict interpretation does not apply in the case of exemptions in favor of a political subdivision or instrumentality of the government. [Maceda v. Macaraig] A tax cannot be imposed unless it is supported by the clear and express language of a statute; on the other hand, once the tax is unquestionably imposed, “a claim of exemption from tax payments must be clearly shown and based on language in the law too plain to be mistaken.” Since the partial refund authorized under Section 5, RA 1435, is in the nature of a tax exemption, it must be construed strictissimi juris against the grantee. Hence, petitioner’s claim of refund on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken. Davao Gulf v. Commissioner, 293 SCRA 76 (1998) 

Restrictions on Revocation of Tax Exemption a) Non-impairment clause There is a contract but we need to qualify because not all instances that the non-impairment clause will restrict the revocation of the tax exemption because if the tax exemption is provided by law, the non-impairment clause will not apply. The non-impairment clause will apply only if the exemption is granted in a contract. b) Adherence to form The rule is if the exemption is granted by the Constitution, then exemption can only be revoked upon Constitutional amendment. You cannot revoke by mere passage of law. c) Where the tax-exempting grant is in the form of special law and not by a general law, even if the terms of the general act are broad enough to include the intent to repeal or alter the special law, still there would be no revocation of tax exemption. So if you want to revoke the tax exemption in a special law then you must pass another special law revoking it. It cannot be revoked by implied revocation.

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Societas Spectra Legis Taxation Law 1 Compilation ix. Tax amnesty, defined A general pardon or intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law o There is already a finding that this person has already evaded the payment of tax -

Partakes of an absolute forgiveness or waiver by the government of its right to collect what otherwise would be due it and, in this sense, prejudicial thereto. It is granted particularly to tax evaders who wish to relent and are willing to reform, thus giving them a chance to do so and thereby become a part of the new society with a clean slate. Republic v. Intermediate Appellate Court, 196 SCRA 335 o when we say of absolute forgiveness, this is retrospective. Meaning it looks back to your previous liabilities and if you are given a tax amnesty, it is as if you did not incur those previous liabilities.

-

Like tax exemption, tax amnesty is never favored nor presumed in law. It is granted by statute. The terms of the amnesty must also be construed against the taxpayer and liberally in favor of the government.

x. Tax remission of tax condonation, defined The word “remit” means to desist or refrain from exacting, inflicting or enforcing something as well as to restore what has already been taken. The remission of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Such a set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike. Juan Luna Subd. V. Sarmiento, 91 Phil 370 Atty. A: from the word condonation, it simply means to say that you forgive the taxpayer out of liberality. But as discussed in the Juan Luna case, if you are going to remit or condoned a tax, you must not apply it to a specific person only but you need to apply it to the entire individual or property belonging to the same class. Otherwise, it will amount to class legislation. -

The condonation of a tax liability is equivalent to and is in the nature of a tax exemption. Thus, it should be sustained only when expressly provided in the law. Surigao Consolidated Mining v. Commissioner of Internal Revenue, 9 SCRA 728

Atty. A: it is still prospective in application. IN SUMMARY: Tax Amnesty  Absolute forgiveness from all criminal and civil obligation arising from your non-payment of taxes (retrospective effect)  General pardon given to all taxpayers to cover a particular taxing period or a particular transaction

Tax Exemption  only immune from your civil liability (prospective effect)

XXI. NATURE, CONSTRUCTION AND APPLICATION OF TAX LAWS i. Nature of internal revenue law Internal revenue laws are not political in nature. Tax laws are civil and not penal in nature. a)

Not political in nature Internal revenue laws are not political in nature. They are deemed to be the laws of the occupied territory and not of the occupying enemy. So even we are occupied by another State, the taxation laws continue. It is as if there is no stoppage of the tax law. Thus, our tax laws continued in force during the Japanese occupation. Hilado v. Collector, 100 Phil 288: It is well known that our internal revenue laws are not political in nature and, as such, continued in force during the period of enemy occupation and in effect were actually enforced by the occupation government. Income tax returns that were filed during that period and income tax payments made were considered valid and legal. Such tax laws are deemed to be the laws of the occupied territory and not of the occupying enemy.

b)

Civil, not penal, in nature Tax laws are civil and not penal in nature, although there are penalties provided for their violation.

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The purpose of tax laws in imposing penalties for delinquencies is to compel the timely payment of taxes or to punish evasion or neglect of duty in respect thereof. Republic v. Oasan, 99 Phil 934: The war profits tax is not subject to the prohibition on ex post facto laws as the latter applies only to criminal or penal matters. Tax laws are civil in nature.

ii. Construction of tax laws 1) Generally prospective in operation 2) Rule when legislative intent is clear: receive reasonable construction to carry out the purpose and intent 3) When there is doubt: In every case of doubt in tax statute imposing payment of tax, it shall be construed strictly against the government and liberally in favor of the taxpayer. (reason: the tax law does not want to burden the inhabitants in the payment of tax) However, when it comes to exemption and deduction, the rule is strictissimi juris. Strictly against the taxpayer and liberally in favor of the government. (reason: lifeblood doctrine) Taxes, being burdens, are not to be presumed beyond what the statute expressly and clearly declares. 4) Provisions granting tax exemption, when there is doubt, it is construed strictly against the taxpayer claiming the tax exemption. 5) When the language is plain, rule on strict construction against the government does not apply 6) Public purpose is always presumed 7) Provisions of the tax act are not to be extended by implication 8) Tax laws are special laws and they prevail over general laws iii. Application of tax laws General rule: Tax laws are prospective in operation because the nature and amount of the tax could not be foreseen and understood by the taxpayer at the time the transactions which the law seeks to tax was completed. Exception: While it is not favored, a statute may nevertheless operate retroactively provided it is expressly declared or is clearly the legislative intent. But a tax law should not be given retroactive application when it would be harsh and oppressive. iv. Mandatory and directory provisions of tax laws Directory provisions are those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings. Mandatory provisions are those intended for the security of the citizens or which are designed to ensure equality of taxation or certainty as to the nature and amount of each person’s tax. The omission to follow mandatory provisions renders invalid the act or proceeding to which it relates while the omission to follow directory provisions does not involve such consequence. [Roxas v. Rafferty, 37 Phil 958] v. Authority of the Secretary of Finance to promulgate rules and regulations The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, shall promulgate needful rules and regulations for the effective enforcement of the provisions of the NIRC. This is without prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar purposes. TAKE NOTE: Promulgation: Sec. of Finance Recommendation: Commissioner of Internal Revenue Administative rulings: Commissioner of Internal Revenue vi. Nature and power to make regulations vii. Necessity and function of regulations Purpose of IRR: 1) To properly enforce and execute the laws 2) To clarify and explain the law 3) To carry into effect the law’s general provisions by providing details of administration and procedure viii. Requisites for validity and effectivity of regulations a) Must be reasonable b) Must be within the authority conferred c) They must not be contrary to law and the Constitution d) They must be published in the Official Gazette or a newspaper of general circulation University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation ix. Force and effect of regulations Revenue Memorandum Circular 20-86 was issued to govern the drafting, issuance, and implementation of revenue tax issuances, including: 1) Revenue Regulations; 2) Revenue Audit Memorandum Orders; and 3) Revenue Memorandum Circulars and Revenue Memorandum Orders. -

Except when the law otherwise expressly provides, the aforesaid revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly assumed.

-

Due notice of the said issuances may be fairly presumed only after the following procedures have been taken: 1) Copies of the tax issuance have been sent through registered mail to the following business and professional organizations: a) Philippine Institute of Certified Public Accountants; b) Integrated Bar of the Philippines; c) Philippine Chamber of Commerce and Industry; d) American Chamber of Commerce; e) Federation of Filipino-Chinese Chamber of Commerce; and f) Japanese Chamber of Commerce and Industry in the Philippines. 2) However, other persons or entities may request a copy of the said issuances. 3) The Bureau of Internal Revenue shall issue a press release covering the highlights and features of the new tax issuance in any newspaper of general circulation. 4) Effectivity date for enforcement of the new issuance shall take place thirty (30) days from the date the issuance has been sent to the above-enumerated organizations.

TAKE NOTE: IRR and admin regulation are NOT THE SAME. You have the law, then you pass the IRR and from the IRR, it now depends from the Commissioner kung kugihan xa kay he will now issue a revenue regulation but this revenue regulation is not to implement the whole IRR but specific provisions only. x. Administrative rulings and opinions (BIR RULINGS) Known as BIR rulings Less general interpretation of tax laws being issued from time to time by the Commissioner of Internal Revenue. They are usually rendered on request of taxpayers to clarify certain provisions of a tax law. These rulings may be revoked by the Secretary of Finance if the latter finds them not in accordance with law. The Commissioner may revoke, repeal or abrogate the acts or previous rulings of his predecessors in office because the construction of the statute by those administering it is not binding on their successors if, thereafter, such successors are satisfied that a different construction of the law should be given. Rulings in the form of opinions are also given by the Secretary of Justice who is the chief legal officer of the Government. Atty. A: IF there is a provision in the tax law which is not clear, you can send a clarification to the BIR. You just have to lay down all the facts and all the details that you have and send it either to the Commissioner or Regional Director and they will address and clarify your concerns. But when it comes to BIR rulings and admin rulings, it applies only to the entity asking for it. So even if you have the same condition, let’s say for example, Company A and Company B and Company A is asking if it is exempted then BIR declared in a ruling that Company A is exempt. Company B, same economy conditions of Company A, cannot presumed that the it (Co. B) is also exempt. To be safe, Company B should also ask from the BIR a ruling pertaining to its own company, even if it has the same situation or condition with Company A. xi. Administrative interpretation and the courts Different from the IRR Rule: when it comes to admin interpretation, ruling or opinions are not binding to the courts. However, it is given great weight in making the decision. Commissioner v. Court of Appeals, 240 SCRA 368: The authority of the Minister of Finance, in conjunction with the Commissioner of Internal Revenue, to promulgate rules and regulations for the effective enforcement of internal revenue rules cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either of the above, however, is that all such issuances must not override, but must remain consistent with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law. La Suerte v. Court of Tax Appeals, 134 SCRA 29: When an administrative agency renders an opinion by means of a circular or University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation memorandum, it merely interprets existing law and no publication is therefore necessary for its validity. Construction by an executive branch of the government of a particular law, although not binding upon courts, must be given weight as the construction came from the branch of the government which is called upon to implement the law. xii. Power of the Secretary of Finance to Revoke the Rulings of his predecessor The Sec. of Finance has the power to revoke, repeal or abrogate the acts or previous rulings of his predecessors in office if the former becomes satisfied that a different construction should be given. xiii. Non-retroactivity of repeal of regulations or rulings, and its exceptions No retroactivity if the repeal, revocation, modification or reversal of regulations or rulings is prejudicial to the taxpayer. Exception: a) Where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; b) Where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; and c) Where the taxpayer acted in bad faith. xiv. Decisions of the SC and the CTA Follow the hierarchy of the courts If it is a question pertaining to the constitutionality of a ruling or IRR, raise it immediately in the regular courts But if it pertains to questions on the tax payable computations, question it first with the BIR (administrative level) then appeal it to the CIR (depends on the amount), then after it can be appealed later on to the Sec. of Finance or CTA then after, that’s the time you can go the SC. But in the SC, it should only be purely questions of law.

XXII. SOURCES OF TAX LAWS i. Constitution ii. Legislations/Statutes (R.A., P.D., E.O.) iii. Administrative rules and regulations, rulings or opinions of tax officials iv. Judicial decisions Stare decisis, meaning, only the decisions of the SC v. Tax treaties or agreements

REVENUE REGULATIONS 1. Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specify, prescribe or define rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statutes. N.B. publication not required in Official Gazette  

Secretary of Finance: Ceasar V. Purisima The role of CIR insofar as RRs are concerned, recommends as to what RR will be promulgated by the Secretary of Finance.

2. Revenue Memorandum Orders (RMOs) are issuances that provide directives or instruction; prescribe guidelines; and outline processes, operations, activities, workflows, methods and procedures necessary in the implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing. 

Usually issued by the BIR through the CIR.

3. Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax laws, as applied to a specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 4. BIR Rulings are official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws.   

Difference between RMR and BIR Ruling? RMR is more comprehensive and encompassing than the BIR Ruling. BIR Ruling should be in accordance with RMR but BIR Ruling is more common than the RMR.

5. Revenue Memorandum Circulars (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications (highlights), of laws, rules, regulations and precedents issued by the BIR and other agencies/offices. 6. Revenue Bulletins (RBs) refer to periodic issuances, notices and official announcements of the Commissioner of Internal Revenue that consolidate the Bureau of Internal Revenue’s position on certain specific issues of law or administration in relation to provisions of the Tax Code, relevant tax laws and other issuances for the guidance of the public. I.

Definition of Income Tax  A tax on all yearly profits arising from property, professions, trades or offices, or  A tax on a person’s income, emoluments, profits & the like.  It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. Profit: Investment worth 1000. You lost. So recovered 500. Is there income tax? No. There is no profit. So when we talk of Profit, it means RETURN ON CAPITAL. Thus, ON top of your capital.

II.

Nature of Income Tax – national, excise, direct, and general tax.  Income Tax is source “blind”.    

National Tax: The BIR has the authority to collect as found in RA 8424, NIRC which took effect on January 1, 1998. Also considered as Excise tax (tax on exercise of profession/on privilege or right to earn something) Direct Tax: impact and incidence of taxation is upon the taxpayer. Cannot be shifted to another, thus personal. General Tax: Levied of all kinds of income. If through gambling or robbery, you earn income, taxable. Thus, SOURCE BLIND (so long as there’s flow of wealth, increase in income, even if source is illegal, should be subject to income tax).

III. Purposes of Income Tax   

FISCAL PURPOSE: To provide large amounts of revenue NON FISCAL PURPOSE: o To offset regressive sales and consumption of taxes o To mitigate the evils arising in the unequal distribution of income and wealth All taxes are for the purpose of raising revenue save for the case of secondary purposes such as to offset the effects of sales and consumption taxes which are seen as regressive taxes by some proponents and in order to mitigate the effects of the inequitable distribution of wealth between different income earners. Of course, this is made together with the imposition of estate taxes because we are taking about wealth and income distribution

IV. Brief Historical Background of Philippine Income Taxation 1.

US Revenue Act of 1913—Income Tax of Philippines has an American Origin. This Act administered collection of income tax here in the Philippines. US was trying to collect revenue taxes.

2.

Revenue Act of 1916 and War Revenue Act of 1917---amended Rev Act 1913. Still American origin.

3.

Act 2833, promulgated by the Philippine Congress under the authority conferred to it under the 1917 Act.—this started during the Commonwealth Era

4.

CA 466 or NIRC of 1939—revised, amended, and codified all internal revenue laws embodied in the 1939 NIRC.

5.

PD 1158 or NIRC of 1977

6.

PD 1994 of NIRC of 1986 which enacted to simplify certain provisions of the NIRC. VAT was first started and introduced in this era. SNITS (Simplified Net Income Tax System) was also introduced here.

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V.

7.

RA 8424, Jan 1 1998, amended by RA 9337. Present Day NIRC.

8.

Since American Origin, in case of doubt, they usually refer to US Jurisprudences.

Sources of Income Tax Law National Internal Revenue Code, as amended

VI. Definition of Terms 

Income (broad sense)- all wealth w/c flows into the taxpayer other than as a mere return of capital; includes the forms of income specifically described as gains & profits, including gains derived from the sale or other disposition of capital assets. (Return ON income) Income means  accession to wealth  gain  flow of wealth



Capital – a fund or property existing at one point of time (while income denotes a flow of wealth during a definite period of time). Capital is wealth, income is the flow of wealth. Should not be subject to income tax. Example: Manufacturing of Furniture Cost – 1M Sales – 1M Is there an income? None. Is cost of sales equated to capital? Not necessarily. Madrigal vs Rafferty  Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income. Capital is wealth, while income is the service of wealth. (See Fisher, "The Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit. A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains."  So what is being taxed is the fruit not the tree. Illustration:  Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt. Is there taxable income for Rocha? No. Rather, it’s Donor’s Tax. There is no income because what has been forgiven is just equivalent to the debt. It is not taxable income but may be subjected to donor’s tax. 

Rocha owed Gocuan 100,000. Out of love and liberality, Gocuan condoned the debt in exchange for a free massage for one year. Is there a taxable income? Yes. There is already consideration—service. Thus, there can be income. THUS if it is just a mere return OF capital, no income. But if it is a return ON capital, there is an income and such is taxable.



Gain - transaction resulting in increases of wealth capable of pecuniary estimation



Gross Income – income (in its broad sense) less income w/c is by statutory provision or otherwise excluded from the tax imposed by law. This includes but not limited to the enumerations under Section 32a.



Gross Income Taxation – a system of taxation where the income is taxed at gross. The taxpayers under this system are not entitled to any deductions.



Net Income Taxation – system of taxation where the income is taxed at net. The taxpayer may claim allowable deductions.



Passive Income – refers to those items of gross income earned by the taxpayer w/o his active/direct participation in the earning process.

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Taxable Income (previously, Net Income) – pertinent items of income as specified in the Tax Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the Code or other special laws. It is the amount of income that is taxed [Pertinent items of GI – Allowed Deductions]

VII. General principles of Income Taxation in the Philippines a. A RESIDENT CITIZEN is taxable on all income derived from sources within and without (outside) the Philippines. 

b.

Sec 1, Art IV, 1987 Phil CONSTI – The following are citizens of the Philippines: (1) Those who are citizens of the Philippines at the time of the adoption of this Constitution; (2) Those whose fathers or mothers are citizens of the Philippines; (3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and (4) Those who are naturalized in accordance with law.

A NON-RESIDENT CITIZEN is taxable only on incomes derived from sources within the Philippines. 

Sec 22(e) of NIRC – The term 'nonresident citizen' means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

c.

An OVERSEAS CONTRACT WORKER (OCW) is taxable only on income from sources within the Philippines. A seafarer who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker. Example: Shipper for Coast-wise shipping (inter-island destination not international)—since this is domestic, thus it means you are still domiciled. Thus Taxable within or without.

d.

An ALIEN INDIVIDUAL whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines.

e.

A DOMESTIC corporation is taxable on all income derived from sources within and without (outside) the Philippines. Domestic Corp: organized and existing under the laws of the Philippines Foreign Corp: under the Foreign laws. NB: To determine, we do not look at the nationality of stockholders or incorporators BUT we look at the law incorporating the corporation.

f.

A FOREIGN Corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

VIII. Systems of Income Taxation [Philippines: partly schedular and partly global system of income taxation] 1.

Schedular Income Tax System Follows a schedule of tax rates The Tax Code or Congress treats differently every category of income earners. Usually applicable to Individual Tax Payers

2.

Global Income Tax System follows the proportional rate

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applicable to corporate taxpayers: 30% a uniform rate or proportional rate for all types of income so long as it is classified within the same class. If it is corporate taxpayer, all the income of the corporations regardless of value is taxed at a flat rate of 30%

IX. Kinds of Income Tax Methods 1. Gross Income Taxation 2.

Net Income Taxation

Formula: All income Less: Exclusions (as enumerated under NIRC) Gross Income Less: Deductions*/Exemptions Net Income or Taxable Income *DEDUCTIONS: pertains to expenses, loss, interest, tax payments made by corporations plus operating expenses. * Net Income: refers to Taxable income For Individual, subjected to graduated tax rate of 5-32% For Corporation, Final Income Tax of 30% X.

Features of Our Present Income Taxation (RA No. 8424, RA No. 9504, RA No. 9337) – Comprehensive Tax Situs To determine taxable income, based on:  Domicile of the taxpayer  Citizenship or Nationality of the taxpayer  Source of the income itself 1.

Basic Features of Individual Income Taxation a. Schedular System of Taxation. Graduated Income Tax (GIT); rates: 5% - 32% Unlike in corporate, we use Normal Income Tax (NIT); rate: 30% b.

Tax rates are progressive in character. When tax rate increases as the income of the taxpayer increases. Tax base increases as tax rate increases. Ability to pay principle. (Consistent with constitutional provision)

c.

Modified gross income taxation as regards pure compensation earner. Pure compensation income earner in the Philippines - all income is derived from pure employment (purely under employer-employee relationship, no business income, no passive income, etc.), subjected to gross income taxation although modified. Modified because deductions such as expenses (ex.transportation expenses) are not allowed. Only personal (P50,000) and additional (P25,000 per dependent) exemption are allowed to be deducted.

d.

Net income taxation as regards those individual taxpayers that derive business, trade or professional income. Allowable deductions under Section 34 may be claimed by individual taxpayers who derive business, trade and/or professional income. Pure business income earner, pure profession income earner or modified (both income and employment) allowed to claim deductions; covered by net income taxation. But in all cases, the schedular rates will have to be applied for individuals. Background on Individual income taxation— o Always, always the rates will be schedular. o WON an individual is allowed deductions; RULES: (1) Pure compensation income earner: modified gross income taxation; deductions would only be personal and additional exemptions which will subjected to (2) Compensation PLUS business earner or profession or trade earner: net income taxation; deductions are allowed. Logic behind-- is once you earn income other than from employment, you will be expected to have incurred expenses for your business, trade or profession.

e.

“Pay-as-you-File” System.

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f.

2.

3.

Expected to pay within the same day upon filling of return. Regarding last minute questions, taxes still needs to be paid but rather pay it “Under Protest”. Self-Assessment System  the taxpayer will be the one who will determine how much is the taxable income (computation) in trade, business or exercise of profession, not the BIR.  if pure compensation earner, employer will be the one who will determine how much is the taxable income. The one who will pay and file is the employer, this is called substituted filling.

Under certain cases, “Pay-as-you-Earn” system, as applicable to income subject to withholding tax. Applicable to income subject to withholding tax. Applied primarily to passive income. Immediately when earned it will be subjected to tax basically final withholding tax. Example: if you have deposits in the bank and it earns interest, the bank will automatically deduct the FWT from the interest income. You did not file yet but the tax is already deducted and remitted by the bank to the BIR.

Basic Features of Corporate Income Taxation a. Global Concept of Taxation No schedule, no graduation of tax rates; tax rate is applied as a final tax rate (30%). b.

Corporate taxpayers’ exception- resident foreign corporations are entitled to deductions. Net Income taxation is applicable to domestic corporations and resident foreign corporations. Only resident foreign corporations are entitled to deductions, non-resident foreign corporations are not entitled. Not all allowable deductions applicable to domestic corporation are applicable to resident foreign corporation. Subject to reciprocity rule. Net Income taxation - applicable to domestic corporations and resident foreign corporations.

c.

“Pay-as-you-File” system (except in cases of electronic filing system application) Exception - in cases of electronic filing system application (EFPS)

Criteria Used a. Residency (Domiciliary Rule) b. Nationality or citizenship (Nationality Rule) c. Place/Source of Income (Source Rule)

XI. Sources of Income 1) Capital A fund or property existing at one point of time. 2) Labor - Taxable if: it is for the benefit of another and; it has pecuniary value or is capable of pecuniary estimation. 3) Both Labor and Capital 4) Sale of Property Shares of tax or real property Example 1:  Farming (fruits and vegetables for personal consumption only);  painter (painted his own house) *Both are under Self-Help income – not taxable, even if income is sourced from labor. Example 2:  N painted the house of R, in return, R massaged N. Not taxable; not under self-help income If it can be estimated, taxable (conceptually only) XII. Criteria to Determine if Income is Taxable 1.

There is gain or profit Condition based from closed and completed transaction (capital)

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2.

o No more condition o Service is rendered Determine if under employer-employee or practice of profession (labor) NB: In determining the profit for sale of property, the formula is Amount Received/Realized LESS Cost of Property = Profit Concept of accrual and deferral in accounting will not matter because: o Rendered the service- taxable o Not rendered the service but received the money/payment- taxable (constructive receipt)

The gain or profit is realized or received (either actually or constructively) Actually or; o physical possession regardless whether there was service rendered or not Constructively o the disposition is under your control although not yet received o Constructive Receipt concept  Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. The income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made.  The property/income already pertains to the taxpayer or the taxpayer already has the control over the property/income even if it is not yet actually received or not yet in possession. Constructively, has the right to claim as an income because it was already earned or the service was already rendered.  Example: dividends applied to debts of shareholders, interests on saving in bank deposits, matured interest coupons, share in the profits in a general of professional partnership. *exercise of profession; ex. lawyers; deposits of clients are already treated as income by the BIR.

3.

Such gain or profit is not exempt under any law or treaty Otherwise stated, if there is a provision of law recognizing or taxing the income. o In short, for an income to be considered as taxable, 2 requirements: a) It must be a realized income; b) It must be a recognized income or there is a law which recognizes it as taxable income If the gain or profit is recognize under the law, then it is not exempt. If It is not recognized, then it is excluded.

TESTS: i.

Flow of Wealth Test There is gain derived in a particular transaction If there is gain, there is flow of wealth

ii.

Realization Test No taxable income until there is a separation from capital of something of exchangeable value, thereby supplying the realization or transmutation which would result in the receipt of income Eisner vs Macomber (Macomber Test)  Issue: Whether or not stock dividends is an income or not. It cannot be considered as a taxable income because it does not make the stockholder nor the corporation any richer or poorer. The stock dividend merely changes the interest of the stockholder in the corporation (General Rule). Exception to the Rule: if only one or some of the stockholders are given the stock dividends and hence, the percentage of ownership of each stockholders will now change.

iii.

Economic-Benefit Principle Increases in economic status Flow of wealth realized is taxable only when the taxpayer is economically benefited. Example: stock option – instead of giving the employees bonuses in cash, employees are offered to purchase stocks at a much lower rate, giving them a chance to be a stockholder of the corporation. The difference between the fair market value of the shares of stocks and the stock price offered to the employees can be considered as taxable income because there is an economic benefit on the part of the employees. Any economic benefit to the employee that increases his net worth is taxable.

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Net Effect Test The substance of the whole transaction will be taken into consideration. We do not look at the form (malversation cases) of the transaction. Common example: shares of stock transfers o Shares of stock (stock owned by a shareholder) are transferred to another person. Usually, in deed of assignment or deed of sale of stocks it reflects that the stocks were sold at par value (value reflected in the financial statement) to make it appear na gamay ra ang nabayaran. Under this test, the BIR will not only look at the par value reflected in such deed but would rather look at other documents such as the audited financial statement or look at the appraisal value of the shares of stocks being sold/transferred - to be able to determine its fair market value (to find out the real rate used in the sale of such shares of stock). The difference between the par value and the fair market value will be considered as income.

v.

Claim of Right Doctrine More or less the same as the realization test (in the concept of accrual)–here the service is already rendered or already parted ways with the consideration (goods were delivered) then the claim of right accrues, which means that the ownership or control of the property/income can already be claimed due to the fulfillment of the obligation. Also Known as Doctrine of Ownership, Command or Control. Note: it does not necessarily mean that you are the owner. Example: embezzled funds of embezzler is taxable as income o Income is source blind o Wealth increases drastically for a short amount of time o A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay that which would otherwise constitute gain. To collect a tax would give the government an unjustified preference as to the part of the money that rightfully and completely belongs to the victim. The embezzler’s title is void. (Commissioner vs. Wilcox, 286u.s. 41~ 424)

XIII. Kinds of Taxable Income or Gain 1.

Capital Gains gains or income from the sale or exchange of capital assets can be realized in relation to capital assets. Capital Asset (Sec. 39, NIRC) – the term “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in subsection (F) of Section 34; or real property used in the trade or business of the taxpayer. *the tax code does not define capital assets, instead it defines ordinary assets, and if it does not fall as an ordinary asset, it is a capital asset. Ordinary assets: (you earn an ordinary income, thus, it is subject to ordinary tax rate) 1) Stocks in trade – must be part of your inventory 2) Property primarily held for sale – (building house for the purpose of selling it) 3) Property used in trade or business, subject to allowance for depreciation - (depreciable assets: machineries, equipments) 4) Real property used in trade or business – (building used as display area for your merchandise or inventory; real estate dealers) Capital Gains Tax still an income tax; when transaction involves (sale or exchange of) capital assets, and there is a gain or income, the income is subject to Capital Gains Tax (CGT) Capital Gains includes: a. income from dealings in shares of stocks of domestic corporation whether or not through the stock exchange; Sale of shares of stocks

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b)

listed AND traded in the Local Stock Exchange exempt from CGT, but subject to Stock Transactions Tax (STT) – ½ of 1% Fair Market Value (FMV) of the shares of stocks STT is a percentage tax, a business tax STT is automatically withheld or remitted by the stock brokers not listed OR not traded in the Local Stock Exchange subject to CGT first P100, 000 – 5%; excess of P100, 000 – 10% (based on the FMV [less cost] of the shares or the gain [selling price – cost] of the shares or the Book Value, whichever is higher) covers listed but not traded shares

FMV

Whichever is higher between

Selling Price Book Value

]

-

COST

x

5% (first P100, 000) 10% (excess of P100, 000)

*FMV is based on the zonal value (as determined by the CIR) or the appraiser’s certificate *zonal value will be used only when the corporation has real properties b.

income from dealings in real property located in the Philippines; Capital Asset; not used in trade or business; not primarily held for sale CGT of 6% FMV or selling price, whichever is higher Cost is not deducted from the FMV or selling price when multiplied by the rate of 6% to get the CGT of the capital asset; cost is only deducted if it is classified as ordinary asset. *what if the real property is located abroad? Determine the owner of the real property. If owned by a resident citizen or domestic corporation, it is taxable (worldwide). CGT? or ordinary income tax? They will form part of the ordinary income. Because they are located outside the Philippines, even if they are NOT used in trade or business or is treated as capital assets if they be situated in the Philippines, they are treated as normal income on the part of the domestic corporation or the resident citizen. Reason of the law: administration and implementation of the law. How will the FMV be determined if it is located outside the Philippines? And when we talk of CGT, it necessitates that you have to file a separate Tax Return. This case is difficult that the property may not be declared to be part of the income.

c. 2.

income from dealings in other capital assets other than (a) and (b).

Ordinary gains gains or income from the sale or exchange or property which are not capital assets. a. Business income – derived from business; merchandising, manufacturing, exercise of profession; flow of wealth in the ordinary day-to-day transaction; if the inflow is extraordinary, it will fall under capital gains. Q: if you are in a business of stock trading, your income will not anymore fall under Capital Gains?  Stock Brokers or Underwriters (business engaged in stock trading), whatever income they earned in stock trading, they report it as their normal income. As to the corporations which listed there stocks in the PSE, are they into stock trading? No. thus, in so far as they are concerned, even if their shares are listed, they will report capital gains because their primary business purpose is into telecommunications, manufacturing, mass media, etc. b. c. d.

Compensation income – presupposes EE-ER relationship Passive income – received without any act from the taxpayer (rent income, interest income) Other income derived from whatever source.

Illustration: Shares of stocks is NOT LISTED and NOT TRADED FMV Cost Net Capital Gain

2M (1M) 1M

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Societas Spectra Legis Taxation Law 1 Compilation So therefore, 5% x 100k* 10% x 900k* CGT*

= 5K = 90K = 95K

*100K is the first 100,000 *900k (1M nga NCG minus 100K) is referring to the excess of the first 100,000 *Capital Gains Tax

XIV. Gross Income 1. INCLUSIONS – Section 32A (C-B-G-I-R-R-D-A-P-P-P) Sec. 32(A) – Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership The enumeration is not exclusive. Special Items Treatment: i. Self-help income – it is not subject to income tax ii. Forgiveness/Condonation of Debt – if there is a consideration, taxable; but if condonation is purely out of love and liberality, exempted iii. Recovery of amounts previously written off – apply tax benefit rule 

COMPENSATION for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items All remuneration for services performed by and EE for his ER under an ER-EE relationship Wages and salaries, insofar as taxation is concern, are just the same The remuneration referred here DOES NOT INCLUDE (Sec. 78(a) of NIRC): (1) For agricultural labor paid entirely in products of the farm where the labor is performed, or (2) For domestic service in a private home, or (3) For casual labor not in the course of the employer's trade or business, or (4) For services by a citizen or resident of the Philippines for a foreign government or an international organization. Includes the cash value of all remuneration paid in any medium other than cash (like for example the ER pays you with properties or stock options basta not cash, it is still considered as compensation income and subject to income tax, just determine the cash value) Types of taxable compensation income:  Salaries  Wages  Bonus  Remuneration  Honorarium  Benefits and allowances  For government: Representation and Transportation Allowances (RATA); Personal Emergency Relief Allowance (PERA)  Longevity pay  Subsistence allowance  Hazard pay  Annuities, pensions and etc.

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Societas Spectra Legis Taxation Law 1 Compilation 

-

Take note that salaries and wages refers to basic pay; these other benefits enumerated above are usually termed as “other benefits”; and these “other benefits” have a specific amount which is considered excluded from the taxable income and the ceiling amount is 30K. Meaning to say, so long as these allowances do not exceed 30K, it will not be subjected to tax but if it exceeds 30K, the excess is taxable.

Backwages, allowances and benefits awarded in labor disputes are subject to withholding tax on the wages.  Different treatment when it comes to separation pay and retirement pay, will be discussed soon. Primary method of collecting tax from compensation income is WITHHOLDING tax.  It is being withheld by the ER for the benefit of the EE because it is the ER who will have to understandably remit it to the BIR.  The goal there is that the total amount withheld by the ER should equal to the total amount of annual income tax payable of the EE.  Two types of withholding: (1) Final Withholding Tax; (2) Creditable Withholding Tax  So therefore, as a General Rule: withholding by the ER; Exception: those employed by the foreign embassies and diplomatic missions (RMC 31-2013) – basaha nalang ni kay kapui summarize  o





COMPENSATION VIS-À-VIS FRINGE BENEFITS Fringe Benefits: these are the benefits provided or granted to the EE other than the basic pay.  To supervisory and Managerial EE: subject to Fringe Benefits Tax (FBT)  To rank and file EE: de minimis benefits, exempted. However, if it exceeds 30K, it is taxable BUSINESS INCOME – gross income derived from the conduct of trade or business or the exercise of a profession Manufacturing, merchandising, mining business:  GI = Total Sales – COGS + other income from other investment Service enterprises (like accounting firm, law firm, etc.):  GI = Total receipts – Direct costs and expenses; refer to RMC 4-2003 as amended by RMC 30-2008 Difference b/w Professional income and Compensation income is the fact that you earned professional income without any ER-EE relationship. Professional income are fees received by a professional from the practice of his profession provided that there is no ER-EE relationship and thus considered as business income. GAINS derived from dealings in property A. Shares of stock of a domestic corporation 1) Capital asset if not a dealer in securities A dealer in securities is the term used for an individual who is engaged in buying and selling of securities or shares of stock So if you’re a dealer in securities, the shares of stocks are considered as your ordinary asset, so subject to ordinary income tax rate If NOT a dealer in securities, the shares of stocks are considered as your capital asset, so subject to capital gains tax 2)

Listed AND traded in local stock exchange Subject to Stock Transactions Tax of ½ of 1% based on gross selling price; but whatever is the excess there maybe subject to donor’s tax

3)

NOT listed OR listed but NOT traded in local stock exchange not over 100,000: 5% On any amount in excess of P100,000: 10% 

How to compute the Fair Market Value (FMV)? If listed but NOT traded, the FMV is: o The closing rate on the date of the transaction (ang closing rate kay kanang rate nga makit.an nimu sa newspaper sa stock exchange section) o If no sale on the date of transaction, the basis of your FMV would be the closing rate nearest to the date of sale -

If NOT listed and NOT traded: o Based on Net Capital Gains, so the BIR will compare the selling price (SP); or the book value (BV) of the shares; or FMV *SP is the consideration or the amount of money that you indicate in your deed of transfer or deed of sale *BV of the shares is the based on the Audited Financial Statement (AFS)

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Societas Spectra Legis Taxation Law 1 Compilation *FMV can be based on the (1) zonal value as determined by the BIR; (2) value as declared in the tax declaration by the Assessor’s office; (3) appraiser’s certificate B.

Real property Located in the Philippines o The seller or transferor is a real estate dealer: ordinary asset, so subject to ordinary income tax o The seller or transferor is NOT a real estate dealer: capital asset, so 6% based on SP or FMV, whichever is higher o However, if real property is sold during involuntary sales, like foreclosure, taxes should be counted from the date the right to redeem (1 year from the date of registration of the certificate of sale) the property has expired and it is based on the bid price, FMV or zonal value, whichever is higher -

C.

Located outside the Philippines o Subject to graduated income tax for residents or normal corporate income tax (NCIT) for corporations

Other Capital Assets What are these?  motor vehicles not used in business  short term commercial papers not considered deposit substitute subject to the graduated income tax for individuals or NCIT for corporations holding period of other capital assets is material only for individual taxpayers o HOLDING PERIOD RULE: *50% of capital gain is taxable if the other capital asset is held more than 12 months (long term capital gain) *100% of capital gain is taxable if held 12 months or less (short term capital gain) Illustration: 1/1/2014 – Mr. X purchased a car for 800K but instead of registering the car on his name, Mr. X gave it to his son, Y. 7/22/2014 – Y purchased a new car and traded-in the old car valued at 900K. So, is there a capital gain? If yes, how much of the capital gain is taxable? ANS: Yes, 100K. 900K - 800K = 100K is the capital gain. The capital gain is here short-term because the car was tradedin less than 12 months or 6 months after its purchase. Therefore, the 100% of the 100K is part of the income and is subject to the graduated income tax rate.

REMEMBER: Capital losses can be offset only against and to the extend of the capital. Capital loss is different from ordinary loss. Capital gain is different from ordinary gain. 2.

EXCLUSIONS – Section 32B Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. (2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. (3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. (4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. (5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. (6) Retirement Benefits, Pensions, Gratuities, etc.(a) Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the

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Societas Spectra Legis Taxation Law 1 Compilation employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. (b) Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. (c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public. (d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration. (e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282. (f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees. (7) Miscellaneous Items. (a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments. (b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. (c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: (i) The recipient was selected without any action on his part to enter the contest or proceeding; and (ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award. (d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations. th

(e) 13 Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and

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Societas Spectra Legis Taxation Law 1 Compilation (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. (f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals. (g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years. (h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code. XV. Situs of Income (Section 42) Sources 1. Compensation Income

Tax Situs Place where the service/s is/are rendered. Example 1: Mr. Sevilla is employed in a foreign corporation, and it asked you to come here in the Phils. and do some work here in behalf of the foreign corporation. Is Mr. Sevilla’s compensation for the services rendered here in the Philippines subject to income tax here in the Philippines even if the payor is a foreign corporation? Yes. The residence of the payor will not matter, what matters is the place where service is rendered. CIR vs Baier-Nickel

2. Business Income

3.

Income from Sale or Exchange of Property

4. 5.

Interest Income Rent Income

6. 7.

Royalties Dividend

Example 2: Bench hired the services of the advertising agency in Singapore to do advertisements in Singapore. Is the advertising income of that advertising agency subject to income tax here in the Phils.? No. it will not be subject to income tax because the advertisement is not rendered here but was rendered in Singapore. Even if the payor is a domestic corporation here in the Phils. Merchandising, Farming, Mining -Place where the business is undertaken. Manufacturing a. Goods manufactured and sold within the Philippines – income derived purely within. b. Goods manufactured & sold outside the Philippines – income derived purely outside. c. Goods manufactured within the Philippines and sold outside the Philippines – income partly within and partly without. d. Goods manufactured outside the Philippines and sold within the Philippines – income partly within and partly without. 1. If it involves personal property – the place of sale. 2. In the case of sale of transport documents* – the place where the transport document is sold. 3. If it involves real property – the place or location of real property *bill of lading; airway bill; carrier’s certificate Residence of the debtor/borrower. Place where the property*subject of the contract is located. *either personal or real property Place where the intangible property is used. 1. Received from domestic corporation – income purely within. 2. Received from foreign corporation outside the income of the

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Societas Spectra Legis Taxation Law 1 Compilation

8. 9.

foreign corporation in the Philippines during the last preceding 3 taxable years, following rules shall apply, to wit— a. The income is purely within if the income derived from the Philippines is more than 85%; b. It is purely without if the proportion of its Philippine income to the total income is less than 50%; c. There should be an allocation if it is 50% but not more than 85%. Place where the contract was made. If on account of services rendered – place where the services were rendered. If not on account of service rendered – place where the same is given. Place where this may be given on account of services rendered. Place where the exercise of profession is undertaken.

Annuities Prizes and Winnings

10. Pension 11. Professional income of professional partners CIR vs Baier-Nickel

XVI. Exclusions form Gross Income 1.

Proceeds of Life Insurance Policy What it refers here in LIFE INSURANCE because there are different kinds of insurance. Why is this excluded? Because this is deemed as INDEMNITY for the loss of life. Why all the proceeds are excluded? Because under insurance law, life is considered priceless. (oh master na kaau ninyu ang insurance, nya ang taxation?) So the tax code cannot put a ceiling on the amount because again life is priceless. It will not matter whether you receive it in lump sum or installment basis, so long as it is a life insurance policy, it is still excluded or exempted. However, the condition here is that the insured should have died. Because if the insured did not die, then not the entire proceeds is excluded, only up to the amount of the premium paid is exempted if the insured outlives the insurance. 

Instances where it is subject to tax: i. If insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the same, the interest will be subject to tax; ii. If there is transfer of the insurance policy.

2.

Amount Received as Return of Premium This primarily is referring to life insurance Reason for exclusion: it represents a mere return OF capital. Insurance premium is the consideration that you pay to the insurer for bearing the risk of the specific peril.

3.

Gifts, Bequests, Devises It is exempted because it is already subject to donor’s, transfer or estate tax. The reason for this is that it is a rule under the Tax Code that no taxpayer will be subjected to two direct taxes at the same time. Take note that donor’s, transfer and estate tax are direct tax. -

-

Gifts are given purely out of love and liberality so if there is a consideration given then it is subject to income tax. o

Example 1: you are an EE of a corporation for 30 years and the corporation gave you bonus gift of 5k per year of service, it is taxable because there is a consideration which is your 30 years of service. But it is subject to the 30k threshold.

o

Example 2: in the internet, there’s a pop up window saying “you are the 1000 th visitor so you will receive an ipad”. You receive the ipad, should you include the cash value of the ipad as part of your income and thus subject to tax? It is subject to income tax because the act of visiting that website is the consideration.

Bequests, or commonly known as legacy, gifts of personal property by virtue of a will and the recipient is called legatee. This bequest is already subject to transfer taxes, which is why it is not anymore subjected to income tax.

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Societas Spectra Legis Taxation Law 1 Compilation 4.

Exceptions to the rule: the income or fruit of such money given by donation, bequests or devise.

Compensation for injuries or sickness Reason for exclusion: this is just an indemnification for the injuries or damages suffered (compensatory in nature). The sources are: a. The compensation may be paid by virtue of a suit; or b. It may be paid by virtue of health insurance, accident insurance or Workmen’s Compensation Act. Illustration: Ms. Burdeos, kinsa imu gnhn patyun diri? Mr. Honculada sir. So, Mr. Honculada met a vehicular accident. His car was damaged and Mr. Honculada was hospitalized, so he was not able to go to work. So Mr. Honculada received the following: Taxable (?) 100k – Hospital bills X 50k – lost income*  10k – maintenance and medication X 1M – moral damages X 500k – attorney’s fees X 500k – car* valued at 200k *lost income is taxable because under normal circumstances, he would have earned the 50k, if he was not hospitalized and was able to work. *the car value was 200k but Mr. Honcx was able to receive 500k for the damage to the car. So the difference of the 500k and 200k, which is 300k, is taxable because that is the extent of the gain he got. Atty. A: for moral damages and attorney’s fees, it is not taxable because moral damages pertains to your non-physical injuries related to your physical injuries. Like si Ron pagbangga niya nagka.umod-umod na siya didto nya perti na gubaa sa iya dagway, dba? So moral damages daun. While for the attorney’s fees, it represents the actual fees you paid your lawyer which is just refunded to you, so basically compensatory in nature. And the hospital bills and medications are just refund for your actual expenses.

5.

Income exempt under treaty Reason for the exclusion: o Treaty has the obligatory force of a contract o Concept of reciprocity and amity among nations Exception: as may be provided in the treaty.

6.

Retirement benefits, Pensions, Gratuities a) Retirement benefits under R.A. No. 7641 or a reasonable private benefit plan o Retirement pay is the payment you receive upon reaching a particular age and length of service. b) Separation pay – amount received by an official or an employee or by his heirs from the employer due to separation from service because of death, sickness, or other physical disability or for any cause beyond the control of the official or employee. c) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or non-resident citizens or resident aliens from foreign institutions, whether public or private. d) US veterans benefit – benefit you receive from the United States Veterans Administration Office e) SSS under R.A. 8282 f) GSIS under R.A. 8291 Recipient: Private employees or official of private firm. Requisites for Retirement Benefits to be exempted: 1) The private employee or official must be at least 50 years of age at the time of his retirement; 2) He must have rendered at least 10 years of service to the employer at the time of retirement; 3) There must be reasonable private benefit plan; 4) Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock bonus plan, or gratuity; 5) The reasonable private benefit plan must be approved by the BIR; 6) The employer must give contribution and no amount shall inure to the benefit of a particular employee or official. This must be established for the common benefit of the employees or officials;

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Societas Spectra Legis Taxation Law 1 Compilation 7)

This can be availed of once. The subsequent retirement benefits received from another private employer is no longer exempt but subject to tax. (If the second employer is a government entity or institution – exempt)

Illustration: must fall in with ALL of the above requirements to be exempted Employee Jorj Kyle Ericka Jean

BIR approved— Private Benefit Plan

X

Age 51 45 60 65

Length of Service 8 years 15 years 12 years 15 years

Taxable (?)

X

Atty. A: You have what we call US-Veterans Benefit, this is a benefit you receive from the United States Veterans Administration Office. 7.

Miscellaneous Items a) Prizes and awards given in recognition of Religious, Charitable, Scientific, Educational, Artistic, Literary, or Civic achievements. Conditions: i. The recipient was selected without any action on his part to enter the contest or proceeding, and ii. The recipient is not required to render substantial future services as a condition to receiving the prize or award. Illustrations:  You won Ms. Wasay-wasay, Bohol 2014 and you receive 50K. Is that 50K taxable? The 50K is subject to income tax. 

b)

You are an author of a fiction book, Adventures of Ms. Wasay-wasay, Bohol and your book won as Best Fiction Book and you receive 100K as a prize. Is that prize taxable or not? You qualify. If you submitted your entry in that literacy contest, the prize is taxable If it was randomly selected without any effort on your part and without your knowledge, not taxable.

Prizes and awards in sports competitions Requisites: i. Competition and tournament must be sanctioned or approved by the National Sports Association; and ii. The competition and tournament must also be approved by the Philippine Olympic Committee, whether local or international, whether held in the Philippines or outside. (like Palarong Pambansa, CVRAA, FIBA and etc.) Illustration:  You joined the Brgy. Wasay-wasay Badminton competition and you won as champion with a prize or 10K. Is that 10K excluded or subject to tax? If approved by the Philippine Olympic Committee, it is exempted. But in reality, a barangay sports competition does not have approval from the POC and thus your winning is subject to income tax.

c)

Income derived by the Government or its political subdivisions from the exercise of any essential governmental function or from any public utility.

d)

Income derived from investments in the Philippines by Foreign Government or Financing Institutions Requisites: i. Recipient must be a: a. Foreign government; b. Financing institution owned, financed or controlled by foreign government; c. Regional financing institution, international financing institution established by foreign government. ii. It must be an income received from investment in the Philippines. Atty. A: this is important, you have to remember that the one who makes an investment in the Philippines is the foreign government or financing institution which is owned, financed or controlled by the foreign government. It is not just any financing institution. Let’s say for example, when the problem states “Co. XYZ is a financing institution makes an investment in the Philippines and earned 1M” kana lang…and you are asked if the 1M is taxable, you have to qualify. Dapat si Co. xyz nga financing institution is owned, financed or controlled by a foreign government. It is also the same case if it company is a RE-financing institution, qualify japun ka.

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Societas Spectra Legis Taxation Law 1 Compilation e)

Gains derived from redemption of shares of stock issued by a Mutual Fund Company Redemption – means you are going to buy back. Mutual Fund – you have smalls funds and you pool it and you make bigger investments. So if you redeem, it’s still excluded because its just considered as your return of capital. There’s no income gained.

f)

Contributions to GSIS, SSS, PAG-IBIG, and Union Dues Pag-ibig: Let’s say your salary is P10k and you want to avail of higher loan, you can increase your contribution. Instead of contributing the minimum contribution which is P100, you instructed your employer to increase your contribution to P500. Take note that whatever is the difference between your minimum contribution and your increased contribution is already taxable because what is excluded from income tax is the minimum contribution which is P100, the excess of P400 is now taxable as income on your part.

g)

Benefits in the form of 13 month pay and other benefits 13 month pay: 1 month pay Other benefits: Christmas bonus, Midyear bonus, loyalty award.

th

-

h)

It is excluded as long as it does not exceed the ceiling or threshold of P30, 000. The excess shall be treated as taxable compensation income. How about the 14th month pay, 15th month pay, etc.? o It is already subject to the P30k threshold because what is excluded is only the 13th month pay.

Gains derived from the sale, exchange, retirement bonds debentures or other certificate of indebtedness with a maturity of more than five (5) years.

XVII. Allowable Deductions INCOME - EXCLUSIONS GROSS INCOME - DEDUCTIONS/EXEMPTIONS NET INCOME 1.

Deduction (outflow) vs. Exemption (inflow)

2.

Deduction (outflow) vs. Exclusion (inflow) 

Similarity between deductions, exemptions and exclusions – they will cause a decrease in your taxable income or tax due.



Difference between deductions, exemptions and exclusions: Deductions: expenses, outflows; Exemptions: inflows not subject to tax because the law or treaty expressly provides for its exemption. Exclusions: inflows not subject to tax because: 1) these are not subject to income tax because it’s just a return of capital and not a return on capital which means there is no gain or income. 2) it may already be subjected to other direct taxes as in the case of gifts, bequeaths, devises. 3) it may just be compensatory in nature.

Atty. A: deduction is the word I use instead of minus. 

3.

Is exclusion more or less the same as exemption? By nature, they are just the same. But as to items considered as excluded or items considered as exempted, they are different.

Basic principles governing deductions (double-nexus rule) i. The taxpayer seeking deduction must point to some specific provisions of the statute authorizing the deduction, and ii. He must be able to prove that he is entitled to the deduction authorized or allowed. iii. Doubtful provisions pertaining to deductions are strictly construed against the taxpayer and liberally construed against the government iv. You must be able to follow statutory requirements

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Societas Spectra Legis Taxation Law 1 Compilation Illustration 1: The act of withholding a particular payment. X is the seller and Y is the buyer. If it’s a sale of land and it’s a capital asset, that’s 6% capital gains tax. Who pays this 6%? If there is no agreement, generally it should be withheld by Y, buyer. If the selling price is P1 million, Y should remit to X P940,000 (P1 million less 6% or 94% of P1 million). The P60,000 will he withheld by Y, the buyer and remitted automatically to the BIR. On the part of the buyer, the act of buying the lot can be considered as an expense. Before this buyer can deduct for expenditure in purchasing the land, he must be able to remit first the amount being withheld. If he failed to remit the amount being withheld, can he claim that expense for purchasing the lot? No. Illustration 2: In cases of rents, the amount you should withheld is 5%. You rent a specific stall in eMall. You pay a rent of P10k per month. Will you automatically remit the entire P10k to eMall? No. Under the law, you should withhold at least 5% of P10k. On your part, you can recognize deduction for rent expenses. But before you can deduct rent expenses, you must be able to prove that you have withhold such amount. No withholding = no deduction 4.

Kinds of allowable deductions It would depend on whether you are an individual taxpayer or a corporate taxpayer i.

Personal and additional deductions/exemptions (Section 35) Equivalent to P50k regardless of your civil status. Does not apply to corporate taxpayers. Additional deductions/exemptions pertains to your child. o P25k per child o Up to the 4th child. Estate: personal exemption up to P20k. (to be discuss later)

ii.

Itemized deductions (Section 34A-K and 34M) You are going to enumerate the expenses and losses related to your business.

iii.

Optional Standard Deduction of forty percent (40%) of the Gross Income. If you do not want to claim the itemized deduction, you may claim the optional standard deduction which is equivalent to 40% of the gross income. Both itemized deduction and optional standard deduction can be availed of by an individual taxpayer or by a corporation. Provided, that in the case of an individual taxpayer, you have your business income or professional income, which means you are not a pure compensation income earner. Cannot be claimed by a non-resident alien not engaged in trade or business.

XVIII. Non-deductible Items, (Section 36A and 36B) i. Personal living or family expenses; Tax code presumes that your personal expenditure in 1 year is only equivalent to P50k. th o Additional P25k if you have a child. Up to the 4 child. Cannot be deducted: your meals, transportation expenses, etc. because under the law, you are already given an annual P50k plus P25k if you have a child, up to the 4th child. ii.

Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; It’s non-deductible because under our Tax Code, it is presumed that you must capitalize these expenses; o Capitalize: recorded as part of your asset and not as an expenditure. These periodic expenses are recognize as depreciation. o

Example: In your business, you constructed a building worth P10 million with a projected useful life of 10 years. Can you outrightly deduct it as an expense in the year when the building was completed? No. you will staggered the cost of constructing the building based on the useful life of the building. You will recognize P1 million depreciation expense per year.  Exemption: Non-stock, non-profit educational institutions- they are not liable to pay any taxes.  When these institutions construct a building worth P10 million, they have the option to outrightly deduct the cost of the building for that particular year.

o

For entities not exempted, staggering the expenses is actually more beneficial because depreciation is a deduction.  Example: In 2014, you have an income of P1 million and you outrightly recognize the P10 million cost of the building as expenses of that year, you have –P9 million. You don’t tax only for one year. But if you spread the expenses for a period of 10 years, that will be more beneficial to you.

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Example: You have a building worth P1 million. You introduce improvements to the building which are permanent in nature worth P500k. You sell the building together with the improvements for P1.5 million. Can you still claim depreciation expenses for those improvements? No because 1. if that building is recorded as a capital asset, you are not allowed to claim for depreciation. Depreciation only pertains to ordinary asset. 2. If you sell the building and if the improvements are attached to the building, then technically you sell everything. Ownership is already transferred to another person, so you cannot claim expenses.

iii.

Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or What do we refer as allowance is or has been made? It is still depreciation expense. So it refers to MAJOR REPAIRS in the asset which understandably extends the life of the asset, thus you must record depreciation expense. o Example: This building (referring to the law building) is going thru retrofitting to extend the life of the building, is the cost of the retrofitting deductible immediately? No. Make it in staggered basis and provide an allowance for depreciation based on the extended life of that repaired asset. Capitalized ang asset. Otherwise, if the repair has no effect on the life of the asset then it is an outright deductible.

iv.

Premium paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. We are talking here of the premiums paid, the outflow na. In other words, if the taxpayer is the one who took the life insurance and he is also the beneficiary, he is not deductible. Illustration 1: Life Insurance Premium 50K

Insured

Beneficiary

Assured

Deductible (?)

President’s life of Company X

Company X

Company X

No

Here, Company X took a life insurance for its president and the president died then the proceeds thereof will go back to Company X. Thus, it is NOT deductible because it is just an indemnity of the loss of Company X’s president’s life. Of course it is the premiums paid we are talking here, so it follows that it is just return OF capital. Illustration 2: Life Insurance Premium 50K

Insured

Beneficiary

Assured

Deductible (?)

President’s life of Company X

Estate of President

Company X

Yes

Here, the beneficiary is the estate of the president. So the proceeds will go to the heirs of the president. Can Company X make a yearly deduction representing the yearly premium of 50K? Yes because it is really an outflow on its part and nothing of it will inure of the benefit of Company X. So the rule here is that the premium pay on life insurance policy can only be deducted if the beneficiary is another person who not the taxpayer himself. v.

Losses from sales or exchanges of property directly or indirectlya. Between members of a family (brother, sister of half or full blood, spouse, ascendants, lineal descendants). b. Except in case of distributions in liquidation, between an individual and a corporation—more than 50% in value of the outstanding stock of each of which is owned directly by or for such individual; c. Except in case of distributions in liquidation, between two corporations—more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company; or d. Between the grantor and a fiduciary of any trust, or e. Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or f. Between a fiduciary of a trust and a beneficiary of such trust.

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Societas Spectra Legis Taxation Law 1 Compilation Atty. A: the reason why these losses from sale or exchanges are not to be deducted is because in the above instances pertains to related parties and under the tax code, there is a presumption that if it a related party transaction, it is not a transaction in good faith or not an arm’s length transaction. It’s more of a transaction for the benefit of either the parties Illustration: if there is a sale of property with a selling price of 2M and the cost is 1M. So therefore you have a loss of 1M. As a general rule, when it comes to losses the loss of 1M is deductible. Unless it falls under those 6 instances above. 1st scenario: X sold the property to Y and X and Y are siblings. Can you deduct a loss of 1M? No, because this is a related-party transaction nd

2 scenario: Company S sold the property to Company B, and there is a loss of 1M. But the problem is silent. Is this deductible? Yes. It can be deducted. rd

3 scenario: Mr. Seller sold the property to Company B and Mr. Seller has a share of 40% of Company B, and there is a loss of 1M. Is this deductible? Yes. It can be deducted because Mr. Seller’s share is not more than 50%. 4th scenario: If Mr. S owns 60% of Company B, is it deductible? No, because it is a related-party transaction and there is a presumption that it is not an arm’s length transaction. It is not an arm’s length transaction when the seller is not compelled to sell and the buyer is not compelled to buy. o But if the sale happens during liquidation of Company B, it is not deductible. 5th scenario: Company S owned by K, L, M, N, O, sold property at a 1M loss to Company B is owned by O, P, Q, R , S, T with the following shares— Company S K’s share – 10% L’s share – 10% M’s share – 10% N’s share – 10% O’s share – 60%

Company B O’s share – 10% P’s share – 20% Q’s share – 30% R’s share – 20% T’s share – 20%

So we have here an interlocking shareholder, Mr. O. The 1M loss is deductible because Mr. O merely own 10% of Company B and the law states that it must more than 50% of EACH company. 6th scenario: same facts as the 5th but this time, O’s share in Company B is 60%. Is the loss of 1M in the sale deductible? No, it is not deductible because O’s share in both companies is more than 50%. th

7 scenario: same facts but this time, another company, Company Z, owns 50% of the shares of Company B. A corporation is a shareholder of another corporation is allowed. O’s share in Company B is 10% while he also has 60% shares in Company Z. So O’s share in Company B is now 40%*. Is the 1M loss deductible? Yes, because O’s share in both companies is less than 50%. *10% in Company B + (50% x 60% in Company Z) = 40% is O’s share in Company B. Atty. A: we use the grandfather rule, wherein Mr. O owns a direct share of 10% in company B and 30% (referring to the 50% x 60% in Company Z) indirect share in Company B. th

th

8 scenario: Same facts in 7 but this time, Mr. O owns 99.9% of Company Z. How much is Mr. O’s share in Company B? 60%* and therefore, it is not deductible because his share is more than 50% in both companies. *60% = 10% direct share + 50% indirect share (referring to the 50% x 99.9% in Company Z)

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TAXABLE INDIVIDUALS a)

Resident citizen  Citizen Article 4. Section 1. The following are citizens of the Philippines: 1) Those who are citizens of the Philippines at the time of the adoption of this Constitution; 2) Those whose fathers or mothers are citizens of the Philippines; 3) Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and 4) Those who are naturalized in accordance with law.  Resident most of the time for the calendar year, you are residing here in the Philippines.

b)

Non-resident citizen [section22(E), NIRC] i. a citizen of the Philippines who establishes to the satisfaction of the commissioner the fact of his physical presence abroad with a definite intention to reside therein  to the satisfaction of the commissioner: you have to inform the BIR that you are no longer residing in the Philippines, otherwise, your income within will be taxable. ii.

a citizen of the Philippines who leaves the Philippines during taxable year to reside abroad, either as an immigrant or for employment on a permanent basis  self-explanatory kay permanent basis; return to the Philippines will probably for vacation purposes nalang.

iii.

a citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year  most of the time: Under a BIR Regulation, it means that that particular citizen stays abroad for 183 days or more (not more than 183 days) during a calendar year.

iv.

a citizen who has been previously condisered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines with respect to his income dereived from sources abroad until the date of his arrival in the Philippines  previously considered as a non-resident citizen:  HYBRID PERSONALITY OR DUAL PERSONALITY OF A TAX PAYER

2012

Jul y2

2013

Arrival: Jul 31

Dec 31

Stayed Abroad from July 2- Dec 31: Stayed outside for 182 days only thus considered RC so taxable within and without

If whole period, he was abroad, then NRC. So taxable income will be those derived within.

BUT :

2014 Dec 31

Arrived on Jul 31 and stayed here til Dec 31: since less than 183 days ka dire sa Phil.,NRC ka. Letter D will not apply

2014 May 31

BUT if arrived on May 31 and stayed until Dec 31; letter D applies. NRC from Jan 1-May30 RC from May 31-Dec 31. —HYBRID PERSONALITY—

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Societas Spectra Legis Taxation Law 1 Compilation *Nota Bene The measure of 183 days or more is made applicable to both letters C and D. Presumption in letters C and D is that the citizen resides abroad temporarily. The ‘183 days’ can either be continuous and aggregate. *Rationale of letter D: If there is no Letter D class, presumption is, for that year (2014) he is a resident citizen for having stayed in the Philippines more than 183 days. Thus income within and without, is taxable. BUT since we have letter D, income within the Philippines for January 1 to May 30 2014 (refer above) will be taxable because he is deemed NRC. v.

the taxpayer shall submit proof to the commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this section.  Implementation is difficult unlike corporations which submit records to SEC. NOTE: a Filipino employed as Philippine embassy/consulate service personnel o f the Philippine embassy/consulate is not treated as a non-resident citizen, hence his income is taxable.  Overseas Contract Worker or Seafarer/Seamen: not considered permanent employees rather—contractual.

c)

resident alien  A person not a citizen of Philippines by resides in the Philippines  The test use to know if resident alien or not is not the length of time he stays here but the fact of whether he is a mere transient or has a definite purpose/intention of staying here in the Philippines. If with definite purpose of staying here, resident alien.  One example: kind of visa applied for

d)

non-resident alien 1. NRA-Engaged in Trade or Business a. Most of the time, he has a transaction here in the Philippines. b. TEST: stayed here for more than 180 days. c. So, if non-resident alien stays here for more than 180 days for no definite purpose, like vacation lang si manong, then NRA-ETB. 2.

e)

NRA-Not Engaged in Trade or Business Not much of a difference between a Resident Alien and a Non-resident Alien engaged in trade or business --because they are both taxable only for income earned within the Philippines. The difference would matter when it comes to personal and additional exemptions. 180 days or more – either continuous or aggregate

special employees called as such because they are subjected to a different rate, special rate of 15 %; and Employed by special corporations (list is exclusive) i. Regional headquarters (RAHQ) of multination corporations, defined in sec. 22 No operations in the Philippines, does not earn any income Only for supervision, to oversee ii. Regional operating headquarters (ROHQ) of multinational corporations, defined in sec. 22 Has operations in the Philippines; earns an income in the Philippines iii. Offshore banking units iv. Petroleum service contractors 

Are all Filipinos employed by these Special Corporations are considered special employees? GR: employed Alien individual (EXPATS), occupying managerial, technical and supervisory positions; considered as Special employee therefore, subjected to 15%. EXC: employed Filipino, 2 conditions must concur: 1. Occupying managerial AND technical positions. 2. No other alien can occupy such position (other than the Filipino)



Why are they termed/called Special Corporations? They are registered here in the Philippines but they are subjected to different requirements than the usual procedure for incorporation in the Philippines. The special tax rate is termed as such because it is way lower than the usual 5%-32% graduated tax rate.

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What are Multinational Corporations? Corporations which have operations internationally or in an international level



If you are an officer of a Multinational corporation, you are subject to a special tax rate of 15% only. IS this correct? NO. Must qualify--officer of a RAHQ or ROHQ of a multinational corporation. On the gross income in the Philippines of aliens employed by regional headquarters 15% (RHQ) or area headquarters and regional operating headquarters (ROH), offshore banking units(OBUs), petroleum service contractor and subcontractor

f)

Estate and Trusts  Taxable as individuals on the INCOME of the estate and of a trust.  Example: On December 31, 2014, G died and left certain properties behind– for the entire year of 2014 G is considered as an individual taxpayer, resident citizen (classification). During the time/period of transferring the properties to the heirs, the law gives persona/personality to the estate and/or trust. The estate is treated as an individual prior to the distribution to the heirs of the estate. Being treated as an individual, if it earns an income or a fruit then it will be subjected to income tax. But the estate itself is subjected to estate tax.  Can avail of the personal exemption of P20,000 but not additional exemptions.  Why does it remained at P20,000? Before the tax code was amended, individuals can avail personal exemption of P20,000(single), P25,000(head of the family), P32,000(married). The estate being treated as a single individual is given a personal exemption at P20,000. But when RA 9504 is passed, this portion tackling about estates and trusts was not amended so being a tax exemption-- it is strictly construed against the taxpayer and liberally in favor of the government. Therefore it remained at P20,000.  Who will report the income? Executor or administrator will have to file the return.

INCOME TAX RATES For individuals Earning Purely Compensation Income and Individuals Engaged in Business and practice of profession Amount of net taxable income Over But not over P10,000

RATE

5%

P10,000

P30,000

P500 + 10% of the excess over P10,000

P30,000

P70,000

P2,500 + 15% of the excess over P30,000

P70,000

P140,000

P8,500 + 20% of the excess over P70,000

P140,000

P250,000

P22,000 + 25% of the excess over P140,000

P250,000

P500,000

P50,000 + 30% of the excess over P250,000

P500,000

P125,000 + 32% of the excess over P500,000 in 200 and onward

Note: when the tax due exceeds P2,000.00, the taxpayer may elect to pay on two equal installments, the first installment to be paid at the time the return is filed and the second installment 15 of the same year at on or before duly the authorized agent bank (AAB) within the jurisdiction of the revenue district office (RDO) where the taxpayer is registered.

INCLUSIONS (GROSS INCOME FOR INDIVIDUALS) 1.

Compensation income i. Definition Any amount or including the cash value of those you receive in kind under an ER-EE relationship (determine ER-EE relationship: four-fold test)

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in labor, compensation in kind is not allowed; in taxation (since nangwarta ang gobyerno) we still consider its cash value to be reported as income subject to income tax.

COMPENSATION in KIND: a. Stock Options – ER offers (ownership) shares of stock to EE GR: not taxable EXC: if there is a difference between the actual consideration paid by the employee versus the FMV of the stocks – there is a gain Ex: FMV – 100; EE is allowed to purchase it @ 10. The 90 difference is subject to income tax. b.

Properties the cash equivalent of the properties is subject to income tax use the cash equivalent doctrine

c.

Promissory Notes GR: taxable at the amount equivalent to the face value of the PN EXC: if it is discounted, the amount taxable is the Discounted Value. *discounted value – value lower than the face value e.i indorsing the note Ex: Y is paid a PN @ P10,000, indorse it to X @ P9,000 (discounted). The actual amount received by Y is P9,000 – the discounted value – therefore Y is taxable @ P9,000

d.

Cancellation of Indebtedness taxable as income if debt is cancelled because a service is rendered by the employee.

ii. a.

Kinds: Regular compensation – includes basic salary, fixed allowances for representation, transportation and others paid to an employee

b.

Supplemental compensation – Includes payments to an example in addition to the regular compensation such as but not limited to the following:  Overtime pay  Fees, including director’s fees  Commission  Profit sharing  Monetized vacation and sick leave  Fringe benefits received by rank & file employees  Hazard pay th  Taxable 13 month pay and other benefits  Other remunerations received froma n employee-employer relationship



Fringe benefit tax for managerial employees is not included as supplemental compensation because it is subject to final tax – Fringe Benefit Tax Add the regular and the supplemental compensation and subject it to graduated tax rate (5%-32%) but withhold first the creditable withholding tax (gi-discuss daw before-means of collection and payment of compensation income is through withholding….wako kasabot) Exclusion – P30, 000, only the excess of the P30,000 (nag.mention pd xa nga “except for overtime pay”---dili nako ma.gets if excluded pd ang overtime pay) will form part of the supplemental income added to the regular compensation

 

iii. -

iv. -

Doctrine of cash equivalent if you are paid in property or in kind, you determine the cash value of the payment of that particular property or payment in kind and that value will be added to your total compensation subject to income tax Mode of compensation income collection/payment Through withholding Pay the balance as you file the tax return, compute as follows: Income tax due Less: withholding tax Net income tax due

P P

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Societas Spectra Legis Taxation Law 1 Compilation *income tax due – for the whole calendar year (January 1 – December 31) *withholding tax – for the whole year *income tax due must be equal to the withholding tax so that net income due will be zero (0). This only happens if the individual taxpayer is a pure compensation income earner with one employer. NOTE: Substituted filing if income tax return (“ITR”) is the manner by which declaration of income of individuals receiving purely compensation income the taxes of which have been withheld correctly by their employer’s annual information return (BIR form no. 1604-CF) duly stamped received by the BIR may be considered as the “substitute” income tax return (ITR) of the employee. However, said the employees may still file ate his/her option. Income Tax Return (BIR Form no. 1700) – if the taxpayer files it personally Annual Information Return (BIR Form no. 1604) – if substituted filling by the employer 

Who can avail substituted filing? Employees who satisfies all of the following conditions: 1) Receiving purely compensation income regardless of amount: 2) Working for only one employer in the Philippines for the calendar year 3) Tax has been withheld correctly by the employer (tax due equals tax withheld); 4) The employee’s spouse also complies with all three (3) conditions stated above 5) The employer files the annual information return(BIR Form No. 1604 – CF) 6) The employer issues BIR Form No. 2316 to each employee. -

v. 1.

what if two (2) employers? Substituted filing is allowed, but at the end of the year, you must file a consolidated ITR personally. if employer incorrectly withheld the amount due, employee will not be guilty of tax evasion. You look into the reason why there was a difference and BIR will just collect the deficiency. for married individuals, their ITR will be consolidated at the end of the year. Reason: one is for the additional deduction; the additional deduction will only be claim once. Husband will claim, and wife will also claim additional deduction – as a rule, only one can claim…. ma.alkansi si BIR

Fringe Benefits Definition NIRC, Section 33. (B) Fringe Benefit defined. - For purposes of this Section, the term "fringe benefit" means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following:. (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.  ” except rank and file employees as defined herein” technically, rank and file employees do not receive any fringe benefits because when we talk of fringe benefit, it is given on top of your compensation and the fringe benefits received by the rank and file employees forms part of their compensation.

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for managerial employees:

Fringe benefit compensatio n



Subject to final tax (Fringe Benefit Tax)

Subject to graduated income tax

for rank and file employees: Compensation + Fringe Benefit Total compensation income – Subject to graduated income tax

2.

Kinds of Fringe Benefits [HEVHIMEHEL} a. Housing CASE

ANNUAL VALUE of BENEFIT

Employer leases residential property for use of the employee

Employer owns residential property which was assigned to an officer for his use as residence (no transfer of ownership) Employer purchases residential property on installment basis and allows the employee to use the same as his residence Purchases residential property and transfers the ownership to the employee Purchases residential property and transfers ownership thereof to his employee for the latter’s residential use at a price less than the employer’s acquisition cost

5% of FMV of land improvements

Monetary Value of Benefit (Monthly) 50% X Monthly rental paid by the employer The 50% is given under the regulation as a sign that there is no transfer of ownership from the ER to EE If there is transfer of ownership, then the entire amount is taxable as fringe benefit 50% x Monthly Value of the benefit *Monthly Value = Annual Value /12 mos.

5% of acquisition cost excluding interest

50% x Monthly Value of Benefit

Acquisition cost of FMV whichever is higher

FMV of CIR and FMV of Assessor, whichever is higher minus the cost of the employee

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Societas Spectra Legis Taxation Law 1 Compilation *Exceptions: I. Housing privilege of officials of AFP, Philippine Navy and Philippine Air Force; Take note wala’I Philippine National Police ha.. II.

A housing unit which is situated inside or within the maximum of fifty (50) meters from the perimeter of the business premises or factory. Exception: wherein the EE is still exempted of the housing privileged of up to 100 meters if ER’s factory is hazardous.

III.

Temporary housing for an employee who stays in a housing unit for three (3) months or less. Applies to transient EE, like he is in Manila for training etc.

Atty A: take note that other than compensation income is what we call as fringe benefit. Compensation income is subject to 5% to 32% graduated income tax while the fringe benefit is given to managerial or supervisory EE subject to fringe benefit tax of 32%, which is a final tax. b.

Expense account Refers to the food, grocery or other representations

c.

Vehicle of any kind if there is transfer of ownership to the EE, 100% of the value is subject to fringe benefit tax if no transfer of ownership, 50% of the value only is subject to FBT what you need to remember here is that you need to:  determine first if the EE is managerial or supervisory: If he is, automatic subject to FBT  next you need to determine if ownership is transferred to the EE: if it was transferred, then the entire value is subject to FBT; if not transferred, only 50% thereof.

Guidelines in valuation of Motor Vehicles: CASE

TRANSACTION

1

Purchase the motor vehicle in the name of the employee

Acquisition Cost

2

Provides the employee with cash for the purchase of a motor vehicle in the name of the employee

Amount of cash received by the employee

3

Shoulders a portion of the amount of the purchase price of a motor vehicle in the name of the employee

Amount shouldered by the employee

4

Purchase the car on install in the name of the employees

Acquisition cost (exclusive of interest) divided by 5 years

5

Owns and maintains a fleet of motor vehicles for the use of the business of the employees

6

Leases and maintains a fleet of motor vehicles for the use of the business and the employees The use of yacht whether owned and maintained or leased by the employer

Acquisition cost of all motor vehicles not normally used in business divided by 5 years x 50%ount of rental payment for motor vehicles not normally used in business x 50% Amount of rental payment for motor vehicles not normally used in business x 50% Depreciation of yacht at an estimated useful life of 20 years

7

d. e.

MONETARY VALUE of Benefit

Household personnel Interest on loan at less than market rate

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Societas Spectra Legis Taxation Law 1 Compilation f. g. h. i. j.

Membership fees, dues and other expenses borne by the ER in social athletic clubs or similar organizations Expenses for foreign travel Holiday and vacation expenses Educational assistance to the EE or his dependents Life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allow

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Societas Spectra Legis Taxation Law 1 Compilation

CORPORATE INCOME TAXATION I. INTRODUCTION AND DEFINITION OF TERMS Corporations – shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), or insurance companies, except: 1. general professional partnerships 2. a joint venture formed for the purpose of undertaking construction projects 3. joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. Joint Venture – created when 2 corporations, while registered and operating separately, are placed under one sole management which operated the business affairs of said companies as though they constituted a single entity thereby obtaining substantial economy and profits in the operation. Joint Account – created when 2 persons form or create a common fund and such persons engages in a business for profit.

II. TAXABLE CORPORATIONS Incorporation rule – in order to determine whether or not it is a domestic or a foreign corporation, you have to determine the place where the corporation was created or organized.

1.

Domestic Corporation – Sec. 27 i. Created or organized in the Philippines or under its laws [Sec. 22(C)] ii. Classification: a. Domestic Corporations in general, including taxable partnerships (other than GPPs) b. Proprietary educational institutions and hospitals c. GOCCs, agencies or instrumentalities iii. Taxed (30%) on net income derived from sources within and without the Philippines.  Since it is taxed based on its net income, it is allowed to deduct for expenses incurred within and without.

2.

Resident Foreign Corporation – Sec. 28[A] i. A corporation formed, organized, authorized, or existing under the laws of any foreign country and engaged in trade or business within the Philippines. ii. Taxed (30%) on net income derived from sources within the Philippines.  Allowed to make deductions for expenses incurred within the Philippines. iii. “Engaged in business” implies continuity of commercial transactions or dealings. iv. “Continuity of business” – there must be continuity of intention to conduct continuous business.  Other proofs of continuous business engagement: 1. Having a representative office here in the Philippines. 2. Ownership of real properties in the Philippines. 3. SEC registration. If it is registered in the SEC as a branch of a foreign corporation, then it is treated as a Resident Foreign Corporation. Otherwise, if it is registered in the SEC as a subsidiary of a foreign corporation, it is considered a domestic corporation. It may still be considered as RFC even if it is not registered with SEC.

BRANCH

SUBSIDIARY

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Societas Spectra Legis Taxation Law 1 Compilation An extension of the personality of the foreign corporation and not an independent entity.

Its treated as a domestic corporation because it has a personality independent from its foreign corporation.

Whatever income the branch earns, it will remit to the foreign corporation. The liabilities incurred by the branch will also the liability of the foreign corporation.

Any liability incurred by the subsidiary will not be answerable by its foreign corporation.

2 instances which make it an RFC: registration with the SEC or engaged in a business in a continuous manner here in the Philippines. 3.

Non-Resident Foreign Corporation – Sec. 28[B] i. A corporation formed, organized, authorized, or existing under the laws of any foreign country. ii. Its business is here in the Philippines is intermittent and not continuous, or an isolated or one-time transaction. iii. Taxed (30%) on gross income from sources derived within the Philippines.  To be withheld by the payor located in the Philippines.  No deductions allowed for any expenses incurred. Take note: Gross income may include interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments, or other fixed or determinable annual, periodic, or casual gains, profits and income, and capital gains – EXCEPT capital gains from the sale of shares of stocks not traded in the stock exchange.

 As for reportorial requirements, corporations are usually required to file on a quarterly basis. On the 4 th quarter, that is the time that whatever income they earned will be annualized. As a rule, the quarterly report by the corporation is based on self-assessment.  This applies Domestic Corporation and Resident Foreign Corporation.  For NRFC, the 30% final withholding tax will be withhold by the payor.  What the payor pays to the NRFC is net of the 30%.  Example: An NRFC enters into a one-time transaction here in the Philippines with Corporation Niño. Payable is P100,000. Corporation Niño will not be paying the whole P100,000 to NRFC but rather only the net of the 30%, which is P70,000. Corporation Niño, as a withholding agent, will remit the P30,000 to the BIR.  For NRFC they usually avail of methods to avoid payment of tax, one of which is through the availment of the benefits in a tax treaty. A tax treaty is a mechanism on decreasing the negative effect of double taxation. (If you want to know the different tax treaties entered into by Philippines, please visit the BIR website.)  In order to avail for relief from double taxation pursuant to existing Philippine tax treaties, you need to file a Tax Treaty Relief Application (TTRA) in the International Tax Affairs Division (ITAD).  In case of conflict between a treaty and a municipal law, the former prevails. Only cases where the treaty is more burdensome that the municipal law will prevail.

III. PARTNERSHIPS AND CO-OWNERSHIPS CO-OWNERSHIP General Rule: A co-ownership is taxed exempt because it is formed and organized not for profit but for common enjoyment or preservation of a property. Exceptions: 1. When the income of the co-ownership is invested by the co-owners in other income-producing activities, or 2. When there is no attempt to divide the inherited property for more than ten (10) years and the said property was not under any administration proceedings nor held in trust, an unregistered partnership is deemed to exist.  Under the Civil Code, co-ownership is presumed to exist only for a period of ten years. Thereafter, an unregistered partnership is deemed to exist. Whatever is earned from it is taxable with the same rate as a corporation. Example: A and B are heirs of X. X died leaving a piece of land with a mango plantation. A and B harvested and sold the mangoes, earning an income from the inherited property. Is there a partnership already? No, it is still co-ownership. We still University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation follow the rule on the CC that the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. Unless, such co-owners make an investment in that co-owned property for the purpose of earning a profit later on.  If you are co-owners of a property and it is earning income from its fruits, there is not tax because there is no partnership. But if you invested money to develop such land and sell it as properties, you are already taxable as partners. [no investment = no tax] PARTNERSHIP 2 Types of Partnership under the Tax Code: 1. General Professional Partnerships – formed by persons for: i. The sole purpose of exercising a common profession and ii. No part of the income of which is derived from engaging in any trade or business.  The partnership is not taxable because it is the partners themselves who are liable to pay tax for the shares they received. o Examples: law firms, accounting firms, clinics, etc. o The partners will file their income tax return and their income is classified as business/professional income.  Being a professional income, there is still a withholding tax equivalent to 10%, but it is a creditable withholding tax which means you will have to deduct it to your taxable income in order to get your net income tax still due or payable. iii.

2.

Needs registration with the BIR. o GPP will be required to file an income tax return even if you are tax exempt or not subject to tax.  Its purpose is to countercheck if the partners are correctly declaring the shares that they received in the GPP regardless of whether or not the shares have been distributed.  Example: Partnership X is composed of 3 partners. If the GPP declared a net income of P300k but one of the partners only declared P50k as the share he received, then the BIR will question such partner.  In a GPP, once the partnership declares a net income, it’s already deemed to be received constructively by the partners. BIR will simply divide the net income with the number of members in a partnership.  In order to avoid any inconvenience, some GPPs prefer to submit the ITR of the GPP together with the individual ITRs of the partners.

Taxable or Business Partnership – all other partnerships except general professional partnerships no matter how created or organized. For purposes of taxation, this business partnership is taxable irrespective of whether it is orally constituted or in writing and whether or not it is registered in the Securities and Exchange Commission.

General co-partnerships (GCP) are partnerships which are by law assimilated to be within the context of, and so legally contemplated as, corporations. The partnership itself is subject to corporate taxation. The individual partners are considered stockholders and therefore, profits distributed to them by the partnership are taxable as dividends.  Whatever income earned (within and without) by these business partnerships or general co-partnerships is tax similarly to a corporation, i.e., 30% corporate income tax rate.  They are allowed to make deductions incurred within and without.  Take note: Partners share in the business partnership is treated similarly as a dividend distribution in a corporation. Therefore, there will be a 10% Final Tax.

Shares/Dividends in Taxable Partnership,

RC w/in or w/o 10%

NRC w/in 10%

RA w/in 10%

NRA-ETB w/in 20%

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NRA-NETB w/in 25% Page 70

Societas Spectra Legis Taxation Law 1 Compilation Joint Consortium, etc. Tests that will determine whether a partnership exists: 1. There must be a contribution to a common fund. 2. There must be an intention to divide the profits among themselves. Summary of Tax Liabilities of Partnerships: 1. General Professional Partnerships – they are not subject to income tax, but are required to file returns of their income for the purpose of furnishing information as to the share of each partners in the net gain or profit, which is partners shall include in his individual return. The net income (income for distribution) shall be computed in the same manner as a corporation. Date of filing of the return is April 15 following the taxable year. 2.

Taxable or Business Partnership – the income tax of this type of partnership is computed and tax like that of a corporation. This kind of partnership, like the regular corporation, is also required to file a quarterly corporate income tax return.

IV. CORPORATE INCOME TAX EXEMPT ENTITIES 1. 2.

General Professional Partnerships Joint Venture for the purpose of undertaking construction projects: Requisites [RR 10-2012]: 1) the joint venture or consortium is formed for the purpose of undertaking of a construction project. 2) it involves joining or pooling of resources by licensed local contracts; 

i.e., licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and Industry (DTI);  No need to register with SEC in order to avail of the tax exemption. 3) the local contractors are engaged in construction business. 4) the joint venture is licensed by PCAB and DTI. 3.

4.

5.

Joint consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the government.  Absence of a service contract with the government renders the consortium liable to 30% corporate income tax. Take note: for 2 and 3 to be exempt from corporate income tax it must be: 1) Unincorporated formed by 2 or more persons (individuals, partnerships, or corporations) 2) Purpose: to undertake construction project or engaged in petroleum and other energy operations with operating contract with the government. Labor, agricultural or horticultural organization not organized principally for profit.  If these organizations makes use or earns income from its property, it may be subject to tax.  Example: Labor organization X owns a parcel of land and is being rented to a commercial institution. The income X earns from the rent is taxable because it is not related to X being a labor organization. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit.  Applies to Foreign Savings Banks provided they meet the requirements: 1. it does not have capital stock represented by shares. 2. operated for mutual purposes and 3. without profit.

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Societas Spectra Legis Taxation Law 1 Compilation 6.

7.

8.

9.

A beneficiary society, order or association, operating for the exclusive benefit of the members [not open to the public] such as a fraternal organization operating under the lodge system [one which must operate under a parent and subsidiary associations- capable of existing on its own], or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; Cemetery company owned and operated exclusively for the benefit of its members;  It must be a non-profit cemetery.  Example: The cemetery is a corporation having shares and the cemetery issued dividends to its shareholders. Is it a non-profit cemetery? No because there are dividends distributed to its shareholders. Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; Requisites:

a. Must be established for common business interest. b. No part of the income shall inure to the benefit of a particular individual. 10. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; 11. A nonstock and nonprofit educational institution;  covers income, property, and donor’s taxes, and customs duties; the revenue, assets, property or donations must be used actually, directly, and exclusively for educational purposes; lands, buildings, and improvements actually, directly, and exclusively used for educational purposes are exempt from property tax whether the educational institution is proprietary or non-profit;  When it comes to cafeteria or bookstore, for it to be exempted: 1. It must be operated by the school 2. It must be considered ancillary to its activities 3. It must be located within the school premises  When it comes to their interest income, its not subject to the passive income tax rate of 20% for NFCD or 7.5% for FCD provided it is able to submit proofs like board resolution, certification from their depositary bank. Take note: common theme for 4 up to 11 is that it must not be for profit or at least, it must be non-stock. 12. Government educational institution; 13. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; 14. Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;  Like association: must be related to fruit or agricultural production

PROVISO: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted FOR PROFIT regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

General Rule: All GOCCs are subject to the 30% corporate tax rate Exceptions: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) 5. NAPOCOR (Special law exemption) 6. Local Water Districts (RMC 28-2010, R.A. No. 10026) University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 7. Cooperatives (R.A. No. 6938) 8. Foundations created for scientific advancement (R.A. No. 2067) Take note: The entities listed here are only exempted from income tax, it does not follow that they are also exempted from business tax like VAT. CONDOMINIUM CORPORATIONS [RMC 65-2012]  The amounts paid in as dues or fees by members and tenants of a condominium corporation form part of the gross income of the latter subject to income tax. o This is because a condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments.  For tax purposes, the association dues, membership fees, and other assessments/charges collected by a condominium corporation constitute income payments or compensation for beneficial services it provides to its members and tenants. HOMEOWNERS ASSOCIATION [RMC 09-2013]  General Rule: the amounts paid in as dues or fees by homeowner-members of a homeowners’ association form part of the gross income of the latter subject to income tax.  This is because a homeowners’ association furnishes its members with benefits, advantages, and privileges in return for such payments.  Exception: If the Homeowner’s association meets the requirement under the Magna Carta for Homeowners and Homeowners' Associations (R.A. No. 9904)  Requirements: 1. Registered with the Housing and Land Use Regulatory Board (HLURB) as an association in accordance with R.A. No. 9904. 2. Certification from the LGU having jurisdiction over the subdivision. 3. Dues and fees collected should only be used for the cleanliness, safety, security and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages. 4. Present proof such as an audited financial statement which shows that the inflow or cash they received from their members were actually used for basic community service and facilities.  For tax purposes, the association dues, membership fees, and other assessments/charges collected by a homeowners’ association constitute income payments or compensation for beneficial services it provides to its members and tenants.

V. TYPES/CLASSIFICATIONS OF INCOME FOR A CORPORATION A. Inclusions to Gross Income: All income derived from whatever source, including but no limited to the following: (C-G2 2 3 IR DAP ) 1. Compensation from services rendered. 2. Gross income from profession, trade or business. 3. Gains from dealings in property. 4. Interests a. Interest on bank deposit/deposit substitutes/trust fund and similar arrangements b. Interest from lending c. Interest from bonds d. Interest on foreign bonds/government bonds e. Interest on treasury bills f. Interest earned from deposits maintained under the FCDU system g. Interest income of pawnshop operators 5. Rents Items considered as rental income: 1.

Agreed amount per month or per year

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Societas Spectra Legis Taxation Law 1 Compilation 2.

Obligations of lessor to third parties which the lessee undertakes to pay as further consideration of the lease such as: i. Real estate taxes on leased premises paid by the lessee to the government. ii. Insurance premiums paid by the lessee on policy covering leased property. iii. Dividends paid by the lessee to stockholders of lessor-corporation in lieu of rent. iv. Interest paid by the lessee to the holder of bonds issued by lessor-corporation instead of rent.  Items 1 to 4 are considered taxable as rent income because it is being shouldered by the lessee, not by the lessor. Normally it is the lessor or the owner of the property who will pay the real estate tax.

2 Kinds of Rents: i. Operating Lease – a contract under which the asset is not wholly amortized during the primary period of the lease and where the lessor does not rely on the rentals during the primary period for his profits but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or the release of the returned assets at the end of the primary lease period.  The purpose of the lease is for the day to day operation of the business.  Only temporary use of the property and there is no eventual transfer of ownership.  Rent payments will be reported as expenses on the part of the lessee. ii. Finance Lease – also called the “Full Pay-out Lease”, a contract involving payment over an obligatory period (called the primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessor’s borrowing costs and profits. Obligatory period is primarily non-cancellable period of the lease which in no case shall be less than 730 days. Lessee exercises choice over the asset.  “Lease-to-own”  Lessor purchases the property on installment through rent payments.  The owner will eventually relinquish ownership over the property in favor of the lessee at the end of the lease contract.  Rent payments will be not be considered as expenses on the part of the lessee

6.

Royalties  The entity must be involved in granting franchises or royalties.  If it’s a one-time transaction, it will be recorded as passive income, and not part of the gross income.

7.

Dividends  A corporate profit set aside, declared and ordered by the directors of a corporation to be paid to stockholders on demand or at a fixed time.  Under the tax code, it means any distribution made by a corporation to its stockholders, whether in money, property, out of its earnings and profits accrued since March 1, 1913.  Example: X is the secretary to the president of Company B. X was given a “dividend” by the corporation. How is that dividend going to be taxed? It will be taxed as an ordinary income tax (5%-32%). Kinds: A. Stock Dividends  General Rule: A stock dividend representing a transfer of surplus to capital account shall not be subject to tax.  Exceptions: i. If subsequently cancelled and redeemed by the corporation.  The corporation will buy back the shares.  Example: X has an existing 1000 shares of stocks in corporation R. The corporation issued a stock dividend of additional 500 shares to X and the rest of the stockholders. As a rule, it is not taxable. If R buys back (cancelled or redeemed) the 500 shares from X, the latter will receive its monetary equivalent. This is now subject to tax. ii. If it leads to substantial alteration in the proportion of ownership in a corporation.  One shareholder has an increased shareholding while another shareholding decreases.

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Societas Spectra Legis Taxation Law 1 Compilation 

Dilution: A reduction in the ownership percentage of a share of stock caused by the issuance of new stock.

General Rule Example: STOCK DIVIDENDS Stockholders Stock Dividend A P100 20% P10 B P100 20% P10 C P100 20% P10 D P100 20% P10 E P100 20% P10 P500 P50

P110 P110 P110 P110 P110 P550

20% 20% 20% 20% 20%

In this example, the stock dividends are not taxable because there is no substantial alteration in the proportion of ownership in a corporation. Even if they received the stock dividend, their interest in the corporation did not change. So long as all the stockholders receive a uniform number of share of stocks or dividends, it will not be subject to tax. Exception Example: STOCK DIVIDENDS Stockholders Stock Dividend A P100 20% P100 B P100 20% P10 C P100 20% P10 D P100 20% P10 E P100 20% P10 P500 P140

P200 P110 P110 P110 P110 P640

31.25% 17.18% 17.18% 17.18% 17.18%

In this example, there is a dilution. A is going to be taxed, depending on whether A is an individual or a corporation. For the rest of the shareholders, their dividends are not subject to tax.  When should corporations issue stock dividends? When the corporation has high earnings.  Under the Corporation Code, a corporation must not have unappropriated retained earnings higher than its paid-up capital. Example: Umbrella Corporation has a paid-up capital of P1 million. Every year it is earning income of P1million, but it did not distribute its income to its stockholders. These income goes to the retained earnings. After 5 years, Umbrella now has 5 million retained earnings. Since its retained earnings is now higher than its paid-up capital, Umbrella will now distribute stock dividends to its shareholders (If it distributes property dividends, it will be subject to tax).

B. Property Dividends  All encompassing; whatever property you would wish to give to your stockholders it will be taxable.  Since the tax will be paid by the individual shareholders, the company will collect the cash equivalent to 10% tax payable before giving them their property dividends.  Dividends paid in securities or other properties, in which the earnings of a corporation have been invested are income to recipients in the amount equal to the full market value of such property when receivable by individual stockholders.  Example: ALO Corporation has shareholders A, L, O, X, and Y. ALO has 10,000 shares in the BURDEOS Corporation (because it has investments in the company). ALO now distributes 5,000 shares to its shareholders A, L, O, X, and Y, each receiving 1000 shares. The shares distributed to the shareholders of ALO Corp. are not the shares of ALO Corp., thus, these are not stock dividends but rather property dividends, because for stock dividends to happen, the shares of stock distributed to the shareholders University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation must be the shares of stock of the distributing corporation. In our example, these 1000 shares were from the stocks of BURDEOS Corporation and not from ALO Corporation. For it to be stock dividends, the shares must be from the ALO Corp. If it’s a share of stock from another corporation to which a corporation has an existing investment distributed to its shareholders, then it’s classified as property dividends which is taxable.  A dividend paid in stock of another corporation is not a stock dividend, even though the stock distributed was acquired through the transfer by the corporation declaring the dividends of property to the corporation, the stock of which is distributed as a dividend. Passive Income RC NRC RA NRA-ETB NRA-NETB w/in or w/o w/in w/in w/in w/in Cash and Property Dividends 10% 10% 10% 20% 25% (To Individuals from Domestic Corporations) C. Liquidating Dividends  Where a corporation distributed all its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is a taxable income or deductible loss as the case may be.  Last inflow going to the shareholders. It may result to a loss or an income.  Usually forms part of the normal income. For individual subject to 5%-32%. For corporations subject to 30%.  Example 1: 2014 2019 Assets

50M

100M

Liabilities

50M

150M

Net worth

0

(50M)

In 2014, 50 shareholders incorporate Corporation X with P1M contribution made by each shareholder. The corporation has an asset of P50M, liability of P50M. In 2019, your assets doubled to P100M but your liability tripled to P150M. Your company undergoes dissolution and there will be no dividends and no tax. 

Example 2: 2014

2019

Assets

50M

100M

Liabilities

50M

70M

Net worth

0

30M/50 shareholder = P600K per shareholder.

Let us change the scenario. In 2019, you have a liability of P70M and a net worth of P30M. Your company undergoes dissolution but now this P30M will be available for distribution to the 50 shareholders. You will divide the 30M with the 50 shareholders (who contributed P1M each). Definitely they will be receiving a liquidating dividend which is less than their contribution (P1M). This will be considered as return OF capital because this will be the last time that the corporation will operate. Being a return of capital and considering that this amount is lower than their investment to the corporation, it will not be subject to the normal 5%-32% individual tax rate.

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Societas Spectra Legis Taxation Law 1 Compilation 

Example 3: 2014

2019

Assets

50M

100M

Liabilities

50M

50M

Net worth

0

50M/50 shareholder = P1M per shareholder.

In this scenario, the liquidating dividend received by each shareholder is equal to their investment. Hence, it will not be subject to the normal 5%-32% individual tax rate. 

Example 4: 2014

2019

Assets

50M

100M

Liabilities

50M

20M

Net worth

0

80M/50 shareholder = P1.6M per shareholder.

In this scenario, the shareholders receive more than what you have invested. And whatever you have invested is the cost of your investment. Any difference of what you receive as liquidating dividend from such cost will be considered as taxable income subject to the rate of 5-32% (Not the entire amount will be taxable, only the excess). So, the excess of P1million will be subjected to tax based on the concept of return ON capital. Take note: this will not apply if what you are receiving is a mere cash dividend or property dividend wherein you will subject it to the passive income tax rate. D. Disguised Dividends These are payments which are equivalent to dividend distribution. In case of excessive payments by corporations, if such payments correspond or bear a close relationship to shareholdings, and are found to be a distribution of earnings or profits, the excessive payments will be treated as dividends. 

  





Not expressly given as dividends. Under the corporation code, a dividend distribution includes a: 1. declaration whether what is to be distributed would be stock, cash or property, 2. date of record, and 3. date of payment In disguised dividends, none preceding requisites are present. It may be any other kind of payment to the owners or stockholders not denominated as dividends but actually profit distribution simply to avoid tax. The point is, whenever there are huge amounts of payments to the owners not considered as dividends, they are actually disguised dividends. Example 1: If the owners composed of the Board of Directors, and the honorarium for every meeting every month is 1 M for the presence of a 10-minute meeting, is that not a dividend distribution disguised as honorarium. Example 2: 50 shareholders. Instead of declaring the 500 Million you will be given 1 motor vehicle each. It will be claimed by the company as an expense, not as a dividend distribution. The company will be benefited by the depreciation of the motor vehicle that they acquire. Example 3: ALO Corporation is engaged in the real estate business. The secretary of the President of the Corporation is given as a house and lot for the services she rendered to the company. Such house and lot will

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Societas Spectra Legis Taxation Law 1 Compilation not be taxed as a dividend. Rather, it will form part of the gross income of the secretary subject to the normal tax rate. Take note: dividends can only be given to shareholders of the corporation. 8. Annuities. 9. Prizes and winnings 10. Pensions 11. Partner’s share in the net income of the general professional partnership. b. Exclusions to Gross Income (refer to outline II)

VI. DEDUCTIONS A. FUNDAMENTAL PRINCIPLES IN DEDUCTIONS (DOUBLE NEXUS RULE) 1. The taxpayer must prove that there is a law authorizing deductions. 2. The taxpayer must prove that he is entitled to deductions. 3. There must be proper withholding. i. Remember the rent expense example. 4. Provisions pertaining deductions must be construed strictly against the taxpayer. i. Similar construction to exemptions. ii. Only applies if there is ambiguity with the law. B. Entitlement to Deductions 1. Domestic Corporations (includes private educational institutions, non-profit hospitals, GOCCs) – entitled to deductions for expenses incurred within and without, tax base is taxable income. 2. Resident Foreign Corporations – entitled to deductions for expenses incurred within, tax base is taxable income. 3. Non-resident Foreign Corporations – not entitled to deductions, tax base is gross income.

Take note: For corporations, they cannot deduct basic personal exemptions, additional personal exemptions, premium on health and life insurance. They only have the option of Itemized Deductions or Optional Standard Deduction. C.

Allowable Deductions  If you can determine that your itemized deductions is lower than 40%, then you might as well opt for OSD. However, if your actual itemized expenses is higher than 40%, then choose Itemized Deductions.  This is where historical data comes into play.  Who can avail of Itemized Deductions or Optional Standard Deduction: 1. Domestic Corporations 2. Resident Foreign Corporations 3. Individuals who are earning business income or mixed-income earners.  Individual taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction: 1. Pure compensation income earners. 2. Non-resident alien whether or not engaged in trade or business.  Corporate taxpayers who cannot avail of Itemized Deductions or Optional Standard Deduction: 1. Non-resident foreign corporation. 1.

Itemized Deductions (Ex-In-Ta-Lo-Ba-Cha-Re-Pen-Pre-Dep-Dep)  Needs proof or substantiation.  In the Income Tax Return of the Corporation, there is still a need to indicate which method of deductions it will be using. The default is itemized deduction.  Take note: The filing of tax return for corporations is quarterly. If a corporation choose for OSD during the first quarter it cannot anymore changed it to itemized deductions in the succeeding quarters because that choice is irrevocable for the whole tax period. It can only change its choice of the method of deductions on the next taxable year.

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2.

Expenses Interest Taxes Losses Bad debts Charitable Institutions Research and development costs Pensions contribution Premiums paid on hospitalization and insurance Depreciation and amortization Depletions of oil, gas, wells, and mines

Optional Standard Deduction (OSD) – A standard deduction available to corporation (DC and RFC only), except non-resident in an amount not exceeding 40% of the gross income in lieu of itemized deductions. Unless the taxpayer signifies in his return his election to elect OSD, he shall be considered as having availed himself of the itemized deductions. Such election when made in the ITR shall be irrevocable for the taxable year in which the ITR is made. Example: Gross income of the corporation is P1M and it opted for OSD, the taxable income will be P600K. No need to show proof for the 40% deductions.

D. Additional Requirements for Deductibility of Certain Payments Any amount paid or payable which is otherwise deductible from or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR.

VII. ITEMIZED DEDUCTIONS (EX-IN-TA-LO-BA-CHA-RE-PEN-PRE-DEP-DEP) 1.

 Not an exclusive enumeration. Expenses  Outflow  You are already benefited from it. Definition of Terms: Business Expense vs Capital Expense Business Expense – refers to all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or the exercise of a profession.  

Everything should be deducted on the year it was paid or incurred E.g. salaries, which you can deduct during that taxable period. o Example: The salary you paid to your employees. The services made by the employees were already rendered during that particular. You, as an employer, have already benefited from such service. Salaries are considered ordinary or necessary business expenses which can be deducted in full during that taxable year. Capital Expense - are expenditures for the extraordinary repairs which are capitalized and subject to depreciation. These are expenses which tend to increase the value or prolong the life of the taxpayer’s property.

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Societas Spectra Legis Taxation Law 1 Compilation  

 



Outlflow. Benefits not only the current taxable year. Contemplates long-term benefit to the taxpayer’s property. E.g. construction or expansion of your company building or warehouse. o You will not deduct outright the total cost of the building because you have to consider the economic or useful life of such building.  Example: Your building costs P1M and has an economic or useful life of 10 years, then you will divide P1M with 10. Only a portion of that expense will be deducted for the current year. E staggered daw nimo ang expenses. Matching concept: Payment pertains to the year for which the income generated relates to the expenditure. You are going to match your expenditure to the revenues you have generated during that particular taxable period. Capitalized:

Ordinary & Necessary Expenses Ordinary Expenses – refers to the expenses which are normal, usual or common to the business, trade or profession of the taxpayer. An expense is ordinary when it is commonly incurred in the trade or business of the taxpayer as distinguished from capital expenditures. The payments, however, need not be normal or habitual in the sense that the taxpayer will have to make them often. The payment may be unique or non-recurring to the particular taxpayer affected. Necessary Expenses – one which is useful and appropriate in the conduct of the taxpayer’s trade or profession. Extra-Ordinary Expenses – these are amortized or depreciated. a)

Common Requisites For Deductibility Of Ordinary And Necessary Expenses i. The expenses must be ordinary and necessary;  Depends on the kind of business you are involved with.  Example: Your business is Procter & Gamble. Advertising your product would be considered as an ordinary and necessary expense. However, if your business is merely a Sari-sari store, it would not be considered as an ordinary and necessary expense.  CIR vs General Foods case: Gen. Foods tried to claim for advertising expenses amounting to P9M. BIR denied the claim, and instead applied the Cohan Rule allowing only 50% of the claim. SC found that the subject expense for the advertisement of a single product to be inordinately large, and even if indeed it is necessary, it cannot be considered an ordinary expense deductible under Section 29 (a) (1) (A) of the NIRC. According to the Court, the subject advertisement is one designed to stimulate the future sale of merchandise or use of services. Said venture of respondent to protect its brand franchise was tantamount to efforts to establish a reputation and is akin to the acquisition of capital assets, and should not, therefore, be considered as business expenses but as capital expenditures which normally should be spread out over a reasonable period of time. ii. It must be paid OR incurred during the taxable year Exception: net operating loss carry-over a. b. c.

d.

if you are benefited (inflow: service from the other party) this year, claim the expense (outflow) this year. Payment and incurrence does not necessarily happen on the same taxable year. Take note: In the succeeding discussions, when we talk of expense we are referring to the corporation incurring such expense. When we talk of income, we are talking about the individual who will claim such expense of the corporation as his income. When a corporation recognizes an item as an expense, there must be another entity who will recognize this expense as his income and vice versa.  Example: Corporation X bought supplies from A. A delivered the goods to X. X has not yet paid A. In his account, X will record it as a liability. When it comes to expenses, the BIR does not follow the cash method. In accounting we have:  Cash Basis – when it comes to income, BIR leans toward cash basis  Accrual Basis - when it comes to expenses, BIR leans toward accrual basis

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iii.

Definition: expenses are recognized when they incurred, not when they are paid. RAM Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year. o Example: I hired Atty. Honculada as my counsel. I paid him in advance although he has not render any service yet. I can now claim such expense as part of my deductions. o The accrual method relies upon the taxpayer's right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment. o For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-events test has been met. This test requires: 1. Fixing of right to income or liability to pay; and 2. Reasonable accurate determination of such income or liability. 3. It must be paid or incurred in connection with the trade, business or profession of the taxpayer.  Traceable to a specific trade, business or profession of a taxpayer.  Example: Corporation X has several businesses like trading or manufacturing. The expenses that can be deducted from the trading business should only be deducted for the trading business and deductions from the manufacturing business should only be deducted for such business. o The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate amount. It must be paid or incurred in connection with the trade, business or profession of the taxpayer  There are some expenses that are not allowed to be deducted because they are not related to trade, business or profession: 1. Expenses on profit remittances abroad by foreign corporations who have branches here in the Philippines  because such remittances is not related to the day-to-day operation of the business. Rather, such expense is in connection with the relation of the branch office and the foreign corporation. 2. Political campaign expenses.  Example: Corporation X supports Senator A and contributes money for his election campaign. Can it be deducted as an expense?  GR: No because it has nothing to do with the trade or business of X.  Exception: If the contribution is made to a political party registered with COMELEC. 3. Expenses on passive investment  Example: Interest expense on bank deposits – cannot be claimed as deductions on your income because it is not your main operating activity. That’s why it is subject to a Final Tax.

 If the expenditure incurred will hinder the day-to-day operation of the business, then such expenditure should be considered as ordinary or necessary expenses. Example: Salaries due to the employees, utility bills, etc. iv. It must be reasonable in amount

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v.

vi.

 There is no hard and fast rule. It really depends on BIR to determine whether such expense can be deducted.  There are some expenses wherein the law puts a ceiling. 1. Entertainment, amusement and recreation expenditure: 1% for sale of service; 0.5% for sale of goods or properties. It must be substantiated with evidence such as official receipts and other official records;  Substantiation Rule (does not apply to OSD): 1. For you to deduct it as an expense, there must be documents like official receipts to substantiate it. 2. For it to be recognized by BIR, the documents you are presenting must be given by a third party.  Receipts, etc. must be provided or filled by such third party.  Cohan Rule: If there is showing that expenses have been incurred but the actual amount cannot be ascertained because you lack the necessary documents to support it, then the BIR has they duty to estimate how much is the amount of such expenditure o Example: Corporation X is claiming advertising expense for P1M but it can only prove through official receipts up to P500K. It is now up to BIR to estimate the remaining P500K based on other documents you can present. However, the estimation of BIR weighs heavily against the taxpayer who failed to present the complete official receipts. Usually, the BIR will apply the 50-50 ratio. 50% will be allowed to be deducted, 50% will not be allowed as deductions. a. Official receipts i. ATP – Authority to print from the BIR. ii. For a receipt to be cognizable by the BIR, you must: 1. Obtain an ATP 2. Indicate the name of the printing press on your OR. 3. Indicate the TIN of the printing press. iii. If it involves a home worker like sastres, you may it claim it as a deduction by presenting other evidences like a contract or acknowledgement receipt issued and signed by such home worker. b. Adequate Records c. Amount of Expense being deducted d. Date and place where such expense is paid or incurred e. Nature of expense – direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. It must not be against law, morals, public policy or public order  Examples: bribes, facilitation fees (under the table), revolutionary taxes and kickbacks  Take note: Insofar as income tax is concerned, these are all considered as income (source blind).

b) Kinds of Ordinary & Necessary Expenses (CARTERS) i. Compensation for Services Rendered *Special Requisites for Deductibility missing…* ii.

Advertising & Promotional Expenses (Gen Foods case)  It must be reasonable Classifications: 1. Advertising to stimulate the current sale of merchandise or use of services.  Deductible in full for that particular taxable period. 2. Advertising to stimulate future sales of merchandise or use of services  Not deductible in full for that particular taxable period because it is treated as capital expense. Therefore, there is a need for you to spread out the cost over the period. 3. Advertising to promote the sale of shares of stocks or create favorable image  Not deductible in full because it is treated as capital expense so you have to spread it out. 

To determine whether or not the advertising is used to stimulate a current or future sale, we use the MATCHING principle.

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iii.

Example: Corporation X has an advertising expense of P10M but its sales during that period is only P1M, it is not advertising to stimulate current sale. It is really the BIR who will decide. It’s highly circumstantial.

Rental expenses  Before you can deduct rental expenses, you should have already withheld 5% of the rental.  These rental expense should pertain to properties whether personal or real which are used in the trade or business. Requisites: I. The rental payment is required as a condition for continued use or possession II. The purpose is for trade, business or profession. III. The taxpayer must not be the owner of the property or he has not equitable title over the property. The taxpayers must not be taking title to the property. IV. This is subject to withholding tax.

iv.

Travelling expenses

Special requisites for deductibility of traveling expenses: 1. 2.

3. v.

The expenses must be reasonable and necessary They must be incurred or paid “while away from home” and “Home” does not refer to your residence but to the station assignment or post/principal place of business regardless of where the family residence is maintained i.e. business trips. This includes transportation, meals and lodging. (RR 2-40)  Example: Transportation expense of Mr. Canoy from his residence in Mandaue to PSBank. Can PSBANK claim such transportation expense as a deduction? No. How about the transportation expense incurred by Mr. Canoy in traveling from PSBank Jones branch to PSBank Manila? Yes such travelling expense can be claimed as a deduction.  If a company vehicle is used both for personal and business trips, the expense should be apportioned i.e. pro-rata deductions. Basis on how to pro-rate: time or mileage. They must be paid or incurred in the conduct of trade or business.

Entertainment, Amusement and Recreation Expenses  This is different from the fixed representation expenses.  Pertains to the expenses incurred by the corporation in entertaining its guest: 1. Restaurant where they dine. 2. Expenses in the golf course. 3. Entertainment center.  Take note: Guests do not include, the officers and board directors of the company or family members.

Special Requisites For Deductibility Of EAR Expenses: 1. 2. 3.

4.

Reasonable in amount. Incurred during the taxable period. Directly connected to the development, management and operation of the trade, business, or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade or its trade, business, or profession. Not to exceed such ceiling as the Secretary of Finance may, by rules and regulations, prescribe (Refer to RR 10-2002)

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Societas Spectra Legis Taxation Law 1 Compilation Limitation: (SIR: Take note of the ceiling for each ) - Those engaged in sale of goods/ properties [Ceiling: 0.5% of net sales (i.e., gross sales less sales returns/allowances and sales discounts)] - Those engaged in sale of service [Ceiling: 1% of net revenue (i.e., gross revenue less discounts)] - Mixed – Apportionment Formula  However, if the taxpayer is deriving income from both sale of goods/properties and services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based on an apportionment formula taking into consideration the percentage of the net sales/net revenue to the total net sales/net revenue, but which in no case shall exceed the maximum percentage ceiling provided in these Regulations. Apportionment Formula: Net sales/net revenue

____

x

Actual Expense

Total Net sales and net revenue

Example: Net Sale

P300,000

Net Revenue

P200,000

EAR

P10,000_

Deductible EAR ?

How much is the deductible EAR? Step 1: Add the net sale and net revenue Net Sale

P300,000

Net Revenue

P200,000

Total

P500,000

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Societas Spectra Legis Taxation Law 1 Compilation Step 2: Get the proportion for the net sale and net revenue using the Apportionment Formula: Net Sale P300,000 x 10,000 = P6,000 P500,000 Net Revenue P200,000 x 10,000 = P4,000 P500,000

Step 3: Determine the deductible EAR Net Sale

P300,000 x .5% = P1,500

Net Revenue

P200,000 x 1% = P2,000

Total

P500,000

P3,500

For the P6000 you can only deduct P1,500 while for the P4,000 you can only deduct P2,000

Step 4: Determine the excess or useless expenditure. Net Sale P6,000 – P1,500 = P4,500 Net Revenue P4,000 – P2,000 = P2,500

These excesses cannot be deducted or transferred to another expenditure.

5.

Any expense incurred for entertainment, amusement or recreation which is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction.  If you provide your guest with condominium units while they are staying here or allowed your yacht to be used to close business deals, you can claim these expenses by deducting it as depreciation expenses.

vi.

Repairs & Maintenance Expenses Expenses for repairs are deductible if such repairs are incidental or ordinary, that is, made to keep the property used in the trade, business of the taxpayer in an ordinarily efficient operating condition. Repairs in the nature of

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Societas Spectra Legis Taxation Law 1 Compilation replacement to the extent that they arrest deterioration and prolong the life of the property are capital expenditures and should be debited against the corresponding allowance for depreciation.

Note: If the cost of the repair increases the life of an asset for a period of more than (1) year, that amount is considered extra-ordinary repair. Otherwise, it is considered ordinary repair.  Ordinary repairs: full deduction  Extra-ordinary repair: capital expenditure which you will capitalize it and every year you will recognize it as an expense.  Useful life of an asset: The period where you can make use of such asset. o Example: You constructed a building worth P10M. you cannot deduct the whole P10M for the current taxable year. If the useful life of the building is 20 years, then you will have to divide the P10M with 20 years. Once the accumulated depreciation is equal to the acquisition cost of the building, the asset is now considered as fully expensed. No further expenditure will be recognize for such asset even if you are still using the asset.

vii.

Supplies and materials This must be actually consumed during the taxable year.

viii.

Litigation Expenses Litigation expenses defrayed by taxpayer to collect apartment rentals and to eject delinquent tenants are ordinary expenses in pursuing his business, regardless of the result of the case. However, litigation expenses are incurred in the defense or protection of title are capital in nature and not deductible.  This can be claimed as a deduction only when there is already a final adjudication and payments have been made.  Capital expense benefits you not only during the taxable year but for several years that is why it is not deduct it in full for one taxable year.

ix.

Option to Private Educational Institution In addition to the allowable deduction, a private education institution-may, at its option, elect either I. II.

Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities (“Outright Method”) or To deduct allowance for depreciation thereof (“Spread-out Method”)

c)

Substantiation Rule vis-à-vis Cohan Rule Principle. See discussion above.

2.

Interest

The amount of interest paid or incurred within a taxable year (1) on indebtedness (2) in connection with taxpayer’s profession, trade or business shall be allowed as deductions from gross income.  The interest referred to here is interest paid for forbearance or loan of money.

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Societas Spectra Legis Taxation Law 1 Compilation Two treatment on deduction of interest expense: 1. If the taxpayer incurs only interest expense but do not earn interest income, he can deduct in full the interest expense (not subject to the Arbitrage Rule) 2. If the taxpayer incurs interest expense and at the same time earning interest income which is subject to a final tax (GR: 20%), then apply the Arbitrage Rule by reducing the allowable deduction to 33% of the interest income earned.

a)

Arbitrage Rule The taxpayer’s allowable deduction for interest expense shall be reduced by an amount equal to 33% of the interest income earned by him which has been subjected to final tax. (effective January 1, 2009)

30% - 20%FT = 33% 30%  Purpose: to prevent back-to-back loan.  Example 1: You loan from Bank A and pay an interest expense. After loaning it, you deposit it to back to Bank B and earn interest income to take advantage of tax benefit/tax shield. The interest paid to Bank A is a deduction on your taxable income which will cause a reduction of your tax payable. If you are a corporation the tax benefit based on the interest expense is equivalent to 30%. On the other hand, if you deposit it and you earn interest income, the final tax you will be paying for such interest income is only 20%. Therefore, you are benefited up to 10%.  Example 2: Corporation X loaned from Bank A the amount of P500,000 at 10% interest (expense) = P50,000. Thereafter, X deposited the same amount to Bank B at 10% interest (income) = P50,000. If there was no Arbitrage Rule, Corporation X can deduct as his interest expense the amount of P50,000.

Sales

P1M

Cost of sales

P500K

Gross income

P500K

Operating Expense

P200K

Interest Expense

P50K_

_--_

Taxable Income

P250K

P300K

30%

30%

P75K

P90K

Tax due/payable

If you did not deduct P50K from the taxable income, your taxable income would have been P300K and your tax payable would have been P90K. However, because you were able to deduct P50K from your taxable income, your tax due was reduced from P90K to P75K and there is a tax shield/benefit of P15K (P50K x 30%). On the other hand, for the Interest Income: P50K x 20% = P10,000. Without the Arbitrage Rule, the gov’t losses P5000.

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Societas Spectra Legis Taxation Law 1 Compilation Now under the Arbitrage Rule, you cannot deduct the entire interest expense of P50K. You have to reduce this amount by 33% of the interest income earned which has been subjected to final tax.

Using the Arbitrage Rule: Sales

P1M

Cost of sales

P500K

Gross income

P500K

Operating Expense

P200K

Interest Expense

P50K - P16,500 (33% of P50K) = P33,500

Taxable Income

P266,500 30%

Tax due/payable

P79,500

Example 3: Corporation X loaned from Bank A the amount of P500,000 at 10% interest (expense) = P50,000. Thereafter, X deposited P600,000 to Bank B at 10% interest (income) = P60,000.

Using the Arbitrage Rule: Sales

P1M

Cost of sales

P500K

Gross income

P500K

Operating Expense

P200K

Interest Expense

P50K – P20,000 (33% of P60K interest income earned) = P30,000

Taxable Income

P270,000 30%

Tax due/payable

P81,000

Example 4: Company A spent P100K interest expense. It earns no interest income. Can Company A deduct the P100K interest expense? Yes the interest expense is fully and entirely deductible. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Example 5: Company B spent P100K interest expense. It has interest income of P50K for loans to its employees which is not subject to interest. Can Company B deduct the P100K interest expense? Yes. Will it not be subject to the Arbitrage Rule? No because although there is an interest income, such is not subjected to final tax. Example 6: Company C has interest expense of P100K. It earns P50K interest income from its bank deposit. Can Company C deduct the P100K interest expense? No. Will it not be subject to the Arbitrage Rule? Yes. Its interest expense shall be reduced by an amount equal to 33% of the interest income earned by C which has been subjected to final tax. Summary: 1. 2.

3.

If there is an interest expense and but no interest income subject to final tax, then the interest expense is fully and entirely deductible. If there is an interest expense and there is an interest income not subject to final tax, then the interest expense is fully and entirely deductible. (Arbitrage Rule will not apply.) a. Example: Company X loans to its employees without any interest. If there is an interest expense and there is an interest income subject to final tax, then the interest expense is not fully deductible because it must be reduced by an amount equal to 33% of the interest income earned by him which has been subjected to final tax.

b) Requisites for Deductibility 1. There must be an indebtedness 2. There should be an interest expense paid or incurred upon such indebtedness 3. The indebtedness must be that of the taxpayer 4. The indebtedness must be connected with the taxpayer’s trade, business or profession 5. The interest expense must have been paid or incurred during the taxable year 6. The interest must have been stipulated in writing 7. The interest must be legally due 8. The interest arrangement must not between related taxpayers. 1. Between members of a family (brother, sister of half or full blood, spouse, ascendants, lineal descendants). 2. Between an individual and a corporation—more than 50% in value of the outstanding stock of each of which is owned directly by or for such individual; 3. Between two corporations—more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company; or 4. Parties to a trust: a. grantor and a fiduciary of any trust, or b. fiduciary of one trust and the fiduciary of another trust, but there is only one grantor. c. fiduciary and a beneficiary. 9. The interest must not be incurred to finance petroleum operations (taken from a Special Law) 10. In case of interest incurred to acquire property used in trade, business or profession, the same, was not treated as capital expenditure.

c)

Optional Treatment of Interest Expense At the option of the taxpayer, interest incurred to acquire property used in trade, business or profession may be allowed or treated as capital expenditure.  Option to treat interest expense either as a deduction or as a capital expenditure. *Treated as capital expenditure: this pertains to forbearance or loan of money where you used to it to purchase capital asset of the business.

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Societas Spectra Legis Taxation Law 1 Compilation  Example: You used it to construct the company building or purchase machinery for your business which will benefit the company for a long period of time. If you opt to treat it as a capital expenditure, you will add it as part of the cost in acquiring the capital asset. This usually applies when there is no interest income which is subject to final tax. d) Delinquency Interest, Interest on Deficiency Taxes - Deductible; Surcharges, Compromise Penalties for Delinquent Payment of Tax and Fines on Tax Payment – Not deductible  Delinquent – late filing or late payment.  Deficient – what your declare was insufficient.  Delinquency interest and interest on deficiency taxes are deductible because delay in payment or once there is deficiency, you are considered indebted to the government. Whatever interest is being assessed by the government that is allowed as a deduction. (CIR vs Palanca case)  Surcharges, Compromise Penalties for Delinquent Payment of Tax and Fines on Tax Payment are not deductible because you are not allowed to benefit from you own mistake. e) Theoritical Interest – Not deductible An interest which is computed or calculated not paid or incurred, for the purpose of determining the opportunity cost of investing in a business. This does not arise from legally demandable interest-bearing obligation. This is not deductible interest. f)

Interest Expenses which are Non-Deductible

I.

Interest expense on preferred stock. Preferred stock – you have a preference either on the distribution of the income or the asset over the common shares or stock. As a rule, interest on preferred stock is not deductible because there is no obligation to speak. It is in effect an interest on dividend. There is no indebtedness involved. One who purchases a preferred stock with interest is not a debtor but rather an investor. However, if it is stated in the preferred stock certificate that the interest payable to the preferred shareholder depends on the earning of corporate profit, then it becomes deductible under the Matching principle. Reason: the payment is dependent upon the profits of the corporation. It will only be paid if the corporation earns profits. BUT if it is not dependent upon corporate profits or earnings, it is not deductible. If it is payable on a particular date of maturity without regard to the corporate profits, it is deductible. GR: If the payment of interest expense on preferred stock is NOT dependent on corporate profits or earnings, it is not deductible ??? EXC: If it is just a provision in a preferred stock that interest expense will be paid depending upon the profits of the corporation, then it is deductible under the Matching principle.

II. III.

When there no arrangement in writing to pay interest Interest expense on loan entered into between related taxpayers. 1. Between members of a family (brother, sister of half or full blood, spouse, ascendants, lineal descendants). 2. Between an individual and a corporation—more than 50% in value of the outstanding stock of each of which is owned directly by or for such individual; 3. Between two corporations—more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company; or 4. Parties to a trust: a. grantor and a fiduciary of any trust, or

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IV. V. VI. VII. VIII. 3.

b. fiduciary of one trust and the fiduciary of another trust, but there is only one grantor. c. fiduciary and a beneficiary. Interest paid or calculated for cost-keeping purposes Interest paid in advances through discount or otherwise by an individual taxpayer reporting income on the cash basis. Such interest shall be allowed as a deduction in the year the indebtedness is paid. Interest on obligation to in finance petroleum exploration Interest on unclaimed salaries from employees 33% of the interest income subjected to final tax.

Tax Expenses

General Rule: All taxes, national or local, paid or incurred within the taxable year in connection with the taxpayer’s trade, business or profession are deductible from the gross income. Exception: 1) Special Assessment and taxes assessed against local benefits of a kind that tends to increase the value of the property.  A special assessment is not a tax. It is levied by the LGU if there any improvements in the land owned by person assessed due to the efforts of the LGU.  Payment for special assessment: Not deductible.  Payment for real estate tax: deductible. 2) Income Tax – includes foreign income tax which has already been claimed as a tax credit.  Who claim for foreign income tax as tax credit? Resident Citizens, Partners in a General Professional Partnership and Domestic Corporations.  Deductions: you deduct this from the gross income before arriving at the taxable income  Tax Credit: you deduct this from the tax due or tax payable.  Two things to remember: 1. If it is a Philippine income tax, it is absolutely not deductible. 2. However, for foreign income tax which you can also claim as a tax credit, it can actually be claimed as a deduction or a tax credit. a. You can no longer deduct it if you already claim it as a tax credit and vice versa.  Which is more beneficial: claiming it as a tax credit or claiming it as a deduction? Tax credit.  Foreign income tax, when deductible:

Example: Rei La Datsun, Non-resident citizen PH

Thailand

Gross Income

P1M

P1M

Expenses

P500K

P500K

Tax Paid

P100K

P50K

Can Ms. Datsun deduct the P50K as tax expenses in her gross income when she files her tax return her in the Philippines? No because she is an NRC who is subject to income tax for income earned within the Philippines. Consequently, the expenses that you can deduct are only those incurred within the Philippines. Can the P50K be subject to tax credit? No.

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Societas Spectra Legis Taxation Law 1 Compilation

3) 4) 5) 6) 7) 8) 9)

 Same thing applies to Resident Foreign Corporation and Non-resident foreign corporation.  Only a 1) Resident Citizen, a 2) Partner in a General Professional Partnership and 3) Domestic Corporation have the option to either deduct or claim as a tax credit here in the Philippines, the taxes paid abroad. Taxes which are not connected with the trade, business or profession of the taxpayer. Estate Tax, Donor’s Tax.  not connected with the trade, business or profession of the taxpayer. Value-Added Tax  Indirect tax, already shouldered by the consumer and not by the taxpayer. Final Taxes, being in the nature of income tax.  Capital Gain Tax Excess electric consumption tax Foreign income tax, war profits and excess profits tax, if the taxpayer makes use of tax credit Taxes paid for commodities not connected with the taxpayer’s business.

Are payments of custom duties deductible? Yes so long as the nature of the business is importation or exportation, or directly related to your trade, business of profession. a)

Requisites for Deductibility of Taxes i. This must be paid or incurred during the taxable year ii. This must be taxes paid or incurred in connection with the trade, business or profession of the taxpayer.

b) Tax Deductions vs Tax Credits Course outline

c)

*Who may claim tax credits for taxes of foreign countries i. Citizens ii. Domestic corporations iii. Members of GPPS iv. Beneficiaries of estates and trusts Limitation on deductions for NRA-ETB and RFC: In the case of NRA-ETB in the Philippines and RFC, deduction for taxes shall be allowed only if and to the extend that they are connected with income from sources within the Philippines

d) Limitations on Credit The amount of the credit taken shall be subject to the following limitations: I.

Per Country Limitation - the amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayers taxable income from sources within such country bears to this entire taxable income for the same taxable year.  If there are several foreign countries involved, you apply first the per country limitation before applying the global limitation.  Formula: Net income per country x Philippine Income Tax Worldwide net income

II.

Global Limitation – the total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s taxable income from sources without (outside) the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.  If there is only one foreign country involved, you immediately apply the global limitation.

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Societas Spectra Legis Taxation Law 1 Compilation  Formula: Total net income from all foreign countries

x Philippine Income Tax

Worldwide net income Example 1: X Corp., Domestic Corporation PH Thailand Gross Income

P1M

P1M

Expenses

P500K

P500K

Tax Paid

P100K

The income tax paid abroad is P100K. The basic issue here is how to treat the tax paid abroad. 1. If the corporation will claim it as a Tax Deduction: You will compute your total taxable income in the Philippines and Thailand:

Gross Income – Expenses = Net Income

PHI

P1M – P500K

= P500K

Thai

P1M – P500K

= P500K

Total Taxable Income

= P1M

- Tax Paid (deduction)

= P100K (in Thailand)

Net Taxable Income

P900K

Corporate Tax Rate

X 30%

Tax Due

2.

= P270K

If the corporation will claim it as a Tax Credit: Since there is only one foreign country involved, we immediately apply the global limitation. Global Limitation: P500K x P300K = P150K P1M For the limit, we will choose whichever is lower between the global limitation and the actual tax abroad. In this case our global limit is P150K while the tax paid abroad is P100K, we will choose P100K.

Total Taxable Income

P1M

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Societas Spectra Legis Taxation Law 1 Compilation Corporate Tax Rate

x 30%

Tax Due

P300K

- Tax Credit

P100K

Tax Due

P200K

Example 2: Domestic Corporation (taxable w/in and w/out; expenses deductible/creditable is also w/in and w/out) PH

Thai

China

Gross Income

P1M

P1M

P500K

Expenses

P500K

P500K

P200K

Tax Paid

?

P100K

P100K

Let us computer first the total taxable income and then the tax due: PHI P1M – P500K = P500K Thai P1M – P500K = P500K China P500K-P200K = P300K Total Taxable Income = P1.3M (Worldwide Net Income) Corporate Tax Rate x 30% Tax Due P390K Actual tax paid in Thailand and China: Thai P100K China P100K In this case, since there are 2 foreign countries involved. X Corp., we will be using the 2 limitations. Per Country Limitation Thai =

Net Income in Thai x Tax Due in the PHI = P500K x P390K = P150K Worldwide net income P1.3M China = Net Income in China x Tax Due in the PHI = P300K x P390K = P90K Worldwide net income P1.3M Now we will compare these values with the actual tax paid abroad. We will once again choose the lower value and add them. Thai China

P150K vs P100K = P100K P90K vs P100K = P90K P190K Global Limitation P500K + P300K P500K+P500K+P300K

= P800K x P390K = P240K P1.3M

For the limit, we will choose whichever is lower between the per country limitation and the global limitation. In this case, the per country limitation is P190K while the global limitation is P240K, we will choose P190K. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Total Taxable Income Corporate Tax Rate Tax Due - Tax Credit Tax Due

P1.3M x 30% P390K P190K P200K

e) Proof of credits (Tax Credits)

The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: I. II. III.

f)

The total amount of income from sources without the Philippines The amount of income derived from each country, the tax pair or incurred to which is claimed as a credit All other information necessary for the verification and computation of such credits.

Tax subsequently refunded or credited Taxes preciously allowed as deductions, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

4. LOSSES: Ordinary Losses - losses sustained in the course of the trade, business or profession of the taxpayer - deductible to your ordinary income. This is deducted to the income tax return of your ordinary income. - This is when operating expenses are greater than your gross income. (OPEX > GI) - Normally you have SALES less Cost of sales (this are those DIRECT COST to the production or sale of your goods) equals your GROSS INCOME. Then from your GI you deduct your Operating expense(OPEX; covers expenses not covered or is INDIRECTLY related to the production and sale of your product). - There is a tendency that your OPEX will be higher lets say pataka lang ka advertise nya wala diay nipalit sa imo goods then this is when you have a NET LOSS which is what we call ordinary loss. Net Operating Loss - excess of allowable deduction over gross income of the business in a taxable year - so this is when your OPERATING EXPENSES is greater than the income of your operation. NOLCO: NET OPERATING LOSS CARRY OVER - carried over 3 consecutive years immediately following the year of loss - to compute as to when mu expire ang NOLCO you simply add +3 to the year the loss occurred. Ex. 2014 +3 = 2017 it will expire; 2015 + 3= 2018 - Take note: FIFO: that as to application of the NOLCO the rule is FIFO(First in – First Out); so loss in 2014 must be first carried over before the loss in 2015 should be carried over - TAKE NOTE: CONSECUTIVE YEARS: the loss will be carried over to the 3 consecutive years after the loss does not matter if on the next year income na or zero. It will not stop the 3 yr period to run - Is availed by: o Individual Taxpayer – business/ professional income o Corporate Taxpayer  BOTH subject to the 4 CONDITIONS. Example: ’14 ’15 ’16 ’17 ’18 ‘19 Sales 5M 6M 10M 6M 5M 5M Less: Cost of sales (2M) (3M) (5M) (2M) (3M) (2M) Gross Income/Profit 3M 3M 5M 4M 2M 3M Less: Operating Expenses 5m 5M 2M 4M 3M 1M University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Net Operating Income/(Loss) Carry Over until year

(2M) ’17

(2M) ‘18

3M

Carry Over Loss of year (NB: FIFO): 2014 2015 Taxable NI: Note:  

0

0

2M

0

0

(2M) (1M) 0

0

0

2M

3 consecutive years; so the Net Loss of 2015 cannot be availed in 2019 because it expired in 2018 FIFO: so carry over sa ang 2014 na 2M before applying the 2015 loss

 4 CONDITIONS FOR NOLCO 1. must not incur a net loss on the year the nolco is applied 2. must not be liable to MCIT (only corporate taxpayer) 3. must not be using OSD (optional standard deduction) 4. No Substantial Change in the ownership of the business of MORE THAN 25% No substantial change if: 1. not less than 75% in the nominal value outstanding issued shares, if business is in the name of a corporation, is held by or on behalf of the same person 2. Not less than 75% of the paid up capital of the corporation, business is in the name of a corporation, is held by or on behalf if the same person Example of 4th condition NO SUBSTANTIAL CHANGE OF MORE THAN 25%: B Corp - experience a loss ‘14

C corp - profit onwards 2014

1st situation: Stockholders: A 80% A 80% C 5% V 5% D 5% W 5% E 5% X 5% F 5% Y 5% - Here A is the interlocking shareholder, tendency mag merger ni sila. So question is can the losses in B Corp be applied to profits of C Corp? o YES. There is no substantial change. Because even if they merge A will still have the same interest. So here they can carry over the loss. Situation 2: Stockholders: A 10% A 80% C 20% V 5% D 20% W 5% E 20 X 5% F 30 Y 5% - Here it is different. Mag merge ni sila there will be a substantial change of more than 25% kay dili jud major stock holder si A in B corp. - In this situation THEY CANNOT USE NOLCO.

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Societas Spectra Legis Taxation Law 1 Compilation Situation 3: Stockholders: A 75% C 5 D 10 E 5% F 5% -

A V W X Y

75% 5% 5% 5% 5%

here you can use NOLCO because there is no substantial change. Take note that there is no substantial change when NOT LESS than 75% of the nominal value of the outstanding issued shares is held by or in the name of the same person. 75% and above.

CAPITAL LOSSES: - are losses from your capital assets - Transactions that are not included in your ordinary day to day transaction - This is reflected in the capital gains tax return. NET CAPITAL LOSS: if you deduct the capital loss from the existing capital gain and there is still a loss Capital assets source of capital loss: 1. Capital loss form sale of SHARES of stock 2. Capital loss from sale of other assets - No capital loss for sale of real property. This is because the tax base of the 6% CGT is the selling price of fair market value whichever is higher in short we do not take into account the cost so dili jud ma loss. - As to sale of other assers, example the owner is a lawyer so profession ang source sa iya income, he has a car then he sold it as a loss, can he deduct it from his ordinary income from profession? o NO. the car is a capital asset. The loss is a capital loss which cannot be deducted to the professional income because it has nothing to do with the profession. Nature of your profession is not into buying and selling of cars. NCLCO 1.) REAL PROPERTY NO 2.) SALE OF SHARES OF STOCK YES 3.) OTHER CAPITAL ASSETS YES

NCLCO (Net Capital Loss Carry Over) - can be availed by individual taxpayer only - carry over only for 1 year

Object Who can avail

Carry over

NOLCO Net Ordinary Loss - Individual Taxpayer – business/ professional income - Corporate Taxpayer BOTH subject to the 4 CONDITIONS.

NCLCO Net Capital Loss individual taxpayer only Reason why only indv: - more applicable when individual taxpayer

3 consecutive years from loss

Only 1 year

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Societas Spectra Legis Taxation Law 1 Compilation Capital Losses include: 1. Loss arising from FAILURE TO EXERCISE PRIVILEGE TO SELL OR BUY PROPERTY - refers to in sales as to OPTION to buy contracts na wala na dayon - this is considered as a capital loss because you did not pursue with the transaction 2.

3.

4.

Securities becoming worthless - Stocks value depreciate due to decrease in the image of the company issuing - Losses of Dealers in Securities  ordinary loss Abandonment losses in the case of natural resources - Refers to development cost in thinking that there will be petroleum or benefits in the exploration but came out to be fruitless Loss from wash sale of stock securities - Exhibits the characteristics of a simulated sale a. When is it considered a wash sale? i. Stocks or securities engaged in the buying or selling OF THE SAME TYPE within:  30 days before date of sale  30 days after date of sale  GR: IT IS A CAPITAL LOSS BUT CANNOT BE DEDUCTED  Exception: i. Dealers in Securites  Ordinary Loss

WAGERING OR GAMBLING LOSSES - deductible to the extent of gains from gambling - must not exceed the gains - usually applies to Individual taxpayers CASUALTY LOSSES - the loss is caused by fortuitous event or face majeure - Remember to be able to deduct: 1. Report to the taxing authorities within 45 days from occurrence of the loss 2. Related to trade and business 3. Evidenced by a closed and completed transaction (perfected sale) 4. ACTUALLY sustained during the taxable year. 5. Must not be compensated by insurance -

Basis of BIR: not your own declaration, maybe through and adjuster, appraiser or court action

ABANDONMENT LOSSES - made investments to explore hoping to find something; especially petroleum and found out that there is no petroleum or minerals - this is considered as a capital loss because you were not able to commence the business that was supposed to be transacted SPECIAL LOSSES - loss arising from the voluntary removal of building as an incident to renewal or replacement COMMON REQUISITIES 1. Incurred in the trade and business or profession 2. Actually sustained within the taxable year 3. Evidenced by a closed and completed transaction 4. must not be compensated by insurance or other forms of indemnity 5. partly compensated, amount not compensated by insurance is deductible only 6. filed a sworn statement or declaration of loss within 45 days after the date of discovery of the casualty or robbery, theft or embezzlement. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 5.

BAD DEBTS: - Requisites: o Valid and subsisting o Ascertained to be worthless o Charged off and uncollectible within the taxable year o Uncollectible in the near future o Arise from trade or business or profession of taxpayer - Steps to be done: 1. There must be a statement of account(SOA) sent to the debtor stating the maturity date 2. If there is no payment at the maturity date then A collection letter is sent by the creditor to the debtor 3. If he failed to pay, refer case to lawyer; Lawyer then send a formal demand letter to the debtor 4. Fails to pay, File an action in court for collection 5. Despite the order of the court there is still no payment then consider it as BAD DEBTS. - Another way of ascertaining that it is already a bad debt when the debtor files in court insolvency and after the rehabilitation dili najud matabang ga liquidate na and his liabilities EXCEED his assets than you are considered insolvent

-

BAD DEBTS charged off subsequently collected: o Apply Tax Benefit Rule

6. CHARITABLE AND OTHER CONTRIBUTIONS: Kinds if Charitable Contributions: - Ordinary Contributions o Individuals  10% of taxable income o Corporation  5% of taxable income  NOTE: AYAW NI I CONFUSE of the Entertainment and Representation Threshold of”  .5% for those engaged in the sale of goods or properties  1% of those engaged in the sale of services - SPECIAL Contributions o Full amount Requisite for deductibility: 1. must be actually paid 2. accredited organization or specified in the code  if NOT CANNOT BE DEDUCTED 3. Net Income of the institution must NOT inure to the benefit of any PRIVATE stockholder or individual 4. Made within the taxable year 5. Evidenced by adequate records or receipts 6. Must NOT EXCEED 10% in the case of individuals and 5% as to corporation of the taxable income except where the donation is deductible in full TABLE: (Atty: Bahala namo memorize ani. Labi nang mga purpose ug priority activities)

Who shall be recipient?

1. Government of the Philippines; any of its agencies or political subdivisons; or any fully –owned government corporation

DEDUCTION IN FULL 2. Accredited Non-government organization, organized or operated for purpose of SES-CCC-HR  It is accredited when it is given accreditation by the different agencies of the government like DSWD, DEPED, DOST depends sa purpose.

3. Foreign or International organization with an agreement with the Philippine Government on deductibility, or in accordance with special law

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Societas Spectra Legis Taxation Law 1 Compilation CONDITIONS:

Priority activity: SEC-HED-HYD 1. Scientific 2. Educational 3. Cultural 4. Health 5. Economic Development 6. Human Settlement 7. Youth and Sports Development

1. MUST BE ACCREDITED 2. For Purpose of: 1. Scientific 2. Educational 3. Cultural 4. Character building/ youth and sports development 5. Charitable 6. Social Welfare 7. Health 8. Research 3. PLUS satisfying the FF conditions: 1. Donation must be utilized NOT th rd LATER THAN 15 day of the 3 month following the close of its taxable year. 15-3 2. Administrative expense must not exceed 30% of total expense 3. Upon dissolution, assets must be distributed to another non-profit domestic corporation or to the state.

Who shall be recipient?

CONDITIONS:

DEDUCTION subject to LIMITATIONS 1. Government of the 2. Accredited Non-government organization, organized or Philippines; any of its operated for purpose of agencies or political SES-CCC-HR subdivisons Non-priority activity and EXCLUSIVE FOR A PUBLIC PURPOSE

Purpose of: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Scientific Educational Cultural Character building/ youth and sports development Charitable Social Welfare Religious Rehabilitation of veterans Social Welfare Institutions

PLUS conditions of FULL DEDUCTIBILITY not complied SUBJECT TO LIMITATION: 1. Individual - 10% of taxable income from TRADE BUSINESS or PROFESSION before contribution 2. Corporation- 5% of taxable income from TRADE BUSINESS or PROFESSION 

So example if you made a donation for Yolanda survivors, is it deductible? Dibah lets say under sya for the ground of “Human Setttlement”. Automatic bah dayon ma deduct in full?

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Societas Spectra Legis Taxation Law 1 Compilation o



It could be yes. Why could be man? Because there other requisite you need to comply. Such as those enumerated: o Requisite for deductibility:  must be actually paid  accredited organization or specified in the code  if NOT CANNOT BE DEDUCTED  Net Income of the institution must NOT inure to the benefit of any PRIVATE stockholder or individual  Made within the taxable year  Evidenced by adequate records or receipts  Must NOT EXCEED 10% in the case of individuals and 5% as to corporation of the taxable income except where the donation is deductible in full What if the non-government organization is NOT ACCREDITED can you deduct? o No. Because the tax specifically required for an accredited non-government organization.

 Let say that your donation does not fall under the priority activities. Is it still deductible? o Yes but subject for limitation which is:  1. Individual - 10% of taxable income from TRADE BUSINESS or PROFESSION before contribution  2. Corporation- 5% of taxable income from TRADE BUSINESS or PROFESSION . DEDUCTIBLE IN FULL UNDER SPECIAL LAWS: Enumerated in the Outline: Highlighted Special Laws ni ATTY: 12. INTERNATIONAL RICE RESEARCH INSTITUTE - TAKE NOTE gawas sa BAr 14. Donations of prizes and awards to athletes - this pertains to sports recognized by the Philippine Olympic Committee and the National Sports Association. - So donate ka sa Gilas kay pildi man sila the ans. Is YES because ASEAN games is reconized. SUMMARY: 3 SCENARIOS FOR CHARITABLE CONTRIBUTION: 1. FULL DEDUCTION: Made to government or non-government accredited or foreign with compliance with the conditions 2. Deductible but SUBJECT TO THE 5%-CORP/10%-INDV Limit : Made to government or nongovernment accredited or foreign BUT NO compliance with the conditions 3. Not Deductible: Not made to government, not made to an accredited non-government org or foreign org. -

Is it okay that you just give the donation without any acceptance by the donee or recipient? o No. There must acceptance plus formal requirements if so required.

7. RESEARCH AND DEVELOPMENT PROGRAMS Expenditures which are paid or incurred by a taxpayer during the taxable year in connection with his trade, business or profession may be treated as ordinary and necessary expenses which are not chargeable to capital account. A. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. B. Amortized where taxpayer elects that the following research and development expenditures as deferred expenses: o Paid or incurred by the taxpayer in connection with his trade, business or profession o Not treated as expense o Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. C. NON- DEDUCTIBLE RESEARCH and DEVELOPMENT EXPENDITURES o Amount spent for the acquisition or improvements of land or for the improvement or development of natural resources  These are not deductible because they form part of the land or resource which shall be a benefit to you for a long time. -

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Societas Spectra Legis Taxation Law 1 Compilation o

8.

Amount paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any natural resources like deposits of ore or other minerals including oil or gas.  Not considered a deduction because this is still a not clear in case there is failure to find anything it will be declared as capital loss.

PENSION TRUST CONTRIBUTIONS Taxpayer usually a Corporation  it creates a private Pension Plan  in favor of Employees. The employer pays the pension plan and the pension plan will pay the EE the so benefits. Since the taxpayer is paying and nothing will be returned to the taxpayer then it is deductible but subject to: o Current Year  fully deductible o Past years  apportioned to the next 10 years; 1/10 deductible per year

-

REQUISITE FOR DEDUCTIBILTY: ER must have establish a pension or retirement plan to provide for the payment of the reasonable pensions to his EE pension plan is reasonable and actuarially sound contribution must be made by the ER to that pension fund 4.funded by the ER 5.amount contributed must be no longer subject to the control and disposition of the ER payment has not yet been allowed as a deduction the deduction is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the transfer or payment is made

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

Why 10 years?  Uniform with the rule in exemption of a pension plan in taxation wherein an EE must have rendered work with the company for atleast 10 years. Ex:

Current year Past Year

’14 ‘15 1M  deduct full 1M  deduct full 1M  deduct 1/10  100K

PREMIUMS ON HEALTH AND/OR HOSPITAIZATION INSURANCE Review: Requisite: 1. Income must be either business/ professional compensation or both 2. Taxpayer must be an individual 3. FAMILY INCOME  NOT MORE THAN 250,000 4. Deduction is limited to P 2,400 per family or 200 a month

DEPRECIATION; DEPRECIATION; AMORTIZATION

-

-

DEPRECIATION pertain to Assets that can be replaced or depreciable assets ex. Property, machinery, vehicle, subject to the normal wear and tear of

DEPRECIATION - pertain to assets that cannot be replaced; Natural resources - considers the volume or unit to be taken form the asset - Mine, Petroleum, diamonds. Resources that cannot be replaced

AMORTIZATION - refers to intangible assets - patent, copyright, trademarks

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Societas Spectra Legis Taxation Law 1 Compilation business operations

REQ: 1. 2.

Used in the trade and business; Ordinary asset. There must be depreciable properties; do not include NON-DEPRECIABLE ASSETS which are:

anymore. “This is according to Biology….aw Science diay”

-

Note: Goodwill that is built by the taxpayer or the corporation BY ITSELF you cannot amortize it. Different story if ACQUIRED GOODWILL gi palit nimu dili na naa jud value versus anang feel lang nimu na naa nay goodwill imo producto based on your own opinion.

Essential Factors: 1. basis of the property 2. estimated total recoverable units in the property 3. no. of units recovered during the taxable year

1.

3. 4. 5. 6.

Personal Property Not Used in business 2. Inventorialble stock and securities( those you are selling) 3. Land 4. Mining and other natural resources Allowance for depreciation must be reasonable Charged off during the taxable year Statement on the allowance must be attached to the return Method of computing must be in accordance with the prescribed by Sec.Of Finance (SOF).

Depreciation Method: 1. Straight line  EXAM PURPOSES WE WILL USE THIS 2. Declining balance 3. Sum of the years digit 4. Any Other method prescribed by the SOF upon recommendation of the BIR commissioner Example: Straight Line Method COST: 1M Salvage/Scrap Value: 50K Estimated Useful Life: 10 years Purchased 2014

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Societas Spectra Legis Taxation Law 1 Compilation Straight Line Method Formula: COST less SALVAGE VALUE = Yearly Depreciation USEFUL LIFE 1M-50K 10 years  95,000 per year depreciation Book Value Formula: - Book Value = COST less Accumulated Depreciation - Accumulated Depreciation = Total yearly Depreciation

Cost Less: Accumulated Dep. (AD) Book Value (BV)

2014 1M (95K) 905K

2015 1M



2024 1M

(190K) [95k+95k] (950K) [95k times 10yrs] 810K 50K  Salvage Value

Salvage Value or Scrap Value  value of the property at the end of its useful life.

AGREEMENT AS TO USEFUL LIFE ON WHICH DEPRECIATION RATE IS BASED - taxpayer and CIR can enter into a an agreement in writing specifically dealing with the useful life and the rate of the depreciation of the property - the rate so agreed upon shall be binding on both taxpayer and the National government - the responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. OBSOLESCENCE - When: o Of the whole or any portion of the physical property is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its natural life, so that depreciation deduction alone would be insufficient to return the cost at the end of its economic terms of usefulness, o a reasonable deduction for obsolesce in addition to depreciation may be allowed - Caveat: there MUST BE APPROVAL OF THE BIR - Ex. Machinery nimu na baha-an so wanay gamit.

MCIT: Minimum Corporate Income Tax - APPLIES ONLY TO CORPORATION legacy of enrille - MCIT or 2% of gross income is used if it is higher than the Normal Income Tax (NIT) even if your reporting a loss - Purpose: this is to counter the acts of corporation of bloating its expenses to reduce its taxable income. FOR: corporate taxpayers they have: - MCIT = 2% of Gross Income - Normal Income Tax (NIT) = 30% of Taxable Income - Gross Income Tax (GIT) = 15% but there are conditions – not included yet for exam

When will a corporation be subject to NIT? University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation subject to 30% of its taxable income at the start of its operation. It is considered as have started operation the moment it registered with SEC which included na ang BIR registration.

-

When will a corporation be subject to MCIT? - Subject during the 4th year following the start of your operation - BIR cleared this by ruling that you merely ADD 4 to the year its started operation Ex. th

WHEN: 4 taxable year immediately following the year the corporation has commenced business  To make your life easier just add 4 to the year incorporated: 2010 + 4 = 2014. o 2010 – NIT 2011 - NIT

-

2012 – NIT 2013 – NIT 2014 – NIT or MCIT Ex: X incorporated in 2009; it is covered by MCIT because 2009 + 4= 2013. Steps: 1. 2. 3. 4.

compute the NIT compute the MCIT Compare the NIT vs MCIT Pay whichever is higher

 1st Scenario: In 2014: Sales 1M Cost of Sales ( COS) (700K) Gross Income(GI) 300K Operating expense(OPEX) (200K) Taxable Income (TI) 100K NIT: 100k x 30% = 30,000  higher so this is the tax payable MCIT: 300k x 2% = 6000 nd

 2 Scenario: Suppose in 2013 there is a NOLCO 500K Then in 2014 Sales 1M COS (700K) GI 300K OPEX (300K) TI 0 MCIT 300k x 2% = 6000.00  higher so this is the tax payable NOLCO  no because there is no income

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 3 Scenario: Suppose in 2014: S 1M COS (200K) GI 800K OPEX (790K) TI 10K NIT: 10K x 30% = 3000 MCIT: 800K x 2% = 16,000 pay the MCIT because higher NOTE: in the 3rd scenario suppose you had loss in 2013. You DO NOT APPLY THE NOLCO anymore because you will be paying the MCIT. No need.

TAX RATES Classification

Sources

Tax Base

Entitled Deduction

Tax Rate

DC

Within and without

Taxable Income

Yes

30%

RFC

Within

Taxable Income

Yes

30%

NRFC

Within

Gross Income

No

30%

1. Rules GR: 30% effective Jan 1 2009 (except in special cases)  Take note where the tax rate will be applied. For DC and RFC its applied to their taxable income while for the NRFC its applied to their gross income. Optional: Domestic Corporations and Resident Foreign Corporations have the option to be taxed at 15% of gross income, provided certain conditions are satisfied. This is available to firms whose ratio of cost of sales to gross sales or receipts from all sources do not exceed 55%. Once elected by the corporation, the option shall be irrevocable for the 3 consecutive years. Exception to GR: a. MCIT—a minimum corporate income tax of 2 % of the gross income at the end of the taxable year. It is imposed on a th taxable corporation beginning on the 4 taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the normal income tax. The 30% tax rate may not be applied if it is lower than the 2% of gross income of such corporate taxpayer. b. Special Rates 2. Conditions to be satisfied to avail of the 15% optional corporate tax:  15% is applied to their GROSS income  Gross Income = Sales less Cost of sales  Once elected by the corporation, the option shall be irrevocable for the 3 consecutive years.  Requires declaration by the President upon the recommendation of the SoF. As of now, there is no such declaration.  Requisites: (SIR: familiarize) 1. Corporation is a Domesitc Corporation or a Resident Foreign Corporation.  NRFC cannot avail of GIT because they do not file their returns here in the Philippines. i. They are subject to 30% Final Withholding based on their gross income. 2. Ratio of the cost of sales or goods sold to the gross sales or receipts from all sources must not exceed 55%.  At most equal to 55%. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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3. 4. 5. 6.

 To obtain the ratio: Cost of Sales divided by Gross of Sales/Receipts  Gross sales = sale of goods/properties  Gross receipts = sale of services A tax effort ratio of 20% of the GNP A ratio of 40% of income tax collection to total tax revenues A VAT tax effort ratio of 4% of the GNP A 0.9% ratio of the consolidated Public Sector Financial Position to GNP

What is the purpose of this 15% GIT? Step 1: compute NIT: Ex. Gross Sales 10M Cost of Sales 5M Gross Income 5M Operating Expenses 2M Taxable Income 3M Corp. Tax Rate 30% Tax Due P900K Step 2: Check if there is a declaration by the President of the optional 15% GIT. If there is, the first thing you need to look for is the classification of the corporation as this will applies to DC or RFC only. Step 3: Next, you will determine if the ratio of the cost of sales or goods sold to the gross sales or receipts from all sources must not exceed 55%. Ratio= 5M/10M = 50% Step 4: if ratio not exceed 55%, get GIT Gross Income Tax = Gross Income x 15% = 5m x 15% = P750K So a qualified taxpayer will avail of the 15% optional GIT rather than pay the normal corporate tax. 3. 2% Minimum Corporate Income Tax (Exception to the GR) The Minimum Corporate Income Tax rate of 2% of gross income means that the corporate taxpayer must pay corporate income tax not lower than 2% of its gross income. If the actual corporate income tax is lower than the 2% tax that is supposed to be paid, it is the 2% minimum.  Applies only if the corporation is subject to NCIT such that if the corporation avails of the 15% optional GIT, MCIT will not apply. o Example: Non-stock non-profit educational institution cannot avail of MCIT since it is not subject to the Normal Corporate Income Tax.  Implemented during the 4th year following the start of your operation which is counted from the date of REGISTRATION with BIR. When are you liable to pay MCIT? 1. When your MCIT is greater than you NCIT. 2. When the corporation incurs a loss or its taxable income is equal to 0. Who are subject to MCIT? 1. Domestic Corporation 2. Resident Foreign Corporation. Note: A Resident Foreign Corporation is not subject to MCIT because it is not liable to pay NCIT. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Definition of Terms Gross Income derived from business shall equivalent to gross sales less sales returns, discounts, and allowances and cost of goods sold. (Section 27A and 27E) For tax payers engaged in sale of service, gross income means gross receipts less returns, discounts, and allowances. (Section 27A) For 15% optional GIT For tax payers engaged in sale of service, gross income means gross receipts less returns, discounts, allowances, and cost of services. (Section 27E) For MCIT Gross Sales xx Less: Sales Returns (xx) – actual returns from the buyer because it is defective Sales Discount (xx) – cash discount given to the buyer Sales Allowances (xx) – estimates on how much is the possible returns of the sales Net Sales xx Less: Cost Of Goods Sold Gross Income Cost of goods shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. Section 27A and 27E For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.  Invoice cost = prices less the cash discount, if there is any.  Example: Goods normally sold at P100. During a Sale it was sold at 10% discount. So P90 is your invoice cost. ??? For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.  Manufacturing overhead: refers to cost or expenses directly incurred in the production of the finish product that cannot be classified as raw material nor direct labor. For a service concern: 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense. Carry Forward of Excess Minimum Tax. Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the Normal Income Tax for the three (3) immediately succeeding taxable years. Requisite: 1. The corporation is liable to pay the NCIT. (Not liable for NCIT = Cannot avail of MCIT)

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Societas Spectra Legis Taxation Law 1 Compilation Illustration: X Corp started operation 2010

Sales Less: CoS Gross Income Less: OPEX Taxable Income NIT Tax Due (NCIT) MCIT (2% of GI) Tax Payable MCIT for that year Excess MCIT Tax Payable

2013

2014

2015

2016

2017

2017

2018

2019

10M 5M 5M 1M 4M 30% 1.2M 0 1.2M

10M 8M 2M 1M 1M 30% 300K 40K 300K 0

10M 4M 6M 7M (1M) 30% 0 120K 120K 120K

5M 3M 2M 1.9M 100K 30% 30K 40K 40K 10K

8M 4M 4M 3.5M 500K 30% 150K 80K 150K

8M 4M 4M 3.9M 100K 30% 30K 80K 80K 50K

10M 10M 0 0 0 30% 0 0

8M 4M 4M 3.M 500K 30% 150K 80K 150K

(120K-0)

(40K-30K)

120K

130K

(80K-30K)

180K

P60K

20K (150K-130K)

The Excess MCT of P120K in 2015 can be carried forward for up to 3 years which means this will expire by 2018. The excess MCT of P10K in 2016 can be carried forward up to 2019. We still observe the First In First Out basis. In 2017, your Taxable Payable would have been P150K. However, you will avail of the carry forward for the previous MCIT. We will deduct our accumulated MCT of P130K from the NCIT of P150K. The tax we will be paying to BIR would only be P20K. By 2018, even if you are liable to pay under NCIT, you no longer can avail of MCIT because you have already exhausted all your accumulated MCIT in the previous year. Now let’s say for 2017, you are liable for MCIT. Your excess will now be P180K. Take note that by 2018, the P120K excess that you have accumulated in 2015 will expire. Let’s say in 2018 your taxable income is P0, therefore you are liable for MCIT. By 2019, if you are liable for NCIT, can you still carry over the excess MCIT of P150K that you have accumulated in 2015? No. By that time your excess MCIT is now only P60K (P180K-P150K). MCIT EXCEPTIONS: 1. For Domestic Corporations a. Proprietary Educational Institutions (PEI) (NOT non-stock non-profit) i. GR: 10% 1. Gross Income for unrelated activities MUST NOT EXCEED 50% Example: UC: Subject to 10% because it did not exceed 50% of the GROSS income.  Proceeds from tuition = 50M  Proceeds from rental = 50M ii. EXCEPTION: 30% NCIT/2% MCIT 1. Example: UC: Subject to 30% or 2 % because it exceed 50% of the GROSS income.  Proceeds from tuition = 40M  Proceeds from rental = 60M b. Non-Profit Hospitals = 10% same rule as Proprietary Educational Institutions. c. Depository Banks FCDS = subject to a different tax rate. 2.

For Resident Foreign Corporations: a. Offshore Banking Units = 10% b. International Carriers = 2.5% Gross Philippine Billings i. Includes air and sea ii. Flight must be originating from the Philippines c. PEZA registered Corporations; Subic Bay Management Authority; other Economic Zones  Two options: 1. 30% NCIT

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Societas Spectra Legis Taxation Law 1 Compilation 2.

5% of Gross Income Tax in lieu of all taxes.

Relief from the Minimum Corporate Income Tax Under Certain Conditions The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. Can you do away of payment of MCIT?  Yes. SOF may suspend the imposition of MCIT on any corporation which suffers losses on account of 1. Prolonged labor dispute 2. Force majeure 3. Legitimate business reverses  NOTE: this is a case to case basis and you need to submit documents to prove your losses. 4. Special Rules a. Special Domestic Corporations 1. Proprietary Educational Institution

Sources Within and without

Tax Base Taxable Income

Tax Rate 10% or 30%

Proprietary Educational Institutions – any private school maintained and administered by private individual or group with an issued permit to operate from the DepEd or CHED, or TESDA, as the case may be. Tax Rates:  10% if its income derived from unrelated trade, business or activity does not exceed 50% of its gross total income.  30% ordinary tax rate if its income from unrelated, trade or business or activity exceeds 50% of its gross income. How do determine the percentage? We use the PRE-DOMINANCE TEST: determine which between the two income is greater the related or unrelated source of income. Sources

Tax Base

2. Non-Profit Hospital Within & without Taxable Income *Same principle (10% or 30%) applied in proprietary institution.

Tax Rate 10% or 30%

b. Special Resident Foreign Corporations Sources

Tax Base

Tax Rate

1.

International Air Within Gross Phil. Billings 2.5% Carrier 2. International Sea Within Gross Phil. Billings 2.5% Carrier For purposes of International Air Carrier, Gross Philippine Billings refer to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or issue, and the place of payment of the ticket or passage document. Tickets revalidated, exchanged and/or endorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines. For purposes of International Sea Carrier, Gross Philippine Billings means gross revenue whether from passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. Note: Revenue Regulation No. 15-2013, dated September 20, 2013: An Act Recognizing the Principle of University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Reciprocity as Basis for the Grant of Income Tax Exemptions to International Carriers and Rationalizing other Taxes Imposed thereon What is important in here is the definition of: when we say Gross Philippine Billings it should be as to air carrier,  

 

revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of the place of sale or issue, and the place of payment of the ticket or passage document.  this means that the international carrier should have LANDING RIGHTS in the philippines because it requires that it MUST ORIGINATE FROM THE PHILIPPINES in a CONTINUOUS AND UNINTERRUPTED FLIGHT.

let say for example the flight is from Philippines to Hong Kong, from HK tranship mo to another airline going to US. It is not anymore uninterputted nor continuous. In the case of a flight that originates from the Philippines but transshipment of passenger, excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging to a different airline company, the Gross Philippine Billings shall be determined based on that portion of the revenue corresponding to the leg flown from any point in the Philippines to the point of transshipment. In cases where a flight is interrupted by force majeure resulting in the transshipment of the passengers, their excess baggage, freight, cargo and/or mail to another airplane operated by another airline company and transshipment takes place in another country, the Gross Philippine Billings shall be determined based on that portion of flight from the Philippines up to the point of said transshipment.

“Gross Philippine Billings” of international sea carriers, there shall be included the total amount of gross revenue whether for passenger, cargo, and/or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.    

3.

even if the items are sold abroad but orginates here in the philippines it is considered as income within because it says regardless of the place of sale. Relate this to the case of SILK AIR, here silk had no flights originating in the phil but it sold tickets here in the phil. Can the airline claim for the 2.5%? NO. because it does not have any flight orginating here in the philippines. Remember that as to sales the situs is as to where the contract is perfected. So we are saying here that it is still TAXABLE but not using the 2.5% instead we use the 30% tax on the resident foreign corporation.

Offshore Banking Units

Within

Income derived from foreign currency transactions with non-residents, offshore banking units in the Phils., local commercial banks, inc. branches of foreign banks that may be authorized by the BSP to transact business with OBUs,

Exempt

Income of non-residents (individual/corporation from OBUs)

Exempt

Income derived from foreign currency loans granted to residents (RC or RA or RFC) University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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4.

Tax on Branch Profits Remittances

5. 6.

R-AreaHQs R-OperationsHQs

Within

Total profits applied or earmarked for remittance, “without deduction for the tax components thereof” (meaning without deducting the 15% ahead) N/A – purpose is for admin no operations COPORATION: Taxable Income Remember INDIVIDUAL: are of this ROHQ are subject to an optional 15% provided they fall within the 3 test: 1. Exclusivity Test 2. Position and Function Test 3. Compensation Threshold Test

15%

Exempt 10% 15%

What is subject to branch remittance tax (BRT)?  15% of the Local profits remitted by a Resident foreign corporation to its mother corporation abroad. Who is subject?  Only to Resident Foreign Corporation May a Domestic corp be held liable for BRT?  No. Review: Passive Tax on dividends: Individuals: RC,NRC,RA -10%, NRA-ETB-20%, NRA-NETB – 25% Dividends of Corporation:  Domestic Corp. (DC) to another DC  EXEMPT  DC to Resident Foreign Corporation  Exempt  DC to Non RFC  30% Income tax rate BUT SUBJECT to TAX SPARING of 15% o provided the country grants tax credit to Filipino corporation equivalent to at least 15% GOING BACK TO BRT: Branch Profit Remittance Tax: Here we go…  a Non Resident Foreign Corporation in CHINA NRFC establishes a branch here in the Philippines so its labeled resident foreign corporation branch RFC-B.  on the other hand, the NRFC also owned 100% equity to a DC. When we talk of DC it its established & incorporated in the Philippines so the first requirement is that you have shareholders. Having a separate and distinct juridical personality the DC is considered as a SUBSIDIARY.  Difference of a branch and subsidiary: o Branch we have a (Home Office – Branch Relationship) while as to a Subsidiary (Parent – Subsidiary Relationship) o Under the Home Office – Branch Relationship, the RFC here in the Philippines is considered ONE AND THE SAME as the NRFC, which is located abroad.  Logic will help you understand that NRFC, non-resident so wala jud dri sa ato, RFC resident man so naa sa ato. Si NRFC it has shareholders while RFC being a branch or an extension in the Philippines have no separate shareholders. ONE AND THE SAME ila shareholders. Same shareholder. Same Assets. Same Liabilities. Same Profit.  Simple example. Jobi, home office in manila. Branches in cebu, bohol, leyte, butuan, cagayan, davao. Usa ra tagia.  TAKE NOTE: RFC-B here is still a corporation its just na ang recorded shareholders ang katong shareholders of NRFC. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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 

When we talk of a subsidiary we are talking here of a domestic corporation having a relationship with a NRFC. But since DC ka, inorder to incorporate you must have your own shareholders. In the eyes of the law this NRFC and DC are SEPARATE AND DISTINCT. Separate entity. Separate shareholders. Separate Assets, Liabilities and Profit.

BOTH DC and RFC earn profit here in the Philippines. Distribution of the Profit: - DC earns a Profit. o The DC will distribute it through dividends declaration to its shareholders. o DC to NRFC dividend is SUBJECT to TAX either 30% or using the tax sparing rule 15% - RFC Branch earns a Profit o Cannot declare dividends. Simply remit profits to the owner NRFC, which is called PROFIT REMITTANCE. o This is subject to Branch Profit Remittance Tax (BPRT) of 15% of the local profit remitted abroad. o The purpose of this is to get the same tax that would be paid by a DC of passive income if were given to a RFC.

EX: CASE FACTS:     

 



 

NRFC has a branch RFC-B DC 1 is subsidiary of a NRFC. The RFC-B also owns a % of the DC 1. DC 2 also owns a % of DC 1. So ang mga major shareholders of DC 1 is o NRFC o RFC-B o DC 2 If DC 1 earns a profit, it will be distributed as dividends to shareholders. So what are the tax rates to be imposed? REVIEW NAPUD TAH: o Rule as to Dividends taxable as to Corporation:  DC to DC/RFC = Exempt  DC to NRFC = 30% of Gross Income subject to Tax Sparing Rule of 15%; rule on reciprocity So what is undisputed is that dividends given by DC 1 to: o RFC Branch = E  Eventually, RFC Branch remits to NRFC: 15% BPRT o DC 2 = E Problem kay si NRFC ni argue man na exempted man ang RFC which is my branch so dapat exempted pud akong nadawat directly from DC 1. Can NRFC argue that it should be exempted because its branch is exempted? SC RULING: NO. subject to 30% of Gross Income subject to Tax Sparing Rule of 15%; rule on reciprocity

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Societas Spectra Legis Taxation Law 1 Compilation c. Special Non-Resident Foreign Corporations(no need to discuss, MEMORIZE ALL THIS RATES) Sources Tax Base 1. 2.

3. 5.

Non Resident Cinematographic Film Owner, Lessor or Distributor Non Resident Owner or Lessor of Vessels Chartered to Filipino Nationals or Corporations The Charter Agreement of which is approved by Maritime Industry Authority

Within

Gross Income

25%

Within

Gross Rentals, Lease or Charter Fees

4.5%

Gross Rentals or Fees

7.5%

Non Resident Owner or Lessor of Aircraft, Machinery Within and Equipment Passive Income (These incomes must be derived from the Philippines) DC

RFC

1.

Interest Income on Bank Deposit

20%

20%

2.

Interest Income on Bank Deposit under the Expanded Foreign Currency Dep. System Royalties derived within the Philippines Capital Gains Derived From Its Sale of Shares of Stock a. If it is listed and traded thru local stock exchange: ½ of 1% of the GSP b. If it is not listed or traded thru local stock exchange: Not over P100,000: 5%

7.5%

7.5%

20%

20%

3. 4.

Tax Rate

NRFC This should be included in its gross income subject to 30% *tax. BUT in the case of interest on loans which have been made on or after August 1, 1986, the same is subject to 20% final tax. Tax Exempt

30%

This rule applies BOTH to corporate and individual tax payers.

Over P100,000: 10% 5.

Capital Gains Derived from the Sale of Real Property which is not Used in Trade or Business

6.

Branch Profit Remitted by a Branch office

7.

Dividends received from

6% of the Gross Selling Price or Zonal Value whichever is higher Not Applicable

Exempt

Should be treated as OTHER INCOME SUBJECT to 30%

Subject to Branch Profit Remittance Tax of 15%, the basis of the tax is the amount applied for or earmarked or remittance Exempt

Not Applicable

These dividends received from DC by

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NRFC is subject to 15% Final Tax IF: the foreign corp allows a tax credit atleast 15% of the taxes deemed paid in the Philippines by NRFC.

Tax Sparing Credit (Section 28B(5)b) – 15% Purpose: To Attract investors in the Philippines There is no statutory provision that requires actual grant of tax credit by the foreign government. Neither is there a Revenue Regulation requiring actual grant. It is clear that the provision of the law “allows”. So, it is enough to prove that foreign government allows a tax credit. It is not incumbent upon the foreign government to prove the amount actually granted.

IAET: Improperly Accumulated Earnings Tax Tax on Improperly Accumulated Earnings Section 29, Tax Code  

IAET this has something to do with dividends distribution to share holders. After earning the profit, and no appropriation, it should be distributed to shareholders and whatever is distributed is subject to tax on dividends. What if wala nlng ka ni distribute kay imo shareholders do not want to pay the passive income tax? Pwede? YES BUT make sure there is no indicator that you are improperly accumulating your earnings.

Indicators of IAET any of the three: 1. Accumulated your earnings in excess of 100% of your paid up capital. or 2. Make investments of substantial earnings or profits of corporation to unrelated business, stocks or securities of unrelated businesses or 3. Make investments in bonds or other long term securities nothing to do with your business Why improper? - Because it is not appropriated for a certain purpose. - Avoid paying of dividends tax Corporations Subject to Improperly Accumulated Earnings Tax (IAET) The IAET shall apply to every corporation formed or availed for the purpose  of avoiding the income tax with respect to shareholders or the shareholders of any other corporation,  by permitting earnings and profits to accumulate instead of being distributed or divided. Coverage For Corporations using the calendar basis, the accumulated earnings tax shall not apply on improperly accumulated income a s of December 31, 1997. For Corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax shall reckoned as of the end of the month comprising the 12-month period of FY 1997-98 Exception of IAET: 1. Public held corporation – not the same as public listed corporation a. Publicly listed corporation  listed in the local stock exchange b. Public held corporation  not closely held corporation i. Closely held corporation – atleast 50% of its outstanding shares of stock allowed to vote must be held directly or indirectly by not more than 20 individuals ii. EXAMPLE: Classify: Corporation A University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation    

A owns 50%, rest 50% held by 20 individuals = CLOSELY HELD 50% owned by 1 person A owns 51%, rest 49% held by 20 individuals = CLOSELY HELD 51% owned by 1 person A owns 49% , rest 51% held by 22 individuals = PUBLICLY HELD 51% owned by 22 A owns 49%, rest 51% held by 20 individuals = CLOSELY HELD 51% owned by 20

TAKE NOTE: “ALAH-NAHAL”  

2. 3. 4.

5. 6.

7. 8.

All Publicly Listed Corporation Are Publicly Held corporation (ALAH) BUT Not All Publicly Held corporation Are Publicly Listed Corporation (NAHAL)

Banks and other non-bank financial intermediaries a. ordered by law, monitored by BSP Insurance Companies – a. ordered by law, needed to make reserve, monitored by Insurance Commission Revenue Regulation No. 2-01: a. Instances when you are allowed to accumulate: i. Allowance or Reserve for a definite expansion program involving a substantial operation, requiring substantial capital expenditure as APPROVED by BOD ii. Acquisition of PPE approved by BOD iii. Compliance with any loan covenants or pre-existing obligations established in any legitimate business agreements such as a loan in a bank. (supported by loan agreement) iv. If accumulation of earnings is required by law or regulations v. Subsidiaries of foreign corporation in the Philippines pertaining to earnings or investments intended for the Philippines. NOTE: corporation code highlights the first 3. The first 2 must be supported by an approval of the Board of directors. PEZA registered companies – a. because it can available of the 5% tax in lieu of all taxes Foreign Corporations a. RFC registered as a branch because it has no capital of its own no shareholder, no distribution of dividends. Taxable business partnerships or general co-partnerships a. covers joint ventures, because again there is no capital stock here. General Professional Partnerships a. Not considered a corporation for tax purposes.

Evidence of Purpose to Avoid Income Tax Prima Facie Evidence: The fact that any corporation is a mere holding company or investment company Evidence Determinative of Purpose: The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by cear preponderance of evidence, shall prove to the contrary. The term “reasonable needs of the business” includes the reasonably anticipated needs of the business.

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Societas Spectra Legis Taxation Law 1 Compilation Computation of improperly Accumulate Taxable Income  This is the formula. No need to solve. Just remember the formula. TAXABLE INCOME: ADD: Taxable Income adjusted by: a. Income exempt from tax (ex. Kato maga 5 years exempt, winnings sanctioned. review) b. Income excluded from gross income c. Income subject to final tax (ex. Royalties, dividends) d. Amount of net operating loss carry-over deducted (NOLCO)

XXXX XXXX XXXX XXXX XXXX XXXX

LESS: And reduced by the sum of: a. Dividends actually or constructively paid (dividends declaration) b. Income tax paid for the taxable year. IMPROPERLY ACCUMULATED EARNINGS Multiply: by 10% IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

XXXX XXXX XXXX x 10% XXXX

Take note: that reason for you to be subject to IAET because you failed to pay dividends on time. What if you paid for the 10% IAET and later on you distributed dividends to shareholders subject to another passive income tax. Can you say that the dividends I subsequently declared or paid should be exempted to the passive income tax of 10%/20%/25% because ni bayad nko sa IAET na 10%? o NO. there is no double taxation. Different purpose. The IAET is for penalty. The dividends tax for the dividends declared and moreover the dividends is payable by the shareholder and not the corporation.

REVIEW:  NIT  GIT  MCIT  BPRT  IAET  Special tax rate

30% 15% 2% 15% 10%

taxable income gross income gross income local profit remitted to NRFC improperly accumulated earnings.

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ACCOUNTING PERIOD; METHODS OF ACCOUNTING; TAX RETURNS AND PAYMENT OF TAX A. Accounting Period General Rule: The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.

Exception: Computations shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income:

i. If no such method of accounting has been so employed; or ii. If the method employed does not clearly reflect the income. [Section 43, NIRC] B. Taxable year- the calendar year on the fiscal year ending during such calendar year, upon the basis of which the net income is computed. Accounting Periods i. ii.

Calendar Year – January 1 to December 31 Fiscal Year – an accounting period of twelve months ending on the last day of any month other than December.

Calendar year shall be used under the following instances: 1. 2. 3. 4.

If the taxpayer chooses the calendar year; If the taxpayer has no annual accounting period; If the taxpayer does not keep books; If the taxpayer is an individual.

When Commissioner is authorized to terminate taxable period 1. 2. 3. 4. 5.

When a taxpayer retires from business subject to tax When he intends to leave the Philippines When he removes his property from the Philippines When he hides or conceals his property When he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year 6. When he renders the collection of the tax totally or partly ineffective C. Methods of Accounting i. Cash Basis Income, profits and gains earned by taxpayer are not included in gross income until received. Expenses are not deducted until paid within the taxable year. ii.

Accrual Method Income, gains and profits are included in the gross income when earned, whether received or not. Expenses are allowed as deductions when incurred, although not yet paid.

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Societas Spectra Legis Taxation Law 1 Compilation iii.

Mixed/ Hybrid Combination of the cash and accrual method

iv.

Any other method which clearly reflects the income

Cash v. Accrual Method of Accounting Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. Tax accounting v. Financial accounting While taxable income is based on the method of accounting used by the taxpayer, it will always differ from accounting income. This is so because of a fundamental difference in the ends the two concepts serve. Accounting attempts to match cost against revenue. Tax Law is aimed at collecting revenue. It is quick to treat an item as income, slow to recognize deductions as losses. Thus, Tax law will not recognize deductions for contingent future losses except in very limited situations. Good accounting, on the other hand, requires their recognition. [Consolidated Mines v. CTA, 58 SCRA 618] D. Long Term contracts The term “long term contract” means building, installation or construction contracts covering a period in excess of one year. [Section 48, NIRC] i.

Treatment of income from long term contracts a.) Percentage of completion basis b.) Completed Contract basis

Note: Section 48 of the NIRC provides that “Persons whose gross income is derived in whole or in part from such (long term) contracts shall report such income upon the basis of percentage completion.” The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under the contract. E. Sales of dealers in personal property A person who regularly sells or otherwise disposes of personal property on the installment plan may return as income there from in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. [Section 49, NIRC] Treatment of Sales of Realty and Casual Sales of Personality These include: a.) Casual sale or other casual disposition of personal property (other than property included in the inventory at the close of the taxable year) for a price exceeding P1000 ; and b.) Sale or other disposition of real property.

Treated either on installment basis or deferred sales basis. a.) Installment basis- if the initial payments do not exceed 25 % of the selling price. b.) Deferred sales basis- if the initial payments exceed 25 % of the selling price [Section 49, NIRC and Section 175, Revenue Regulations 2] University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation Initial Payments These include the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period which the sale or other disposition is made. The term “initial payments” contemplates at least one other payment in addition to the initial payment. [Section 175, Revenue Regulation 2] F. Termination of leasehold Lessor who acquires building or improvements made by the lessee after the termination of the lease has two options in reporting said income: 1. Lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements; or 2. Lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease and report as income for each of the lease an adequate part thereof. [Section 49, Revenue Regulation 2] G. Allocation of Income and Deductions In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled, directly or indirectly, by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion taxes or clearly to reflect the income of any such organization, trade or business. [Section 50, NIRC]

FILING OF TAX RETURN AND PAYMENT OF THE TAX H. Tax Return – A report prepared by the taxpayer showing to internal revenue officers an enumeration of taxable amounts and description of taxable transactions, allowable deductions, amounts subject to tax and the tax payable by the taxpayer to the government (self-assessment). There is pain of perjury if the return is not correct. i. BIR Form 1700 and 1701 – Annual Income Tax Return for Individuals ii. BIR Form No. 1702 – Annual Income Tax Returns for Corporations and Partnerships iii. BIR Form No. 1800 – Donor’s Tax Return iv. BIR Form No. 1801 – Estate Tax Return I. Persons Required to File Income Tax Return A. Individual 1.) Resident Citizen 2.) Non –Resident Citizen on income from within the Philippines 3.) Resident alien on income from within the Phil. 4.) NRA ETB on income within the Philippines 5.) An individual (citizen/aliens) engaged in business or practice of a profession within the Phil. Regardless of the amount of gross income 6.) Individual deriving compensation income concurrently from two or more employers at any time during the taxable year 7.) Individuals whose pure compensation income derived from sources within the Philippines exceeds P 60, 000. B. Taxable Estate and Trust C. General Professional partnership D. Corporation 1.) Not exempt from income tax University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation 2.) Exempt from income tax under Sec. 30 of NIRC but has not shown proof of exemption. J. Individuals Exempt From Filing Income Tax Return 1.) Individual whose gross income does not exceed total personal and additional exemptions 2.) Individual with respect to pure compensation income derived from sources within the Phils., the income tax which has been correctly withheld 3.) Individual whose sole income has been subjected to final withholding income tax 4.) Individual who is exempt from income tax K. Substituted filing of Income Tax Returns by Employees Receiving Purely Compensation Income [Section 4, RR 3-2002] Requisites: 1.) The employee receives purely compensation income (regardless of amount) during the taxable year 2.) The employee receives the income only from one employer during the taxable year 3.) The amount of tax due from the employee at the end of the year equals the amount withheld by the employer 4.) The employee’s spouse also complies with all three conditions stated above 5.) Employer files the annual information return (BIR Form No. 1604-cf), and 6.) Employer issues BIR Form 2316 to each employees

Individuals not qualified for substituted filing (still required to file) 1.) Individuals deriving compensation income from 2 or more employers concurrently or successively during the taxable year 2.) Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return 3.) Individuals deriving other non-business, non-profession- related income in addition to compensation income not otherwise subject to final tax 4.) Individuals receiving purely compensation income from a single employer although the income tax has been correctly withheld , but whose spouse falls under 1 to 3 above 5.) Non –resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, non-profession-related income. L. Place of Filing 1.) Legal Residence – authorized agent bank; Revenue District Officer; Collection Agent or duly authorized treasurer 2.) Principal place of business 3.) With the Office of the Commissioner M. Due Dates of Filing and Payment of Tax INCOME TAXES Income Tax –Compensation (individual Taxpayer) Income Tax – Business or profession (individual Tax Payer a.) 1st quarter (January –March) b.) 2nd quarter (april-June) c.) 3rd quarter (July –Sept.) d.) Annual final return Income Tax (corporate taxpayers)

DUE DATES April 15 succeeding year

April 15 August 15 November 15 April 15 succeeding year

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Societas Spectra Legis Taxation Law 1 Compilation a.) 1st quarter b.) 2nd quarter c.) 3rd quarter d.) Annual Final Return Capital Gains Tax on sale of real property a.) Cash Sale b.) Installment Sale Remittance to tax withheld In general a.) January to November

60th day after end of quarter 60th day after end of quarter 60th day after end of quarter April 15 succeeding year 30th day after sale 30th day after receipt of installment On or before 10th day of succeeding month

b.) December

Not later than Jan. 25 of the succeeding year

c.) Large Taxpayers

On or before 25th day of the month following the month withholding was made

Note: When the tax due is in excess of P2,000- the taxpayer may elect to pay in two equal installments: a.) 1st installment – April 15 b.) 2nd installment – on or before July 15 N. Extension of Time To File Return The Commissioner may on meritorious cases grant a reasonable extension of time for filing income tax return and may subject the imposition of twenty percent interest per annum from the original due date. O. Return of Husband and Wife File one (1) return during the taxable year if following requisites are complied: 1.) Married individuals (citizens, resident or non-resident aliens) 2.) Do not derive income purely from compensation. If impracticable to file one return: each spouse file a separate return of income but the return so filed shall be consolidated by the Bureau for the purposes of verification for the year.

Unmarried Minor Income of unmarried minors derived from property received by the living parent shall be included in the return of the parent, except from donor’s tax a.) When donor’s tax has been paid on such property, or b.) When transfer of such property is exempt from donor’s tax P. Persons Under Disability If a taxpayer is unable to make his own return, it may be made by his i. ii. iii. iv.

Duly authorized agents Representative By guardian Other person charged with the care of his person or property who will assume the responsibility of making the return and incurring penalties provided for erroneous, false, or fraudulent return. Q. Return of Estate and Trust and Partnership Estate and Trust with gross income of P20, 000 or more and partnership (whether professional or business) shall file their income tax return on or before April 15. University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation R. Tax Returns of General Professional Partnerships (GPP) Each GPP shall file in duplicate, a return of its income (except those income exempt) Shall set forth: 1.) Items of gross income or deductions allowed 2.) Names of partners 3.) TIN 4.) Share of each partner S. Self-employed Individuals Every individual subject to income tax, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination of salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. Non-resident Filipino citizens with respect to income from without the Philippines and non-resident aliens not engaged in trade or business in the Philippines are not required to render a declaration of estimated income tax.

Self-employment income Self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Return and payment of estimated income tax by individuals The amount of estimated income shall be paid in 4 installments. Estimated Tax Estimated tax means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed against said tax. If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates. T. Corporate Returns Every corporation subject to income tax, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate: 1.) Quarterly income tax return; and 2.) Final or adjustment return  The return shall be filed by the president, vice president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.  A corporation may employ either the calendar year or fiscal year as basis for filing its annual income tax return  Every corporation deriving capital gains from the sale or exchange of shares of stocks not traded through a local stock exchange shall file a return within 30 days after each transaction and a final University of San Carlos – School of Law and Governance | Based on the outlined discussion of EVS

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Societas Spectra Legis Taxation Law 1 Compilation consolidated return of all transactions during the taxable year on or before the 15th day of the 4th month following the close of the taxable year.

Declaration of quarterly corporate income tax Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The tax computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than 60 days from the close of each of the first 3 quarters of the taxable year, whether calendar or fiscal year. Fiscal adjustment return Every corporation liable for tax shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: 1.) Pay the balance of tax still due, or 2.) Carry over the excess credit; or 3.) Be credited or refunded with the excess amount paid, as the case may be. U. Computation of Income Tax Formula: All income for taxable year less exclusions = Gross Income Less Allowable deductions = Net Income Less Personal and additional exemptions = Taxable Net Income Multiply with appropriate tax rate = Income Tax Due Less Creditable Withholding Tax or Tax Credits = Net Income Tax Payable -end-

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