Tax (Income Tax)

Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

INCOME is the flow of wealth which goes into the hands of the taxpayer other than the return of capital.

overstated expenses. There would determination of your taxable income.

Example: The lender will lend money to the borrower P10,000 at 12% interest per annum. At the end of the year, the borrower pays the lender P11,200. The lender now receives P11,200. That is a wealth which goes into the hands of the taxpayer. But, is that income or is that both income or capital? This P11,200 is composed of: PRINCIPAL P 10,000 INTEREST (12% per annum) 1,200 -----------TOTAL AMOUNT RECEIVED P 11,200

3.

1)

GLOBAL APPROACH – This is also known as the totality or the aggregate approach. The Global System of Taxation of Income follows the principle that all income are one and the same. There is no variance as to the type, the purpose, the character and the kind of income.

In so far as to the P10,000, this is not income because this is return of capital. This represents capital. The excess of P1,200 represents the interest which we consider as the income.

2)

SCHEDULAR APPROACH – This is also known as differentiated or segregated approach. The Schedular System of Taxation recognizes that income are different from each other. There is a distinction and differentiation on tax treatment and character. A type of income is to be differentiated from another type of income. All income are not one and the same.

INCOME is basically the amount of money or property received by a person or a corporation within a specified time whether as payment for services, interest or profits from investments. Income refers to earnings derived from services rendered through the use of labor and capital, including gains or benefits from property, whether real or personal. Income is also derived from gains or profits excess of capital as a result of business transactions. REQUISITES FOR THE TAXABILITY OF THE INCOME: 1.

There must be a gain or profit Mere expectation for profit or mere increase in the value or appreciation in the value of the property will not give rise to an income. You bought a property P1M 10 years ago. Now, the property is worth P 10M. The increase in the value of the property is not income. So that there will be a gain or profit, there must be a transaction that will give rise to the income. A transaction where no exchangeable value is given or received does not give rise to income. The sale or disposition of that property will give rise to income. The mere appreciation or increase, unless you sell or transfer or have that disposed with a gain or profit, will not give rise to income. 2.

The gain or profit must be received or realized Gain is realized or received in the form of actual receipt or constructive receipt. When we say that income is recognized on actual receipt (cash basis of accounting), this means that you recognize that the income was earned at the time you actually received the cash. There is actual recognition at the time you actually received the income. The other way of recognizing the income is on the basis of constructive receipt (accrual basis of accounting). This means that income was already earned or realized at that point in time, even though the actual receipt will take place later. A clear example of this is the declaration of dividends. Dividends are the earnings or profits of the corporation which are distributed to the stockholders of the corporation. The stockholders will receive, what we call, dividends income. Declaration of Dividends December 2007 Distribution/Receipt of Dividends January 2008 If you are a cash basis taxpayer or you recognize the income on the basis of actual receipt, then, the income is recognized only on January 2008 because you are recognizing income on the actual receipt or on the cash basis of accounting for it. But if you recognize income on the basis of constructive receipt, income was already earned as early as December 2007, even though the receipt or distribution will take place on a later date. The taxpayer is allowed to use either actual or constructive receipt. The taxpayer is not allowed to use a combination of methods. For purposes of consistency, if the taxpayer uses actual receipt, then, that should also be the method of accounting for the deductions. If you use actual basis in recognizing income and constructive basis in recognizing expenses, then, you would have an understated income or

be

no

accurate

The gain must not be excluded by law or treaty from taxation

APPROACHES/METHODS IN THE TAXATION OF INCOME:

4 Classes of Income under Schedular Approach: 1. Compensation Income 2. Business/Professional Income 3. Passive Income 4. Capital Gains GROSS INCOME SEC. 32. Gross Income. – (A) General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items: (1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2) Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professional partnership. These are the sources of income but the enumeration is not limited. (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this title: (1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. When you are indemnified for such loss or insurance proceeds are paid for such loss, what you have is a return of capital. That is excluded and not subject to income tax. But if such amounts are held by the insurer under an agreement to pay interest, then, income is earned by way of the interest but not on the principal amount covering the proceeds of the policy. (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. These are return of premiums. They represent return of capital. They are not income.

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

1

Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

(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. They are not income because they are receipt of capital. (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. These are forms of indemnity. These are return of capital. Actual damages in payment for hospitalization and other medical expenses are not income. Moral damages are not income. But if they are damages for payment of loss of income or loss of earning capacity, then, they are taxable income. (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 (Labor Code) and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. REQUIREMENTS FOR EXCLUSION: (1) The private benefit plan must be registered by the employer of with the BIR. (2) Length of service – the retiring official or employee has been in the service of the same employer for at least ten (10) years (3) Age – the retiring official or employee is not less than fifty (50) years of age at the time of his retirement (4) That the benefits shall be availed of by an official or employee only once. Absence of one, the said retirement benefits are taxable. Suppose there is a higher standard of retirement, which will prevail? If the employer sets up a higher standard than the one set up by your tax code, it will be standards of the employer that will be prevail. If you retire lower than the standards set up required by the tax code, your retirement it will be taxable.

(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. This refers to separation pay. As a rule, separation pay is taxable. It becomes excluded when it is payment by reason of death, sickness

or other physical disability or for any cause beyond the control of the said official or employee. If you resign and you are given a separation pay, that is taxable because that is a cause within the control of the employee. There are resignations which are beyond the control of the employee such as in the case of mergers or consolidations. The separation pay given in such circumstances is excluded because despite the resignation, it is a cause beyond the control of the 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. As a rule, prizes and awards are taxable. excluded in the instances provided.

They are

(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. As a rule, prizes and awards in sports competition are taxable. They are excluded under the conditions aforementioned. (e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686; (ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; (iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

(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. AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE OF 1997 RA 9504 took effect on July 2008. The statutory minimum wage earners are no longer taxable. They are exempted from payment of income tax. The determination of statutory wages is determined on a regular basis by the RTWPB. If they earn overtime pay, night-shift pays and hazard pay, they also form party of the minimum wage. They are likewise exempted or excluded. If they receive over and above the statutory minimum wage, then, income is taxable. The entire wage is subject to tax, including any add-on pays. Optional Standard Deduction: Before, only individuals engaged in business or practice their profession, who are citizens and resident aliens (excluding non-resident aliens) can avail of OSD. The availment of the OSD is also now allowed to corporations. It used to be 10% of the gross income. It is now 40% of the gross income. Personal Exemptions: Before, we used to have the scaling of the status of the individual – single, head of the family or married. Now, regardless of your status, you have a personal exemption of P 50,000. Additional Exemptions: It used to be P 8,000, maximum of 4. increased to P 25,000, maximum of 4.

It is now

TAXATION OF THE INDIVIDUALS & CORPORATIONS (See handouts given as discussions reflected in the said handout will not be included here anymore ) SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. SEC. 22. Definitions. - When used in this Title: xxx (B) The term "corporation" shall include partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), association, or

insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. The professional partnership is not taxable under Section 26. But the individual professional partners are the ones taxable. SEC. 26 Tax Liability of Members of General Professional Partnerships – A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. In the case of business partnerships, they are taxed like corporations. In the case of estates and trusts, they are taxable like individuals. Resident Citizen’s income from outside the Philippines: The foreign income of the resident citizen is not anymore treated as schedular. It will be treated as global. All income from foreign source is taxed at 5% to 32%. There is no distinction as to the kind of income, as long as they are from a foreign source. CORPORATE INCOME TAX Income in general – the rate is 35%. Beginning January 1, 2009), the corporate income tax will be reduced to 30%. The rate of 30% of non-resident foreign corporations is at gross (without the benefit of deductions). For the domestic and resident foreign corporations, the 30% tax is based on taxable income, with the benefit of deductions. The treatment of the foreign source income of a domestic corporation, regardless of the nature of that income, is at a global rate of 30%. In the case of GOCCs, the rule is that they are taxable. Those which are not taxable are GSIS, SSS, PhilHealth and PCSO. PAGCOR has been removed under RA 9337 as being exempted. So, PAGCOR is already taxable. In the case of proprietary educational institutions and hospitals, they are subject, as a rule, to the regular corporate income tax. Unless, under the predominance test, where they are entitled to a 10% tax on their taxable income provided that the predominant income is the educational or hospital income. If the predominant income (more than 50%) of the proprietary educational or hospital is from unrelated income or unrelated business, then, it will be subject to regular rates. MINIMUM CORPORATE INCOME TAX (MCIT) Section 27 (E) Minimum Corporate Income Tax on Domestic Corporations. — (1) Imposition of Tax. — A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. Section 28 (E) Minimum Corporate Income Tax on Resident Foreign Corporations. — A minimum corporate income tax of two percent (2%) of gross income, as prescribed under

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection. The MCIT applies to both domestic corporations and to the resident foreign corporations. In its application, the tax due computed during the tax year at 35% is compared to the 2% of gross income. The tax due payable is whichever is higher. When we say that the MCIT applies beginning on the 4th taxable year immediately following the year in which the corporation commenced business, it means that newly established corporations will not yet be subject to the MCIT. When the corporation has been in the business and operating for 4 years or more at the time this tax became effective, then, that provision is covered. Prior to RA 9337, the MCIT was annualized – you determine the tax to be paid, whether MCIT or 35%, at the end of the year. When RA 9337 took effect in 2005, the application of the MCIT is now on a quarterly basis. Corporations are required to file quarterly returns. In the case of corporations subject to MCIT, they have to determine at the end of the quarter the taxable income computed under the MCIT and under the 35% rate. There is no 4th quarter return for you will have the annual return. SECTION 29. Imposition of Improperly Accumulated Earnings Tax. — (A) In General. — In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. — (1) In General. — The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or distributed. (2) Exceptions. — The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies. The improperly accumulated earnings tax is in addition to your income tax. This actually operates more as a penalty tax or a surtax. It is imposed on the improperly accumulated taxable income of the corporation. For improperly accumulating earnings beyond the reasonable needs of the business, the corporation will be subject to 10% on the improperly accumulated taxable income. When corporations are set up and it continues to accumulate profits beyond the reasonable means of the business, the tax code penalizes these corporations because corporations should not accumulate beyond its business needs. It should distribute their earnings to the stockholders, to the owners of the corporations, whether individuals or corporations. Otherwise, if they would accumulate earnings beyond the reasonable means of the business, then, it would be penalized and subject at 10% improper accumulated earnings tax on the basis of improperly accumulated taxable income. This is in addition to the regular corporate income tax that it will pay. The improperly accumulated earnings tax shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or distributed. So as not to be penalized, the corporation has to declare dividends. If the corporation accumulates earnings, there must be a business purpose for it not to be penalized. This penalty tax will not apply to: 1. Publicly-held corporations; (corporations which are traded in the stock exchange) 2. Banks and other non-bank financial intermediaries 3. Insurance companies

Remember that the distribution of dividends to the individual taxholders is a taxable distribution, except when the distribution is made to another corporation where it is taxfree distribution of dividends. SECTION 30. Exemptions from Tax on Corporations. — The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock 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 non-stock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code. Last paragraph is important. Remember the YMCA case where non-members used the parking lots and parking fees were collected. They also had their premises rented to other persons. Even if the rental income is used to the purpose of YMCA, the income is still taxable because the income is derived from activities conducted for profit regardless of the disposition made. SECTION 33. Special Treatment of Fringe Benefit. — (A) Imposition of Tax. — A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57(A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed-up value of the

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D) and (E) of Section 25. The Fringe Benefit Tax in Section 33 is a tax imposed to the employers. The fringe benefit that is given to rank-and-file employees forms part of the salaries and wages of the individual rank-and-file employees and subject to a withholding tax to that income. When the fringe benefits are given to managerial and supervisory employees, this is where Section 33 comes in. It will be subject to tax and the tax is to be paid by the employer. The fringe benefit tax will be based on the Grossed Up Monetary Value, not the Monetary Value. FBT = Grossed Up Monetary Value x 32% Grossed Up Monetary Value = Actual Monetary Value ---------------------------68% 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. (C) Fringe Benefits Not Taxable. — The following fringe benefits are not taxable under this Section: (1) Fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer. You have the employer’s convenience rule. If you have rank-and-file employees and they are provided with allowances, living quarters, board and lodging, when these benefits are for the convenience of the employer, they are not taxable income as to the employee. DEDUCTIONS (Sections 34, 35, 37 & 61 – see your codal provisions kay taas) Prior to RA 9504, corporate taxpayers were only entitled to avail of the itemized deductions. Now, under RA 9504, both the individual and corporate taxpayers may avail the itemized or the optional standard deduction (OSD). 2 categories of deductions;

A. Deductions profession B. Exemptions A. Deductions profession 1.

arising

arising

from

from

business,

trade,

or

business,

trade

or

Itemized Deduction a. Expenses (Section 34 A) – 1. Ordinary and Necessary Trade, Business or Professional Expenses. — 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 exercise of a profession. It must substantiated by vouchers. b.Interest - for the use of business. It will not be deductible if the borrowing is done be if the borrowing is done between related taxpayers. SECTION 36. Items not Deductible. — (B) Losses from Sales or Exchanges of Property. — In computing net income, no deduction shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly — (1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants; or (2) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or (3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; (4) Between the grantor and a fiduciary of any trust; or (5) Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and a beneficiary of such trust. Another common treatment of interest is when you would borrow money to purchase equipment to be used in the business.

There are 2 options/treatments: 1. Taxpayer will be allowed to claim it as an interest expense under Section 34(B); or 2. Taxpayer will claim it as a capital expenditure and claim it as a deduction by way of depreciation. c. Taxes – (Section 34 C) Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction. Income tax is not allowed as a deduction. Foreign income tax is not allowed as a deduction but is allowed by way of a tax credit. Estate and donor’s tax are also not allowed as a deduction. Percentage taxes are also not allowed as a deduction against gross income.

The local taxes are allowed as deductions. The real property taxes that are paid on real properties used in the business are also allowed as a deduction. d. Losses – Allowed as a deduction for as long as they are in connection with business, trade or profession of the taxpayer.

The general requirements for losses to be deductible are: 1. actually sustained during the taxable year 2. they are not compensated for by insurance or other forms of indemnity 3. they are incurred in trade, profession or business 4. of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

Net Operating Loss Carry-over (NOLCO) It means that the result of the operations is a loss where you have more expenses than gross income. But the law allows that the loss that you incurred may be claimed and carried over in the next tax year as a deduction as against gross income. You are allowed to carry your losses to be carried over in the next 3 consecutive taxable years as a deduction against gross income. It is required that there must be no substantial change in the ownership of the business. Capital Losses They are deductible when you have capital gains. Wagering Losses Losses from gambling are deductible only when you have gambling or wagering gains. Abandonment Losses

Abandonment losses are peculiar to those engage in mining, in oil or gas wells, where after spending some time, it was decided that it was not viable to continue. But you have spent exploration and other development costs. But the investment is not justifiable to continue and pursue, so, you decide to abandon. The law allows you to claim abandonment losses as a deduction of your gross income. e. Bad Debts - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year. The burden is on the taxpayer to prove that this debts are no longer collectible.

Bad Debts Recovery/Tax Benefit Rule That recovery of bad debts previously allowed as a deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. There are 2 items on the principle of income tax benefit – one in taxes in case of refund and one in case of bad debts recovery. In other words, there are two recognitions – one will be treated as an income and the other is not treated an income. If bad debts were claimed as a deduction, as a result of the deduction the taxpayer had an income tax benefit wherein he paid a lesser tax, then, in the event of recovery, income will be recognized. But if a deduction was recognized for bad debts did not result to an income tax benefit, there was no income tax benefit. In the event that there was no income tax benefit by reason of the deduction, in the event of recovery, you are not anymore required to recognize the income of such recovery. f. Depreciation – deduction for the use, exhaustion, wear and tear of property used in trade or business or profession. Methods of Depreciation: i. Straight Line Method (most common) ii. Sum-of-the-years-digit Method iii. Declining Balance Method g. Depletion – Depletion as a deduction is peculiar only to those in the mining, in the business of mines, oil and gas wells. They would incur exploration and development expenses and put up structures and other facilities at the site. These are legitimate expenses. But you are not allowed to claim them outright as a deduction. The exploration and development expenses are claimed as a deduction through the process of depletion. The cost of exploration and development is connected to the amount of minerals contained in that land. Determine your depletion rate on the basis of the total exploration and development cost incurred by the taxpayer and the estimated units. The depletion rate times the units extracted annually from the land would be your depletion.

h. Charitable and other Contributions – is the only deduction not related to the business of the taxpayer. This deduction recognizes the taxpayer’s sense of social responsibility. Two Kinds of Deductions (Charitable & Other Contributions): A. Full Deductibility of your contributions – Your contributions will be allowed deductibility in these three areas: i. When you make donations to government in areas determined by NEDA for priority development ii. Donations to Foreign Institutions or International Organizations iii. Donations to Accredited Non-Government Organizations The requirement here is the accreditation. So, not all NGOs. Full deductibility will be the ones to those given to accredited nongovernment organizations. BIR has a list of what are these accredited NGOs. would

Outside of these 3, the donations or contributions be subject only to partial deductibility.

B. Partial Deductibility of your contributions – The partial deductibility will depend on the tax status of the taxpayer. If the taxpayer is an individual subject to that limitation of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of 10% in the case of an individual and 5% in case of a corporate contributor of the taxpayer’s taxable income derived from trade, business or profession computed without the benefit of the contribution. If you are an individual, 10% of your taxable income or if corporation, 5% of the taxable income, these amounts, what is the resulting 5% or 10% as against the actual contribution, whichever is lower, is the allowed contribution. i. Research and Development – If a taxpayer has a research and development expense, he may treat it under Section 34 (A) or treat it as Section 34 (I), where he will accumulate all research and development expenses until he is able to come up with a product. When that product is already in the market, the taxpayer would then start the recognition of the deduction and amortize for a period not less than 60 months/5 years. j. Pension Trust - A pension trust is a taxable person under your taxation on estate and trusts. The pension trust is an income tax-exempt entity because with the pension trust, money or contributions are put in the trust. The pension trust is not a taxable person and does not pay an income tax. 2 contributions contemplated under Pension Trust: i. Contributions to set up the trust or the fund In the case of contributions to set up the trust or the fund, this is first set-up by the employer where the employer puts in so much money because he will have to consider the past services of his existing personnel or workers. These people have been there for the past 18 or 20 years, then, you would have 300 of them, then, that is a big money you have to put in to set up the trust, to cover their past services. In the case of contributions to set up the trust or the fund, this will be amortized for a period of 10 years. ii. Annual contributions These are amounts which are to be paid annually. This is outright deductible during the tax year. So, if you have these 2, for the next 10 years you have two contributions = 1/10 of the amount of the fund to set- up plus the annual contribution. At the 11 th year, it will only be the annual contribution. 2. Optional Standard Deduction (Section 34 L as amended by RA 9504) ((L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

(40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Whether corporate or individual, they may avail either the Itemized Deduction or Optional Standard Deduction. But in the case of a non-resident alien individual, that individual is not allowed to avail of OSD but only the Itemized Deduction. 3.

Special Deductions

a. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether Domestic or Foreign (Section 37) i. ii. iii. iv.

Insurance Companies Mutual Insurance Companies Mutual Marine Insurance Companies Assessment of Insurance Companies

What are the

i. The amount of premiums should not to exceed P2,400 per family or P200 a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income ii. That said family has a gross income of not more than P250,000 for the tax year c.

Income Distributed to beneficiaries of estate or trusts (Section 61 A)

B. EXEMPTIONS 1.

Personal Exemption

We still follow the same ruling in the case of additional exemptions as to the qualified dependents of the taxpayer. The dependents are the legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of selfsupport because of mental or physical defect.

3. Personal exemption for the Non-Resident Alien Engaged in Trade or Business They will be entitled to personal exemptions subject to reciprocity. The exemption will be given on the basis of reciprocity. This means that we will give the personal exemption provided that citizens in that country will be given similar personal exemption. If they will not give, then, they we will not give. That is the basis of reciprocity. If they will give an exemption, then, we will give an exemption. The next condition is how much are we going to give by way of personal exemption? The rule is that the Philippine personal exemption will be the maximum or the ceiling. Since we no longer have the status of the taxpayer, we now use P 50,000 as the maximum or ceiling. If the exemption in the other country is P 30,000, then, we give P 30,000. But if in the other country the personal exemption is P 60,000, we can only give P 50,000. 4. Exemptions allowed to Estates and Trusts (Section 62)

RA 9504 SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. (A) In General. - For purposes of determining the tax provided in Section 24(A) of this title, there shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50,000) for each individual taxpayer. In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

We no longer have the classification of single, married or head of the family. The basic personal exemption is P50,000. Who are allowed exemption? i. citizens ii. resident aliens

(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4). The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

Now, we still have 4 as the maximum number of qualified dependents but it is now at P 25,000 each.

b. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer (Section 34 M) This will apply only to the individual. conditions?

2. Section 35 (B) - Additional Exemption for Dependents (as amended by RA 9504)

avail

of

the

basic

personal

In the case of married individuals, each spouse will be entitled to claim the basic personal exemption of P 50,000. If only one is working or engaged in business or practice of profession, only that spouse can claim the P 50,000. Change of status is not applicable anymore because it will not matter. Your personal exemption will still be P 50,000.

This remains the same. There is no amendment as to the figures. The personal exemption for estates and trusts is still P 20,000. Section 36 – Items not Deductible i. In general, you have personal, living or family expenses. ii. The amounts paid for new buildings or for permanent improvements or betterments for purposes of increasing the value of the property or estate will not be allowed as an outright deduction. iii. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made iv. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. Treatment of Capital Gains and Losses Capital Assets (Section 39 A) Bar Question: What are capital assets?

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

"CAPITAL ASSETS" means property held by the taxpayer (whether or not connected with his trade or business), but does not include the following: 1. 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 2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or 3. 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 4. real property used in trade or business of the taxpayer. TRANSACTIONS INVOLVING CAPITAL ASSETS NOT GOVERNED BY SECTION 39 Not all transactions involving capital assets are governed by Section 39. There are only specific transactions and capital assets that are governed by Section 39. What are these capital assets which are not governed by Section 39? 1. sale or disposition of real properties classified as capital assets It is taxed for 6% capital gains tax based on selling price or market value, which ever is higher. Remember that when you have your family residence or other property which are not used in business and they are real property, when they are sold, they shall be taxed for 6% capital gains tax based on selling price or market value, which ever is higher. 2. sale or disposition of shares of stocks NOT traded at the Philippine Stock Exchange It’s taxability will be based on 5-10% net capital gains. 5% if not over than P10,000 and other rates for amounts above P10,000. 3. sale or disposition of shares of stocks TRADED at the Philippine Stock Exchange It will be governed by Section 127 of the NIRC under the percentage tax. All other capital assets All other sale or disposition of capital assets will now be governed by Section 39. In Section 39, the capital asset involved in the sale or disposition are not anymore any real properties or shares of stocks. Capital gain – when the selling price is more than the cost of the property Capital loss – when the selling price is less than the cost of the property (2) Net Capital Gain. - The means the excess of the exchanges of capital assets over sales or exchanges. (3) Net Capital Loss. - The means the excess of the exchanges of capital assets such sales or exchanges.

term "net capital gain" gains from sales or the losses from such term "net capital loss" losses from sales or over the gains from

Net capital gain is taxable. The taxability of the net capital gain will depend on the taxpayer. a. If the taxpayer is an INDIVIDUAL If it is an individual, then it is consolidated with the regular income tax, which is the tax under Section 24-A which is 5-32%. b. If the Taxpayer is a CORPORATION If the taxpayer is a corporation, then 30% tax rate.

HOLDING PERIOD – EXTENT OF GAIN OR LOSS TO BE RECOGNIZED (B) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account

in computing net capital gain, net capital loss, and net income: (1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and (2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months; If it is a corporation, whether it has been held 1 year or less or more than 1 year, the entire gain or loss is recognized. CAPITAL LOSS ARE DEDUCTIBLE AGAINST CAPITAL GAINS (Section 39 C) Capital losses are deductible against capital gains. NET CAPITAL LOSS CARRY-OVER (Section 39 D) If you have a net capital loss, you are allowed to carry over. Only the individual is allowed to carry over. Corporations are not allowed to carry over any capital loss in the next tax year. The amount of the loss to be carried over must not exceed the net income in the year that the net capital loss was sustained. SECTION 40. Determination of Amount and Recognition of Gain or Loss. No gain or loss to be recognized – Section 40 (C) (1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation – (a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. BIR RULING IS STILL REQUIRED IN ORDER TO CLAIM EXEMPTION FROM THE RECOGNITION OF THE LOSS OR GAIN For purposes that no gain or loss is to be recognized, you have to ask for tax ruling to apply the provisions of Section 40. Otherwise, if you do not ask a tax ruling exemption from the Commissioner, the resulting exchange will be taxable. From a single proprietorship, a family corporation was formed. Then, the parents now will bring in their properties from single proprietorship to the family corporation created in exchange for shares of stocks. No gain or loss is recognized. There is no taxable transaction. There is only an exchange of capital. Filing of Tax Returns RA 9504 Individual income taxpayers who are called the minimum wage earners or those receiving the statutory minimum wage are now exempted from filing their income tax returns. Their income is exempted and they are likewise exempted from filing the income tax return. 2 or more employers – still required to file an income tax return But if you have only 1 employer earning under the minimum wage, you need not file an income tax return. As to purely compensation income earners, your employers are required, for purposes of withholding, that the income tax withheld should be equivalent to the tax due. When that is your only source of income, you can indicate that you will no longer file a return. Using the withholding tax certificate that you received from your employer, that would be the equivalent of your tax return. No need to file another return.

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

ITR Deadlines Individuals engaged in business or in the practice of profession: Quarterly returns: April 15 First Quarter August 15 Second Quarter November 15 Third Quarter April 15 (following year) Annual return So, the individual engaged in business or in the practice of profession will file 2 returns on April 15 – 1 st quarter return for the current year and the annual return for the previous year Individuals are only allowed to use the calendar year. Corporations: Corporations may either use the fiscal year or the calendar year as their tax year. Quarterly returns: First 3 quarters depending on the tax year used by the corporation. Deadline of filing is within 60 days from the end of the quarter. The annual ITR is the 15th day of the 4th month following the end of its tax year. There is no 4th quarter return. Payment of Tax on Installment Basis (Section 56 A2) The installment payment will only apply to annual return. It is only allowed to individuals. Corporations are not allowed to pay installments. (2) Installment Payment. — When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. In corporations contemplating dissolutions and liquidations, you do not wait for the regular deadline. Section 52 (C) (C) Return of Corporation Contemplating Dissolution or Reorganization. — Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the Commissioner, shall, by rules and regulations, prescribe. "The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

Treatment of Stock Dividends (Section 73) Dividends are taxable when what is distributed is cash or property dividends, except intra-corporate dividends where there is no tax imposed. In the case of distribution of stock dividends, where the corporation distributes its own shares of stocks to its stockholders, it is a non-taxable distribution of dividends. They are tax-free because they are distribution of capital. SECTION 73. Distribution of Dividends or Assets by Corporations. — (A) Definition of Dividends. — The term 'dividends' when used in this Title means any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or in other property.

Where a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporate, is a taxable income or a deductible loss, as the case may be. (B) Stock Dividend. — A stock dividend representing the transfer of surplus to capital account shall not be subject to tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable income to the extent that it represents a distribution of earnings or profits. It is different when you have A Corporation distributing stock dividends of A Corporation’s shares because this is not taxable. But when A Corporation distributes stock dividends of B Corporation, this is now taxable. SECTION 76. Final Adjustment Return. — Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. Withholding of Taxes The WITHHOLDING TAX SYSTEM is therefore a system of collecting income tax on income payment paid to an individual or a corporate by the payors thereof who are required to withhold a certain percentage of the payments and remit the same to the government at regular intervals. This is a form of advance payment of taxes. We follow the principle of pay as you go or collecting tax at the source of the income. Now, the withholding agent is the one who has receipt or control or custody of the fund and the following are considered as withholding agents: a) the individual with respect to payments made in connection with his trade or business; b) government offices; and c) those enumerated or mentioned in your Revenue Regulation 2-98 as to who are these persons designated as withholding agents. 5 forms of withholding of tax: 1.

Withholding tax on wages That those under an employer-employee relationship, the employer withholds the corresponding tax from the salaries of their employees. The employer must make adjustments so that the tax withheld should be equal to the tax due. 2.

Final withholding tax These are types of income where the tax withheld is considered to be a final one (e.g. passive income – interest on deposits) 3.

Creditable Withholding tax This is called creditable because the tax withheld will be credited against the tax due. The tax withheld is not final but they are creditable. 4.

Quarterly Corporate Income Tax Returns Corporations are required to file quarterly returns on the first three quarters. The fourth is the annual or final or consolidated return. The quarterly returns operate also

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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Tax Review (Income Tax) – Based on the 4th Year Lectures (2008-2009) of Atty. Manuel P. Quibod

as a system of withholding because these are advanced payments made by the corporation. 5. Quarterly Individual Income Tax Returns The individuals covered here are those engaged in business, trade or practice of profession. The individuals engaged in business, trade or practice of profession are required to file quarterly individual income tax returns. Then, the annual return at the end of the year.

Law: the only game where the best players get to sit on the bench. 

Prepared by: Jazzie M. Sarona (4-Manresa 2008-2009) References: 2007 Lectures of Atty. Quibod as transcribed by Mariblithe Cartujano, Felai Puerto & Jazzie Sarona

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