Taxation Law - 2013 Dimaampao Lecture Notes.pdf
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TAX NOTES (LEGAL GROUND) Lectures of Atty. Japar B. Dimampao Supplement Bar Material STATE POLICY Declared Policy of the State: (Code:RDB-N) 1) to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration; 2) to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity; 3) to create a robust environment for business to enable firms to compete better in the regional as well as the global market; 4) the State ensures that the Government is able to provide for the needs of those under its jurisdiction and care. THE B.I.R. 1) Powers and duties of the BIR. The BIR shall be under the supervision and control of the DOF and its powers and duties shall comprehend: (CODE: ACE-JP) 1) the assessment; 2) collection of all national internal revenue taxes, fees, and charges; 3) the enforcement of all forfeitures, penalties, and fines; 4) execution of judgments in all cases decided in favor by the CTA and ordinary courts 5) give effect and to administer the supervisory and police powers conferred to it by the Code and other laws. 2) POWERS of the Commissioner of the Internal Revenue. 1) to interpret tax laws and to decide tax cases (Sec. 4); 2) to obtain information and to summon, examine, and take testimony of persons (Sec. 5); 3) to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6); 4) to delegate powers (Sec. 7); 5) to administer oaths and take testimony (Sec. 14); 6) to make arrests and seizures (Sec. 15); 7) to assign or re-assign internal revenue officers (Sec. 16 & 17). REQUISITES OF A VALID TAX REGULATION (LIMITATION OF THE POWER TO INTERPRET TAX LAWS) 1) It must be consistent with the provision of the Tax Code 2) Reasonable 3) Useful and necessary 4) It must be published in the official gazette or in the newspapers of general circulation. SOURCES OF REVENUES The following taxes, fees and charges are deemed to be national internal revenue taxes: (Code:IEVPEDO or EVE-PIDO) 1) Income tax; 2) Estate and donor’s taxes; 3) Value-added tax; 4) Other percentage taxes; 5) Excise taxes; 6) Documentary stamp taxes; and
Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue
INCOME TAX FEATURES OF OUR PRESENT INCOME TAXATION Q. What are the features of our present income taxation in the light of R.A 8424? A. We adopted the so-called “COMPREHENSIVE TAX SITUS” – Comprehensive in the sense that we practically apply all possible rules of tax situs. Criteria used: (Code: R. P. N.) a) Residency of taxpayer; Situations where we utilized residency as basis: 1) We tax the income of a resident alien derived from sources within the Philippines. 2) We also tax the income from sources within of resident foreign corporation in the Philippines. b) Place/Source Used as a basis in taxing the income of a non-resident alien individual. We can only tax his income derived from sources within and in taxing the same, we consider the place where the income is derived. c) Nationality or Citizenship in the case of individual taxpayer We used that as a basis in imposing tax on the income of a resident citizen. Resident citizen may be taxed from his sources within and without. The source of income here is immaterial what we consider is the nationality or citizenship of the taxpayer. Domestic corporation – we can tax its income derived from sources within and without. On Non-resident citizen, they can only be taxed on their income derived from the sources within – tax situs is the place /source of income.
Taxpayer 1. RC 2. NRC 3. OCW 4. ALIEN 4.1 NRA-ETB 4.2 NRA-NETB 4.3 ALIEN ERA-MNC 4.4 ALIEN OBUs 4.5 ALIEN PSCS 5. Domestic Corp. 6. Foreign Corp-RFC/NRFC
Sources I/O (Sec. 23 [A]) I (Sec. 23 [B]) I (Sec. 23 [C]) I (Sec. 23 [D])
(Sec. 23 [E]) (Sec. 23 [F])
A resident citizen is taxable on all income derived from sources within and without the Philippines.
A non-resident citizen is taxable only on income derived from sources within the Philippines.
An overseas contract worker is taxable only on income from sources within the Philippines; 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 the international trade shall be treated as an overseas contract worker. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
6] A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Income Taxation may be grouped into: 1) individual income taxation 2) corporate income taxation Q. What are the basic features of individual taxation? (S.P. F. E. M.) A. 1) Individual income taxation adopted the Schedular system of taxation Schedular System of Taxation – is a system employed where the income tax treatment varies and made to depend on the kind or category of the taxpayer’s taxable income (Tan vs. Del Rosario). Characteristics of schedular system of taxation: a) It gives or accords different tax treatment on the income of individual taxpayer. b) It classifies income. Manifestations: (that under the individual taxation we adopted the schedular system of taxation) [C, B, P, Dp, I, R, R, D, A, Pw, P, P] Under Sec. 32(a), income may be categorized as follows: 1) compensation income, 2) business income, 3) professional income, 4) income derived from dealings in property, 5) interest income, 6) rent income, 7) royalties, 8) dividends, 9) annuities, 10) prizes, 11) winnings, 12) pensions, and 13) partner’s distributive share from the net income of the general professional partnership. This is the manifestation that as far as individual income taxation, the income is categorized. 2] The tax rates are progressive in character. This is clear under Sec. 24 (a). You will notice there that the tax base increases as the tax rate increases. 3] Modified gross income as regards compensation earner. Modified because in determining the taxable compensation income, the only allowable deductions are personal and additional exemption. You cannot deduct the allowable deductions under Sec. 34 from gross compensation income. But as regards those individual taxpayers that derived business, trade or professional income, we adopted the net income system. This is so because
4 under Sec. 34, allowable deductions may be claimed by individual taxpayers who derived business trade and professional income. 4] We employ this “Pay as you File” system. 5] Under certain cases, we employ the “pay as you earn” system. This applies to “income subject to withholding tax”. Q. What are the basic features of corporate income taxation? A. 1] Global Concept has been adopted. >>> Global system where the tax treatment views indifferently the tax base and treats in common all categories of taxable income of taxpayer (Tan vs. Del Rosario). Characteristics of Global system of Taxation: a) Uniform tax treatment – this is subject to diminishing corporate tax rates of 34% (Jan. 1, 1998), 33% (Jan. 1, 1999), 32% (Jan. 1, 2000). See Chapter IV, Sec. 27). b) Does not categorize income. 2] Corporate taxpayer, particularly domestic corporations are entitled to deductions. So, insofar as domestic corporation and resident foreign corporation is concerned, we adopted here the net income tax system. New provisions under R.A. 8424: 10% tax on improperly accumulated earnings of a corporate taxpayer. 3] Pay as you file system has also been employed. Corporate taxpayer is allowed to adopt calendar or fiscal year period. Corporate taxpayer files corporate income tax return quarterly. And it also files the so-called FINAL ADJUSTED RETURN. In the case of individual taxpayer, the payment should not be later than April 15 of every taxable year. Individual taxpayers are not allowed to adopt the so-called FISCAL YEAR PERIOD. * Individual taxpayers are allowed to adopt only the calendar year period while corporate taxpayers have the option either the calendar year period of the fiscal year period. Calendar year period – this covers the period of 12-month commencing from Jan. 1 and ending Dec. 31. Fiscal year period – this is also a 12-month period commencing on any month or ending on any month other than Dec. 31. DEFINITION OF CERTAIN TERMS GROSS INCOME TAXATION – is a system of taxation, where the income is taxed at gross. The taxpayers under this system are not entitled to any deductions. In general, we adopted the net income taxation because under Sec. 34, taxpayers are allowed to claim the so-called ALLOWABLE DEDUCTIONS. GROSS INCOME – means all income derived whatever source, including but not limited to the following: [STP-IRR-DAP-PS] 1. Compensation for services; 2. Gross income from trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Rents; 6. Royalties; 7. Dividends;
5 8. Annuities; 9. Prizes and winnings; 10. Pensions; and 11. Partner’s distributive share from the net income of the general professional partnership. NET INCOME TAXATION – income is taxed at net. The taxpayer may claim allowable deductions. INCOME – all wealth which flows in the taxpayer other than a mere return of capital. It includes all income specifically described as gain or profit including gain derived from the sale or disposition of capital asset. JUDICIAL DEFINITION: It also means gains derived from (1) capital, (2) labor, or (3) both labor and capital including gains derived from the sale or exchange of capital asset. FOUR (4) Sources of INCOME; [ClaBS] a. Capital b. Labor c. Both labor and capital d. Sale of property Example of income derived from capital >>> Interest Income Example of income derived from labor >>> Compensation Income Example of income derived from both capital and labor >>> Income of an independent contractor. The independent contractor provides work force, provides capital and derives income from such capital. * In determining the profit from the sale of property, you should always be guided by this formula: Amount Received Or Realized LESS Cost of Property = PROFIT TAXABLE INCOME – (the old term is Net Income) – means all pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31 of the TRA of 1997). Shoter Version: All pertinent items of gross income less allowable deductions. Q. What are the advantages/disadvantages of gross income taxation and net income taxation? Advantages of gross income taxation: 1. It simplifies our income taxation. This is so because since no deductions are allowed, it is very easy to tax the income. You don’t have to find out whether deductions or expenses are legitimate or not because they are not deductible. 2. This will generate more revenue to the government. 3. It minimizes cost. Disadvantages of gross income taxation: 1. As far as the taxpayer is concerned, this is inequitable because they cannot claim the expenses, which are incurred in connection with his trade or business or exercise of his profession. 2. And if this is the system, in all likelihood the taxpayers will lose interest to earn more. It will in effect reduce the purchasing capacity of the taxpayer. 3. Since taxpayers cannot claim those legitimate expenses as deductions, they may resort to fraudulent scheme that will minimize their tax ability and this
6 may be done through the understatement of income. So, in effect, this will encourage tax evasion. Advantages of net income taxation: 1. As far as the taxpayer is concerned, they will consider this as equitable and just system. 2. This will minimize tax evasion because examiners will be employed to check whether expenses are correct or not. 3. The consequence of no. 2 is that this will generate more revenues. Disadvantages of net income taxation: 1. vulnerable to graft and corruption 2. vulnerable to tax evasion 3. will give rise to loss of revenues.
SOURCES/SITUS OF INCOME An income may be an income from within or without the Philippines. The other term for income within is Local Income while income without is sometimes called Global Income or Universal Income. In determining whether an income is an income within or without, you have to consider the classification or kind of income. CLASSIFICATION OF INCOME: [C, B, P, I, R, R, D, A, P, P, P] 1. Compensation income from services 2. Income derived from business, trade or profession – in this regard, the common forms of business are merchandising business, farming business, mining business and manufacturing business. 3. Income from sale or exchange of property (either real or personal property) 4. Interest Income 5. Rent Income 6. Royalties 7. Dividends, which may be received from domestic or foreign corporation 8. Annuities 9. Prizes and winnings 10. Pensions 11. Partner’s distributive share in the net income of general professional partnership (Professional income of a partner) * COMPENSATION INCOME Tax Situs: Place where services are rendered. So, if services are rendered within the Phils., that is a Local Income. If it is a payment for services rendered outside the Phils., that is an income without. RC – income from within and without are taxable. NRC – only compensation income from sources within is taxable. RA – same as NRC. * BUSINESS INCOME [M3 F] a) Merchandising Business b) Farming Business c) Mining Business d) Manufacturing Business
Tax Situs: Place where these business are undertaken.
Tax Situs: (1) if the goods are manufactured in the Phils. And sold within the phils. This is considered as income derived purely within. (2) Goods manufactured outside the Phils. and sold outside – income derived purely without.
7 (3) Goods manufactured within the Phils. and sold outside the Phils. – income partly within and partly without. (4) Goods manufactured outside the Phils. and sold within the Phils. – income partly within and partly without. * INCOME FROM SALE OR EXCHANGE OF PROPERTY If it involves personal property, in determining the tax situs, we have to consider the place of sale.
In the case of sale of transport documents, tax situs is the place where the transport document is sold (BOAC Case).
If it involves real property, the tax situs is the place or location of the real property. So, if the property sold is situated within the Phils., the income derived from such sale is considered as income within. * INTEREST INCOME Tax Situs: RESIDENCE of the DEBTOR Case: There was this contract regarding the construction of ocean-going vessels. There was this issuance of letter of credit and the payment of downpayment. All the elements of the transactions took place in Japan. The payment was made in Japan. The letter of credit was executed in Japan. The delivery was made in Japan. The debtor is a domestic corp. Is the interest income on this loan evidenced by the letter of credit taxable to the Japanese corp.? HELD: NO, because the tax situs of interest income is not the activity but the residence of the debtor. The place where the contract of loan is executed is immaterial. * RENT INCOME Tax Situs: the PLACE of property subject of the contract of lease. * ROYALTIES Tax Situs: the PLACE where the intangible property is USED * DIVIDEND a. Received from domestic corp. – this is an income purely within. b. Received from foreign corp. – consider the income of the foreign corp. in the Phils. during the last preceding three (3) taxable years; rules: (1) The income is purely within if the income derived from the Phil. sources is more than 85% (2) It is purely without if the proportion of its Phil. income to the total income is less than 60% (3) There should be an allocation if it is more than 50% but not exceeding 85% * ANNUITIES Tax Situs: the PLACE where the contract was made * PRIZES AND WINNINGS
8 Prizes may be given on account of services rendered – in which case, the tax situs is the place where the services were rendered.
If these prizes are not given on account of services, the tax situs is the place where the same was given.
Tax situs of winnings is the place where the same was given. *PENSION Tax Situs: PLACE where this may be given on account of services rendered *PROFESSIONAL INCOME OF PROFESISONAL PARTNERS Tax Situs: PLACE where the exercise of profession is undertaken
GROSS INCOME GROSS INCOME – means all income derived from whatever source, including but not limited to the following: INCLUSION: [code: STP-IRR-DAP-PS] 1. compensation for services 2. gross income from 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 (Sec. 32 of TRA of 1997) EXCLUSIONS [code: LAGCIRM] 1. proceeds of life insurance policy 2. amount received by the insured as return of premium 3. gifts, bequests, devises or descent 4. compensation for injuries or sickness 5. income exempt under treaty 6. retirement benefits, pensions, gratuities and others: (F, V, R, S, S, G) a. retirement benefits received from foreign institution whether public or private b. veteran’s benefits c. retirement benefits received from private firms whether individual or corporate d. separation pay e. SSS f. GSIS 7. miscellaneous items: a. prizes and awards given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements CONDITIONS: 1. the recipient was selected without any action on his part to enter the contest or proceeding 2. the recipient is not required to render substantial future services as a condition to receiving the prize or award
9 b. income derived by the government or its political subdivisions from the exercise of any essential governmental function or from any public utility c. income derived from investment in the Philippines by foreign government or financing institutions d. prizes and awards in sports competitions e. gain derived from the redemption of shares of stock issued by the mutual fund company f. contributions to GSIS, SSS, PAG-IBIG, and union dues g. benefits in the from of 13th month pay and other benefits h. gain derived from the sale, exchange, retirement of bonds debentures or other certificate of indebtedness with a maturity of more than five (5) years. (Sec. 32 (b), TRA of 1997) *ALLOWABLE DEDUCTIONS 1. Optional Standard Deduction – of ten percent (10%) of the Gross Income available only to individual other than a non-resident alien provided he signifies in his return his intention to elect OSD, otherwise, itemized deductions apply. Election made shall be irrevocable for the taxable year (Sec. 34 L) 2. Itemized Deductions – under Sec. 34 A-K, and M 3. Personal and Additional Deductions/Exemptions under Sec. 35 * ITEMIZED DEDUCTIONS [code: ELIT-BDD-CRC] 1. expenses 2. loses 3. interest 4. taxes 5. bad debts 6. depreciation 7. depletion of oil, gas wells and mines 8. charitable and other contributions 9. research and development 10. contribution to pension trust * NON-DEDUCTIBLE ITEMS (Sec. 36 A) 1. Personal living or family expenses; 2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or 4. 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. (Sec. 36 B) Losses from sales or exchanges of property directly or indirectly – 1. Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants); 2. Except in case of distributions in liquidation, between an individual and a corporation – more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual; or 3. 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 4. Between the grantor and a fiduciary of any trust; or 5. Between 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.
TAXABLE INDIVIDUALS RESIDENT CITIZENS (RC) Income from within and without – taxable NON-RESIDENT CITIZENS (NRC) Income from within When an NRC returns to the Phils., his income may also be taxed as Resident Citizen or Non-Resident Citizen. Illustration: A, an OCW, arrived in the Phils. sometime in June 1998. He will be taxed as a Non-Resident Citizen (NRC) as regards the income that he earned which covers the period of January to June. Now as regards the income that he will derive upon his arrival from June to December, he will be taxed as Resident Citizen (RC). But if he is not in the Phils. from the period of January to December 1998, he will be taxed as NRC for the said period. If he will return to the Phils. and stay there from January t December 1999, he will be taxed as RC for the same period. * NRC must prove to the satisfaction of the BIR Commissioner the fact of physical presence abroad with the intention to reside therein. * When an NRC decides to return to the Phils., he must prove his intention to reside here permanently. * Now NRC includes OVERSEAS CONTACT WORKERS (OCW), IMMIGRANTS, and those who STAY OUTSIDE the Phils. by virtue of an employment. RESIDENT ALIEN (RA) 1. An individual who is not a citizen of the Phils. but a resident of the Phils. * Includes those who consider the Phils. as a second home. *** Transient tourist who just sojourn, their stay is merely temporary, thus may not be considered as RA. * If an alien stays in the Phils. for a period of more than one (1) year, he is considered as RA. SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRANETB) * He must be an alien individual who is not residing in the Phils. and not engaged in trade or business in the Phils. * He is one whose stay in the Phis.is not more than 180 days SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR BUSINESS (SNRANETB) * Those employed by: (ROP) 1. Regional or Area Headquarters of Multinational corporations; 2. Offshore Banking Units; 3. Petroleum Service Contractors NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB) > considered as engaged in trade or business if his stay is more than 180 days > We can no longer tax his income from sources without. We can only tax his income from sources within.
11 ENTITLEMENT OF DEDUCTIONS RC – entitled to deductions because the tax base is taxable income. Gross Income Less: Allowable deductions ======================= Taxable Income NRC – entitled to deductions because the tax base is taxable income. RA – entitled to deductions because the tax base is taxable income. NRA-TB – entitled to deductions because the tax base is gross income. Their income is subject to 25% tax rate. SNRA-NETB – subject to 15% tax rate on their income in the from of: S - Salaries H - Honoraria O - Other W - Wages E - Emoluments R - Remuneration
EXCLUSION FROM GROSS INCOME “PROCEEDS OF LIFE INSURANCE” Subject to tax if : 1. the 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 is the one subject to tax; 2. there is transfer of the insurance policy; Example: A transferred to B his life insurance policy. The value of the policy is P1 M. B paid a consideration amounting to P300,000. B continued paying the premiums after the transfer such that the premiums amounted to P200,000. Upon the death of the insured, the P1 M may be received by the heirs. Q. Is the full amount of P1 M exempt? A. NO, only the consideration given and the total premiums paid may be excluded. That is, P1 M less P500,000. Problem: A obtained a life insurance policy for B. B is the president of A’s corporation. Corp. has an insurable interest in the life of its officers, so premiums may be paid by the employer A. Upon the death of B, his designated beneficiaries will receive the proceeds. a. Is the amount representing the proceeds of the life insurance policy taxable? b. What about the premium paid by the employer A? Does this amount form part of the gross compensation income? c. Does the amount representing the proceeds of life insurance policy from part of the estate of the decedent? Answers:
a. Let us first make two (2) assumptions. Let us assume that:
1. the beneficiary designated is the employer; 2. the beneficiary designated is the heir of the family of the insured.
The Tax Code however, makes no distinction. Regardless of the designated beneficiary is the employer or the heirs, or the family of the insured proceeds of life insurance policy should always be excluded.
b. Premiums of life insurance policy paid by the employer may form part of compensation income; hence, taxable if the beneficiary designated are the heirs or the family or the employees.
It is not taxable compensation income if the designated beneficiary is the employer because that is just a mere return of capital. c. Proceeds of life insurance policy may be excluded from the gross estate of the decedent under the following cases: 1. if the beneficiary designated is a 3rd person and the designation is irrevocable; 2. it is a proceed of a group insurance policy. However, it is included in the gross estate of the decedent: 1. if the beneficiary designated in the estate, executor or administrator of the estate or the family of heirs of the decedent; 2. if the beneficiary designated is a 3rd person and the designation is revocable [see Section 85 (e)] As far as Sec. 85 (e) is concerned, an employer may be considered a 3rd person. “AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM” Reason for Exclusion: It represents a mere return of capital. The sources of this return of premium: (L.E.A.) 1. Life Insurance Policy 2. Endowment contracts 3. Annuity contracts ---Whether the premiums are returned during or at the maturity of the term mentioned in the contract or upon surrender of thee contract Problem: A took out an endowment policy amounting to P1 M. He paid premiums amounting to P800,000. Upon the maturity of the policy, A received that P1M. How much is the taxable amount? Answer: That is P1,000,000. – value of endowment policy LESS: P 800,000. – representing amount of premium ============================================ === P 200,000. – taxable amount *“GIFTS, BEQUESTS and DEVISES” Rationale: What is contemplated here are donations which are purely gratuitous in character in order that it may be excluded.
Gifts are excluded because these are subject to donor’s tax. Bequests and devises are excluded because these may be subject to estate tax.
13 What about remuneratory donations? Remuneratory donations are subject to income tax. EXCEPTIONS to the Rule:>>> the income or fruit of such money given by donation, bequests or devise, including the income of this gift, bequest or devise in cases of transfer of divided interest. *“COMPENSATION FOR INJURIES OR SICKNESS” Reason for Exclusion: This is just an indemnification for the injuries or damages suffered. This is compensatory in nature. The sources are: 1. The compensation may be paid by virtue of a suit; 2. It may be paid by virtue of health insurance, accident insurance or Workmen’s Compensation Act But as regards damages representing loss of anticipated income, this is the one that is taxable. If damages are in the nature of moral, exemplary, nominal, temperate, actual and liquidated damages, as a rule, these may not be subject to tax. Example: If a person suffered injury as a result of a vehicular accident, and an action is filed in court, the Court awards the following: Moral Exemplary Actual -
P100,000. P100,000. P 60,000. (hospitalization expenses) P 20,000. (repair of car) P 60,000. (loss of income)
*** All damages awarded are tax-exempt except damages of representing loss of income. Question: Are damages awarded by the Court on account of breach of contract taxable? Answer: Qualify your answer. With regards to damages awarded on account of loss of earnings of the contracting party, it is taxable. “INCOME EXEMPT UNDER TREATY” Reason for the Exclusion: Treaty has obligatory force of contract. Exception: As may be provided for in the treaty. *“RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHERS” - VETERAN’S BENEFIT * This may be given by the US Administration. * The recipient must be a resident veteran. - BENEFITS GIVEN BY FOREIGN AGENCIES OR INSTITUTIONS WHETHER PUBLIC OR PRIVATE Giver: Foreign government agencies or institutions whether public or private. Recipient: Resident citizen, non-resident citizen or resident alien. Observation: Non-resident citizen should not be included in the enumeration since it is already understood that we cannot tax his income from without. We can only tax the income of non=-resident citizen derived from sources within.
The same is true with resident alien because we can only tax his income from sources within. The inclusion of NRC and RA in the enumeration are mere surplusage. -RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM WHETHER INDIVIDUAL OR CORPORATE Recipient: Private employees or official of such private firm. REQUISITES: 1. The private employee or official must be at least 50 years of age at the time of his requirement; 2. He must have rendered at least 10 years of service to the employer at the time of the retirement; 3. There must be reasonable private benefit plan – established by the employer; 4. The reasonable private benefit plan must be approved by the BIR. 5. Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock bonus plan, or gratuity; 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; 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, in which case, that is exempt because the giver here is not a private firm. The limitation applies only when the giver of the subsequent retirement benefits is another private employer. -PHYSICAL DISABILITY BENEFITS * These include death benefit, sickness benefit and other disability benefit. Sometimes, the term used is “separation pay”. Giver: may either be public or private employer *Sources of Separation Pay: 1. Death of an employee; 2. Physical disability of an employee; 3. Any other cause beyond the control of the employee or official. Example of no.3 a. Retrenchment of employees; b. Installation of labor saving devises; c. Dissolution of law firm. >Resignation of an employee is a cause within his control. >But, involuntary resignation is beyond the control of the employee. >The most important thing here is that the separation pay was given on account of the above-mentioned sources. >There is no requirement as to age of the employee or official; there is also no requirement as to the length of service of the employee or official. >No requirement also as to the number of availment of benefits. -AMOUNT OF THE ACCUMULATED SICK LEAVE AND VACATION LEAVE CREDITS The monetized value of these benefits may be subject to tax if these will not form part of the terminal leave pay.
15 The monetized value of sick leave credit is always tax exempt, if it forms part of the terminal leave pay. As regards UNUSED VACATION LEAVE CREDIT, this is exempt only if the number of days is 10 days or less in excess of 10 days, it is already subject to tax. If the unused sick leave benefit is monetized, if the employer allow such practice, and the same is given at the end of this year, it is subject to withholding tax because in this case, it does not form part of the terminal leave pay. Reason for exemption of terminal leave pay: The accumulated value of unused sick leave and vacation leave credits included in the terminal leave pay is exempt from income tax because it is one received on account of a cause beyond the control of the employee. This terminal leave pay is usually given under a compulsory retirement. Compulsory retirement is a cause beyond the control ofte employee.
a. Prizes and Awards in Awards Competitions REQUISITES: 1. Competition and tournament must be sanctioned or approved by the National Sports Association; 2. The competition and tournament must also be approved by the Philippine Olympic Committee, whether local or international; whether held in the Phils or outside.(if not accredited- 20% tax)
b. Prizes and Awards made primarily in recognition of: (RCS-SALE)
Religious, Charitable, Civic Achievement, Scientific, Athletic, Literary, Educational Example: P1 M reward given to Mr. Advincula for his exemplary honesty. This may be excluded from his gross income because it is given in recognition of civic achievement. He was (1) selected without any action on his part to enter a contest or proceeding; and (2) he is not required to render substantial future services as a condition to receiving the award. c. Income derived from public utility or from the exercise of essential government function by the Government or political subdivisions of the Phils. Recipient: Government or its Political Subdivision * Government of the Republic of the Phils or Government of the Phils vs. National Government Government of the Republic of the Phils. is synonymous with Government of the Phils. Government of the Phils. or government of the Phils. – refers to the government corporate entity through which the functions of the government are exercised throughout the Phils., including save as the contrary appears from the context, the various arms through which political authority is made effective in the Phils., whether pertaining to the autonomous regions, cities, provinces, municipalities, barangays or other forms of local government. These autonomous regions, provincial, city, municipal or barangay subdivisions are the political subdivisions. National government - refers to the entire machinery of the central government. This includes the three (3) major departments of the government: the Executive, the Legislative and the Judiciary (Mactan Cebu International Airport Authority vs. Marcos, Sept. 11, 1996).
16 It is clear that government-owned and controlled corporations is within the contemplation of the term “national government”. We need this distinctions because the particular item of exclusion emphasizes the fact that political subdivisions of the State form part of the Government of the Phils. You must have noticed that there is no provision regarding government-owned and controlled corporations. Also, there are no provisions on agencies or instrumentalities of the government. The item or income here is exempt if the recipient is either the Government of the Republic of the Phils. or the provincial subdivisions of the State such as provinces, cities, etc. * Income derived by a government-owned and controlled corporation, agency or instrumentality of the government may be subject to tax. *Government-owned and controlled corporations are now subject to corporate income tax, except: a. SSS b. GSIS c. Phil. Health Insurance Corp. d. PCSO e. PAGCOR Situation: A municipality derived income from holding a fiesta. Rule: The rule is settled that holding a town fiesta is considered a proprietary function. Therefore, said income is subject to tax. Situation: A municipality derived income from the operation of public market, electric power plant and other public utilities. Rule: That income is tax exempt. d. Income derived from investment in the Phils. (1) by foreign government or (2) financing institutions, owned, controlled or financed by foreign government, regional or (3) international financing institutions established by foreign government REQUISITES: 1. Recipient must be: a. foreign government; b. financing institution owned, financed or controlled by foreign government; c. regional financing institution, international financing institution established by foreign government; 2. It must be an income derived from investment in the Phils. Sources of such income: --- It may be in the nature of bonds. So, foreign government here may be considered the creditor – possible income here is the interest of bonds. Now, loans may be extended – possible income here is interest on loans. --- If a foreign government or financing institution made a deposit in a bank, Phil. currency deposit – the income here is the nature of interest income. --- If a foreign government made an investment in a domestic corporation. It may be considered a stockholder. And a stockhlder is entitled to dividend. Hence, the dividend income received from domestic corporation is tax exempt. ** If the recipient of such dividend is a resident foreign corporation that is also tax exempt. It is only subject to tax if the recipient of such dividend is a non-resident foreign corporation.
Case: EXIMBANK, which is a consortium of Japanese banks, extended a loan in the amount of S20M to Mitsubishi Metal Corp., a Japanese corporation. The same amount was extended by Mitsubishi as a loan to Atlas Corp., a domestic corporation. The contract entered into between Mitsubishi Metal Corp. is denominated as “contract of loan and sale”. It is a contract of loan because Mitsubishi would lend Atlas S20M. It is a contract of sale because under the contract Atlas bound itself to sell the concentrates (this is a mining corp.) that may be produced by the concentrator machine/equipment purchased through the use of the S20M for a period of 15 years. This being a contract of loan, Mitsubishi is entitled to interest on loan. ISSUE: Whether or not such interest on loan is subject to Phil. income tax ARGUMENTS: Mitsubishi contended that this is not taxable because: 1. The source of S20M is a tax exempt entity (EXIMBANK is a financing institution controlled and financed by a foreign government); and 2. Mitsubishi is an agent of EXIMBANK, a tax exempt entity. HELD: There was no evidence to the effect that Mitsubishi is an agent of EXIMBANK. It is a mere allegation that has not been proven. In a contract of loan, once the loan is consummated, the amount becomes exclusive property of the borrower. It is no longer considered the money of EXIMBANK. Hence, the interest of such loan should be subject to tax. The lender is not a tax exempt entity. The creditor here is Mitsubishi and it is not a tax exempt entity. Such being the case, tax exemption must be strictly construed against the taxpayer and liberally in favor of the government. When you claim exemption, you should prove it clear and categorical terms. * The problem may be modified by the examiner. The examiner may clearly state the Mitsubishi is an agent of EXIMBANK. The answer is, the interest on loan is tax exempt. Mitsubishi then is considered as an extension of EXIMBANK. It is as if the lender is EXIMBANK.
e. 13th month Pay and Benefits * This applies both to private and public employees. * Total exclusion should not exceed P30,000 subject to increase by the Secretary of Finance upon the recommendation of the BIR Commissioner. f. Contributions to GSIS, SSS, MEDICARE, PAG-IBIG, and union dues * This is a surplusage. Even if this is not mentioned, we cannot tax that. g. Sale, exchange, retirement of bonds, debentures and other certificates of indebtedness with a maturity of more than FIVE (5) YEARS - If maturity is less than 5 years, taxable. Rule: Interest on bonds 1. issued by C.B - exempt 2. if issued by corp.- not exempt Rule: Redemptions of share in mutual funds:
18 - only those gains derived from redemption of shares issued by a mutual fund company are exempt - it must emanate from a mutual fund - If the term is not more than 5 years (5 years or less), the gain derived from the sale, exchange and retirement of the same, may be subject to tax. Illustration: If you are a creditor, you may sell these bonds, debentures or certificates of indebtedness to another. Hindi mo na mahintay ang maturity kasi long term. If there is a gain on the sale of the same, it would be a tax exempt provided that the bonds, etc., have a maturity or term of more than 5 years. Retirement of bonds, debenture, etc. --- Nagbayad na ‘yung debtor. There may be gain derived from the same, such as interest. This time, since the gain is in the nature of interest, it is subject to tax. But, the gain derived from the sale, exchange or retirement with a term of more than 5 years, is tax exempt. This is because exemptions are strictly construed against the taxpayer and liberally in favor of the government. Interests on bonds, debentures, etc. are taxable, the provision is clear. It only covers sale/exchange/retirement of bonds, debentures and other certificate of indebtedness with a maturity of five years. Strict interpretation of tax exemption.
TYPES/ CLASSIFICATION OF INCOME 1. COMPENSATION INCOME – an income derived under an employeeemployer relationship.
This may include the following: (WEBB-DROP) Wages, Emoluments, Bonuses, Benefits, Director’s fee, Taxable Retirement Benefits, Other items of income of similar nature, Taxable Pensions * Retirement benefits may be subject to tax, if it does not comply with the provision of Sec. 32 (b) par. 6 sub.par a. * Pensions may be subject to tax, if it is given not in accordance with the conditions laid down under that exclusion provision. * Other items of income of similar nature may include: (CHAMP) Clothing allowance, Hospitalization allowance, Allowances for Food, Medical allowance, Share from the Profit sharing plan of the employee * TESTS TO DETERMINE WHETHER AN INCOME IS COMPENSATION or NOT: Find out whether it is received under an employer-employee relationship. Any payment received under an employer-employee relationship is compensation income. *TESTS TO DETERMINE THERE EXISTS AN EMPLOYER-EMPLOYEE RELATIONSHIP: (AC-DC) 1. Appointment (selection and hiring) 2. Compensation 3. Dismissal power 4. Control test N.B. : The name or designation of income is immaterial. The basis of the income is immaterial and the manner by which it is paid, is also not important. As long as it is given under an employer-employee relationship, then that is compensation income.
19 CANCELLATION OF INDEBTEDNESS – Considered as compensation income is the indebtedness had been cancelled in consideration of the services rendered. *** Share of the employee from the PROFIT SHARING PLAN of the employerCompensation income received in consideration of services rendered. TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER – Compensation income if paid under an employer-employee relationship in consideration of services rendered. PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF THE EMPLOYEE – Compensation income if the beneficiary designated is the family of heirs of the employee. *** The basis of the income is immaterial. Even if it is paid in piece work, fixed rate or percentage basis as long as it is paid under an employer-employee relationship. REQUISITES FOR TAXABILITY OF COMPENSATION INCOME ARE: (SPR) 1. There must be services, rendered under an employer-employee relationship. 2. If payment must be for that services rendered. 3. It must be reasonable. The compensation for services rendered must be reasonable. Purpose why only a reasonable amount may be taxed as compensation income: Take note on the part of the employer, he can claim such compensation for services as deduction. Now, only the amount that is reasonable under the circumstances can be claimed as deduction. So, if the amount or the value of the services rendered is P10,000 but the employee received P15,000. As far as the employer is concerned, he can only claim the reasonable amount of P10,000. In the case of an employee, he can consider P10,000 as compensation income. The excess of P5,000 may be treated as other income. *** Not all payments for services rendered are considered compensation income. Only those paid under the employer-employee relationship. THE FOLLOWING ARE NOT COMPENSATION INCOME: (P I) 1. Compensation for services rendered by independent service contractor. This may be treated as trade or business income. 2. Income derived by professionals from the practice of profession under professional partnership. This is treated as professional income. *** Fringe benefit is considered as compensation income. This is governed by Sec. 33, TRA 1997. This is compensation income in the sense that this is received under an employer-employee relatioship. DOCTRINE OF CASH EQUIVALENT - you may be paid in cash or in property/kind - equivalent value of property is taxable * DIFFERENT FORMS OF COMPENSATION INCOME: 1. Property/Kind – Fair Market Value (FMV) of the property. If there is a price stipulated, it is the price stipulated that will be followed in the absence of contrary evidence. 2. Promissory Note or other evidence of Indebtedness a. If it is not discounted, it is the face value of the promissory note. b. If it is discounted, it is the fair discounted value of the promissory note.
3. Stock – FMV of that shares of stock
4. Cancellation of Indebtedness – Cancellation of indebtedness has the following tax consequences: a. It may amount to taxable compensation income if the indebtedness has been cancelled in consideration of the services rendered. b.
It may amount to taxable gift or donation if the indebtedness has been cancelled without any consideration at all. This is not subject to income tax but may amount to taxable gift or donation.
It may amount to capital transaction if the creditor is a corporation and the debtor is a stockholder. If creditor corporation condoned the indebtedness of the debtor stockholder, that may amount to taxable capital transaction. This is the form of direct dividend. Now, property dividend is subject to tax rates of 6%, 8% and 10%. Dividend received from domestic corporation is now subject to tax.
5. Tax liability of the Employee paid by the employer in consideration of services rendered – amount of tax liability 6. Premiums paid by the employer on the life insurance policy of the employee. a. It is a taxable compensation income if the beneficiary designated are the heirs of the employee or his family. b. It is not a taxable compensation income if the beneficiary designated is the employer because it is just a mere return of capital. If the designation of the employer as beneficiary is indirect (e.g.: It is the creditor of the employer that is designated as beneficiary), that is still not taxable compensation income. Example of Indirect designation of the employer as a beneficiary: a. Beneficiary is the wife of the President of a close corporation. b. If the employer may secure a loan from he insurance policy. Premiums will be taxed under Sec. 33 par.b no.10. it is stated there: “Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. * If the payment was received by the employee when he was no longer connected with his employer, it is still considered compensation income. What is important here is that it must be received during the existence of the employer-employee relationship. Employees may be dismissed by the employer, and they may file complaint for illegal dismissal against the employer. Judgment was rendered by the arbiter in favor of the employee. All the wages supposed to be paid (e.g. backwages) can be taxed as compensation income. What about attorney’s fees? That is exempt.
FRINGE BENEFITS: code (HEV-HIM-EHEL) FRINGE BENEFIT – 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 employee) 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, others; 5. Interest on loan at less than market rate to the extent of the difference between the market rate and the 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.(if contributionexempt) * Housing allowance may be exempt from tax if the living quarters are: a. Provided with the premises of the employer. b. It must be made as a condition of employment. If said requisites are not present, housing allowance may be taxed as fringe benefits. * Meal allowance may be exempt from tax if it is provided within the premises of the employer. * Privilege or purchase discount are tax exempt if it does not exceed ½ of the basic monthly salary of the employee. If it is more than ½, the excess may be as fringe bene * Medical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if the following requisites are present: 1. It must be of relatively small value (reasonable amount). (RSV) 2. It must be given for the following purposes: (CHEG) a. To promote Contentment b. To promote Health c. To promote Efficiency d. To promote Goodwill * Tax Exempt fringe benefits: (RF, DM, C, Ex, ECR) 1. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not. 2.
“De minimis benefits” – means of small amount. These are benefits relatively of small amount.
Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plans.
Fringe benefits which are authorized or exempted from tax under special laws.
Those given for the convenience of the employer, including those which
22 are required by the nature of the trade, business or profession of the employer (Employer’s Convenience Rule) De minimis benefits (of relatively small value) – limited to facilities or privileges furnished or offered by employer to his employees merely as a means of promoting health, goodwill, contentment, or efficiency of employees, such as: a. b. c. d. e. f. g.
h. i. j.
Monetized unused vacation leave credits not exceeding ten (10) days during the year; Medical cash allowance to dependents of employees not exceeding P750 per semester of P125 per month; Rice subsidy of P350 per month; Uniforms; Medical benefits Laundry allowance of P150 per month; Employee achievement awards, for length of service of safety achievement in the form of tangible personal property other than cash gift certificate, with an annual monetary value not exceeding ½ month of the basic salary of employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees; Christmas and major anniversary celebrations for employees and their guests; Company picnics and sports tournaments in the Philippines and are participated in exclusively by employees; and Flowers, fruits, books or similar items given to employees under special circumstances on account of illness, marriage, birth of a baby, etc.
*Principle of Employer’s Convenience Rule: - fringe benefits may be exempt/not subject to tax if these are given for the benefit or advantage of the employer. The following are the possible fringe benefits, which may be exempt under the Employer’s Convenience Rule: (H V H M T) a. Housing benefit b. Vehicle c. Household personnel d. Membership in a social or athletic club or similar organization e. Traveling expense benefit * Housing benefit – in determining whether the same is exempt under the employer’s convenience rule, you have to consider the peculiar nature of the special needs of the employer. Requisites for exemption: 1. It must be made as a condition for employment; 2. It must be provided within the premises of the employer *** This may apply to a supervisor of a plant or a company. * If the housing or living quarters are provided outside the premises of the employer, even if that is for the convenience of the employer, this is only exempt up to 50% of the amount. So, 50% taxable, 50% exempt. * Vehicle – Exempt but depends upon the peculiar nature of the special needs of the business of the employer. Example: LBC or DHL business * Household personnel such as maid, driver and others – Exempt, but depends upon the peculiar nature of the business of the employer.
23 * Membership in a social club, etc. – Peculiar nature requirement. * Traveling expense benefit – Peculiar nature requirement. Example: Employer sent his employees abroad to attend a particular seminar to improve their technical know-how. BAR QUESTION: A is a driver of Congressman Magtanggol and he received a monthly salary of P5,000 and living quarter allowance of P2,500. a. Whether the P2,500 living quarter allowance is excluded or subject to tax? b. Assuming the employer is an obstetrician would your answer be the same? ANSWER: a. That should be subject to tax. b. It should be excluded. Reason: Convenience of the employer’s rule.
2. GROSS INCOME FROM BUSINESS, TRADE OR PROFESSION BUSINESS – Any activity that entails time, attention, effort for purposes of livelihood or profit.
As regards construction business, the taxpayer here must be an independent contractor. He may report his income under the percentage of completion method or under the so-called completed contract method. PROFESSIONAL INCOME – The recipient of the same must be professionals. How about those who claim that they are professionals but are not registered in the P. R. C., can they still be tax as such? Yes, irrespective of whether they are licensed or not because of the rule that gross income derived from whatever source.
3. PASSIVE INCOME PASSIVE INCOME – This is the income that is subject to final tax. Income subject to final tax are the following: (code:RPD-WIDS) 1.
Interests on bank deposit, deposit substitutes, trust funds and other similar arrangements.
Dividend received from domestic corporation, mutual fund insurance company, regional headquarters of multi-national corporation and other corporation.
Share a partner in the net income after tax of a taxable partnership, joint account, joint venture or concessions.
*** Do not include passive income in the income of your business or profession, or in your compensation income. This is so because when you receive this income, the tax had already been imposed and deducted.
PRIZES exceeding P10,000.00 If it is P10,000.00 or less, it is NOT subject to final tax but the same must be included in other income (e.g. compensation, business, professional) WINNINGS except PCSO & Lotto INTERESTS ON BANK DEPOSITS, etc. DIVIDENDS RECEIVED from domestic corp., etc.
RC, NRC, RA 20% except in the case of literary works, books and musical compositions which are subject to 10% final tax
20% 20% Subject to increasing rates of 6% if received in 1998; 8% in 1999; and 10% in 2000.
SHARE OF A PARTNER in the net income after a tax of a - dotaxable partnership, 6, 8 & 10 etc.
Same as RC, NRC, RA
Question: How do you treat that share of a professional partner from the net income of a general-professional partnership? Answer: This should be taxed at the rate provided under Sec.24, that is, 5% to 34%. But as regards the share of a partner in the net income after tax of a taxable or business partnership, that is one which is subject to final tax.
25 PRIZES – may be exempt if given in sports competition and if given primary in recognition of scientific, artistic, literary, educational, religious, charitable, or civic achievement. INTEREST Rules 1. If it is an interest on foreign currency deposit system, it is exempt. If the recipient is non-resident individual (NRC, NRA-ETB, NRA-NETB). 2. If the recipient is a resident individual (RC, RA), that is subject to 7.5 %. 3. Interest income is also exempt if it is an interest income on a long- term deposit or long-term investment (this must have a term of not less than 5 years). If the term is less than 5 years it is subject to the following rates: 1. 4 years to less than 5 years 5% 2. 3 years to less than 4 years 12% 3. Less than 3 years 20% DIVIDEND RECEIVED FROM DOMESTIC CORPORATION 1. This is exempt from tax if the recipient is a foreign government, financing institution, regional financing institution, international financing institution established by foreign government [see Sec.32 (B) (7) (a)]. 2.
It is also exempt if the recipient of such dividend is another domestic corporation or resident foreign corporation [see Sec. 28(A)(7)(d)]
CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK
Listed and traded through local stock exchange – this is not subject to income tax but subject to percentage tax of ½ of 1% of the gross selling price.
Not listed and traded through local stock exchange – this is the one subject to income tax. Not over P100,000.00 Amount Over P100,000.00
If the share of stock is not listed and traded through local stock exchange, the basis of the tax is net capital gain. So, you should first deduct the capital loss.
If listed and traded through local exchange, there is no deduction allowed because the basis of the tax rate of ½ of 1% of the gross selling price. The above-mentioned tax rates apply to all individual taxpayers. * CAPITAL GAIN DERIVED FROM THE SALE OF REAL PROPERTY - The real property involved must be considered CAPITAL ASSET. - The tax on capital gain derived from the sale of real property is 6% of the gross selling price or zonal value which ever is higher. * CAPITAL ASSET – property held by the taxpayer whether or not connected in his trade or business except: (code: SOUR) 1.
Stock in trade or other property of any kind which would be included
in the inventory of the taxpayer if on hand at the end of the taxable year. 2. Property primarily held for sale to customers in the Ordinary course of trade or business. 3. Property Used in trade or business subject to depreciation 4. Real property used in trade or business. The definition of capital asset says “real property held by the taxpayer whether or not connected with his trade or business except real property used in trade or business.” So, in order to be a capital asset, the real property must be one not used in trade or business.
That is why, the sale of residential house and lot is subject to 6% of capital gains because it is a real property not used in trade or business.
But, sale of real property by a real estate dealer is not a capital transaction because the property involved is one primarily held for sale to customer in the ordinary course of trade or business. That is not a capital asset but an ordinary asset.
This covers not only “sale” of property; it also covers conditional sale of real property including the so-called pacto de retro sale under Art. 1602 of the NCC, or disposition of property located in the Phils.
If the buyer is the government or any of its political sub-divisions or political agencies, including government owned and controlled corporations, the seller have the option to avail the 6% or under Sec. 24(A), wherein the basis under said section is taxable income so deductions may be allowed. The cost of the property may be deducted but when you avail of the 6%, the basis is gross selling price or zonal value whichever is higher.
Is this a tax on the buyer or the seller? It is a tax on the seller. But sometimes, through an agreement, pwede nilang I-transfer sa buyer, and there’s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale.
OTHER INCOME * OTHER INCOME includes [code: R.I.D.O.] a. Rent income other than royalties b. Interest income other than interest income on bank deposit c. Dividend income d. Income from Other sources and this may include: (BIT-CDC) d.1. Bad debts recovered d.2. Illegal gains derived from gambling d.3. Tax funds d.4. Compensation for private property expropriated by the government for public use. d.5. Damages d.6. Cancellation of indebtedness 1.
- Compensation for the use of one’s property. - The payment may be in cash or in kind. The property involved is either personal or real property. - In the case of personal intangible property, subject to final tax if it involves intellectual property, copyright, trademarks etc.
THE FOLLOWING CONSTITUTES TAXABLE RENT INCOME: 1. The regular rent may be monthly, semi-annually or annually
Additional rent income which includes:
a. Obligation of the lessor assumed by the lessee The following are obligations which may be assumed by the lessee: [R.I.D.I.O.] a.1. Real property taxed on leased premises a.2. Obligation to pay insurance premium on the insured leased premises a.3. If the lessor is a corp., the obligation to distribute Dividends to its stockholders a.4. Obligation to pay interest on the bonds issued by the lessor. a.5 Other obligations of the lessor which may be assumed by the lessee.
b. Value of permanent improvements on leased premises. This may be reported through: b.1. Outright method at the time of permanent is completed, he may report that as additional rent income – FMV of the building or permanent improvement. b.2. Spread out method by allocating the depreciation among throughout the remaining term of the leased.
c. Advance rentals c.1. If in the nature of the prepaid rentals without restriction on the use of the amount, it is taxable. c.2. If it is in the nature of security deposit, it is taxable rent income if there is a violation of the term of the lease. c.3. If it is in the nature of a loan to the lessor, it is not taxable. 2. INTEREST INCOME – compensation for the use of money. Whether it is an interest on loan pursuant to the business of a taxpayer or personal transaction, interest income, except if it is tax exempt, is always taxable. This is so because the source of income is immaterial, even if it is from an illegal source. -
Interest income on bank deposits is subject to final tax.
3. DIVIDEND INCOME – amount declared, set aside and distributed by the Board of Directors to stockholders, on demand or a fixed period. Classes of Dividend: [C.L.I.P.S.S.] Cash dividend Liquidating dividendthis is given upon liquidation of corporate affairs Indirect dividend it is given in other form and this includes cancellation of indebtedness by the corp. of the obligation of stockholder Property dividend it may be in the form of stock other than the stock of the corp. Stock dividend stock issued by the giver corp. Script dividend It is given in the form of promissory note or other evidence of indebtedness. STOCK DIVIDEND – as a rule not taxable. This is so because there is no income here. It merely represents the transfer of surplus account to the capital account. EXCEPTIONS to the Rule: Stock dividend may be subject to tax under the following exceptional cases: [C OR D] 1. If there is a Change in the stockholders interest in the net assets of the corp; 2. If it is one issued by Other corp. We call that “dividend stock” Stock dividend vs. dividend stock – Stock dividend as a rule is not taxable
whereas dividend in stock is taxable. Redemption of stock dividend; If the corp. issues Different shares of stock. If the corp. issues two different classes of shares of stock, the dividend that may be declared thereafter is taxable.
Example: Outstanding stock 1. Preferred 2. Common 3. Preferred 4. Common 5. Preferred/Common 6. Preferred/Common
Stock dividend Common Preferred Preferred Common Preferred Common
Taxable NT NT NT NT T T
Disguised dividend – treasury stock dividend declared out of the outstanding capital stock, the purpose of which is to avoid the effect of taxation (Commissioner vs. Manning). It is one which is made to appear as stock dividend when the truth of the matter is that it is a dividend which is illegally declared, such a case, since the purpose is to evade taxation, it is taxable. Remember, treasury shares of stock are not entitled to dividends.
ALLOWABLE DEDUCTIONS (SEC. 34) 1. 2. 3. 4. 5.
As regards individual taxpayers, the following may claim allowable deductions: RC NRC, only those expenses incurred in the Phils. because here, we cannot tax his income derived from sources without. RA, only those expenses incurred in the Phils. NRA-ETB, but only those expenses incurred in the Phils. PP (Professional Partners under Sec. 26)
Exceptions: 1. IT earning CI – EE, ER REL 2. NRA-NTB 3. Aliens employed A. RMC B. OBU C. PSC 4. NRFC As regards corporate taxpayers, the following are entitled to claim allowable deductions: 1. DC, which includes private educational institutions, non-profit hospital, government-owned and controlled corps. 2. RFC ITEMIZED DEDUCTIONS: [E,I.T,L,B,D,D,C,R,C] 1. Expenses 6. Depreciation 2. Interests 7. Depletion of oil, gas, wells and mines 3. Taxes 8. Charitable contributions 4. Losses 9. Research & Development 5. Bad debts 10. Contribution to Pension Trust * In the case of individual taxpayers, they may avail of the optional standard deduction of 10% of gross income
29 * Corporate taxpayers are not allowed to claim 10% optional standard deductions. * All individual taxpayers except the NRA individual may claim this optional standard deductions. * Itemized deduction may apply to corporate taxpayers as well as individual taxpayers. * FUNDAMENTAL PRINCIPLE IN DEDUCTIONS 1. The taxpayer must prove that there is law authorizing deductions. 2. The taxpayer must prove that he is entitled to deductions. *** NRFC are not entitled to claim deductions.
1. EXPENSES ORDINARY & NECESSARY EXPENSES When we speak of ORDINARY, this simply refers to the expenses which are normal, usual or common to the business, trade or profession of the taxpayer. This may not be recurring. Example: if an action is filed in court, it is but normal to hire the services of a lawyer. So, the taxpayer has to pay attorney’s fees. It is an ordinary expense under this circumstances. NECESSARY- It is one which is useful and appropriate in the conduct of the taxpayer’s trade or profession. ORDINARY & NECESSARY EXPENSES -are those which are incurred or paid in the development, operation management of the business, trade or profession of the taxpayer. EXTRA-ORDINARY EXPENSES – Not Deductible. These are amortized or in lieu of the same, you may claim that so-called allowance for depreciation. And if it involves intangible asset, the word used is AMORTIZATION. There is no hard and fast rule. An expense may be ordinary insofar as a particular taxpayer is concerned and it may not be an ordinary as regards another taxpayer. Example: If you have business here in Manila and you also have business in Tawitawi, what is the expense that you may incur in Tawi-tawi which you may not possibly incur in Manila? In Tawi-tawi, you may need people to guard your business. But here in Manila, you may need not because of our new President-elect. KINDS OF ORDINARY & NECESSARY EXPENSES [C.A.R.T.E.R.S.] 1. Compensation for services rendered 2. Advertising & promotional expenses 3. Rent expenses 4. Travelling expenses 5. Entertainment expenses 6. Repairs & maintenance expenses 7. Supplies and materials COMMON REQUISITES FOR DEDUCTIBILITY of these ordinary & necessary expenses: [D.I.R.] a. Must be paid or incurred DURING the taxable year. If you incur expenses in 1997, you cannot carry this over to 1998. expenses incurred during a particular year must be claimed as deductions during this year when the same were incurred.
“PAID” – to signify the fact that the taxpayer uses the CASH BASIS. Under the CASH BASIS, an expense is recognized when it is PAID. “INCURRED” – implies that the taxpayer employs the ACCRUAL BASIS. Under the ACCRUAL BASIS, income is recognized when earned regardless of the receipt of the same and the expense is recognized when incurred. b.
Must be paid or incurred in connection with the trade, business or profession of the taxpayer.
Must be proven by RECEIPTS.
SPECIAL REQUISITES FOR DEDUCTIBILITY OF THESE ORDINARY & NECESSARY EXPENSES: 1. COMPENSATION FOR SERVICES RENDERED This must be reasonable, meaning, this must not be ostensible. Case 1: Partnership was sold to a corp. and it was agreed that the partners will serve the corp. and make it appear that they render services. So, compensation for services was ostensibly made by the corp. Held: These is a mere ostensible salary or payment for services not actually rendered because that amount really forms part of the properties purchased by the corp. Case 2: Corporate officers succeeded in selling the property of the corp. So, profit was derived therefrom. Bonuses were given to these corporate officers. Held: The rule is settled. Bonuses must be given in good faith. There must be services rendered because bonuses are additional compensation. In this particular case, there was really no services rendered because that sale was made through a broker. The corp. made it appear that it was through the efforts of these corporate officers that brought about a successful sale of property. Bonuses must be given in good faith and in determining whether bonuses will form part of the compensation for services rendered, you have to consider the (1) nature of the business, (2) the financial capacity of the taxpayer and (3) the extent of the services rendered. 2. ADVERTISING AND PROMOTIONAL EXPENSES - It must be reasonable. Case: Sugar Dev’t. Corp paid P125,000.00 to Algue Corp. representing promotional expenses. Held: This is reasonable under the circumstances because the particular budget subject for promotion involves million of pesos. And under that circumstances, the P125,000.00 is reasonable as this may coincide with the efforts exerted considering that the taxpayer has no venture in that experimental project to establish that vegetables of investment company and this involves millions of pesos. 3. RENT EXPENSE a. The taxpayer must NOT be the owner of the property or he has no equitable title over the property.
31 b. This is subject to withholding tax. You cannot claim that the taxes supposed to be withheld have not been paid or remitted to BIR. 4. TRAVELLING EXPENSES - This must be incurred or paid while “away from home”. - “Home” does not refer to your residence but to the station assignment or post. Example: From home office to branch office, the traveling expenses incurred are deductible. And this includes not only the transporatiotion expenses but also meal allowance and hotel accommodations. 5. ENTERTAINMENT EXPENSES - This must not be contrary to law, morals, good customs, public policy or public order. - Hence, bribes, kickbacks, and similar payments are not deductible. -Also, the expenses incurred by the taxpayer in entertaining gov’t officials in 5star hotel to gain political influence are not deductible. 6. REPAIRS AND MAINTENANCE EXPENSES - Only ordinary or minor repairs are deductible. - Extra-ordinary repairs cannot be claimed as deduction and in lieu of that, the taxpayer may not be allowed to claim depreciation. - If the cost of the repair increases the life of an asset for a period of more than one (1) year, that amount is considered extra-ordinary repair. Otherwise, it is considered ordinary repair. 7. SUPPLIES AND MATERIALS -This must be actually consumed during the taxable year. - RULE ON SUBSTANTIATION simply requires that ordinary and necessary expenses must be proven. The proofs required include: [N.O.R.E.D.] a. Official receipts b. Adequate Recourse c. Amount of Expense d. Date and place where such expense is paid or incurred e. Nature of expense
2. INTEREST REQUISITES FOR DEDUCTIBILITY 1. This must be paid or incurred DURING the taxable year. 2. This must be paid or incurred in connection with the trade, business or profession of the taxpayer 3. There must be an obligation which is valid and subsisting. 4. There must be an agreement in writing to pay interest. Question 1: What about that interest on unclaimed salaries of the employees, is that interest deductions? Answer/Held: NO, because there is no obligation or indebtedness. It is the fault of the employees in case they failed to claim their salaries.
32 Question 2: What about that interest charged to the capital of the taxpayer, is that deductible? Answer: Interest on cost-keeping purposes is not deductible. This does not arise under an interest-bearing obligation. THEORETICAL INTEREST – an interest which is computed or calculated, not paid or incurred, for the purposes of determining the opportunity cost of investing in a business. This does not arise from legally demandable interestbearing obligation. This is not a deductible interest. Question 3: What about interest on preferred stock, is this deductible? Answer: As a rule, interest on preferred stock is not deductible, because there is no obligation to speak of. It is in effect an interest on dividend. The reason why it is not deductible is that the payment is dependent upon the profits of the corp. It will only be paid if the corp. earn profits. And would not be paid of the corp. incurs losses. BUT if it is not dependent upon corporate profits or earnings, that is deductible. If is payable on a particular on a particular date or maturity without regard to the corporate profits, it is deductible. The Supreme Court mentions TWO (2) FACTORS: 1. not dependent upon corporate profits; and 2. agreement as to the date or term within which payment will be made. INTEREST ON GOV’T SECURITIES is now taxable. So, if the taxpayer obtained a loan from PNB and used the proceeds in purchasing gov’t securities, the interest is now taxable. Likewise, the interest expense paid on that loan, the proceeds of the same, had been use to purchase gov’t securities is now deductible. Q. What about an interest on a loan paid in advance, is this deductible? Let us say that the taxpayer obtained a loan from a bank and it is payable within 5 years. The loan obtained is P50,000.00. Now, it was deducted in advance, can that be claimed as deductions? A. NO. You can only deduct the same when the installment is due a particular year. INTEREST EXPENSES WHICH ARE NON-DEDUCTIBLE [PARCAPU] 1. Interest expense on PREFERRED STOCK; 2. When there is NO AGREEMENT in writing to pay interest; 3. Interest expense on loan entered into between RELATED TAXPAYERS. 4. Interest paid or calculated for COST-KEEPING PURPOSES 5. Interest paid in ADVANCE 6. Interest on obligation to finance PETROLEUM EXPLORATION 7. Interest on UNCLAIMED SALARIES of the employees Related taxpayers:
33 a. members of the same family which includes: a.1. spouses a.2. brothers and sisters a.3. descendants and ascendants b. between two (2) corporations owned or controlled by one individual. He must have a controlling interest over these two corporations. OR, if one corp. is considered as personal holding company of another corp. c. between a corp. and an individual; that individual owns or controls more than 50% of the outstanding capital stock of the such corp. d. parties to a trust; d.1. grant or fiduciary d.2. fiduciary of one trust and fiduciary of another trust but there is only one grantor d.3. beneficiary and fiduciary *Your knowledge of related taxpayers is also important in determining whether losses are deductible or not. If losses were incurred or paid in connections with the transactions between these related taxpayers, these are not deductible. Question:
How much interest expense is deductible?
Answer: The interest that may be claimed as deductions shall be reduced by: a. 41% Beginning January 1, 1998 b. 39% Beginning January 1, 1999 c. 38% Beginning January 1, 2000 of the income subject to final tax. EXAMPLE OF INCOME SUBJECT TO FINAL TAX: 1. interest on bank deposit 2. interest on deposit maintained under the foreign currency deposit system So, if the interest income on bank deposit amounted to P100,000.00. And the total interest expense incurred or paid by the taxpayer is P200,000.00. If this is incurred in 1998, 41% of P100,000.00 is P41,000.00. That P200,000.00 interest expense incurred or paid, should be reduced to P41% of that P100,000.00 to arrive at P159,000.00 which is the interest that may be claimed as deduction. P200,000.00 - 41,000.00 ----------------------P159,000.00 The rule has been established that TAXES are NOT ORDINARY OBLIGATIONS. But the Supreme Court in two (2) cases relaxed the distinction between taxes and ordinary obligations. 1.
The interest on deficiency donor’s tax is deductible. The SC explained that taxes here are considered obligations or indebtedness. And it ruled that we have to relax the distinction between tax and ordinary obligation in this respect.
Interest on deficiency income tax can also be claimed as deductible interest expense because taxes here are considered ordinary obligations.
3. TAXES REQUISITES FOR DEDUCTIBILITY: 1. This must be paid or incurred during the taxable year.
34 2. This must be taxes paid or incurred in connection with the trade, business or profession of the taxpayer. *** Taxes that may be claimed as deductions may be national or local taxes.
THE FOLLOWING ARE NON-DEDUCTIBLE TAXES [S.I.N.E] 1. SPECIAL ASSESSMENT – tax imposed on the improvement of a parcel of land 2.
INCOME TAX – This includes foreign income tax. In this regard, the socalled foreign income tax may be claimed as a deduction from gross income or this may be claimed as tax credit against Phil. income tax. In the event that he claims that as tax credit, he can no longer claim the same as deduction.
Taxes which are NOT CONNECTED WITH THE TRADE, BUSINESS OR PROFESSION OF THE TAXPAYER
ESTATE TAX, DONOR’S TAX (see also discussion on tax benefit rule)
TAX AS DEDUCTIONS vs. TAX CREDIT ► Taxes as deductions may be claimed as deductions from gross income. ► Tax credit is a deduction from Phil. income tax. ►
Tax as deduction includes those taxes which are paid or incurred in connection with the trade, business or profession of the taxpayer. However, the sources of a tax credit is foreign income tax paid, war profit tax, excess profit tax paid to the foreign country.
The foreign income tax paid to the foreign country is not always the amount that may be claimed as tax credit because under the limitation provided under the Tax Code, it must not be more than the ratio of foreign income to the total income multiplied by the Phil. income tax.
Taxes are deductible only by the person upon whom the tax is imposed Except: 1. Share holder 2. corporate bonds - tax free Covenant clause
The following are entitled to claim tax credit: 1.RC 2. DC
4. LOSSES CLASSIFICATION OF LOSSES [O. C. W. – C. S.] 1. ORDINARY LOSSES – losses sustained in the course of trade, business or profession of the taxpayer. 2. CAPITAL LOSSES – the assets that must be involved there must be capital assets Capital Losses include the following: a. Loss arising from failure to exercise privilege to sell or buy property b. Worthless securities c. Abandonment losses in the case of natural resources d. Loss from wash sale 3. WAGERING OR GAMBLING LOSSES – the amount that is deductible
35 must not exceed the gains. Example: The winnings amounted to P1,000.00 Loss is P500. This loss is deductible. If the winning is P500 and if the loss is P1,000. The amount deductible is only P500 because the amount must not exceed the gains. If there is no winnings and loss is P500. Deduction losses here is ZERO. 4. CASUALTY LOSSES – this must be reported to the BIR earlier than 30 days but not later than 45 days following the date of the loss. Casualty a. b. c. d. e. f. g.
losses include: Fire Storm shipwreck Other casualty losses Robbery Embezzlement Theft
5. SPECIAL LOSSES – include the following: a. loss arising from voluntary removal of buildings as an incident to renewal or replacement Problem: Supposed the taxpayer had a building constructed on a parcel of land. He owned this as well as the building erected thereon. He had business and his business was conducted within the premises. Then, he decided to remove such building as to construct a new building for new business. Is the cost of demolition to give way to a new building deductible loss? YES. Suppose A purchased that parcel of land of B and included in that sale was that of the building. A demolish this building in order to construct a new building. Is the cost of demolition deductible insofar as A is concerned? NO. That can only be claimed as deductions if the one demolishing the same is the taxpayer. The moment that is sold to another claim that as deductible loss. The treatment here is, the cost of demolition should be capitalized in the selling price. Exception:A may claim that as deductible loss if this was demolished by value of a court order because the gov’t considered this as a fire hazard, loss of useful value of property or capital asset. THE COMMON REQUISITES for DEDUCTIBILITY OF LOSSES are: 1. Losses must be actually/sustained and not mere anticipated losses; 2.
Must not be compensated by insurance; --- If it is partly compensated, only the amount not compensated by insurance is deductible.
Must be evidenced by a completed transaction. Completed Transaction – this means that the loss must be fixed by identifiable event. Example: If it is a loss sustained from sale, the event that may identify or complete the transaction is the consummation of the contract of sale.
36 Suppose it is in the nature of casualty losses like fire? The fire destroyed your property in 1995, no payment has been made because the insurer and the insured were still under negotiation. It was only in 1997 that they agreed on the amount. The amount agrees upon is P100,000. The taxpayer may claim that casualty losses only in 1997 when payment was actually made. This is the event that will complete the transaction.
5. BAD DEBTS REQUISITES FOR DEDUCTIBLITY: [CU, W, TBP, VS, U] 1. Must be charged off and uncollectible within the taxable year; 2. Must be ascertained to be worthless 3. Must arise from trade, business or profession of the taxpayer; 4. Must be valid and subsisting indebtedness; 5. Must be uncollectible in the near future. HOW TO PROVE THE WORTHLESSNESS OF OBLIGATION: According to the Supreme Court, the following STEPS must be complied: 1. There must be a statement of account sent to the debtor; 2. A collection letter; 3. If he failed to pay, refer the case to a lawyer; 4. If lawyer may send a demand letter to the debtor; 5. If the debtor still fails to pay the same, file an action in court for collection. In proving that the debtor is insolvent of bankrupt, mere allegation of the same is not enough. You should prove that the debtor is indeed bankrupt or insolvent. So, you may secure a copy of that decision by the SEC or other agency as the case may be, declaring the debtor as bankrupt or insolvent. And then there must be a demand letter sent to him. In case the debtor was robbed, there must be a police report to that effect. The debtor may be a NRFC, so you may argue that he may not be sued here. According to the Supreme Court, as a rule that is not an excuse. You should still send a demand letter to that NRFC. In other words, there must be diligent efforts to collect the indebtedness and to prove that in the near future such obligation is no longer collectible. ***
If the recovery of bad debts, resulted in a tax benefit to the taxpayer, that is taxable. If it did not result in any tax benefit to the taxpayer, that is not taxable. (TAX BENEFIT RULE)
Read the case of Phil. Refining Company vs. Commissioner, a 1989 case.
6. DEPRECIATION The idea here is not to recover profit, but to recover the cost of property invested in business. When the properties are used in trade, business or profession of the taxpayer, the law considers or recognizes the gradual loss or sale of property. DEPRECIATION refers to the gradual diminution of the useful value of the property used in trade, business or profession of the taxpayer, arising from wear and tear or natural obsolence.
37 REQUISITES FOR DEDUCTIBILITY: [U P R A C ] 1. The property must be used in trade, business or profession of the taxpayer; 2.
There must be depreciable properties. The non-depreciable properties are a. Personal property not used in trade, business or profession of the taxpayer; b. Inventoriable stock and securities c. Land d. Mining and other natural resources
The allowance for depreciation must be reasonable
The method in computing the allowance for depreciation must be in accordance with the method prescribed by the Sec. of Finance upon the recommendation of the BIR Commissioner. This prescribed method includes: a. Declining balance method b. Sum of the years digit method c. Straight line method d. Any other method as may be prescribed by the Sec. of Finance upon the recommendation of the BIR Commissioner
This must be charged off during the taxable year.
7. DEPLETION – natural resources ►
This involves natural resources such as oil, gas wells and mines. These are non-replaceable assets.
The requisites for deductibility are the same as that of depreciation except that the properties involved are natural resources
The idea here is not for profit but to recover the cost of investment through this allowance for depletion.
8. CHARITABLE AND OTHER CONTRIBUTIONS * These are fully deductible if the contributions are given to the following: [F. A. G.] 1. Government or its political subdivisions, agencies or instrumentalities, for the purpose of undertaking priority projects of the government; These priority projects include: [S.H.E.] a. Sports development, science and invention b. Health and human settlement c. Educational and economic development 2.
Foreign government or institution and international civic organizations;
Accredited NGO N.G.O. means non-profit domestic corporation which are formed and organized for any of the following purposes: [C.H.E.R.S.] a. Research b. Health c. Education d. Charitable, cultural, character building e. Sports development and social welfare The amount of charitable contribution that may be claimed as deduction may be:
1. In the case of individual taxpayer: - Not more than 10% of the net income before charitable contribution 2. In the case of corporate taxpayer: - Not more than 5% of the net income before the charitable contribution ►IF the recipient of such contribution is any of the following DC formed or organized for: [R.E.C.S.] 1. Religious purpose and rehabilitation of veterans 2. Educational purpose like educational corporations which are not qualified as NGO 3. Charitable, cultural purpose 4. Scientific, sports development an social welfare purpose “10% or 5% of the net income before charitable contribution” Example: If an individual taxpayer has a gross income of P100,000 and the allowable deduction, except charitable contribution, is P50,000. The Charitable contribution is P5,000. Deduction first P50,000 from P100,000 and the result is P50,000. This P50,000 is the basis of that “10% or 5% of net income before charitable contribution”. So, 10% of the P50,000 is P5,000. Hence, the actual contribution of P5,000 may be fully claimed as deduction. But let us say, the amount of charitable contribution is P10,000. So, he can only deduct P5,000 as charitable contribution, and not the actual amount of P10,000 because the law imposes a limitation that the amount that may be claimed as deduction must not be more than 10% of net income before charitable contribution.
9. RESEARCH & DEVELOPMENT PROGRAM This may not be claimed as deduction if the amount is: 1. Spent for the acquisition or improvements of land or for the improvement or development of natural resources. 2.
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.
10. CONTRIBUTION TO PENSION TRUSTS REQUISITES OF DEDUCTIBILITY: 1. There must be a pension plan established by the employer; 2. The pension must be reasonable or sound; 3. Contribution must be given by the employer to that pension plan; 4. This must be for the benefit of the employees; 5. The plan must not be subject to the control of the employer. Contribution to pension trust may refer to the current year or past years. CURRENT YEAR- this is considered as ordinary & necessary expenses
Employer may also make a contribution to the pension plan in regard to the services rendered for the past 10 years.
PERSONAL EXEMPTIONS PERSONAL EXEMPTIONS 1. Personal and additional exemptions. (Note: Wala na yung S.A.P.E.) 2. Premiums on health and hospital insurance Limitations: a It must not be more than P2,400.00 a year. In other words, P200.00 . a month. The P2,400.00 is the maximum amount that may be claimed as deductions. b .
The family must have an income of not more than P250,000.00 a year.
The claimant exemption.
Premiums on life insurance policy is also included here because it is included under the health insurance policy. PERSONAL EXEMPTION This is an arbitrary amount in the nature of deductions from gross compensation income. If the taxpayer has no compensation income, this can be claimed as deduction from gross income from business, trade or profession. Personal exemption is given to approximate the needs of the taxpayer. It is a substitute for the disallowance of family, personal and living expenses. KINDS OF PERSONAL EXEMPTION: 1. Basic personal exemption: a.
single or legally separated without dependent;
head of the family;
each married individual if both of them are earning Compensation income Php32,000.00 (in case only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemptions)
2. Additional exemption - This only applies to qualified dependent child and Php8,000.00 for every children such as legitimate and illegitimate qualified dependent children. child but not to exceed 4
► Personal Exemption – only individual taxpayers, including estate and trust, are entitled. ►In case of estate and trust – Php20,000.00
Personal Exemptio n
Additiona l Exemptio n
NRA-NTB /subject to the rule on reciprocity. But it must not exceed the maximum allowable personal exemption. X Rule on reciprocity does not apply.
Legend: / - available; X – not available Head of the family – unmarried man or woman legally separated man or woman who has the following qualified dependents: 1.
One or both parents. Must be living with the taxpayer and dependent upon the taxpayer for chief support. Parents must be natural parents.
Brothers or sister To be qualified they must be: a. Living with the taxpayer; b. Dependent upon the taxpayer for chief support; c. Unmarried; d. Not gainfully employed. e. No more than 21 years old except if physically or mentally incapacitated; ► must be brothers or sisters by blood ► one is enough
ChildrenConditions: a. b. c. d. e.
Must be legitimate stepchildren
Living with the taxpayer; Dependent upon the taxpayer for chief support; Unmarried; Not gainfully employed; Not more than 21 years old except if physically or mentally incapacitated.
41 ► Dependent is considered “living with the taxpayer” even if the former or the latter are not physically together if that is brought about by force of circumstances. Example if one of the parents will have to undergo by-pass operation in the U.S. ►Chief Support – means more than 50% of the needs of the dependents are provided by the taxpayer. Problem: If the child or the brother/sister got married and then he has found to be physically or mentally incapacitated, so bumalik si tatay at dependent sa tatay for chief support, can he qualify as dependent? Answer: No, physical or mental defect applies only to age requirement. Once the child or brother/sister got married, he is automatically disqualified as dependent. ► CHANGE OF STATUS: 1. Death of spouse during the taxable year; 2. Death of dependent during the taxable year; 3. Death of the taxpayer during the taxable year; estate of the taxpayer may claim the basic personal exemption; 4. Additional dependent during the taxable year; 5. Taxpayer got married during the taxable year; 6. Gainful employment of the dependent during the taxable year 7. Dependent became more than 21 years old during the taxable year. ► Even if the above-mentioned change of status happened during the taxable year, the taxpayer may still claim the basic personal exemption because it is as if the change of status happened at the end of the taxable year. ► There is a provision in the Tax Code, which is not so clear. For purposes of head of the family, in the case of natural children or child, there is that word “acknowledged or recognized”. ► For purposes of the definition of head of the family, it is clear that to qualify as dependent, the natural child or legitimate child must be acknowledged or recognized by the taxpayer. ► But in the definition of the dependent, dependent means legitimate, illegitimate or legally adopted child or children. There is no word acknowledged or recognized. ► Was this deliberately omitted by our Congressmen? Does this imply that since they have so may illegitimate children, they may not be required to acknowledge or recognize them and they can claim this illegitimate child as their dependent? This is not clear. If we will try to interpret the law literally, there is no need of any recognition on the part of the taxpayer. ► Is this really the intention of law? ► No. The intention of the law has always been to recognize this illegitimate child and this is one way of compelling the taxpayers to recognize this child. ► The President of the Republic of the Phils. cannot issue an executive order to increase the basic personal exemption because the provision under the Old Tax Code authorizing the President to increase the personal and additional exemption upon the recommendation of the Sec. of Finance has been removed or deleted by RA 8424. ► Now, you can only increase the amount of personal and additional exemption by legislative enactment.
NON-DEDUCTIBLE ITEMS 1.
Personal, living or family expenses
Those which are considered capital expenses. Capital expenditures may be one that may increase the value of an asset.
Extra-ordinary repair expended to restore the property, or making good its exhaustion. Extra-ordinary repair is one that may prolong the life of an asset for more than one (1) year. You cannot claim the same as deduction. Instead, you may claim it as allowance for depreciation.
Premiums paid on the life insurance policy of the officer or employee of the employer, when the employer is directly or indirectly designated as beneficiary.
5. Losses from sales or exchanges of property between related taxpayers RULES: ► Premiums paid on the insurance policy of the officer or employee may be claimed as deduction by the employer, If the beneficiary is the family or the heirs of the officer or the employee. ► It is not deductible on the part of the employer, If the beneficiary designated directly or indirectly is the employer. If the beneficiary designated is the creditor or the heirs of the employer, the designation is indirect; hence, that premium is not deductible. ► On the other hand, on the part of the employees, these premiums may be a taxable compensation income. It is taxable compensation income on the part of the employee if the beneficiary designated is the family of heirs of the employee. ► Therefore, if these premiums are deductible on the part of the employer, that is taxable on the part of the employee. If these premiums are not deductible on the part of the employer, that is not taxable on the part of the employee. N.B. Personal, living and family expenses are deductible for the simple reason that these are not connected with the business, trade or profession of the taxpayer. In lieu of the same, the taxpayer may claim the so-called “Personal and Additional Exemption” in the case of individual taxpayers.
CORPORATE INCOME TAXATION CORPORATE TAXPAYER – corporation, includes partnership no matter how created or organized, joint account companies, insurance companies and other associations. It excludes: [Gpp, JV-c, JC- PGE-G] 1. General professional partnership; 2. Joint venture for the purpose of undertaking construction projects; 3. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operations pursuant to a consortium agreement with the government TAX EXEMPT CORPORATIONS:
43 The following organizations shall not be taxed in respect to income received by them as such: 1.
General professional partnership – devoted to a common profession, must not engage in a business;
Joint venture for the purpose of undertaking construction projects;
Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operation pursuant to a consortium agreement under service contract with the government – there must be a consortium agreement with the government
Labor, agricultural or horticultural organization not organized principally for profit.
So, it may derive income from such business as long as it is merely incidental, the organization is still exempt. What is important here is that in the articles of incorporation of this tax-exempt organization, it must be clearly provided that these organizations are not formed or organized for profit. Example: In the course of promoting agricultural products, the agricultural organization may sponsor exhibits and income may be derived from the same. That will not make this corporation taxable because that is merely incidental. The activity has connection with the purpose for which the corporation was organized.
Mutual savings bank not having s capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit. - must form and organize for mutual purposes - Mutual savings bank and cooperative bank must not be organized for profit. So, it must not issue shares of stock.
A beneficiary society, order or association, operating for the exclusive benefits of the members such as a fraternal organization operating under the lodge system, or a payment of life, sickness, accident, or other benefits exclusively to the members of such society, order or association, or non-stock corp. or their dependents. Lodge system – one which must operate under a parent and subsidiary associations
Cemetery company owned and operated exclusively for the benefit of its members. - This must be non-profit cemetery. Example: Libingan ng mga Bayani
Non-stock 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 income or asset shall belong to 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.
Makati stock exchange and Manila stock exchange are not covered by the exception. They are subject to tax.
Requisites: a. This must be established for common business interest. b. No part of the income shall inure to the benefit of a particular individual. Example: A clearing house corp. established by member not for profit and such corp. is tax exempt. If an association is organized by businessmen for the purpose of encouraging prospective investors to invest in the Phils. that association is not tax exempt because the members of such organization have different business interests. 10.
Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare. Example: Piso for Pasig Foundation is not for profit. This is a civic organization. Homeowners Association is subject to tax because that is not organized for profit.
Farmers associations or like associations, 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. “Quantity of poduce” means proportionate. This must not be for profit.
Farmers cooperative or other mutual typhoon or fire insurance company, mutual ditch or irrigation 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.
Government educational institution. These are U.P.M.S.U.
A non-stock and non-profit educational institution. ► Take note that the last paragraph of Sec. 30; it provides, “Not withstanding the provisions in the preceding paragraphs.” This means that even though they are exempt, as regards certain income, they may be subject to tax. ** So, 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. ** The implication is that if these tax exempt corps mentioned under nos. 4 to 14, made an investment, the income derived from such investment may be subject to tax. ► So, if they have real property and lease it to another, the rent income is subject to tax. ►If they have deposit in a bank, the interest income on the same is
45 subject to tax. ►If they sell property for profit, that is subject to tax So, the exemption does not cover this income derived form such investment. Thus, it must be an income derived from their activities which may be the purpose for which they are organized. *** The insertion of non-stock, non-profit educational institution, to my mind, is not in accordance with the provision of Art.14 Sec. 3 par. 3, because the Constitution provides for a particular test for exemption and that is “use” of the property. So, if a non-stock, non-profit educational institution has interest income derived from bank deposit, in view of this provision (Sec. 30, NIRC), the BIR may impose a tax on the same, regardless of the use or disposition. So, even if the interest on such deposit is used to achieve educational purposes, that will not exempt it from taxation. The Constitution says “actually, directly and exclusively used for educational purposes”, the meaning of this is, as the proceeds or income is actually directly and exclusively used for educational purposes, that may be exempt. But under Sec. 30, no. That must be connected with the purposes or purposes for which such institution has been formed or organized. Since this runs counter to Art. 14 Sec. 4 par. 3 of the Constitution, this Sec. 30 should be declared unconstitutional. The Constitution says “use” but here (Sec. 30) it is regardless of the use or disposition. This must yield to that Constitutional provision.
(Sec. 27 par C, TRA 1997) GSIS (Government Service Insurance System)
SSS (Social Security System)
PHIC (Phil. Health Insurance Corp.)
PCSO (Phil. Charity Sweepstakes Office)
PAGCOR (Phil. Amusement & Gaming Corp.)
NAPOCOR – special law
N.B.: The rule now is settled, Gov’t owned and controlled corps. Are subject to corporate income tax except those mentioned under Sec. 27 par C. PARTNERSHIP -
This is an association of two or more persons and they may contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.
Tests that will determine whether a partnership exists or not: 1. There must be a contribution to a common fund. 2.
There must be an intention to divide the profits among themselves.
Co-ownership is not a partnership. Co-ownership, as a rule is a tax exempt because a co-ownership is formed and organized not for profit but for common enjoyment of the property or for the preservation of the property.
Partnership is considered a corporate taxpayer. Take note that this excludes general professional partnership. Only partnership formed or organized for profit is excluded.
If it is formed and organized for the practice of common profession, it is a tax-exempt partnership.
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 SEC.
Case: The heirs of the decent inherited the property. There was distribution of share. But such shares are held under single management. In fact the income of such property after distribution was managed by one of the co-heirs. Held: The fact that they agreed that the shares shall be held by the coheir under the single management for profit, this according to the SC convert the co-ownership in to a taxable unregistered partnership. (Una vs. Commissioner – Una doctrine) Case: The heirs inherited the properties from their deceased mother. The property was under the administration of an administrator. This administrator of the property was authorized to sell these properties for profit, or leased properties for profit and engaged in an income producing activities. Held: When these heirs inherited the property from their deceased mother, coownership exists. At the particular stage, it is exempt from tax when the heirs decided to invest such property in an income producing activity that coownership is converted in to a taxable unregistered ownership (Seña vs. Commissioner – Seña doctrine) Case: There was two sisters who form a common fund for the purpose of engaging in a series of transaction for profit. Held: There is a taxable unregistered partnership here. **Test that will determine whether co-ownership is taxable unregistered partnership – Find out whether the heirs made a substantial improvements on the inherited property. The heirs made a substantial improvement on the inherited property, the implication is that they will engage in a business for profit, (Evangelista vs. Commissioner – Evangelista doctrine). If that happens, that co-ownership will be taxed as unregistered. Case: Obelio Sr. entered into a contract with Ortigas limited company. Under that contract, Ortigas limited company will distribute parcels of land to the Children of Obelio Sr. for their residential houses. After the subdivision of such parcel of land to the children of Obelio Sr., these children decided to sell this parcel of land to Wide City Corp. Was there a taxable partnership formed by the children of Obelio Sr.? Held: There was no partnership formed because there was no intention to divide the profits among themselves. This was a mere isolated transaction. Isolated transaction will negate any intention to divide the profits among themselves. Thus, there was no taxable partnership formed. Case: Pascual and Dragon purchased 3 parcels of land from Bernardino and 2 parcels of land form Mr. Roque. Thereafter, the three parcels of land which were purchased from Bernardino, were sold to Marimer Corp. with a profit of P165,222.70 while the parcel of land purchased from Mr. Roque were sold at a profit of P60,000 to Reyes.
47 Held: there was no partnership organized because this is just a mere sharing of gross return. And as you have learned in partnership, the law says, “the partners share in the net profits of a taxable partnership”. So, mere sharing of gross return does not of itself establish a partnership. Joint account – When two persons form or create a common fund and such persons engaged in a business for profit, this may result in a taxable unregistered association or partnership. Registration is not a requisite for purposes of taxation. What is important here is they must engage in a business or activity for profit. Joint stock companies – This is the midway between corporation and partnership. This has what you call “hybrid personality”. It is somewhat a partnership because it is an association, and persons or members of the same contribute fund, money to a common fund. And this us managed by Board of Directors; this means: it has that feature of a corporation. And these persons may transfer their share without the consent of others. Emergency operation – These may be formed by two corporations. This two corporations have separate personalities. If they form that emergency operation (it is really a special activity) to engage in a joint venture, corporation 1 may be taxed only from the income derived from such business. The income derived from such emergency operation should also be included in that taxable income subject to corporate income tax. In the same way, that corporation 2, has a separate and distinct personality; if it a part of that emergency operation, the income derived from such special activity should also be included in the income of that corporation 2, subject to corporate income tax, even if it is not registered with the SEC (Securities and Exchange Commission). ►But if two corporations are managed by one manager, and this 2 corporations leased services, managed by one person and it has 2 separate accounts, it is not an association formed which is subject to tax. Domestic Corporation (DC) – corp. formed or organized under Phil. Laws Resident Foreign Corporation (RFC) – foreign corporation engaged in trade or business within the Phils. Non-Resident Foreign Corporation (NRFC) – foreign corp. not engaged in trade or business within the Phil. There is no fix criterion as to what constitute engaged in trade or business. Each case shall be judged in the light of peculiar environmental circumstances. But “engaged in business” implies continuity of commercial transaction or dealings – continuity of business; there must be continuity of intention to conduct continuous business. Case: BOAC is an offline international airline. Offline because it does not render any services and no landing rights in the Phils. BOAC claimed that it is not subject to tax with respect to the sale of transport documents or airline tickets in the Phils because it is an offline international airline. It does not render any service and it has no lending rights. Held: The contention of BOAC is not tenable. The income derived from the sale of that transport documents in the Phil. is subject to tax. The subject of income may be property, activity or service that produce the same. For an income to be considered as an income derived from sources within the income must be derived from activity conducted or undertaken in the Phil.
48 It is true that BOAC had no property in the Phil. from which its income may be derived. It is true that BOAC did not render any service in the Phil. from which its income may be derived. But there was that activity that was undertaken in the Phil. from which income was derived and that refers to the sale of transport document. According to the Supreme Court, the sale was made in the Phil. and the payment was made in the Phil. This particular activity enjoys protection of the Phil. government. So, it should share the burden of tax. BOAC was considered doing business in the Phil. under this particular situation because there were series of transactions made in the Phil. and BOAC was appointed a permanent agent in the Phil. This implies that the Phil. and the BOAC had no intention to establish continuous business here in the Phil. Continuity of conduct is the peculiar circumstance referred to in the case. **If these were mere isolated transaction (let’s modify the facts of the case) and BOAC has no permanent agent in the Phil., such airline is not considered doing business in the Philippines. Remember, international carrier is taxed on gross Philippine billings. Case:
A foreign vessel unloaded cargoes in the Phil. twice.
Held: We cannot consider that as resident foreign corp. These are mere isolated transactions. Case: If a corporation made an investment in another corp., the Supreme Court held that, it will not make the corp. as doing business in the Phil. because it has no intention to establish continuous business. Case: Marubeni corp. is a foreign corp. it invested in a domestic corp. This foreign corp. has a branch office in the Phil. it made a direct investment in that domestic corp. So, it received dividend from that domestic corp. Held: That will not make such foreign corp. a resident foreign corp. because of that absence of intention to establish continues business. It would be different if it was coursed through the branch office of such foreign corp.
GENERAL RULES Classificatio n DC RFC NRFC
Tax Rate 34%- 1998 33%- 1999 32% - 2000 34% - 1998 33% - 1999 32% - 2000
Question: Can Congress pass a law imposing tax on the income of a RFC derived from sources without? Answer: No, because this will violate the principle of territoriality in taxation. We cannot extend protection to that particular subject of taxation. The fundamental basis of the power to tax is the capacity of the taxing authority to extend protection to the subject of taxation. ► The 34%, 33% 32% tax rates mentioned may not be applied except if it is lower than the 2% of gross income of such corporate taxpayer. This is called “minimum corporate income tax rate of 2% of gross income”.
49 Example: If a corporate taxpayer has a gross income of P20M. 2% of that is P400,000. In this case, the tax to be paid must not be lower than P400,000. If the net income is P20M and the deduction is P19M, we only have P1M . You multiply that by 34% because now is 1998, so that will give you P340,000. This is the corporate income tax applying that tax rate (34%) is lower than 2% which is P400,000 (this is the amount supposed to be paid). Applying the minimum corporate income tax rate of 2% if the gross income, the amount to be paid as tax is P400,000. ► So, 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. But, if the actual corporate income tax applying that 34% is P600,000, this is the tax that should be paid.
SPECIAL RULES A. SPECIAL DC 1. PRIVATE EDUCATIONAL INSTITUTION
Tax Rate 1998:10%or34% 1999: 33% 2000: 32%
Notes: ► Tax rate is 10% if its income derived from unrelated trade, business or activity does NOT exceed 50% of its gross total income. ► But its income is subject to 34% tax rate if its income from unrelated, trade or business or activity exceeds 50% of its gross income. Example: Its income derived from unrelated trade, business or activity amounted to P20M. And income derived from related trade, business or activity is P10M. So, the total income is P30M. If the allowable expenses amounted to P10M, the taxable income now would be P20M. 66.67% =
Income derived from Unrelated TBA
Income derived from Related TBA
So, the amount from unrelated TBA (66.67%) is more than 50% of its gross income (P30M). Thus, this P20M taxable income is subject to 34% tax rate. But, if the income from related TBA is P20M and its income derived from unrelated TBA is P10M. So: Related TBA -------------- vs.
>> 19% Purpose: To attract investors in the Phils. Situation:
NRFC received dividend, cash or property dividend from DC. That dividend received from DC is subject to 15% FINAL WITHOLDING TAX.
This 15% may be imposed on this dividend received from DC if the foreign govt. of the NRFC allows a tax credit at least 19% (1998), 18% (1999), 17% (2000). It should be credited from the taxes deemed paid by this NRFC in the Phils. So, if the foreign govt. does not allow a tax credit of at least 19%, the tax there is not 15% but 34%. Thus, the tax spared or saved is 19% because normally the tax is 34%. So, 34% less 15% equals 19%, that is the tax saved and that represents the tax credit allowed by the foreign govt. Question: Must the foreign govt. actually grant a tax credit or is it enough that the foreign govt. allow such tax credit? Answer: There is no statutory provision that requires actual grant. Neither is there a Revenue Regulation requiring actual grant. It is clear that the provision of the law says “allows”. So, it is enough to prove that the foreign corp. allows a tax
53 credit. It is not incumbent upon the foreign corp. to prove the amount actually granted. Question: Does a withholding agent or a subsidiary corp. have the personality to file a written claim or refund? Answer: The withholding agent has the personality to file a written claim for refund. A withholding agent is technically a taxpayer because it is required to deduct and withhold the tax, and it has the obligation to remit the same to the govt. So, withholding agent is liable for tax. It has therefore the personality to file a written claim for refund. Withholding agent is not only an agent of the taxpayer but also an agent of the govt. Since it is an agent of the taxpayer, it is ipso facto authorized to file a written claim for refund. CAPITAL TRANSACTIONS EXPLAINED Capital Transaction Involves Capital Asset. CAPITAL ASSET means property held by the taxpayer whether or not connected with his trade or business EXCEPT: [S.O.U.R.] 1. Stock in trade or property of the taxpayer which may be properly included in the inventory at the end of the taxable year [inventoriable property may include finished goods, raw materials or work in process.] 2. Property primarily held for sale to customers in the Ordinary course of trade or business. 3. Property Used in trade or business subject to depreciation, which means that this must be depreciable property. 4. Real property used in trade or business. These 4 properties enumerated are called ORDINARY ASSETS. ASSETS WHICH ARE CONSIDERED AS CAPITAL ARE: 1. Properties not included in those above enumerated 2. Properties used in trade or business classified as capital assets: a. accounts receivable b. property for investment in stock c. subdivision of lots to tenants at the instance of the government. The sale of these subdivided lots at the instance of the govt. to the tenants is considered as Capital Transaction. d. Interest of a partner in a partnership. The partner may transfer that interest to another and he may derive gain therefrom, that is considered as Capital Transaction. N.B. It is therefore safe to say that all properties not used in trade or business are considered as Capital Assets. Capital Asset can be Converted into an Ordinary Asset. Example: A property was inherited by the heirs from their deceased parents. That property is considered as Capital Asset. In the event that this property (a parcel of land) is improved by the heirs substantially and sell the same at a profit, said capital property is now converted into an Ordinary Asset. The profit derived from the sale of the land which has been substantially improved by the heirs is considered as ordinary gain. Ordinary Asset can be converted into a Capital Asset. Example: If the taxpayer is engaged in real estate business, if he dies, these properties will be transmitted to his heirs. And if the heirs will discontinue the business
54 of that deceased parent, that properties which are ordinarily held for sale to customers maybe converted into a Capital Asset. FACTORS that should be considered in DETERMINING whether it is CAPITAL or NOT: 1. It may be the vocation of the taxpayer. In one case, if the taxpayer is engaged in hotel management and he inherited jewelry from his parents and he’ll sell the same, the Court said that it is a Capital Transaction.
It would be different if the one selling a parcel of land is a real estate dealer and he developed the same before this property may be sold to another, this time such taxpayer is engaged in a business, in which case that sale of parcel of land is considered as Ordinary Transaction.
2. Sometimes the period or the extent of activities may play an important role. Case: If a taxpayer is engaged in a lumber business and he has been unsuccessful for a period of 11 years and he tried again on the 12th year. The sale that may be made on the 12th year may not be considered ordinary transaction. But those sales which, would have been made during that 11th year when such taxpayer is engaged in trade or business may be considered Ordinary Asset. If the taxpayer stop his business and then undertake another business, that may be considered Capital Transaction. SPECIAL CAPITAL TRANSACTIONS – these transactions are deemed capital transactions. SPECIAL CAPITAL TRANSACTIONS INCLUDE: 1. Failure to exercise option or privilege to buy or sell property. Example: B offers his land to A. B gives A 5 days within which to make up his mind to buy this parcel of land for P500,000.00 Now, A pays B P5,000 for giving him time to think whether he will buy that during the 5 day-period. If A fails to buy the same, he incurred a loss and we call this Capital Loss. So, the loss of A is considered a gain on the part of B because the latter received that P5,000. So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer. As regards the seller, the gain is considered Capital Gain. 2. Distribution of assets or shares of stock to stockholder upon liquidation of a corporation. Example: After liquidation, the stockholders are entitled to the return of their capital if there is still something left. If A made an investment and the value of his shares of stock is P100,000, after liquidation of the corporate affairs, the corp. gives A P150,000. The gain of A which is P50,000 is considered Capital Gain. 3. Readjustment of partner’s interest in a partnership. Example: A partnership is earning a profit, let us say, P100,000. Then it increases to P1M. So, the partnership may readjust the partner’s interest in the partnership. Or it may also arise if for example, A made an additional contribution. So, A’s interest will change. Now, in making readjustment of interest, the partner may derive gain therefrom, and that is a Capital Gain. 4. Retirement of bonds. Example: The debtor issues bonds and after one (1) year, he pays the same. The value of the bonds is P100,000. Upon redemption, the debtor pays P120,000 to the
55 creditor. So the P20,000 is a gain to the creditor and we consider that as a Capital Gain. But if there is a loss, that is considered as Capital Loss. 5. Wash SaleThis has been described as “61 days sale” The seller here is not a dealer in securities. It is described as 61 days sale because here, 30 days before the sale, the seller acquired substantially identical securities OR 30 days before the sale, he acquired identical or substantially the same stocks or securities. “Sale” may also include exchange or option to sell securities. Example: Today is June 10, Now, here is A who is not a dealer in securities or stocks. He sells securities. Can that be classified as wash sale? You must find out whether 30 days before June 10, he purchased identical securities. Or he ma not have purchased identical securities within that 30 day period before the sale but it is possible that within 30 days after June 10, he may have purchased identical securities. The tax treatment here is, the gain is taxable, meaning that is classified as Capital Gain because the seller is not engaged in such business. If there is a loss, since it is classified as Capital Transaction, that is considered Capital Loss. The capital gain is taxable but the capital loss incurred from wash sale transaction is not deductible. 6. Short Sale – a transaction wherein a person sells securities which he does not own yet. The seller here is a mere speculator; he is selling securities which he is yet to acquire, provided however, that he has ownership of the securities at the time of delivery – he has the right to transfer ownership. (See further discussion on p. 77). RULES THAT GOVERN CAPITAL TRANSACTIONS: 1. Holding Period Rule Under this rule, if the property has been held by the taxpayer for a period of not more than 12 months, the gain or loss is 100% recognized. If it is more than 12 months, the gain or loss is 50% recognized. be.
So, the gain or loss may be 100% or 50% taxable deductible as the case may
Example: You sell your personal car. This is a capital transaction because the asset involved is a capital asset. Let us say that you sell the car at P200,000 and the cost of the car is P150,000. Here, there is a gain of P50,000. You must find out the date of the acquisition and the date of sale or disposition. If the date of acquisition and the date of sale fall within the 12 month period, this P50,000 is P100,000 taxable. But if exceeding 12 months, this P50,000 is only tacable up to P25,000. This is an example of tax avoidance. N.B. This rule is applicable only to individual taxpayers. This is so because the capital gain derived from capital transaction of corporate taxpayers is always 100% recognized respective of the number of months during which the property was in the possession of the corp. taxpayer. 2. Capital Loss Limitation Rule - meaning, capital losses are deductible only to the extent of capital gain - so, it follows that there is no capital gain, there is no deductible losses. - Capital loss cannot be deducted from capital gain - Ordinary loss is deductible from ordinary gain. N.B. This rule applies to individual and corporate taxpayers EXCEPT on banks and trust companies because they are considered as dealer in securities as far as issuance of bond and evidence of indebtedness are concerned.
Net Capital Loss Carry-over Rule -meaning, the capital loss that may be carried over in the succeeding taxable year must not exceed the net income during the year that it was incurred. Example: In 1996, the capital gain is P100,000 and capital loss is P200,000. SO, there is a capital loss of P100,000 which may be carried over in 1997 by the taxpayer. This net capital loss in 1996 may be claimed as deductions from the capital gain in 1997. But if in 1996 the net income is P150,000 and the net capital loss is P100,000, so the net capital loss does not exceed the net income. Thus, the entire amount of P100,000 net capital loss can be carried over in 1997. Can that P100,000 net capital loss be carried over in 1998? NO, because the law says during the “succeeding taxable year”. Tax exemption must be strictly construed against the taxpayer and liberally in favor of the govt. N.B. This rule applies to individual taxpayers. In this regard, there is such a thing as no operating loss carry over. OPERATING LOSS are losses incurred in the course of trade or business of the taxpayer. Net operating loss may be carried over by the taxpayer, whether corporate or individual, to the next three (3) consecutive years provided that during that year, such taxpayer is not exempt from taxation and there must be no substantial change in ownership of the corporation, in the case of the corporation. Substantial change may arise if less than 75% of the outstanding capital stock or paid up capital stock is held by the same person. Case: The BOI registered industries are allowed to carry over operating losses. This time, those losses that were incurred during that period of 16 years operation may be carried over to succeeding taxable year. The rule that we have established is: expenses must be paid or incurred during the taxable year. You can claim those expenses as deduction during the year when the same were incurred or paid. The exception to this rule are net operating loss carry-over and net capital loss carry-over. Meaning of Terms: CAPITAL GAIN – gain from sale or exchange of capital asset. CAPITAL LOSS – loss incurred from sale or exchange of capital asset. NET CAPITAL GAIN – excess of capital gain over capital loss. NET CAPITAL LOSS – excess of capital loss over capital gain. Gains derived from dealings in property form part of Gross Income (Sec. 32 A. no. 3) - This may include sale or exchange of goods or properties. - If the property is sold for cash, that is considered as sale. - If it property for another property, this may be classified as exchange. There may be a gain in regard to exchange of property if the following concur: 1. The property received must have a fair market value; 2. The property disposed of must be substantially different from the property received. - So, a like kind transactions are not taxable transactions. - If a land has been substantially improved and then it is exchanged with another land, that may not be taxable. However, there is that BIR ruling that this is no longer applicable even if these are like kind transactions, it may be taxable. But Prof. Geronimo of Ateneo disagreed. He said, you cannot change that by BIR ruling. So, we can compromise that this will not apply to capital transactions but to ordinary transactions. In determining the gain or loss in the sale or exchange of property, this is the basic formula:
“Amount received or realized LESS Cost or adjusted basis.” How to determine the cost or adjusted basis? *** It depends upon the manner of acquisition. 1. If it was acquired through purchase, it is the cost of the property. Example: I sell a property in the amount of P100,000. It is previously purchased the same at P60,000, this P60,000 is the cost of property. 2. If the property sold was previously acquired through inheritance, it is the fair market value (FMV) of the property at the time of the acquisition. “At the time of acquisition” means at the time of the death of the decedent or testator. 3. If the property sold was acquired through donation, the basis shall be the same as if it would be in the hands of the donor. Situation: A, the donor donated property to B, the donee. Subsequently, such donated property was sold by the donee for P200,000. What must be the cost? Answer: The law says, the same basis in the hands of the donor. So, the donee should ask the donor the basis. It is also that A, the donor acquired the property from another either through purchase or donation. So, you should ask A, the last donor, his basis. Exception to the general rule: If the basis is greater than the FMV of the property at the time of the donation/gift then, for the purpose of determining loss, the basis shall be such FMV. 4. If the property sold was acquired for less than an adequate consideration in money or money’s worth, the basis of such property is the amount paid by the transferee for the property. Situation: The seller acquired the property from A in the amount of P70,000. The FMV of said property is P100,000. So, the seller here is the transferee and A is the transferor. The seller sold the property at P200,000. What must be the cost? Answer: It is the amount paid by the transferee. And the amount paid by the transferee who subsequently sold the property is P70,000. So, he will have a gain of P130,000. *** Remember, it is not the FMV of the property but the amount paid bv the transferee. Suppose the property was acquired in a transaction where gain or loss is not recognized? (NO GAIN, NO LOSS RECOGNIZED) Before we answer that, we should know these transactions where the gain is not recognized (meaning it is not taxable) and the loss is not recognized (meaning, it is not deductible). The basic rule is, in the sale or exchange of property if there is a gain, the gain taxable; If there is loss, the loss is deductible). Exception to the basic rule (no gain or loss shall be recognized): 1. Transactions made pursuant to plan of merger or consideration. Sometimes, we call this “Tax Exempt Transactions” or “Transactions Solely in Kind”. a. A corporation, party to merger or consolidation exchanges its properties solely for stock in corp., which is a party to the merger or consolidation.
Illustration: Property Corp. A
property for Stock
Stock b. A stockholder of a corp. party to a merger or consolidation exchanges his stock solely for stock in another corp. party to that merger or consolidation. Illustration: Security or Stock Stockholder ------------------------ Corp. Securities
1. Stock for Stock 2. Securities for stock 3. Securities for
Security or Stock ** Sometimes, we call the above-mentioned transactions as “Transactions solely in kind” or “Tax Exempt Transactions”. 2. If a person alone or together with others or not exceeding four (4) (so, the total number should be five (5) exchanges his property for stock in a corp. and this person or persons, after this exchange, acquired controlling interest over that corp. This means that they acquired at least 15% of the shares of stock of such corp. - This is also a transaction solely in kind. Question: Suppose these persons, at the time of transaction, already acquired controlling interest over such corp., is the transaction or exchange taxable? Answer: Even if these persons acquired controlling interest at the time of the transaction, the rule is still applicable in which case that is still tax exempt. Question: So, if these properties acquired under this tax exempt transactions are subsequently disposed of, how will you determine the basis? Answer: The basis of the stock or properties acquired under this no gain, no loss recognized shall be the same basis in the hands if the transferor. Suppose the property was acquired under transactions where gain is recognized and loss is not recognized? (GAIN RECOGNIZED, LOSS NOT RECOGNIZED) Transaction solely in kind – this means that there are other consideration given other than those mentioned under transactions solely in kind (nos. 1 and 2 above, but cash is added). Example: Corp. A party merger or consolidation transfers its cash and property to Corp. B, also a party to such merger or consolidation. Corp. B, in exchange, transfers its stocks to Corp. A. Illustration: Property and Cash Corp. A
Corp. B Stock
Property: P50,000 Cash: P50,000 P100,000 FMV – Stock: P100,000
59 Let us say that FMV of stock given by Corp. B is P100,000. The value of the property transferred by Corp. A is P50,000 while cash is also P50,000. So if you add all of these, the amount received or realized is P200,000. Now, you deduct the cost of the stock disposed of. Let us say that the cost of stock is P80,000. So, Corp. B derived gain of P120,000. Is this taxable? Answer: YES, but only P100,000 is the amount that is taxable. This is so because of the limitation that it must not exceed the total cash and the FMV of the property. And if you add the FMV of the property and the total cash given, the total is P100,000. Under the law, there is that limitation in transactions which involves not only the property but also cash. The gain is recognized or taxable but the taxable gain must not exceed the cash given and the FMV of the property which forms part of the consideration. On the other hand, supposed the cost of stock disposed of or transferred to Corp. A is P250,000. So, there is a loss of P50,000, is this recognized or deductible? NO. If this property received under this transactions which is not solely in kind is subsequently disposed of, how do you determine the basis of that? Answer: The basis of the property in the hands of the transferor less the FMV of the property, less cash received plus the gain recognized, if any, plus the dividend that may be treated as such, if there is any. Basis in the hands of the transferor Less: FMV of the property Cash received Plus: Gain recognized, if any Dividend recognized, if any Transactions were gain is recognized and loss is not recognized (meaning, if there is a gain, the gain is taxable and if the loss is not deductible) are: [W.I.R.N.] 1. Wash Sale 2. Illegal transactions 3. Those transactions involving Related taxpayers 4. Transactions Not solely in kind. SHORT SALE - this is also considered as Capital Transaction. - Short sale is really an obligation payable not in cash but in goods. The seller of securities or stock will decline. And if it declines, he earns profit. However, if the price of securities increases, he incurs loss.
Example: I borrow your securities on June 10 and I’ll pay it on June 15. The price of securities on June 10 is P50 and you speculate that said price will decline on June 15. On June 15, the price has been lowered to P40. So, you earn a profit of P10 because I will pay my obligation at P50 on June 15 and not P40.
Tax consequence of short sale: ** If there is a gain, the gain is taxable. We call this Capital Gain. ** If there is a loss, the loss is deductible
WASH SALE vs. SHORT SALE * BOTH may be classified as Capital Transactions. * The basic distinction is in wash sale, the loss that may be incurred is not deductible, whereas in short sale, the loss is deductible. TRANSFER TAXES
60 ESTATE & TRUSTS ESTATE – refers to the mass of properties left by decedent or testator to his heirs or beneficiaries. TRUST – is the right to the property, real or personal, exercised by one person for the benefit of another parties. Parties to a Trust: a. Trustor or grantor - one who created the trust b. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the fiduciary is also the nbeneficiary. c. Beneficiary
Estate may be the subject to tax, if it is under your administration. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement.
If the estate is under extra-judicial settlement, it is not subject to tax because that will not earn income considering that the heirs agreed to settle the estate extra-judicially.
When we speak of judicial settlement, this may include estate or intestate proceedings.
Trust may be subject to tax if the trust is irrevocable. Non-taxable trust are: 1. Revocable Trust. The income here will be taxed in so far as the recipient of the same is concerned. 2. Employee’s Trust. If an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable. The trust is revocable if the power to revest the title to the property of the trust is vested: 1. in the grantor or in conjunction with other person who does not have the substantial adverse interest in the disposition of the property 2. in any person who does not have substantial adverse interest in the disposition of the property.
In irrevocable trust, you cannot transfer or revest the title of the property.
“No substantial interest in the disposition of the property” – he must not be the beneficiary.
If the properties of the estate is not invested in a business, so ten heirs are just co-owners of the property, that is not taxable because coownership as a rule is not taxable.
If the heirs decide to continue the business, such that the administrator may manage the same, that will become an unregistered taxable partnership.
Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. So, they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust.
Estate and trust are entitled to personal exemptions P20,000.
SPECIAL DEDUCTIONS (this can be availed of only by estate and trust):
61 1. In the case of intestate, the executor, or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. 2. In the case of a trust, the income may be distributed to the beneficiaries during that year may also be deducted. The trustee or fiduciary may distribute the income or accumulate the income. The trustee has the discretion whether to distribute the income to the beneficiaries during the taxable year or to accumulate the same and distribute such income after the lapse of certain period of time or year. In the event that income of the trust is distributed to the beneficiary, this particular amount may also be claimed as deductions. Questions: If there are two (2) trust created by one trustor or grantor, how do we tax the income of that trust? Answer: Under the law, the taxable income of these two (2) trust must be consolidated. That trust should be taxed as if they constitute one trust. Situation: Grantor X created 2 trust. One is A trust created and the other is B trust. There is only one beneficiary named Y. Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income is P30,000. We will tax these 2 trust separately but through consolidation. In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to trust A and B. So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax, the tax due should be apportioned. TRANSFER TAXES Taxes may be imposed on onerous transmission of properties or on the gratuitous transmission of properties. Transfer taxes that are imposed on the onerous transmission of properties: 1. VAT (value-added tax) 2. Percentage Tax (excluded this 1998 Bar) 3. Excise Tax (also excluded) CONTENTS OF THE BACK PAGES DIVISION OF GROSS ESTATE: 1. INDIVIDUAL WHO DIED SINGLE - G. E. includes all that he owns at the time of death 2. MARRIED DECEDENT - his estate includes his exclusive properties and his shares in the conjugal properties BUT NOT the exclusive properties of the surviving spouse PROPERTY OWNERSHIP bet. SPOUSES - NCC – before Aug. 3, 1988 > CPG - EXCLUSIVE PROPERTY under N.C.C. 1. brought into the marriage as his/her own 2. acquired during the marriage by LUCRATIVE TITLE 3. acquired by RIGHT of REDEMPTION or EXCHANGE with other exclusive properties 4. purchased with exclusive money - CPG under N.C.C. 1. acquired by ONEROUS TITLE - common fund 2. acquired by INDUSTRY/WORK, SALARY or either 3. FRUITS< RENTS or INTERESTS [conjugal/exclusive] 4. all properties not determined to be exclusive shall be presumed to be conjugal FAMILY CODE - after Aug. 3, 1988
62 - ACP - EXCLUSIVE PROPERTY under the F.C. 1. gift, donation, contribution exclusively given to one of the spouses only - gift and fruits/income considered exclusive 2. INHERITANCE given exclusively to one spouse - gift or fruits/income considered exclusive 3. acquired of personal and exclusive use - except JEWELRY 4. exclusively owned before marriage including fruits /income IF spouse has children from the former marriage 5. purchased from exclusive fund. EXEMPTIONS FROM ESTATE TAX - special laws 1. Benefits received [GSIS, SSS] 2. proceeds of GSIS life insurance 3. Benefits received – U. S. Veterans 4. REPARATIONS – WW II Veterans 5. RETIREMENT BENEFITS - if included in gross estate 6. proceeds of group insurance DECEDENT’S INTEREST assets that are still owned by decedent at the time of death to the extent of his equity or interest in any property whether as exclusive owner, conjugal owner, or common owner. COMPOSITION OF GROSS ESTATE [DI, T-GPA, RT, T-IC, P-LI, T-CD] 1. DECEDENT’S INTEREST 2. TRANSFER by VIRTUE OF GENERAL POWER OF APPOINTMENT 3. REVOCABLE TRANSFER 4. TRANSFER for INSUFFICIENT CONSIDERATION 5. PROCEEDS from LIFE INSURANCE 6. TRANSFER in CONTEMPLATION of DEATH FUNERAL EXPENSES INCLUDE: 1. expenses for interment 2. mourning clothing [widow, children] 3. expenses for wake before burial 4. charges for rites and ceremonies incident to interment 5. cost of burial plot 6. tombstone or monument 7. obituary or death notices JUDICIAL EXPENSES 1. accountants fee 2. appraisers fee 3. administrator’s fee 4. attorney’s fee 5. docket fee 6. stenographers’ fee 7. other expenses of court hearings CLAIMS AGAINST THE ESTATE
63 - obligations of the decedent contracted in good faith while still alive but remains unpaid at the time of death UNPAID MORTGAGES OR INDEBTEDNESS RULES: (claimed as deductions) 1. the said mortgage/indebtedness must have been contracted during the decedent’s lifetime in good faith for an adequate and full consideration in money or moneys worth 2. the value of the decedents interest in the property mortgaged is included in the value of the gross estate - must be undiminished by said mortgage/indebtedness 3. must not include: A. any income tax upon income received after the death of decedent B. property taxes not accrued before his death C. any estate tax LOSSES – fire, storm, shipwreck or other casualty, robbery, theft, embezzlement RULES: 1. must not be compensated by insurance 2. must have been incurred during the settlement of the estate BUT NOT LATER than the last day for the payment of the estate tax (6 mos.) 3. not claimed as deduction in an income tax return of the taxable estate TAXES which are not DEDUCTIBLE 1. income tax or income received after death 2. property taxes not accrued before death 3. estate tax COMPUTATION of VANISHING DEDUCTION FORMULA: INITIAL BASIS GROSS ESTATE X E. L. I. T. and transfers for public purposes SHARE OF SURVIVING SPOUSE RULES: 1. the gross conjugal estate shall be diminished by expenses and charges EXCEPT those chargeable to the exclusive properties 2. the NET amount shall be divided into two (2) 3. ½ goes to the surviving spouse and deducted from the estate of the decedent ALLOWABLE DEDUCTIONS - NON-RESIDENT DECEDENT [ELIT-TVS] 1. ELIT (expenses, losses, indebtedness, taxes) FORMULA: PHIL. GROSS ESTATE WORLD GROSS ESTATE x ELIT 2. transfer for public purposes 3. vanishing deductions 4. share of the surviving spouse NOTICE OF DEATH - if value exceeds Php20,000 - FILE notice with BIR within two mos. Of decedent’s death or within two mos. After election of qualified executor or administrator ESTATE TAX RETURN
if gross value of estate exceeds P200,000 or if gross estate consists of registered property, FILE in duplicate and under OATH if value of gross estate exceeds P2,000,000, return must be supported by a certificate of C.P.A.
TIME FOR FILING RETURN - within 6 mos. From decedent’s death - EXTENSION: not exceed 30 days PAYMENT OF ESTATE TAX - upon filing of the estate tax return and before delivery to any beneficiary of his distribution’s share of the estate - EXTENSION: not to exceed 5 years - If extra-judicially settled, 2 years - It must file bond – not to exceed double the value to be paid
SURCHARGE - 25% for late filing, for late payment - 50% for filing of false or fraudulent return INTEREST – 20% per annum PARTIES TO A DONATION 1. DONOR – gratuitously disposes 2. DONEE – receives and accepts KINDS OF DONATION 1. PERSONAL PROPERTY – may be orally or in writing EXCEPT: exceeds P5,000 – donation and acceptance must be in writing 2. REAL PROPERTY – PUBLIC DOCUMENT ACCEPTANCE - same deed of donation or separate instrument; done during the lifetime of the donor RULE: HUSBAND AND WIFE G.R.: Every donation between Husband and Wife during the marriage is VOID EXCEPTION: 1. donation mortis causa 2. moderate gifts - family affair *** gifts coming from the conjugal property made by both spouses are taxable, ½ to each spouse RULE on INADEQUATE CONSIDERATION * if the property transferred is real property classified as capital asset, the transfer is subject to capital gains tax of 6% and not to donor’s tax * where the consideration is fictitious, the entire value of the property transfer shall be subject to donor’s tax * the amount by which the value of the property exceed the amount of consideration shall be deemed a gift for purposes of the donor’s tax VALUATION OF GROSS GIFTS - FMV at time of donation 1. Real Property - BIR zonal value or FMV fixed by city/provincial assessor whichever is higher 2. Shares of Stock A. If listed – average value at the date of donation
65 B. If not listed – book value at the date of donation 3. Personal Properties – FMV at the time of donation * FMV = pawn value x 3
EXEMPTIONS/ALLOWABLE DEDUCTIONS 1. DOWRIES RULES: A. Exempt up to 1st P10,000; B. Legitimate recognized or legally adopted children; C. Made before marriage or within one year thereof. 2. GIFTS TO NATIONAL GOV’T. or POL. SUB. - not conducted for profit 3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs. - not more than 30% used for administrative purposes - may be a school or non-stock entity DEDUCTIONS ALLOWABLE 1. ENCUMBRANCES or donated property, if assumed by the donee 2. DIMINUTION of the donated property as specified by the DONOR RULE (non-resident donor) 1. Same allowable deductions as resident donors except that the same must be connected with donated property situated in the Phils. 2. NO deductions for “dowries” RULE if Donee is a Stranger 1. TAX PAYABLE – 30% of net gift STRANGER – one who is not a brother, sister (whole or half-blood), spouse, ancestor, lineal descendant or relative by CONSANGUINITY in the COLLATERAL LINE within the 4th degree. RULE ON POLITICAL CONTRIBUTIONS - considered TAXABLE GIFTS - donee in this case is deemed to receive a financial advantage gratuitously ADMINISTRATIVE PROVISIONS - donor’s tax return must be filed under oath and in duplicate - filed within 30 days from date of donation EXTENSION: not exceeding 30 days - WHEN PAID - time the return is filed EXTENSION: not exceeding 6 mos. PROVIDED – BOND- double the amount of TAX TAX CREDIT for donors tax paid to a foreign country - donor was a Filipino citizen or resident alien at the time of foreign donation - donor’s taxes of any character or description are imposed and paid by the authority of a foreign country LIMITATIONS: 1. The amount of credit in respect to the tax paid to any country shall NOT EXCEED the same proportions of the tax against which such credit was taken 2. The total amount of credit shall not exceed the same portion of the tax against which such credit is taken Transfer taxes imposed on gratuitous transmission of properties are: 1. Estate tax
66 2. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of a decedent or testator DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This transmission of properties occurs during the lifetime of the donor and the donee. ESTATE TAX NATURE OF ESTATE TAX – It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself. PURPOSES OF ESTATE TAX – to avoid the undue accumulation or concentration of wealth 1. The primary purpose is to raise revenue in order to support the government; 2. To supplement income tax; 3. To reduce successive inequalities in wealth, meaning, to achieve social equality. KINDS OF ESTATE TAXPAYER: 1. Resident estate taxpayer – includes citizen of the Phils., resident alien who died in the Phils., and such alien, at the time of his death, is a resident of the Phils; 2. Non-resident estate taxpayer – is limited to non-resident alien individual.
Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated.
Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils.
Real and personal tangible properties of NRD are taxable only if they acquire tax situs in the Phils.
Personal intangible properties that are deemed to have acquired Phil. situs are: [F, SOB (DC, FC-85%, FC-SP), SR – P] 1. Franchise which is exercised in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corporation or sociedad anonima 3. Shares of stock, obligation or bonds issued by foreign corp., 85% of the business of which is conducted in the Phils 4. Shares, obligations or bonds acquire business suits in the Phils. > Such shares, obligations or bonds acquire business situs in the Phils. of they are used by foreign corp. in furtherance of its trade or business. 5. Shares or rights in any partnership, business or in any partnership, business or industry, established in the Phils. ► If the personal intangible properties of a NRD does not belong to the abovementioned enumeration, they may not form part of his gross income or we may also apply the doctrine of mobilia sequntur personam. ► Mobilia sequntum personam, according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which provides tax situs. Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from real estate tax? Answer: YES, by applying the rule on reciprocity. RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on tax on the properties of the citizens of the Phils. who died in that foreign country. The phrase “does not impose” and “allows exemption” are different from each other.
When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover all properties but only certain properties. Case: Country of Morocco has no international personality. If it grants exemptions to the intangible personal properties if Filipino citizens who died in that country, will you apply also that rule on reciprocity? Held: YES. It does not matter whether the country has international personality or not. What is important is it allows or grants exemption from estate tax. “Sec. 85, Gross Estate – The value (FMV) of the gross estate of the decedent shall be determined by including the value, at the time of his death, of all property, real or personal, tangible or intangible, wherever situated: Provided, however, That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.” The composition of the gross estate may include: 1. Decedent’s Interest. (includes yields, fruits and interest) - The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest. - In the case of parcel of land, it may produce income in the form of harvest which harvest may form part of the gross estate. - In the case of apartment, the rental of such apartment should also be included, not only the value of the property. - Dividends - Partnership profits - Rights of usufruct 2. Transfer by virtue of general power of appointment - It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. - In general power of appointment, the power is exercisable or in favor of the estate, executor, administrator or a creditor of the estate. If the power is exercisable other than these (estate, administrator, administrator or creditor of the estate), that may be considered as special power of appointment. 3. Revocable Transfer – Any transfer made by the decedent during his lifetime where the decedent has reserved the right to ALTER, AMEND, TERMINATE, or REVOKE. such transfer; it is sufficient that the decedent had the power to REVOKE, though he did not exercise such power. - Irrevocable transfers should be excluded from gross estate. - Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the decedent. 4. Transfers for Insufficient Consideration - The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given. Example: If the property has a FMV of P100,000 and the consideration given is only P50,000, the difference of P50,000 represents insufficient consideration. 5. Proceeds of Life Insurance Policy - Proceeds of life insurance policy may be included if: a. the beneficiary designated is the estate executor, administrator or heirs of the decedent – whether revocable or not revocable b. the beneficiary designated is a 3rd person who is revocably designated as beneficiary - Proceeds of life insurance policy is excluded from the gross estate in the following cases: a. 3rd person is irrevocably designated as beneficiary b. proceeds of group insurance policy – taken out by the co. for its employees
68 c. proceeds of accident insurance policy except accident insurance policy as characteristic d. proceeds of GSIS Life Insurance Policy (govt. employees) e. proceeds of life insurance payable to the heirs of deceased U. S. and Phil. Army Note: As regards the estate executor, administrator or heirs as beneficiary, it is immaterial whether the designation is irrevocable or revocable. 6. Transfer in Contemplation of Death - If such transfer was induced by the thought of death principally, REGARDLESS of whether the death is impending forthcoming or not - TRANSFER may be done before, at the time of or even after the decedent’s death - 3-YEAR PRESUMPTION [deleted by P.D. 1705. Aug. 1, 1986) [MU-NT, F, T-1ST-B, B-SCC] EXCEPTINS/EXCLUSIONS from GROSS ESTATE 1) merger of USUFRUCT in the MAKED TITLE 2) FIDEICOMISSARY 3) transmission from 1st heir to another beneficiary - will of the testator 4) BEQUEST, DEVISEES, LEGACIES or TRANSFER - SOCIAL WELFARE, CULTURAL and CHARITABLE institutions - no part of net income inures to any individual - not more than 30% for admin. purposes DEDUCTIONS FROM GROSS ESTATE DEDUCTIONS FROM GROSS ESTATE THAT MAY BE: 1. Conjugal deductions [FH, JE, FE, ME, CAE, L, U(M/I),T, SD, SP, C-IP] 2. Absolute deductions 3. Exclusive deductions [VD, T-PU, UM, E-EP] (share of SS) OTHERS: [M-U, F, T-1ST-B, G-CI] I. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. Family home 2. Judicial of funeral expenses 3. Casualty losses 4. Indebtedness/unpaid claim against the estate 5. Accrued taxes (before the death of the decedent) 6. Standard Deduction 7. Separation pay given to the heirs of the decedent on account of death Discussion: 1. Family home – (even unmarried person may have a family home) subject to the following conditions: a. there must be only one (1) family home; b. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home in that particular locality; c. the amount that is deductible or the FMV of the family home should not be more than P1M; excess shall be subject to tax d. the FMV must be included in the gross estate of the decedent. If the FMV of the family home is P5M, this should be included in the gross estate of the decedent. But when you claim deductions, you can only claim up to P1M. 2. Expenses which may be in the nature of judicial expenses or funeral expenses. ► Medical expenses are also deductible subject to the following conditions: a. the amount deductible, is limited only to P500,000; b. it must be incurred within one (1) year before the death of the decedent; c. this must be substantiated by receipts
69 ► In the case of funeral expenses, the amount deductible is the actual funeral expenses on the amount which is not more than 5% of the gross estate whichever is lower, but in no case to exceed P200,000. ► There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection with the preservation, administration or settlement of the estate, it may be claimed as deductions. Judicial expenses also include extrajudicial expenses. 3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other casualty losses. ► These losses must be sustained not later than six (6) months after the death of the decedent. ► not compensated by insurance 4. Indebtedness which partake of the nature of the unpaid claims against the estate. ► These must be supported by notarized documents. These obligations must be incurred within three (3) years prior to death of the decedent. ► Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the decedent. In order to be deductible, this claim must be included in the gross estate. ► deduction from the gross estate shall be the collectible portion 5. Taxes which must accrue before the death of the decedent. 6. Standard deduction ► The amount is P1M. So, this may only be applied if the gross estate of the decedent is more than P1M. 7. Separation pay given to the heirs of the decedent on account of death. ► The procedure is to include the amount in the gross estate and then claim this thereafter deductions. II. EXCLUSIVE DEDUCTIONS ► These are deductions against exclusive properties. These may include: (VP-CE) 1. Vanishing deductions – whether inherited or acquired by Donation 2. Transfer for public use 3. Other charges against the exclusive property 4. Encumbrance on exclusive property Discussion: 1. VANISHING DEDUCTION [5, IP, I-GE, PD, PT, N-P-VD] - is an allowable deduction against the exclusive property of the decedent - may be claimed as deduction under the following conditions: a. Death of a decedent which must take place within FIVE YEARS from the death of the prior incident or before gift was given. Situation: A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive property. This property had already been taxed because that forms part of the gross estate of A. Again, this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B.
70 There seems to be double taxation. That is why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which may reduce his estate tax. The condition set by law is that B must have died within the 5-year period. If B died 6 years after the death of A, B can no longer claim such vanishing deductions. b. Identity of Property – located in the Phils. So, there must be evidence to that effect that this is the same property which forms part of the gross estate of A. c. Inclusion of the tax property in the gross estate of the prior decedent. d. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been paid by prior estate. e. No previous vanishing deductions. Question: So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it was acquired through inheritance. Can C claim vanishing deductions? Answer: NO, because this had already been claimed by B. You can only claim vanishing deduction once. It is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. Can we apply this vanishing deduction? YES. Here, B must have died within the 5-year period from the date of donation. Acquisition and transmission exempt from estate tax are: a. The merger of usufruct in the owner of the naked title b. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee of the fideicommisssary. c. Transmission of the property from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor. d. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual and not more than 30% of said bequests, devises, legacies or transfers be used by such institutions for administrative purposes. So, transfers to non-stock, non-profit educational institution is not exempt from estate tax because this is not included from the enumeration BUT exempt from donor’s tax. 2. Transfer For Public Use The donee must be the government or any political subdivision. It must be used exclusively for public use. The transfer must be done orally but testamentary disposition and must be at its present value. 3. Other Charges Against The Exclusive Property So, if the property has been mortgaged with a bank, we consider that as unpaid mortgage. 4. Encumbrance On Exclusive Property VALUATION OF THE GROSS ESTATE: valuation as of the time of death
71 1. Real Property The FMV equivalent to the value as determined by the BIR or zonal value OR that of the value as determined by the provincial or city assessor whichever is higher. 2. Personal Property a. Tangible Personal Property if not being sold; pawn value x 3; The FMV is equivalent to the selling price of the property. (Brand new items) b. Intangible Property – includes interest, shares of stock - It must be the FMV of the interest or shares of stock. - If the intangible personal property is account receivable, it should be Principal PLUS interest unpaid upon the death of the decedent except if worthless) - If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate. - American tropical experience table - IF LISTED – mean or ave. value between the highest and lowest stock quotation - IF NOT LISTED – BOOK value DONOR’S TAX DONOR’S TAX – is an excise tax because what is being tax here is the right or privilege to transmit or dispose of property gratuitously in favor of another. - Tax imposed on the privilege of transmitting property by and living person to another by way of donation - Prevents avoidance of estate tax PURPOSE OF DONOR’S TAX: 1. The primary purpose is to raise revenue; 2. To supplement income tax and estate tax. DONATION – the act of liberality whereby a person disposes gratuitously of a THING or a RIGHT in favor of another who accepts it. DONATIONS SUBJECT TO DONOR’S TAX - trust or not - real or personal - tangible or intangible 1. Indirect donation – Example: Cancellation of indebtedness 2. Direct donation Donor’s tax applies to both natural and juridical persons The law says, “donor’s tax apply whether the transfer is in trust or otherwise”. So, property held in trust may be the subject of donation. But, this contemplates of a transfer where the dominion, the right over such property, use, enjoyment of the same other rights, must all be transferred to the donee so that it will constitute as taxable donation. Read Section 104. CHARACTERISTICS OF VALID DONATION: [F, A, C, I, D] 1. It must be given during the lifetime of the donor. 2. It must be irrevocable. 3. It must comply with the formalities of donation. 4. Acceptance of the donee. REQUISITES OF VALID DONATION 1. It must comply with the formalities of donation. - If the amount of personal property is P5,000 or less, the donation may be made orally. - If the amount of personal property is more than P5,000 the acceptance shall be in writing. - Donation of real property must be made in a public instrument irrespective of the amount 2. Acceptance by the donee of the donation. - Acceptance must be made during the lifetime of the donor. - If the amount of personal property is P5,000 or less, acceptance may be made orally.
If the amount of personal property is more than P5,000, the acceptance shall be in writing. In the case of donation of real property, acceptance must be made in the same deed of donation or in a separate public instrument.
3. Capacity of the donor and the donee: a. Those made between persons who were guilty of adultery or concubinage at the time of the donation. b. Those made between persons found guilty of the same criminal offense, in consideration thereof; c. Those made to a public officer or his wife, descendants and ascendants by reason of his office. Incapacitated donees are: [P, R-P, G, D, NPL] a. The priest who heard the confession of the donor during his illness, or the minister of the gospel who extended spiritual aid to him during the same period. b. The relatives of such priest or minister of the gospel within the 4th degree, the church, order, chapter, community, organization or institution to which such priest or minister belongs. c. A guardian with respect to donation made by a ward in his favor before the final accounts of the guardianship have been approved, even if donor should die after the approval thereof; nevertheless, any donation made by ward in favor of the guardian when the latter is his ascendant, brother and sister, or spouse, shall be valid. d. Any physician, surgeon, nurse, health officers or druggist who took care of the donor during his last illness. e. Individuals, association & corporations not permitted by the law to receive donations. *The following are also incapable of receiving donations by reason of unworthiness: [P (AC, ID, AV), C-AL, A-6 yrs., H-KVD, A or C, F-D, F] a. Parents who have abandoned their children or induced their daughters to lead a corrupt or immoral life, or attempted against their virtue. b. Any person who has been convicted of an attempt against the life of the donor, his or her spouse, descendants or ascendants. c. Any person who has accused the donor of a crime for which the law prescribes imprisonment for 6 years or more, if the accusation has been found groundless. d. Any heir full of age who, having knowledge of the violent death of the donor, should fail to report it to an officer of the law within a month unless the authorities have already taken action, this prohibition shall not apply to cases wherein, according to law, there is no obligation to make an accusation. e. Any person convicted of adultery or concubinage with the spouse of the donor. f. Any person who by fraud, violation, intimidation, or undue influence should cause the donor to make a donation or to change one already made. g. Any person who by the same means prevents another from making a donation, or from revoking one already made, or who supplants, conceals, or alters the latter’s donation. h. Any person who falsifies or forges a supposed donation of the decedent. Under Art. 87 of the F.C., husband and wife are prohibited from making donation to each other. 4. Intention to donate the property of the donee (or DONATIVE INTENT). Exception: Transfer of insufficient consideration in the case of a contract of sale. Example: If the FMV of the property is P100,000 and P50,000 was the consideration given. The difference of P50,000 is considered a donation. * The amount received by a disinherited heir is subject to donor’s tax because he has no right to such property and the same was gratuitously given, so there is no donative intent. 5. Delivery of the property.
Note: If there is no valid donation, the recipient is subject to income tax because of the provision “from whatever source derived.” Classification of donor subject to donor’s tax: 1. Resident donor (RD) - this includes citizen of the Phils. or a resident alien. 2. Non-resident alien (NRD) – he must be a non-resident alien. RD – Real properties, personal tangible properties, and personal intangible properties of resident donor are subject to donor’s tax wherever situated. NRD – Real properties and personal tangible properties of a non-resident donor are subject to donor’s tax only if they are located in the Phils… Personal intangible properties of NRD are subject to donor’s tax only if they acquire tax situs in the Phils… Personal Intangible properties that are deemed situated or acquire situs in the Phils. are: GROSS GIFTS [F, SOB (DC, FC-85%, FC-SP), SR, P] 1. Franchise which is exercised in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corp. or sociedad anonima. 3. Shares of stock, obligations or bonds issued by foreign corporation, 85% of the business of which is conducted in the Phils. 4. Shares, obligations, bonds issued by a foreign corp. which acquires business situs in the Phils. Such shares, obligations or bonds acquires business situs in the Phils. if they are used by such foreign corp. in furtherance 5. Shares or rights in any partnership, business or industry established in the Phils. 6. Real, Intangible and Intangible Personal property or Mixed Even if the personal intangible properties of the NRD acquired tax situs in the Phils. it may still be exempt from donor’s tax by applying the rule on reciprocity. Rule on Reciprocity – If the foreign country of that NRD does not impose, or allows exemption on the donor’s tax on the properties of citizens of the Phils. who died in that foreign country. Sec. 104 is applicable to both estate tax and donor’s tax. TARIFF AND CUSTOMS CODE CUSTOMS LAW – does not refer only to the provisions of Tariff and Customs Code. It also includes other laws and regulations subject to enforcement by the Bureau of Customs. Other laws subject to enforcement by the Bureau of Customs: 1. NIRC – Sec. 107. Importation of goods or articles subject to VAT. The VAT must be paid before these goods are released from Customs Custody. 2. NIRC – Sec. 131. Importation of Articles subject to excise taxes. The payment of excise tax must be made before the goods are released from Customs custody. 3. Regulations that may be issued by the CB, the implementation of such regulation is vested in the Bureau of Customs. Customs duties – are duties which are charged upon commodities on their being imported in or exported out of a country. Tariff – means a book of rates; a table or catalogue drawn usually in alphabetical order containing the names of several states that hold commerce together. Offices charged with enforcement or administration of Customs laws 1. Tariff Commission (TC) 2. Bureau of Customs (BOC)
74 Powers of TC: (TRACER) The power of the TC are investigatory in nature: They investigate the following matters: 1. Matters relative to Tariff relations between the Philippines and the foreign countries. So, that includes commercial treaties. 2. Relation between the rate on raw materials and finished products. 3. Matters relative to the Arrangement of schedules of values 4. Matters pertinent to the Classification of articles 5. It shall also investigate the Effects of foreign competition. 6. It shall investigate the operation of the Tariff Laws and submit Report regarding the same. After investigation, TC shall submit its report to the Bureau Commissioners or to Secretary of Finance. POWERS OF THE BOC: (PERAS) 1. BOC has the power to Prevent and suppress smuggling and other frauds upon BOC. Consistent with this power, the BOC has: a. Power to control and supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries. b. Police power to exercise over Harbor, Airport, River and Port. c. The right of pursuit against vessel subject to seizure even if it is seized beyond the maritime zone. This is called the extra-territorial jurisdiction of the BOC. Sometimes, we call this right of pursuit. The BOC may exercise this power when:
c.1. the vessel was subject to seizure or forfeiture c.2. there was violation of the Customs law committed within the
As regards smuggled goods imported not in accordance with the provisions of the Customs law, it may be pursued by the BOC even if it is transported through air, land or water. Consistent with this power, the BOC may enter in a building, house, structure, enclosure and warehouse. No search warrant is required. As long as they reasonably believed that the place store smuggled goods, seizure or search may be made. But it must be shown that the place must not constitute a dwelling place or unit. This is also because if it is a dwelling place that is covered by the Constitutional provision where warrant must be secured. Situation: Suppose the watchman or security guard and his family live in that place or building where smuggled goods are stored can there be seized without search warrant? Can we consider that a dwelling place? Answer: No, that will make the building a dwelling place. Even if it is outside of its district such that it came from Zamboanga and was unloaded at Cebu, the collector of Cebu may still seize the goods. What is only required is that it came from a port of entry within the Phils. 2. Enforcement of the Tariff and Customs Law including other laws and regulation affecting the administration of Tariff laws. 3. Recommend to the Sec. of Finance needed rules and regulations necessary for the effective enforcement of the provisions of the TCC. 4. Assessment and collection of lawful revenues from imported articles. Also, assessment and collection of fines, penalties, fees and other charges accruing under the provisions of the TCC. 5. It has the exclusive and original jurisdiction over Seizure and forfeiture cases. Meaning, to the exclusion of regular courts. Articles subject to Customs duties: Articles means wares, merchandise, goods and anything which may be made subject of importation or exportation. Articles include Philippine money. So, if the
75 Philippine money is transmitted or taken out of the Phils. without authority from the Central Bank, that may be the subject matter of seizure. Articles subject to Customs duties: 1. Dutiable articles – are articles subject to Custom duties 2. Prohibited articles: a. Absolutely prohibited articles: (SWING) 1. those prohibited by Special Laws 2. Weapons of War 3. Insidious, obscene or immoral articles 4. Narcotic or prohibited drugs 5. Gambling devices b. Qualifiedly prohibited – meaning subject to restrictions or limitations. IF these limitations are not complied with. They will be prohibited. 3. Duty free imported articles – these are articles not subject to custom duties. These are: (MASARAP) a. Medals, badges used as trophies or awards b. Animals and plants for experimental purposes c. Sample articles d. Aquatic resources e. Repair materials f. Articles necessary for the take-off and landing of an airplane or for safe navigation of vessels g. Articles for Public exposition. Included here are historical books and personal household effects Customs duties may be classified as: 1. Regular or ordinary custom duties – these are the ad valorem tax and specific tax. For purposes of determining the ad valorem tax, the basis must be the home consumption value. Home consumption value is the price stated in the commercial, trade or sales invoice. If there is a reasonable doubt as to this value, recourse may be had to the commercial and revenue attachė report, the BOC should refer to the available information that may help the BOC determine the applicable ad valorem tax. Case: NCR-Japan has a subsidiary in the Phils. which is NCR-Phil. Ten adding machines were imported from NCR-Japan and they used, for purposes for determining ad valorem, the home consumption value, the price stated in the sales invoice. Instead, we should refer to the commercial revenue attaché report to determine the basis of that ad valorem tax. 2. Special custom duties: (DCMD) a. Dumping duties b. Countervailing duties Note: The purpose of dumping and countervailing duties is to protect our local products against unfair foreign competition c. Marking duties – the purpose of this is to prevent possible public deception. d. Discriminatory duties – duties which are imposed for the purpose of protecting our national interest Dumping duty – duty levied on imported goods where it appears that a specific kind or class of foreign article being imported into or sold is likely to be sold in the Phils. at a price less than its fair value.
Imposed on specific kind or class of foreign article which is being imported into, or sold or is likely to be sold for exportation to or in the Phils. at a price less than its fair value, the importation or sale of which is likely to injure an industry imposing like goods in the Philippines.
The duty is equal to the difference between the actual purchase price and the fair value of the articles in question in the country or exportation as determined by the Sec. of Finance.
76 These are special duties imposed on imported articles. This may be imposed subject to the ff. requisites: 1. There must be a deliberate and continuous sale of imported article in the Philippines as price lower than the prices in the exporting country. 2. This must prejudice or cause or likely to cause injury to our local industry. Situation: There are articles of foreign origin the prevailing price of which in the US is equivalent to P100. These articles are sold or dumped in the Phils. at lower than the prevailing price in the US because they are saleable in the U.S. So, this will prejudice our local industries. In order to protect our local product or to discourage people from buying this imported product, we should be impose special duties in addition to the regular duties. Dumping duties should be imposed. Countervailing duty – duty equal to the ascertained or estimated amount of the subdsidy or bounty or subvention granted by the foreign country on the production, manufacture, or exportation into the Phils. of any article likely to injure an industry in the Phils. or retard or considerably retard the establishment of such industry.
Imposed on articles, upon the production, manufacture or export of which any bounty or subsidy is directly or indirectly, granted in the country of origin and/exportation. No need to show proof that the imports cause injuries to domestic industries producing the same products. The duty is equal to the ascertained or estimated amount of the bounty or subsidy given.
Situation: Sometimes imported products enjoys certain subsidy from their government. So, they have an advantage. Our local products for example, does not enjoy similar subsidy. We should counter that advantage by imposing countervailing duties. The purpose there is to protect our local products against unfair competition. This represents the inland excise tax on locally manufactured articles of the same kind to off-set this advantage. As regards dumping duties, the extent of the special duty is the amount that represents under-pricing. As regards countervailing duties, the extent is the excise inland tax or the amount of advantage enjoyed by that imported article. Marking duty – duty on ad valorem basis imposed for improperly marked articles. The requirement that foreign importation must be marked in any official language of the Phils., the name of the country of origin of the article.
The purpose is to prevent deception of consumers. The articles must be properly marked, otherwise a special duty of 5% of the value shall be imposed.
Retaliatory or Discriminatory duty – duty imposed on imported goods whenever it is found as a fact that the country of origin discriminates against the commerce of the Philippines in such manner as to place it at a disadvantage compared with the commerce of any foreign country.
The amount may be increased in an amount not exceeding 100% ad valorem when the President finds the public interest may be served thereby.
This may be imposed by the President of the Philippines when our goods are discriminated against.
As regards dumping, countervailing and marking duties, it is the Sec of Finance, upon recommendation of the Tariff Commission, who may impose these duties.
Question: What is the extent of the flexible power of the President of the Phils. under the TCC? Answer: That includes the power to impose discriminatory duties. The President upon recommendation of the Tariff Commission may increase the tariff rates by not more than 5x or meaning 500x of the tariff rates. He may also decrease the tariff rates by not less than 50%.
He can only exercise these powers in the interest of the national economy, national security and general welfare of the people. 2. Other duties: a. Storage fee – this is charged on the goods or articles stored in a warehouse under the control and supervision of the BOC. Articles owned by the government are exempt from storage fee is these articles are stored in a government warehouse.
b. *Wharfage dues – Even if there is no wharf where the goods may be unloaded, wharfage dues may still be imposed because it is not a duty or charge on the use of the wharf. Even if the goods are unloaded in a private wharf or seashore, wharfage dues still be imposed because this is a duty imposed on the cargoes or articles which are unloaded. These are taxes. These are not really custom duties. The significance of this is that when tax exemption is granted from all forms of taxes, this may be included. If the exemption is only from custom duties, wharfage dues is not included.
c. Arrastre charges – this is a duty imposed on goods or articles for handling, receiving or custody of such articles.
d. Tonnage fees – this is based on weight or tonnage of vessel. e. Harbor fees
f. Berthing fees – this is imposed on the vessel for mooring berthing at a particular pier or port. Berthing fees may only be imposed if the vessel is wharfed or berthed at national port. So, if it is wharfed at privately owned port, that is not subject to berthing fees. Steps in the imposition of custom duties: 1. Declaration of goods or articles 2. Assessment by an appraiser. Determine the value applying the schedule of values stated in the tariff rates and that is subject to the approval of the Collector of Customs. 3. Liquidation which may be: (a) Partial – means the value cannot be promptly ascertained. (b) Final - meaning custom duties had been ascertained or finally determined. If these duties are not paid by the taxpayer, the government or the BOC has the power to impose the following administrative sanctions: (1) (2) (3)
Surcharges may be imposed under certain situations Fines may be imposed under certain situations Seizure or forfeiture
Forfeiture is the penalty , seizure is the remedy. Situations where goods may be seized or forfeited by the government: (a)
Articles, vessels, aircraft may be the subject matter of seizure if they are unlawfully used in the importation of foods into the Philippines or exportation of goods form the Phils. Case: Jose had a vessel, M/V Maria Victoria. It was unlawfully used for the importation of cargo. When this was seized by the government, Jose raised the defense of good faith. Held:
78 (1) It is an action directed against the articles and in fact, the caption of the case is Republic of the Phils. vs. M/V Maria Victoria. It is a proceeding in rem, so good faith is not a defense. (2) Even if the vessel did not carry the contraband, that may be the subject matter of seizure if the vessel facilities the importation of that contraband. It is not also required that the vessel must come from the foreign country. Case: Cruz was caught carrying a bulk of foreign currencies. These were seized by the government because she had no license issued by the CB to carry said sum of foreign currency. Held: Cruz must prove that she had a license otherwise seizure was proper. The burden of proof lies on the importer. (b)
Excessive sea stores. Sea stores are the provisions of the vessel necessary for administration and maintenance.
Excessive sea stores for aircraft. Sea stores must be in the place where it should be displayed. If these are kept in the cabin of the crew, these may be the subject matter of seizure because these are considered excessive.
Unlawful transfer of cargoes from one vessel to another before reaching the point of destination.
Envelopes, boxes, trunks
Thing of value or money which is intended to influence BIR officers.
Tax Remedies under the Tariff and Customs Code: Remedies
(1) Administrative or extra-judicial
(a) Enforcement of tax lien (b) Seizure
(a) Tax refund (b) Abandonement (c) Protest
(a) Filing of civil action (b) Filing of criminal action if there is fraud and it must be serious
(a) Appeal to CTA, CA, SC (b) Filing of criminal action against erring Customs officials
ENFORCEMENT OF TAX LIEN Requisites: (1) (2)
Articles must neither be prohibited nor irregular The articles must be in the possession of the BOC If the articles are prohibited or irregular, the remedy is seizure Abandonment may be express or implied.
Cases cognizable by the BOC (1) (2)
Seizure cases on the part of the government and Protest case on the part of the importer
Seizure cases: The issue here pertain to the validity of the importation because you may raise the defense that these are not prohibited importation. Protest: The issue here is the validity of the assessment or collection, or the validity of the classification of articles where customs duties are imposed. PROCEDURE IN PROTEST Remedy (1) File a protest
(2) If protest is denied, Appeal collector’s ruling (3) If CC affirm collector’s ruling, Appeal (4) If CTA affirm collector’s ruling, Appeal (5) If CA affirm CTA, Appeal
Where to file Collector Customs
Customs Commissioner (CC) CTA
[Issues which may be raised] (a) Validity if the assessment or collection (b) Validity of classification of articles Questions of fact or Question of law Question of fact or Question of law
Question of fact or Question of law
Question of law
Prescriptive Period 15 days from the payment of Customs duties
Within 15 days from receipt of the Collector’s ruling Within 30 days from receipt of the decision of the CC. Within 15 days from receipt of CTA decision Within 15 days from receipt of CA decision
TRANSFER TAXES ESTATES & TRUSTS ESTATE – refers to the mass of properties left by decedent or testator to his heirs or beneficiaries. TRUST – is the right to the property, real or personal, exercised by one person for the benefit of another parties. Parties to a Trust: a. Trustor or grantor - one who created the trust. b. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the fiduciary is also the beneficiary. c. Beneficiary ☺ Estate may be the subject to tax if it is under administration. It may only be under administration or settlement if the properties of the decedent are settled under judicial settlement. ☺ If the estate is under extra-judicial settlement, it is not subject to tax because that will not earn income considering that the heirs agreed to settle the estate extrajudicially. ☺ When we speak of judicial settlement, this may include estate or intestate proceedings. ☺ Trust may be subject to tax if the trust is irrevocable. Non-taxable trust are: 1. Revocable Trust. The income here will be taxed insofar as the recipient of the same is concerned. 2. Employee’s Trust. So, if an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable.
80 The trust is revocable if the power to revest the title to the property of the trust is vested: 1. In the grantor or in conjunction with other person who does not have substantial adverse interest in the disposition of the property. 2. In any person who does not have substantial adverse interest in the disposition of the property. ☺ In irrevocable trust, you cannot transfer or revest the title of the property. ☺ “No substantial interest in the disposition of the property” – he must not be the beneficiary. ☺ If the properties of the estate is not vested in a business, so the heirs are just coowners of the property, that is not taxable because co-ownership as a rule is not taxable. ☺ If the heirs decide to continue the business, such that the administrator may manage the same, that will become an unregistered taxable partnership. ☺ Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. S, they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or trust. ☺ Estate and trust are entitled to personal exemptions to P20,000. SPECIAL DEDUCTIONS (this can be valid of only by estate and trust): 3. In the case of estate, the executor or administrator may deduct the income distributed to the heirs during the particular year when such estate is still under settlement. 4. In the case of trust, the income may be distributed to the beneficiaries during that year also be deducted. The trustee or beneficiary may distribute the income or accumulate the income. The trustee has the discretion whether to distribute such income after the lapse of certain period of time or year. In the event that income of the trust is distributed to the beneficiary, this particular amount may also be claimed as deductions. ☺ Question: If these are two (2) trust created by one trustor or grantor, how do we tax the income of that trust? ☺ Answer: Under the law, the taxable income of these two (2) trust may be consolidated. That trust should be taxed as if they constitute one trust. ☺ Situation: Grantor X created 2 trust. One is A and the other is B. There is only one beneficiary named Y. Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income is P30,000. We will tax these 2 trust separately but through consolidation. In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to trust A and B. So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax, the tax due should be apportioned. TRANSFER TAXES Taxes may be imposed on the onerous transmission of properties or on the gratuitous transmissions of properties. Transfer taxes that are imposed on the onerous transmission of properties: 1. VAT (value-added tax) (excluded this 2000 Bar) 2. Percentage Tax (also excluded) 3. Excise Tax (also excluded) Transfer taxes imposed on gratuitous transmission of properties are: 1. Estate Tax
81 2. Donor’s Tax ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of the decedent or testator. DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This transmission of properties occurs during the lifetime of the donor and the donee. ESTATE TAX NATURE OF ESTATE TAX It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the property itself. PURPOSES OF ESTATE TAX: 1. The primary purpose is to raise revenue in order to support the government; 2. To supplement income tax; 3. To reduce excessive inequalities in wealth; meaning, to achieve social equality. KINDS OF ESTATE TAXPAYER: 1. Resident estate taxpayer – includes citizen of the Phils., resident alien who died in the Phils., and such alien, at the time of his death, is a resident of the Phils.; 2. Non-resident estate taxpayer – is limited to non-resident alien individual. → Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated. → Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils. → Personal intangible properties of NRD are taxable only if they acquire tax situs in the Phils. → Personal intangible properties that are deemed situated or deemed to have acquired Phil. situs are: 1. Franchise which is exercise in the Phils. 2. Shares of stock, obligation or bonds issued by domestic corporation or sociedad anonima 3. Shares of stock, obligations or bonds issued by foreign corp. 85% of the business of which is conducted in the Phils. 4. Shares, obligations, bonds issued by a foreign corp. which acquired business situs in the Phils. Such shares, obligations or bonds or in any partnership, business or industry established in the Phils. if they are used by such foreign corp. in furtherance of its trade or business. 5. Shares or rights in any partnership, business or in any partnership, business or industry established in the Phils. → If the personal intangible properties of a NRD does not belong to the abovementioned enumeration, they may not from part of his income or we may also apply the doctrine of mobilia sequntur personam. → Mobilia sequntur personam, according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which provides tax situs. Question: Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from estate tax? Answer: YES, by applying the rule on reciprocity. RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on estate tax on the properties of citizens of the Phils. who died in that foreign country. other.
The phrase “does not impose” and “allows exemtion” are different from each
When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover all properties but only certain properties. Case: Country of Morocco has no international personality or not. What is important is it allows or grants exemption from estate tax. “Sec. 85. Gross Estate. – The value of the gross estate of the decedent shall be determined by including the value, at the time of his death, of all property, real or personal, tangible or intangible, wherever situated. Provided, however, That in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.” The composition of the gross estate may include: 1. Decedent’s Interest. - The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest. - In the case of parcel of land, it may produce income in the form of harvest which harvest may form part of the gross estate. - In the case of apartment, the rental on such apartment should also be included, not only the value of the property. 2. Transfer by virtue of general power of appointment - It implies that if the transfer is made under special power of appointment that should be excluded from gross estate. - The general power of appointment, the power is exercisable or in favor of the estate, executor, administrator or a creditor of the estate. If the power is exercisable other than these (estate, administrator or creditor of the estate), that may be considered as special power of appointment. 3. Revocable Transfer - Irrevocable transfer should be excluded from gross estate. - Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the decedent. 4. Transfer for Insufficient Consideration - The amount that may form part of the gross estate is the difference between the FMV of the property and the consideration given. Example: If the property has a FMV of P100,000 and the consideration given is only P50,000, the difference of P50,000 represents that insufficient consideration. 5. Proceeds of Life insurance policy. - Proceeds of life insurance policy may be included if: a. 3rd person is irrevocably designated is the estate executor, administrator or heirs of the decedent b. the beneficiary designated is a 3rd person who is revocably designated as beneficiary 1. 2. 3. 4. -
Proceeds of life insurance policy is excluded from the gross estate in the following cases: 3rd person is irrevocably designated as beneficiary proceeds of group insurance policy proceeds of accident insurance policy except if accident insurance policy has a characteristic Proceeds of GSIS Life Insurance Policy Note: As regards the estate executor, administrator or heirs as beneficiary, it is immaterial whether the designation is irrevocable or revocable.
DEDUCTIONS FROM GROSS ESTATE:
DEDUCTIONS FROM THE GROSS ESTATE MAY BE: 1. Conjugal deductions 2. Absolute deductions 3. Exclusive deductions I. CONJUGAL AND ABSOLUTE DEDUCTIONS include: 1. Family home 2. Judicial or funeral expenses 3. Casualty losses 4. Indebtedness/unpaid claim against the estate 5. Accrued taxes (before the death of the decedent) 6. Standard Deduction 7. Separation pay given to the heirs of decedent on account of death. Discussion: 1. Family home, subject to the following conditions: a. there must be only one (1) family home; b. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home, in that particular locality; c. the amount that is deductible or the FMV of the family home should not be more than P1M; d. the FMV of the family home is P5M, this should be included in the gross estate of the decedent. But when you claim deductions, you can only claim up to P1M. 2. Expenses which may be in the nature of judicial expenses or funeral expenses.
In the case of funeral expenses, the amount deductible is the actual funeral expenses or the amount deductible is limited only to P500,000;
There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection with the preservation, administration or settlement of the estate, it may be claimed as deductions, judicial expenses also include extra-judicial expenses.
3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other casualty losses. These losses must be sustained not later than six (6) months after the death of the decedent. 4. Indebtedness which partake of the nature of unpaid claims against the estate. There must be supported by notarized document. These obligations must be incurred within three (3) years prior to the death of the decedent. Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the decedent. In order to be deductible, this claim must be included in the gross estate. 5. Taxes which must accrue before the death of the decedent. 6. Standard Deduction The amount is P1M. So, this may only be applied if the gross estate and the decedent is more than P1M. 7. Separation pay is given to the heirs of the decedent on account of death. The procedure is to include the amount in the gross estate and then claim this thereafter as deductions. II. EXCLUSIVE DEDUCTIONS These are deductions against exclusive properties. These may include: (VP-CE) 1. * Vanishing deduction 2. Transfer for public use 3. Other charges against exclusive property 4. Encumbrance on exclusive property
84 Discussion: 1. * VANISHING DEDUCTION - is an allowable deduction against the exclusive property of the decedent. - May be claimed as deduction under the following conditions: a. Death of the decedent which must take place within FIVE (5) YEARS from the death of the prior incident. Situation: A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as exclusive property. One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive property. This property had already been taxed because that forms part of the gross estate of A. again, this same property may be subject to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which may reduce his estate tax. The condition set by law is that B must have died within the five-year period. If B died 6 years after the death of A, B can no longer claim such vanishing deductions. b. Identity of Property So, there must be evidence to the effect that this is the same property which forms part of he gross estate of A. c. Inclusion of the property in the gross estate of the prior decedent. d. Previous taxation The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been paid by prior estate. e. No previous vanishing deductions. Question: So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it was acquired through inheritance. Can C claim vanishing deduction? Answer: NO, because this had already been claimed by B. You can only claim vanishing deduction at once. If it is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive property and forms part of his gross estate. Can we apply this vanishing deduction? YES. Here, B must have died within 5-year period from the date of donation. Acquisitions and transmissions exempt from estate tax are: 1. The merger of usufruct in the owner of the naked title 2. Transmission or delivery if the inheritance or legacy by the fiduciary heir or legatee to the fideeeicommissary. 3. Transmissions of the property from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor. 4. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inures to the benefit of any individual and not more than 30% of said bequests, devises, legacies or transfers shall be used by such institutions for administrative purposes. 2. Transfer for Public Use - The donee must be the government or any political subdivision. It must be used exclusively for public use.
85 3. Other Charges Against the Exclusive Property - So, if the property has been mortaged with a bank, we consider that as unpaid mortgage. 4. Encumbrance on Exclusive Property VALUATION OF THE GROSS ESTATE: 1. Real Property → The FMV equivalent to the value as determined by the BIR or zonal value and that of the value as determined by the provincial or city assessor whichever is higher. 2. Personal Property a. Tangible Personal Property – The FMV is equivalent to the selling price of the property. b. Intangible Personal Property – includes interest, shares of stock. - it must be the FMV of the interest or shares of stock - If the intangible personal property is account receivable, it should be Principal PLLUS interest unpaid upon the death of the decedent. - If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate. TAX REMEDIES
According to the SC, government and taxpayers must stand on reasonably equal terms. Basically, the remedies that may be availed of by the Government or the taxpayer may be grouped into: a. Administrative remedies b. Judicial remedies If the tax law is silent on administrative remedies, the government may still avail of the usual administrative remedies such as Distraint of personal property, or Levy on real property. But that may be resorted to by the government in the collection of taxes are: a. Distraint of personal property b. Enforcement of tax lien c. Levy on real property. Distrain and levy can only be done if notice is given.
If the tax law is silent on administrative remedies, the taxpayer may still avail of the usual administrative remedies of protest and refund for purposes of convenience and expediency.
If the tax law is explicit on administrative remedies, the taxpayer must observe the principle of exhaustion of administrative remedies. Under the Tax Code, if an assessment is made by the BIR, the remedy of the taxpayer is to protest first the assessment. It is the decision of the BIR on that disputed assessment that is being appealed to the CTA.
In claiming for tax refund, the taxpayer have to file first a written claim for refund with the BIR Commissioner.
Exception to the Principle of Exhaustion of Administrative Remedies: a. if it involves judicial questions b. if it involves disregards of due process c. if it involves an illegal act.
Judicial Remedies: IF the tax law is silent on judicial remedies, the government can still avail of the usual judicial remedy. Example: filing an action for collection with the court. If the tax is silent on judicial remedies, the taxpayer may file a special civil action for declaratory relief. But this does not apply as far as the NLRC or the TCC is concerned because these particular tax laws are explicit on this judicial remedies. If the tax law is explicit on judicial remedies, the government should observe the provisions of the law.
86 Example: The filing of an action for collection with the Court must be approved by the BIR Commissioner. Distinction between the Distraint and Levy Distraint of personal property 1. The subject matter is personal property, stocks and securities, bank accounts, debts and credits. 2. In the event that the taxpayer failed to pay the tax, the BIR will issue warrant of distraint. 3. The only requirement is posting of notice of sale in 2 public or conspicuous places 4. If the bid is not equal to the amount of tax liability, the BIR may purchase the property distrained for and in behalf of the government. 5. There is no right of redmption 6. There is that remedy of constructive distraint of personal property. Levy of real property 1. The subject property is real property 2. What is issued is in the nature of an authenticated certificate describing the property and stating the name of the taxpayer as well as the amount due 3. Requires not only posting but also publication of the notice of sale in a newspaper of general circulation in 3 consecutive weeks. 4. If the bid is not equal to the tax liability of there is no bidder, the BIR may forfeit such real property levied by the government. 5. There is right of redemption within 1 year from the date of sale plus 15% interest. 6. There is no such remedy as constructive levy of property. Constructive Distraint can only be resorted to under the following situation: Code: C.A.R.L.) 1. When a taxpayer cancels or hides his property 2. If he performs any act which will obstruct the collection efforts of the BIR 3. If he is retiring from business subject to tax 4. When he is about to leave the Philippines Enforcement of the tax lien: If the taxpayer failed despite receipt of notice to pay the BIR, a lien is created against the properties of the taxpayer.
It is the discretion of the BIR to avail itself of remedies which may result in the expeditious collection of taxes.
Case: Which is preferred, the claim of the government arising from tax lien or the claim of the workers predicated on the judgment rendered by the NLRC? Held: The claim of the government arising from tax lien is superior to the claim of a private litigant predicated on a judgment. Exception: The claim of the laborers may be superior under Art. 110 of the Labor Code when the employer was declared bankrupt of judicial liquidation.
*In observing the provisions of the tax code in regard to distraint or levy, the BIR cannot apply or invoke the presumption of regularity in administrative proceedings. So, if the procedure had been questioned by the taxpayer, it is not for the taxpayer to prove that the procedures under the NLRC in regard to distraint on levy had been complied with.
Revenue taxes are self-assessing taxes.
Requisites of Assessment: 1. Written notice stating that the amount is due as tax. 2. Written notice must contain a demand for the payment of such tax.
Assessment is not a condition sine qua non for purposes of collecting taxes. This is so because demand is not required. The rule under Art. 1169 of the NCC that demand is required before a person may incur in
87 delay cannot be applied. Taxpayer incurred in delay if he fails to pay the tax on date fixed by Tax Code.
Assessments, made by the BIR Commissioner are presumed correct. The presumption does not violate the due process under the Constitution because the presumption is merely disputable.
Normally, the BIR may require the taxpayer to submit reports, documents, books of accounts and other report to establish his tax liability. In the absence of these reports, documents, etc., the BIR may determine the tax liability by using other methods.
*The BIR can determine the tax liability of the taxpayer on the basis of that so-called best evidence obtainable in the absence of said reports etc. In one case, agents of the BIR used the books of account seized as a result of raid by means of search warrant.
NET WORTH OR INVENTORY METHOD (also called Net Investigatory Method) - This is another method that may be employed by the BIR in determining the tax liability of the taxpayer. This is an expansion of that accounting principle, assets less liabilities equals net worth. Assessment is made when it is mailed, released or sent. Example: If it was received by the taxpayer in a particular date (Dec. 5, 1997), you should count the prescriptive period for making an assessment from the date it was mailed, released or sent by the BIR and not from the receipt of the notice of assessment by the taxpayer. The assessment may be subject to revision by the BIR. If revised, the prescriptive period will commence to run from the safe when such revised assessment is mailed, released or sent. So, it is not from the date the original assessment is mailed etc. but from the date the revised assessment has been mailed. The making of assessment is prescriptible.
The rule is, the BIR may collect taxes with or without prior assessment. PRESCRIPTIVE PERIOD FOR MAKING AN ASSESSMENT & COLLECTION With prior assessment
I. Return filed is not false or fraudulent a. Return was file but there exist a deficiency b. Return was filed but no payment has been made II. Failure/Falsify/Fraudulent a. Intentional failure to file a return b. False return c. Fraudulent return
3 years from the date of actual filing. If it was filed earlier than the date fixed by the Tax Code.
Without prior assessment 3 years from the date of actual filing or from the last day fixed by law for filing such return.
COLLECTION: Within 3 years from the date of assessment 10 years from the discovery of such omission of failure, falsity or fraud COLLECTION: from the assessment.
3 years date of
Taxes may be collected even without prior assessment and prescriptive period is 10 years from the discovery of failure or omission, falsity or fraud.
Notes: The rule is if prior assessment has been made, the BIR can avail of the administrative and judicial remedy. But if without prior assessment, the BIR can only avail of the judicial remedies.
88 Return must be the one prescribed by the BIR. SO, if you file your Books of Accounts in lieu of that return, that does not constitute return. PRINCIPLES GOVERNING THE FILING OF AN ACTION FOR COLLECTION BY THE BIR Collection is proper under the following situations: a. BIR assessment is considered final and executory, if no protest or dispute has been made by the taxpayer. IF protested by the taxpayer but he did not appeal, the BIR decision on such protest, the effect is that the BIR decision shall be considered final and executory. b. IF he appeal the decision of the BIR of the Commissioner to the CTA but he did not appeal the decision of the CTA to CA, the decision of the CTA shall be final and executory. c. If he appeal to the CA but the CA decision affirming that decision of the BIR was not appealed to the SC, CA decision shall be final and executory. d. If appealed to SC but SC affirm the decision of the CA, SC decision is final and executory.
If the decision of the BIR is final and executory, the assessment made cannot be questioned. The issue of prescription can no longer be raised except if the BIR submitted the particular issue for the resolution of the Court, that is considered as waiver on the part of the BIR and such issue of prescription may be subject to resolution. There is no provision in the TAX Code that prohibits the BIR from filing an action for collection even if the resolution on the motion for reconsideration on the assessment made is still pending. When the case is pending before the CTA, collection may also be made by filing of an answer to the petition for review with the CTA. This is tantamount to a filing of collection of tax. This will also stop the running of the prescriptive period for collection of taxes. Collection of taxes is prescriptible.
GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE PERIOD IN THE COLLECTION OF TAXES: (Code: N.A.P.O.C.A.R.) 1. No property could be allocated; 2. Agreement between the BIR and the taxpayer to the effect that the prescriptive period shall be suspended pending the negotiation; 3. If the BIR is Prohibited from a distraint or levy of real property; 4. If the taxpayer is Out of the Philippines; 5. If the address of the taxpayer Cannot be located; 6. The filing of an Answer to the petition for review executed by a taxpayer with the CTA; 7. When a Request for reinvestigation has been granted by the BIR. PRINCIPLES IN CRIMINAL ACTION 1. The filing of an action requires the approval of the BIR Commissioner. Also, the filing of civil action requires the approval of the BIR Commissioner. BUT this is not jurisdictional. This is merely a formal defect which can be cured. 2. The purpose of filing criminal action is to impose statutory penalties. 3. The payment of tax liability does not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the Tax Code. This is so because the civil liability arises from the failure of the taxpayer to pay and this does not arise from felonious act. 4. The acquittal of the taxpayer from criminal liability does not carry with it the extinguishments of civil liability. 5. The penalty of subsidiary imprisonment applies only to the failure of the taxpayer to pay the penalties. But, the Tax Law is silent on the failure of the taxpayer to pay his deficiency or delinquency tax. DEFICIENCY VS. DELINQUENCY
In deficiency, the taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax due and the tax paid.
In delinquency, the taxpayer did not file a return.
FALSE RETURN vs. FRAUDULENT RETURN In the case of false return, this is a deviation from the truth. It may be the result of mistake, error, or negligence of the taxpayer. It is not always intentional because it may be the result of an honest opinion of the CPA. In fraudulent return, there is always the intent to defraud the government to evade taxes. It is always intentional and deliberate.
Criminal action may be suspended if the taxpayer is absent from the Philippines.
FIVE (5) years – the prescriptive period for filing a criminal action for violations of the provision of the Tax Code.
In the case of refusal to pay the tax, the 5-year prescriptive period will commence to run from the date final notice or demand has been served upon the taxpayer.
As regards violation of the Tax Code, if the violation is known the 5-year prescriptive period shall commence to run from the date of the discovery of the violation and the institution of judicial proceedings for investigation and punishment. The law uses the conjunction “and”. So, it will commence to run only from the time the BIR referred the case to the Fiscal’s Office or City Prosecutor. In effect, it is always in the control of the BIR.
REMEDIES OF THE TAXPAYER BEFORE PAYMENT, the taxpayer may dispute or protest the assessment. He ma also invoke the power of the BIR Commissioner to compromise tax liability. If you RECEIVED AN ASSESSMENT by the BIR, the remedies are: a. File a request for reconsideration of the assessment or this is a claim for reevaluation of the assessment based on the existing records. b. File a request for investigation of the assessment --- it is also a claim for a reevaluation of the assessment on the basis of newly discovered evidence, or additional evidence that the taxpayer intends to present in the reinvestigation. WHERE TO FILE: (a) & (b) >>>>> BIR Commissioner ISSUES which may be raised >>>>> Question of law or fact or both questions of law and fact WHEN >>>>>>>>>>>>>>>>>>>>>>> Within 30 days from receipt of such assessment IF the request for investigation or reconsideration has been denied by the BIR: 1. File a motion for reconsideration of the decision with the BIR; OR 2. Appeal the decision with the CTA. *** Motion for reconsideration must raise new grounds, meaning grounds which have not been raised in that request for reconsideration or reinvestigation. Otherwise, it is just a pro-forma motion, it will not suspend the period within which to appeal the BIR decision to the CTA which is 30 days from receipt of the BIR decision. ISSUES that may be raised on appeal with the CTA >>> Questions of Law or fact OR both If CTA affirms the decision of the BIR: Appeal the CTA decision to CA. ISSUES >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Questions of law WHEN >>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Within 15 days from receipt of the CA decision
The taxpayer may, instead of filing a protest, file a written claim for refund. REQUISITES FOR FILING REFUND: 1. This must be filed within the two (2) year period from the date of payment; 2. The fact of withholding must be proven; 3. This must be included in the income tax return of the taxpayer; 4. It must be shown that the payment or the amount stated in the return was received by the government. WHERE TO FILE REFUND: ISSUES:
--- BIR --- Questions of law or fact OR --- both OR --- the taxes are illegally or erroneously collected
ILLEGALLY COLLECTED TAX vs. ERRONEOUSLY COLLECTED TAX: Illegally collected tax means it violates certain provision of the law. It may not be authorized by a peculiar Tax Law or statute. Erroneously collected tax means there may be a law passed but there was a mistake in the collection. WHEN TO FILE: Within 2 years from the date of payment > Payment must be proven in contemplation of Tax Law, there is payment when the tax liability is fully paid. So, if it is payable in installment, there can only be payment when the final installment has been paid.