01 taxation law outline

8/10/2019 01 Taxation Law Outline

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TAXATION IUniversity of San CarlosCollege of Law

Part IIncome Taxation, In General

A.

Definition of Terms

Incomein its broad sense, means all wealth which flows into the taxpayer other than as a mere return oncapital.

Capitalid s fund or property existing at one point of time (while income denotes a flow of wealth during adefinite period of time). Capital is wealth, Income is the service of wealth.

Gross Incomeall income derived from whatever source, including but not limited to the items enumeratedin Section 32A.

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

Net Income Taxationis a system of taxation where the income is taxed at net. The taxpayer may claimallowable deductions.

Taxable Income(the old term: Net Income)means all pertinent items of gross income specified in the TaxCode less the deductions and/or personal and additional exemptions, if any, authorized for such types ofincome by this Code or special laws.Shorter version: All pertinent items of gross income less allowable deductions.

Income Taxa tax on all yearly profits arising from property, profession, trade or business, or as a tax on apersons income,emoluments, profits and the like. It is generally regarded as an excise tax. It is not leviedupon persons, property, funds or profits but upon the right of a person to receive income or profits.

B.

Purposes of Income Taxation

C. Systems of Income TaxationPhilippine Tax laws employ partly scheduler and partly global system of income taxation

a)

Schedular Income Tax Systemb) Global Income Tax System

D. Kinds of Income Tax Methods

1. Gross Income TaxationAdvantagesDisadvantages

2.

Net Income TaxationAdvantagesDisadvantages

E.

Features of Our Present Income Taxation (RA No. 8424, RA No. 9337, RA No. 9504)Comprehensive TaxSitus

1.

Basic Features of Individual Taxationa) Schedular System of Taxationb)

Tax rates are progressive in character.c) Modified gross income taxation as regards pure compensation earner.d)

Net income taxation as regards those individual taxpayers that derive business, trade or professionalincome. Allowable deductions under Section 34 may be claimed by individual taxpayers who derivebusiness trade and professional income.

e) Pay as you File system.f)

Under certain cases, pay as you earn system, as applicable to income subject to withholding tax.


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2.

Basic Features of Corporate Income Taxation

a)

Global Concept of Taxationb) Corporate taxpayers, except non-resident foreign corporations, are entitled to deductions.

Net income taxation is applicable to domestic corporations and resident foreign corporations.c) Pay as you File system (except insofar as the electronic filing system is applied)

3.

Criteria Useda) Residencyb) Nationality or Citizenshipc) Place/Source of Income

F. Sources of Income

1. Capital2.

Labor3. Both labor and capital4. Sale of property

G.

Criteria to Determine if Income is Taxable

1.

There is gain or profitIn determining the profit from the sale of property, the formula is:

Amount Received/ Realized LESS Cost of Property = PROFIT2.

The gain or profit is realized or received (either actually or constructively received)3. Such gain or profit is not exempt under any law or treaty

H. Kinds of Taxable Income or Gain

1. Capital Gains-

Gains r income from the sale or exchange of capital assets, including:a. Income from dealings in shares of stock of domestic corporation whether or not through the stock

exchangeb. Income from dealings in real property located in the Philippines; andc. Income from dealings in other capital assets other than (a) and (b).

2.

Ordinary Gains- Gains or income from the sale or exchange of property which are not capital assets

a.

Business incomeb. Compensation incomec.

Passive incomed. Other income from whatever source derived

I. Gross Income

1. InclusionsSections 32AThe enumeration is not exclusiveTreatment of some special items:a)

Forgiveness of indebtednessb)

Recovery of amounts previously written off

2.

ExclusionsSection 32B

J. Situs of Income (Section 42)

1. Compensation IncomeTax Situs: place where the services are rendered.

2. Business IncomeTax Situs: place where the business (merchandising, farming, mining) is undertaken.For Manufacturing BusinessTax Situs:


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(1) Goods are manufactured in the Philippines and sold within the Philippines income derived purelywithin.

(2) Goods manufactured outside the Philippines and sold outsideincome derived purely without.(3)

Goods manufactured within the Philippines and sold outside the Philippines income partly within &partly without.

(4)

Goods manufactured outside the Philippines and sold within the Philippines income partly within &partly without.

3.

Income From Sale or Exchange Of Property(1)

If it involves personal propertythe place of sale.(2) In the case of sale of transport documentsthe place where the transport document is sold.(3) If it involves real propertythe place or location of the real property.

4. Interest IncomeTax Situs: residence of the debtor.

5. Rent IncomeTax Situs: place where the property subject of the contract of lease is located.

6. RoyaltiesTax Situs: place where the intangible property is used.

7. Dividenda. Received from domestic corporationincome purely within.b. Received from foreign corporation consider the income of the foreign corporation in the Philippines

during the last preceding 3 taxable years:(1) The income is purely within if the income derived from the Philippine sources is more than 85%(2)

It is purely without if the proportion of its Philippine income to the total income is less than 50%(3)

There should be an allocation if it is more than 50% but not exceeding 85%8. Annuities

Tax Situs: place where the contract was made.9. Prizes and Winnings

-

Given on account of services renderedplace where the services were rendered.- Not given on account of servicesplace where the same was given.

10.

PensionTax Situs: place where this may be given on account of services rendered.

11.

Professional Income of Professional PartnersTax Situs: place where the exercise of profession is undertaken.

K. Exclusions from Gross Income

1.

Proceeds of Life Insurance PolicySubject to tax if:a.)

Insurer & insured agreed that the amount of the proceeds shall be withheld by the insurer with theobligation to pay interest in the same, the interest is the one subject to tax;

b.)

There is transfer of the insurance policy.2. Amount Received by the as Return of Premium

Reason for Exclusion: It represents a mere return of capital.3. Gifts, Besquests, Devises or Descent

Exceptions to the rule: the income or fruit of such money given by donation, bequests or devise4. Compensation for Injuries or Sickness

Reason for Exclusion: This is just an indemnification for the injuries or damages suffered (compensatory innature).The sources are:a)

The compensation may be paid by virtue of a suit; or

b)

It may be paid by virtue of health insurance, accident insurance or Workmens Compensation Act5.

Income Exempt Under TreatyReason for Exclusion: Treaty has the obligatory force of a contract.Exception: As may be provided for in the treaty.

6. Retirement Benefits, Pensions, Gratuitiesa)

Retirement benefits under RA No. 7641 or a reasonable private benefit planb) Separation pay amount received by an official or employee by his heirs from the employer due to

separation from the service because of death, sickness or other physical disability or for any causebeyond the control of the official or employee.


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c) Social security benefits, retirement gratuities, pensions and other similar benefits received by residentor non-resident citizens or resident aliens from foreign institutions, whether public or private

d) US veterans benefitse)

SSSf) GSISRecipient: 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 retirement;2.

He must have rendered at least 10 years of service to the employer at the time of his retirement;3. There must be reasonable private benefit plan established by the employer;4. Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock

bonus plan, or gratuity;5.

The reasonable private benefit plan must be approved by the BIR;6. The employer must give contribution and no amount shall inure to the benefit of a particular

employee or official. This must be established for the common benefit of the employees orofficials;

7.

This can be availed of once. The subsequent retirement benefits received from another privateemployer is no longer exempt but subject to tax. (If the second employer is a government entityor institutionexempt)

7. Miscellaneous Itemsa)

Prizes and awards given in recognition of religious, charitable, scientific, educational, artistic, literary,or civic achievementsConditions:-

The recipient was selected without any action on his part to enter the contest or proceeding; and- The recipient is not required to render substantial future services as a condition to receiving the

prize or award.b) Income derived by the Government or its Political Subdivisions from the exercise of any

essential governmental function or from any public utilityc) Income derived from investment in the Philippines by Foreign Government or financing

institutionsRequisites:1.

Recipient must be a:a. Foreign government;b. Financing institution owned, financed or controlled by foreign government;c. Regional financing institution, international financing institution established by foreign

government;

2.

It must be an income derived from the investment in the Philippines.d) Prizes and awards in sports competitions

Requisites:- Competition and tournament must be sanctioned or approved by the National Sports Association;

and- The competition or tournament must also be approved by the Philippine Olympic Committee,

whether local or international; whether held in the Philippines or outside.e) Gains derived from the redemption of shares of stock issued by the Mutual Fund Companyf) Contributions to GSIS, SSS, Pag-IBIG, And Union Duesg) Benefits in the form of 13thmonth pay and other benefitsh) Gains derived from the sale, exchange, retirement of bonds debentures or other certificate

of indebtedness with a maturity of more than five (5) years.

L.

Allowable Deductions

1.

Deduction vs Exemption2. Deduction vs Exclusion3.

Basic principles governing deductionsa. The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the

deduction; andb. He must be able to prove that he is entitled to the deduction authorized or allowed.

4.

Kinds of Allowable Deductionsa. Personal and Additional Deductions/Exemptions Section 35b.

Itemized Deductions Section 34AK and 34M


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c. Optional Standard Deduction or forty percent (40%) of the Gross Income

M. Non-Deductible Items, Section 36A and 36B

1. Personal living or family expenses;2.

Amount paid for new buildings or permanent improvements, or betterment to increase the value of anyproperty or estate;

3.

Any amount expended in restoring property or in making food the exhaustion thereof for which anallowance is or has been made, or

4. Premiums paid on any life insurance policy covering the life of any officer or employee , or of nay personfinancially interested in any trade or business carried on by the taxpayer, individual, or corporate, whenthe taxpayer is directly or indirectly a beneficiary under such policy;

5.

Losses from sales or exchanges of property directly or indirectlya) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal

descendants);b) Except in case of distributions in liquidation, between an individual and a corporationmore than 50%

in value of the outstanding capital stock of which is owned directly, by or for such an individual; orc) Except in case of distributions in liquidation, between two corporations more than 50% in value of

the outstanding capital stock of each of which is owned, directly or indirectly, by or for same individual,if either one of such corporation is a personal holding company or a foreign personal holding company;or

d) Between the grantor and a fiduciary of any trust; ore)

Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor withrespect to each trust; or

f) Between a fiduciary of a trust and a beneficiary of such trust.

N. General Principles of Income Taxation in the Philippines. Section 23

1. A resident citizen is taxable on all income derived from sources within and without the Philippines.2.

A non-resident citizen is taxable only on income derived from sources within the Philippines.3. 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 amember of the complement of a vessel engaged exclusively in the international trade shall be traded as anoverseas contract worker.

4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived fromsources within the Philippines.

5.

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 onlyfromsources within the Philippines.


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TAXATION IUniversity of San CarlosCollege of Law

Part IIIndividual Income Taxation

A.

Taxable Individuals

1.

Resident Citizens (RC), Section 24General Rule: A resident citizen is subject to the schedular rates of 5% - 32% tax on income derived fromsources within and without the Philippines.

2. Non-Resident Citizens (NRC), enumerated in Section 22EGeneral Rule: A non-resident citizen is subject to the schedular rates of 5% - 32% tax on income derivedfrom sources within the Philippines.

3. Resident Alien (RA), Section 24General Rule: A resident alien is subject to the schedular rates of 5% - 32% tax on income derived fromsources within the Philippines.

Section 4 of Revenue Regulations No. 2 (Income Tax Regulations) provides:An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of thePhilippines for purposes of the income tax. Whether he is a transient or not is determined by his intentionswith regard to the length and nature of his stay a mere floating intention indefinite as to time, to return toanother country is not sufficient to constitute him a transient. If he lives int he Philippines and has nodefinite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purposewhich in its nature may be promptly accomplished is a transient. But if his purpose is of such a nature thatan extended stay may be necessary for its accomplishment, and to that end the alien makes his hometemporarily in the Philippines, he becomes a resident, though it may be his intention at all times to returnto this domicile abroad when the purpose for which he came has been consummated or abandoned.

4. Non-Resident Alien Engaged in Trade or Business (NRA-ETB), Section 25AA non-resident alien is considered as engaged in trade or business if his aggregate stay in the Philippines ismore than 180 days.General Rule: Subject to the same income tax rates as a citizen and a resident alien.Exception: Cash and/or property dividends received by a NRA individual shall be subject to a final tax of20%.

5. Non-Resident Alien NOT Engaged in Trade or Business (NRA-NETB), Section 25BA non-resident alien is considered not engaged in trade or business if his aggregate stay in the Philippinesis not more than 180 days.General Rule: Subject to a 25% final tax on all items of income.Exceptions:-

Gain on sale of shared of stock in any domestic corporation- Gain on sale of real property located in the Philippines

6. Special Employees, Section 25C, 25D and 25EThose employed by:a) Regional Area Headquarters of Multinational corporations, defined in Section 22b)

Regional Operation Headquarters of Multinational corporations, defined in Section 22c)

Offshore Banking Units;

d)

Petroleum Service ContractorsGeneral Rule: Subject to the 15% preferential tax on their salaries, honorarium, wages, emoluments,remunerations and other similar income.

7. Estates and TrustsThe income tax imposed upon individuals shall also apply to the income of estates or of any kind ofproperty held in trust. The tax shall be computed upon taxable income of the estate or tryst and shall bepaid by the fiduciary.

B. Types/Classification of Income


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Gross Income, Inclusions

1. Compensation IncomeGeneral Rule: A resident citizen is subject to the 5% - 32% tax on income derived from sources within andwithout the Philippines.

a. Requisites for taxability:i.

There must be services, rendered under an employer-employee relationship.ii.

Payment must be for that services rendered.iii. The compensation for services rendered must be reasonable.

b. Different forms of Compensation IncomeDoctrine of Cash Equivalenti. Property/KindFair Market Value (FMV) of the property

If there is a price stipulated, it is the price stipulated that will be followed in the absence ofcontrary evidence.

ii.

Promissory Note or other evidence of Indebtedness- If it is not discounted, it is the face value of the promissory note.- If it is discounted, it is the fair discounted value of the promissory note.

iii. StockFMV of that shares of stockiv.

Cancellation of Indebtedness in favor of services renderedv. Tax liability of the Employee paid by the employer in consideration of services rendered amount

of tax liabilityvi.

Premiums paid by the employer on the life insurance policy of the employee- It is a taxable compensation income if the beneficiaries designated are the heirs of the employee.- It is not a taxable compensation income if the beneficiary designated is the employer.

c.

Fringe benefit any good, service, or other benefit furnished or granted in cash or in kind by anemployer to an individual employee (except rank and file employee).i.

Taxable Fringe BenefitsGeneral Rule: Subject to 32% final tax on the grossed-up monetary value of the following taxablefringe benefits, but not limited to the following:- Housing;- Expense account;- Vehicle of any kind;- Household personnel;

- Interest on load at less than market rate ((extent of the difference between market rate andactual rate);

- Membership fees, dues and other expenses borne by the employer in social and athletic clubs orother similar organizations;- Expenses for foreign travel;- Holiday and vacation expenses;- Educational assistance to the employee or his dependents; and- Life or health insurance and other non-life insurance premiums or similar amounts in excess ofthe law allows.

ii. Exempt Fringe Benefits:- Benefits given to rank & file employees, whether or not granted under a Collective Bargaining

Agreement.- De minimis benefits benefits relatively of small amount, 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: see RR Nos. 8-00, 10-00 and 5-08.- 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.- Employers Convenience Rule those which are required by the nature of the trade, business or

profession of the employer.

2.

Gross Income from Business, Trade and ProfessionGeneral Rule: A resident citizen is subject to the schedular rates of 5% - 32% tax on income derived fromsources within and without the Philippines.


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3.

Passive IncomePassive income, being subjected to final tax, no longer forms part of the income of ones business orprofession, or in ones compensation income.

Income subject to final tax are the following:i. Royaltiesii.

Prizesiii.

Winningsiv. Interests on bank deposit, deposit substitutes, trust funds and other similar arrangements.v. Dividends received from domestic corporation, mutual fund insurance company, regional

headquarters of multi-national corporation and other corporation.vi.

Share of a partner in the net income after tax of a taxable partnership, joint account, joint ventureor concessions.

RC, NRC, RA NRA-ETB NRA-NETB

Royalties

20%, except in thecase of literaryworks, books &musicalcompositions whichare subject to 10%final tax

Same as RC,NRC, RA

25%

Prizes exceeding Php10,000If it is Php10,000 or less, it issubject to final tax but the samemust be included in other income(e.g. compensation, business,professional)

20% 20% 25%

Winnings derived fromsources withinExcept PCSO & Lotto

20% 20% 25%

Interests on Bank Deposits,etc.

20% 20% 25%

Dividends Received from

domestic corp., etc. (excludingLiquidating Dividends) 10% 20% 25%

Share of a Partner in the netincome after a tax of a taxablepartnership, etc.

10% 20% 25%

4. Capital Gains derived from Sale of Shares of Stocka.

Listed and traded through local stock exchange Stock Transaction tax of of 1% of the grossselling price.

b.

Not listed and traded through local stock exchange this is the one subject to income tax (capitalgains tax), as follows:Not over P100,000.00 5% of the capital gains

Amount Over P100,000.00 10%% of the capital gains

5.

Capital Gains derived from the Sale Of Real PropertyCapital Asset, Section 39 property held by the taxpayer whether or not connected in his trade orbusiness except:a. Stock in trade or other property of any kind which would be included in the inventory of the taxpayer

of on hand at the end of the taxable year.b. Property primarily held for sale to customers in the Ordinary course or trade or business.c. Property used in trade or business subject to depreciation.d. Real property used in trade or business.General Rule: Final tax on capital tax on capital gain derived from the sale of real property is 6% of thegross selling price or zonal value whichever is higher.


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Optional: if the option to choose from the final tax of 6% of gross selling price or fair market valuewhichever is higher, or the schedular tax rate of 5% - 32% under Section 24A, wherein the basis undersaid section is taxable income so deductions may be allowed. The cost of the property may be deducted.Exception: Sale or disposition of the principal residence of natural persons is exempt from capital gains taxif certain conditions are met, as follows:a.

Proceeds are fully utilized in acquiring or constructing a new principal residence within 18 months fromthe date of sale or disposition;

b.

Historical cost or adjusted basis of the real property sold or disposed shall be carried over to the newprincipal residence built or acquired;

c. Notice to the Commissioner of Internal Revenue shall be given within 30 days from the date of sale ordisposition;

d. This exemption can only be availed of once every 10 years.e.

If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have beenrealized from the sale or disposition shall be subject of capital gains tax.

GSP or FMW, whichever is higher x Unutilized proceeds/GSP = Taxable Portion

6.

Other Incomea. Rent income other than royaltiesb. Interest income other than interest income on bank depositc. Dividend incomed.

Income from Other sources and this may include:d.1. Bad debts recoveredd.2. Illegal gains derived from gamblingd.3. Tax Refundsd.4. Compensation for private property expropriated by the government for public use.d.5. Damagesd.6. Cancellation of indebtedness

C. Exclusions from Gross Income, refer to Outline II

D. Entitlement to Deductions, in general

1. Resident Citizenentitled to deductions, tax base is taxable income.2. Non Resident Citizenentitled to deductions, tax base is taxable income.3. Resident Alienentitled to deductions, tax base is taxable income.4. Non Resident Alien-Engaged in Trade or Businessentitled to deductions, tax base is taxable income.

5.

Non Resident Alien-Not Engaged in Trade or Businessnot entitled to deductions, tax base is gross income.6. Special Employees subject to 15% tax rate on their income in the form of salaries, honoraria, wages,

emoluments and remuneration and other similar income.

E. Entitlement to Deductions, according to income earned

1.

For Individuals (Citizens and Resident Aliens) Earning Purely Compensation Income

a.

Personal and Additional ExemptionsOnly individual taxpayers, including estates and trusts, are entitled to personal exemptions.

Kinds of Personal Exemption:i.

Basic personal exemptionPhp50,000.00ii.

Additional exemptionPhp25,000.00 for every qualified dependent, but not to exceed four (4).

Qualified Dependent refers only to the legitimate, illegitimate or legally adopted children of thetaxpayer.The child is:

a.

Living with the taxpayer;b. Chiefly dependent upon the taxpayer for supportc.

Not more than 21 years of age;d. Not married;e.

Not gainfully employed or, even though over 21 years old, incapable of self support becauseof mental or physical defect.


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Note: If the taxpayer has no compensation income, this can be claimed as deduction from gross incomefrom business, trade or profession.

Change of Status: (general rule: interpret in favor of the taxpayer)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 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 year7. Dependent became more than 21 years old during the taxable year.

RC NRC RA NRA-NTB NRA-NETB

PersonalExemption

//

Within/

Within

/Subject to rule on

reciprocitymust notexceed the maximum

allowable personalexemption

X

AdditionalExemption

//

Within/

Within

XReciprocity does not

applyX

b.

Premiums on Health and Hospital InsuranceLimitations:

i.

It must not be more than Php2,400.00 a year (i.e., Php200.00 a month).ii. The family must have an income of not more than Php250,000.00 a year.iii.

The claimant must be the spouse claiming the additional exemption.

2.

For Individuals Earning Compensation and/or Business and/or Professional Income (except NRA-NETB)

a. Personal and Additional Exemptions, as discussed above

b. Premiums on Health and Hospital Insurance, as discussed above

c.

Itemized or Optional Standard Deductions

i.

Itemized Deductions those expenses incurred in relation to trade, business or profession, asenumerated in Section 34 (to be discussed lengthily in Corporate Income Taxation). The following mayclaim allowable itemized deductions:

1. Resident Citizens2.

Non Resident Citizens, only those expenses incurred in the Philippines3. Resident Aliens, only those expenses incurred in the Philippines4.

Non Resident Alien, Engaged in Trade or Business, but only those expenses incurred in thePhilippines

5.

Professional Partners, Section 26Exceptions:1. Individual taxpayers earning purely compensation income2.

Non Resident Alien, Not Engaged in Trade or Business3.

Aliens Employed by Regional Area HQs, Regional Operating HQs, Offshore Banking Units,Petroleum Service Contractors & Subcontractors

ii.

Optional Standard Deduction a standard deduction available to individuals except non-resident aliens, in an amount not exceeding forty percent (40%) of the gross income, in lieu ofitemized deductions. Unless the taxpayer signifies in his return his intention to elect the optionalstandard deduction, he shall be considered as having availed himself of the itemized deductions.Such election when made in the return shall be irrevocable for the taxable year in which thereturn is made. A taxpayer whop is entitled to and claimed for the optional standard deduction


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shall not be required to submit with his tax return such financial statements otherwise required inthe Tax Code.

F. Estates and Trusts

1.

Income of estates or trusts included for taxationa) Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent

interests and income accumulated or held for future distribution under the terms if the will or trust.b)

Income which is to be distributed currently but he fiduciary to the beneficiaries, and income collected by aguardian or an infant which is to be held or distributed as the court may direct.

c) Income received by estates of deceased persons during the period of administration or settlement of theestate.

d)

Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries oraccumulated.

2. Exception from taxationEmployees trust which forms part of a pension, stock, bonus or profit -sharing plan of an employer for thebenefit of some or all of his employees shall be exempt from income tax:a) If contributions are made to the trust by such employer, or employees or both, for the purpose of

distributing such employees the earning and the principal of the fund accumulated by the trust inaccordance with such plan; and

b) If under the trust instrument, it is impossible, at any time prior to the satisfaction of all liabilities withrespect to employees under the trust, for any part of the corpus or income to be used for or diverted topurposes other than for the exclusive benefit of the employees.

However, any amount actually distributed to any employee or distribute shall be taxable to him in the year inwhich so distributed to the extent that it exceed the amount contributed by such employee or distribute.

3.

Exemption allowed to estates and trustsPhp50,000 personal exemption

4.

Deductions allowed to estates and trusts

a)

The amount of the income of the estate or trust for the taxable year which is to be distributed currently bythe fiduciary to the beneficiaries

b) The amount of the income collected by a guardian of an infant which is to be held or distributed as thecourt may direct

c) The amount of the income of the estate or trust for its taxable year, which is properly paid or credited

during such year to the legatee, heir or beneficiaryNote: the amount so allowed as a deduction shall be included in computing the taxable income of the heirs.Beneficiaries or legatees whether distributed or not.


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Part IIICorporate Income Taxation

A. Introduction and Definition of Terms

Corporation includes partnership no matter how created or organized, join account companies, insurancecompanies and other associations, except: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 operationspursuant to a consortium agreement with the government

4. Sole proprietorshipPartnershipan association of two or more persons where they may contribute money, property, or industry toa common fund with the intention of dividing the profits among themselves. The partners are considered asstockholders and, therefore, profits distributed to them by the partnership are considered as dividends.

Tests that will determine whether a partnership exists or not:1.

There must be a contribution to a common fund2. There must be an intention to divide the profits among themselves.

For the purposes of taxation, this business partnership is taxable irrespective of whether it is orallyconstituted or in writing and whether or not it is registered in the Securities and Exchange Commission.

Insurance Pool or Clearing HouseWhere an insurance pool or clearing house (composed of non-life insurance corporations) is created,whose role is limited to the principal function of allocating and distributing the risks arising from theoriginal insurance among the signatories to the members of the pool on their ability to absorb the risksceded as well as the performance of incidental functions and which did not insure/assure any risk in itsown name, a partnership or association is created and subject to tax as a corporation.

Co-ownership as a rule, tax exempt, because co-ownership is not a partnership but one formed andorganized not for profit but for common enjoyment of the property or for the preservation of the property.

Lease of properties under common managementWhere there is a series of transactions (i.e., properties leased out to tenants for several years,) whosepurpose is not limited to the conservation of the common fund or even acquired properties, a taxablepartnership is formed. The character of habituality peculiar to business transactions engaged in for the

purposes of gain is present. (Evangelista v. Collector, 102 Phil 140)

General Professional Partnership (GPP) - partnerships formed by persons for the sole purpose of exercising theircommon profession, no part of the income of which is derived from engaging in any trade or business. Persons engagedin business as partners in GPP shall be liable for income tax only in their separate and individual capacities. For purposesof computing the distributive share of the partners, the net income of the partnership shall be computed in the samemanner as a corporation. Each partner shall report as gross income his distributive share, actually or constructivelyreceived, in the net income of the partnership. Income of a GPP is deemed constructively received by the partners.

Joint Venturecreated when two corporations, while registered and operation separately, are placed under one solemanagement which operated the business affairs of said companies as though they constituted a single entity therebyobtaining substantial economy and profits in the operation.

Joint Account created when two persons form or create a common fund and such persons engages in a business for

profit. This may result in a taxable unregistered association or partnership.

Joint Stock Companiesthe midway between a corporation and a partnership, a hybrid personality, somewhat acorporation because this is managed but a Board of Directors and such persons may transfer their share/s without theconsent of others, and somewhat a partnership because it is an association, and persons or members of the samecontribute fund, money to a common fund.

Emergency Operation these may be formed by two corporations with separate personalities. If they form thatemergency operation (it really is a special activity) to engage in a joint venture, corporation 1 may be taxed only fromthe income derived from such business. The income derived from such emergency operation should also be included in


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that taxable income subject to corporate income tax. In the same way, that corporation 2, has a separate and distinctpersonality; it its a part of that emergency operation, the income derived from such special activity should also beincluded in the income of that corporation 2, subject to corporate income tax, even if it is not registered with theSecurities and Exchange Commission.

B.

Taxable Corporations

1.

Domestic Corporations (DC),Section 27A corporation formed or organized under Philippine laws. It is subject to tax on its net taxable income fromsources within and without the Philippines.

2. Resident Foreign Corporations (RFC),Section 24A corporation formed, organized, authorized or existing under the laws of any foreign country, andengaged in trade or business within the Philippines. It is subject to tax on its net taxable income fromsources within the Philippines.

This is no fix criterion as to what constitutes engaged in trade or business. Being engaged in businessimplies continuity of commercial transactions or dealings continuity of business or continuity of intentionto conduct continuous business.

3.

Non-Resident Foreign Corporations (NRFC), Section 28BA corporation formed, organized, authorized or existing under the laws of any foreign country. It is subjectto tax on its gross income from sources within the Philippines.

Such gross income may include interests, dividends, rents, royalties, salaries, premiums (exceptreinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casualgains, profits and income, and capital gains, EXCEPT, capital gains from the sale of shares of stock nottraded in the stock exchange.

C.

Income Tax Exempt Entities,Section 30

1.

General Professional Partnerships- Special rule in expense deductions

2. Joint Venture for the purpose of undertaking construction projects3. 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.

4.

Labor, agricultural or horticultural organization not organized principally for profit.- May derive income from such business as long as it is merely incidental (the organization is still

exempt).It is important that in the articles of incorporation of this tax-exempt organization, it must be clearlyprovided that it is not formed or organized for profit.

5. Mutual savings bank not having capital stock represented by shares and cooperative bankwithout capital stock organized and operated for mutual purposes and without profit.

6. A beneficiary society, order or association, operating for the exclusive benefits of themembers such as a fraternal organization operation under the lodge system (one which mustoperate under a parent and subsidiary associations), or a payment of life, sickness, accident, orother benefits exclusively to members of such society, order or association, or non-stockcorporation or their dependents.

7.

Cemetery company owned and operated exclusively for the benefit of its members (must be anon-profit cemetery)

8.

Non-stock corporation or association organized and operated exclusively for religious,charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans; nopart of its income or asset shall belong to or inure to the benefit of any member, organizer,officer, or any specific person.

9. Business league, chamber of commerce, or board of trade, not organized for profit, and notpart of the net income of which inures to the benefit of any private stock holder or individual. Requisites:a.

This must be established for common business interestb. No part of the income shall inure to the benefit or a particular individual


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10.Civic league or organization not organized for profit but operated exclusively for thepromotion of social welfare

11. Farmers associations or like associations, organized and operated as a sales agent, for thepurpose of marketing the products of its members, and turning back to them the proceeds ofsales, less the necessary selling expenses on the basis of quantity of produce finished by them(must be a non-profit association)

12.Farmers cooperative or other mutual typhoon or fire insurance company, mutual ditch orirrigation company, or like organization of a purely local character, the income of whichconsists of solely assessments, dues and fees collected from members for the sole purpose ofmeeting its expenses.

13.Government educational institution.14.Non-stock and non-profit educational institution

General Rule:All corporations, agencies or instrumentalities owned and controlled but the government shallpay such rate of tax upon their taxable income as are imposed upon corporations or associations engagedin a similar business, industry or activity.Exception:

15.

GSIS (Government Service Insurance System)16.SSS (Social Security System)17.PHIC (Philippine Health Insurance Corporation)18.PCSO (Philippine Charity Sweepstakes Office)19.

LWD (Local Water Districts) RA 1002620.NAPOCOR (special law)

Exception:1.

Income from the use of properties, real or personal2. Income from activities conducted for profit

D. Types/Classification of Income

1. Gross Income, Inclusions

a) Compensation for services

b) Gross income from trade or business or the exercise of a profession

c) Gains derived from dealings in property

d)

InterestsMay or may not be subject to final withholding tax.

- Interest on bank deposit substitutes/trust fund and similar arrangement- Interest from lending/interest income from bonds- Interest on foreign bonds/government bonds- Interest on treasury bills- Interest earned from deposits maintained under the FCDU system- Interest income of pawnshop operators

e) RentsOperating Leasea contract under which the asses is not wholly amortized during the primary periodof the lease, and where the lessor does not rely solely on the rentals during the primary period for hisprofits, but looks for the recovery of the balance of his costs and for the rest of his profits from thesale or the re-lease of the returned assets at the end of the primary lease period.

Financial Lease also called the full payout lease, a contract involving payment over an ob ligatoryperiod (also called the primary or basic period) of specified rental amounts for the use of a lessorsproperty, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessorsborrowing costs and profits. Obligatory period is primary non-cancellable period of the lease which inno case shall be less than 730 days. Lessee exercises choice over the asset.

f) Royalties

g) Dividends


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Any distribution made by a corporation to its shareholders out of its earnings on profits and payable toits shareholders, whether in money or in other property.Requirements for dividend declaration, in general:1.

Unrestricted retained earnings2. Board of Directors declaration3.

Absence of prohibition in any loan agreementKinds of dividend income:i.

Stock DividendGeneral Rule: Stock dividend representing the transfer of surplus to capital account shall notbe subject to tax.Exception:a) Taxable if subsequently cancelled and redeemed by the corporation;b)

Taxable if it leads to a substantial alteration in the proportion of tax ownership in acorporation.

ii.

Disguised DividendsThese are payments which are equivalent to dividend distribution. In the case of excessivepayments by corporations, if such payments correspond or bear a close relationship tostockholdings, and are found to be a distribution of earnings or profits, the excessivepayments will be treated as dividends.

iii. Property DividendsThese are dividends paid in securities or other property, in which the earning of a corporationhave been invested are income to the recipients to the amount of the full market value ofsuch property when receivable by individual stockholders.Note: A dividend paid in stock of another corporation is not a stock dividend, even though thestock distributed was acquired through the transfer by the corporation declaring the dividendsof property to the corporation the stock of which is distributed as a dividend.

iv. Liquidating DividendsOccurs where a corporation distributes all its assets in complete liquidation or dissolution. Thegain realized or loss sustained by the stockholder, whether individual or corporation, is ataxable income or deductible loss.

h)

Annuities

i) Prizes and winnings

j) Pensions

k) Partners distributive share from the net income of the general professional partnership

l) Others

E. Deductions

1. Fundamental Principles in Deductionsa)

The taxpayer must prove that there is a law authorizing deductions.b) The taxpayer must prove that he is entitled to deductions.

2. Entitlement to Deductionsa)

Domestic Corporations (includes private educational institutions, non-profit hospital, government-owned and controlled corporations)entitled to deductions, tax base is taxable income.

b)

Resident Foreign Corporationsentitled to deductions, tax base is taxable incomec)

Non-Resident Foreign Corporationsnot entitled to deductions, tax base is gross income.

3.

Allowable Deductions]a) Itemized Deductions

i.

Expensesii. Interestsiii.

Taxesiv. Lossesv.

Bad Debts


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vi. Depreciationvii.

Depletion of oil, gas, wells and minesviii. Charitable Contributionsix.

Research and Developmentx. Contribution to Pension Trust

b)

Optional Standard DeductionA standard deduction available to corporation, except to non-resident, in an amount not exceedingforty percent (40%) of the gross income, in lieu of itemized deductions. Unless the taxpayer signifiesin its return its intention to elect the optional standard deduction, it shall be considered as havingavailed of the itemized deductions. Such election when made in the return shall be irrevocable for thetaxable year in which the return is made. A taxpayer who is entitled to and claimed for the optionalstandard deduction shall not be required to submit with its tax return such financial statementsotherwise required in the Tax Code.See: Rule for general professional partnerships and its partners

4. Additional Requirement for Deductibility of Certain PaymentsAny amount paid or payable which is otherwise deductible from or take into account in computing grossincome or for which depreciation or amortization may be allowed, shall be allowed as a deduction only if itshown that the tax required to be deducted and withheld therefrom has been paid to the BIR. Section 34K

F.

Itemized Deductions

1.

ExpensesDefinition of Terms:Business Expense v. Capital ExpenseBusiness Expensesrefer to all the ordinary and necessary expenses paid or incurred during the taxableyear in carrying on which are directly attributable to the development, management, operation and/orconduct of the trade, business or the exercise of a profession.Capital Expenses are expenditures for the extraordinary repairs which are capitalized and subject todepreciation. These are expenses which tend to increase the value or prolong the life of the taxpayersproperty.Ordinary & Necessary ExpensesOrdinary Expensesrefers to the expenses which are normal, usual or common to the business, trade orprofession of the taxpayer. An expense is ordinary when it is commonly incurred in the trade or business ofthe taxpayer as distinguished from capital expenditures. The payments, however, need not be normal orhabitual in the sense that the taxpayer will have to make them often. The payment may be unique or non-

recurring to the particular taxpayer affected.Necessary Expenses one which is useful and appropriate in the conduct of the taxpayers trade or profession.Extra-Ordinary Expenses these are amortized or depreciated.

a) Common Requisites for Deductibility of Ordinary and Necessary Expensesi.

The expenses must be ordinary and necessary;ii. It must be paid or incurred during the taxable year;iii.

It must be paid or incurred in connection with the trade, business or professioniv. It must be reasonable in amount;v.

It must be substantiated by sufficient evidence such as official receipts and other officialrecords; and

- Official receipts

- Adequate Records

-Amount of Expense being deducted

- Date and place where such expense is paid or incurredNature of expensedirect connection or relation of the expense being deducted tothe development, management, operation, and/or conduct of the trade, business orprofession of the taxpayer.

vi.

It must not be against law, morals, public policy or public order.

b)

Kinds of Ordinary & Necessary Expensesi. Compensation for services renderedii.

Advertising & promotional expenses


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iii. Rent Expensesiv.

Travelling expensesv. Entertainment expensesvi.

Repairs & maintenance expensesvii. Supplies and materials

c) Compensation for Services RenderedSpecial Requisites for deductibility of these Expenses:i.

This must be reasonable, meaning, this must not be ostensible; andii. These are, in fact, payments for personal services actually rendered.

Special Requisites for Deductibility of Bonuses to Employees:i.

The bonuses are made in good faithii. They are given for personal services actually rendered; andiii.

They do not exceed a reasonable compensation for the services rendered, when added to thestipulated salaries, measured by the amount and quality performed in relation to thetaxpayers business.

Bonuses must be given in good faith and in determining whether bonuses will form part of thecompensation for services rendered, you have to consider the (1) nature of the business, (2) thefinancial capacity of the taxpayer and (3) the extent of the services rendered.

d) Advertising and Promotional ExpensesIt must be reasonable.

e) Rental Expensesi.

The rental payment is required as a condition for continued use or possession;ii. The purpose is for trade, business or profession;iii.

The taxpayer must not be the owner of the property or he has no equitable title over theproperty. The taxpayer must not be taking title to the property.

iv.

This is subject to withholding tax.

f)

Traveling ExpensesSpecial Requisites for Deductibility of Traveling Expenses:i. The expenses must be reasonable and necessaryii. They must be incurred or paid while away from home, and

Home does not refer to your residence but to the station assignment or post/principal place

of business.iii. They must be paid or incurred in the conduct of trade or business.

g) Entertainment, Amusement and Recreation ExpensesSpecial Requisites for Deductibility of EAR Expenses:i. Reasonable in amount;ii.

Incurred during the taxable period;iii. Directly connected to the development, management and operation of the trade, business, or

profession of the taxpayer, or that are directly related to or in furtherance of the conduct ofhis or its trade, business or profession;

iv.

Not to exceed such ceiling as the Secretary of Finance may, by rules and regulations,prescribe; and

- of 1% of net sales for sellers of goods

- 1% of net sales for sellers of services

v.

Any expense incurred for entertainment, amusement or recreation which is contrary to law,morals, public policy, or public order shall in no case be allowed as deduction.

h)

Repairs and Maintenance ExpensesExpenses for repairs are deductible if such repairs are incidental or ordinary, that is, made to keep theproperty used in the trade or business of the taxpayer in an ordinarily efficient operation condition.Repairs in the nature of replacement to the extent that they arrest deterioration and prolong the life ofthe property are capital expenditures and should be debited against the corresponding allowance ofdepreciation.


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iv. Interest paid or calculated for cost-keeping purposes.v.

Interest paid in advance through discount or otherwise by an individual taxpayer reportingincome on the cash basis. Such interest shall be allowed as a deduction in the year theindebtedness is paid.

vi. Interest on obligation to finance petroleum exploration.vii.

Interest on unclaimed salaries of the employees.viii. 33% interest income subject to final tax.

e)

Theoretical InterestAn interest which is computed or calculated, not paid or incurred, for the purposes of determining theopportunity cost of investing in a business. This does not arise from legally demandable interest-bearing obligation. This is not a deductible interest.

f) Optional Treatment of Interest ExpenseAt the option of the taxpayer, interest incurred to acquire property used in trade, business or exerciseof a profession may be allowed as a deduction or treated as a capital expenditure.

3. TaxesGeneral Rule:All taxes, national or local, paid or incurred within the taxable year in connection with thetaxpayers trade, business or profession are deductible from gross income.Exception:

i. Special Assessment on real propertiestax imposed on the improvement of a parcel of landii.

Income TaxPhilippine and Foreign income tax.iii.

Taxes which are not connected with the trade, business or profession of the taxpayeriv. Transfer TaxesEstate Tax and Donors Taxv.

Value-Added Taxvi. Electric Energy Consumption Tax (BP No. 36)

a) Requisites for Deductibility of Taxesi.

This must be paid or incurred during the taxable year; andii. This must be taxes paid or incurred in connection with the trade, business or profession of

the taxpayer.

b) Tax Deductions v. Tax CreditsTaxes, as deductions, include those taxes which are paid or incurred in connection with the trade,business or profession of the taxpayer. However, the source of a tax credit is foreign income tax paid,

war profit tax, excess profit tax paid to the foreign country.Taxes, as deductions, may be claimed as deductions from gross income in computing the net incomeWHILE tax credit is a deduction from Philippine income tax.The foreign income tax paid to the foreign country is not always the amount that may be claimed astax credit because under the limitation under the Tax Code, it must not be more that the ration offoreign income to the total income multiplied by the Philippine income tax.

c) Who may claim tax credits for taxes of foreign countries?i.

Citizensii. Domestic corporationsiii.

Members of GPPsiv. Beneficiaries of estates and trusts

Limitations on deductions for NRA-ETB and RFC:In the case of a NRA-ETB in the Philippines and a RFC, deductions for taxes shall be allowed

only if and to the extent that they are connected with income from sources within thePhilippines.

d)

Limitations on CreditThe amount of the credit taken shall be subject to each of the following limitations:i.

Per Country Limitationthe amount of the credit in respect to the tax paid or incurred to anycountry shall not exceed the same proportion of the tax against which such credit is taken,which the taxpayers taxable income from sources within such country bears to his entiretaxable income for the same taxable year; and


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ii. Global Limitationthe total amount of the credit shall not exceed the same proportion of thetax against which such credit is taken, which the taxpayers taxable income from sourceswithout the Philippines taxable under this Title bears to his entire taxable income for thesame taxable year.

e)

Proof of Credits (Tax Credits)The credits shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner thefollowing:i.

The total amount of income from sources without the Philippines;ii. The amount of income derived from each country, the tax paid or incurred to which is

claimed as a credit; andiii. All other information necessary for the verification and computation of such credits.

f) Tax subsequently Refunded or CreditedTaxes previously allowed as deductions, when refunded or credited, shall be included as part of grossincome in the year of receipt to the extent of the income tax benefit of said deduction.

4. Losses

a) Classification of Losses

i. Ordinary Losses losses sustained in the course of trade, business or profession of thetaxpayer.Net Operation Lossthe excess of allowable deduction over gross income of the businessin a taxable year.Net Operation Loss Carry Over (NOLCO)shall be carried over as a deduction from thegross income for the next 3 consecutive taxable years immediately following the year of loss.Such loss shall be allowed as a deduction if it had not been previously offset as deductionfrom gross income. However, any net loss incurred in a taxable year during which thetaxpayer was exempt from income tax shall not be allowed as a deduction.NOLCO shall be allowed only if there has been no substantial change in the ownership of thebusiness or enterprise. There is no substantial change when:

a. Not less than 75% in nominal value of outstanding issued shares, if thebusiness is in the name of a corporation, is held by or on behalf of thesame persons; or

b. Not less than 75% of the paid up capital of the corporation, if the business

is in the name of a corporation, is held by or on behalf of the same persons.

ii.

Capital Losses governed by rules on loss from the sale or exchange of capital assets.Losses from sales or exchange of capital asses shall be allowed only to the extent of the gainsfrom such sales or exchanges.Net Capital Lossthe excess of capital loss over capital gainsNet Capital Loss Carry Over (NCLCO)not available to corporate taxpayers.Capital Losses include the following:

a.

Loss arising from failure to exercise privilege to sell or buy propertyb. Securities becoming worthlessc.

Abandonment losses in the case of natural resourcesd. Loss from wash sale or stock securities

Wash Sale occurs where it appears that within a period beginning 30 daysbefore the date of the sale or disposition of shares of stock or securities and

ending 30 days after such date, the taxpayer has acquired (by purchase orexchange) or has entered into a contract or option to so acquire, substantiallyidentical stock or securities. No deduction for loss shall be allowed for washsales unless the claim is made by a dealer in stock or securities and with respectto a transaction made in the ordinary course of the business of such dealer.

iii.

Wagering or Gambling Lossesthe amount that is deductible must not exceed the gainsiv. Casualty Lossesinclude losses from fire, storm, shipwreck, other casualty losses, robbery,

embezzlement and theft.


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v. Abandonment Losses - in the even a contract are where petroleum operations areundertaken is partially or wholly abandoned, all accumulated exploration and developmentexpenditures pertaining thereto shall be allowed as deduction.

vi.

Special Lossese.g., loss arising from voluntary removal of buildings as an incident to renewal or replacement.

b) Common Requisites for Deductibility of Lossesi.

The loss must be incurred by the taxpayer in the course of his trade, business or profession;ii.

Losses must be actually sustained and charged off within the taxable year, and not mereanticipated losses;

iii. Must be evidenced by a closed and completed transaction;iv. Must not be compensated by insurance or other forms of indemnity;

If it is partly compensated, only the amount not compensated by insurance is deductible.v. The loss is not claimed as a deduction for estate tax purposes; andvi.

If it is a casualty loss, the taxpayer has filed a sworn declaration of loss within 45 days afterthe date of discovery of the casualty or robber, theft or embezzlement.

5. Bad DebtsThese are debts due to the taxpayer which are usually ascertained to be worthless and charged off withinthe taxable year.

a) Requisites for Deductibility of Bad Debtsi.

Must be valid and subsisting indebtedness;ii.

Must be ascertained to be worthless;iii. Must be charged off and uncollectible within the taxable year;iv.

Must be uncollectable in the near future; andv. Must arise from trade, business or profession of the taxpayer.

b) Steps to Prove the Worthlessnessi.

There must be a statement of account sent to the debtor;ii. A collection letter;iii.

If he failed to pay, refer the case to a lawyer;iv. If lawyer may send a demand letter to the debtor; andv. If the debtor still fails to pay the same, file an action in court for collection.

c) Bad Debts Charged Off Subsequently Collected

If the recovery of bad debts, resulted in tax benefit to the taxpayer, that is taxable. If it did not resultin any tax benefit to the taxpayer, that is not taxable.

6. DepreciationThe gradual diminution of the useful value of the property used in trade, business or profession of thetaxpayer, arising from wear and tear or natural obsolescence. The term is also applied to amortization ofthe value of intangible assets, the use of which in trade or business is definitely limited in duration.

a)

Requisites for Deductibility of Depreciationi. The property must be used in trade, business or profession of the taxpayer;ii.

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.

Landd.

Mining and other natural resourcesiii. The allowance for depreciation must be reasonable;iv.

This must be charged off during the taxable year;v. A statement on the allowance must be attached to the return; andvi.

The method in computing the allowance for depreciation must be in accordance with themethod prescribed by the Secretary of Finance upon the recommendation of the BIRCommissioner.This prescribed method includes:a.

Declining balance method


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b. Sum of the years digit methodc.

Straight line methodd. Any other method as may be prescribed by the Secretary of Finance upon the

recommendation of the BIR Commissioner.

b)

Agreement as to Useful Life on which Depreciation Rate is basedWhere the taxpayer and the CIR have entered into an agreement in writing specifically dealing withthe useful life and rate of depreciation of the property, the rate so agreed upon shall be binding uponthe taxpayer and the National Government in the absence of facts and circumstances not taken intoconsideration during the adoption of such agreement. The responsibility of establishing the existenceof such facts and circumstances shall rest with the party initiating the modification.

c)

Deduction for ObsolescenceIf the whole or any portion of physical property is clearly shown by the taxpayer as being affected byeconomic conditions that will result in its being abandoned at a future date prior to the end of itsnatural life, so that depreciation deductions alone would be insufficient to return the cost at the end ofits economic terms of usefulness, a reasonable deduction for obsolescence, in addition to depreciation,may be allowed.

d) Depreciation of Patent or CopyrightIn computing a depreciation allowance in the case of a patent or copyright, the capital sum to bereplaced is the cost or other basis of the patent copyright. The allowance should be computed by anapportionment of the cost or other basis of the patent or copyright over the life of the patent orcopyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913 as the casemay be.

7. DepletionDepletion is the exhaustion of natural resources like mines and oil and gas wells as a result of productionor severance from such mines or wells. These are non-replaceable assets.

a) Requisites for Deductibility of DepreciationSame as that of depreciation, except that the properties involved are natural resources.Depletion vs. DepreciationDepletion and depreciation are predicated on the same basic premise of avoiding tax on capital.Depletion is based upon the concept of exhaustion of natural resource whereas depreciation is basedupon the concept of exhaustion of the property, not otherwise a natural resource, used in a trade or

business or held for the production of income. Thus, depletion and depreciation are made applicable todifferent types of assets.

b) Determination of Amount of Depletion CostEssential factors:i. The basis of the property;ii.

The estimated total recoverable units in the property; andiii. The number of units recovered during the taxable year.

c) Intangible Cost in Petroleum OperationsAny cost incurred in petroleum operations which in itself has no salvage value and which is incidentalto and necessary for the drilling of wells and preparation of wells for the production of petroleum.

8.

Charitable and Other Contribution

a)

Kinds of Charitable Contributionsi. Ordinary those which are subject to limitations as to the amount deductible from gross

incomeLimitations: It must not exceed 10% in the case of an individual and 5% in the case of acorporation of the taxpayers taxable income (except when the donation is deductible in full)to be determined without the benefit of the contribution.

ii.

Specialthose which are deductible in full from gross income

b)

Requisites for Deductibility of Charitable and Other Contributions


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i. The contribution must actually be paid or made to the Philippine government or any politicalsubdivision or to any of the domestic corporations or associations specified by the Tax Code;

ii. No part of the net income of the beneficiary must insure to the benefit of any privatestockholder of individual;

iii. It must be made within the taxable year;It must not exceed 10% in the case of an individual and 5% in the case of a corporation ofthe taxpayers taxable income (except when the donation is deductible in full) to bedetermined without the benefit of the contribution; and

iv.

It must be evidenced by adequate records or receipts.

c) Charitable and Other Contributions which are Fully DeductibleIf the contributions are given to the following:i.

Government or to any of its agencies or political subdivisions, including GOCCs, exclusive tofinance, to provide for, or to be used in undertaking priority projects:a.

Sports development, science and inventionb. Health and human settlementc.

Educational and economic developmentii. Foreign government or institution and international civic organizations;iii. Accredited NGO

NGO means non-profit domestic corporation which are formed and organized for any of thefollowing purposes:a. Researchb.

Healthc.

Educationd. Charitable, cultural, character buildinge.

Sports development and social welfare

9.

Research and Development ProgramResearch and development expenditures which are paid or incurred by a taxpayer during the taxable yearin connection with his trade, business or profession may be treated as ordinary and necessary expenseswhich are not chargeable to capital account. The expenditures so treated shall be allowed as deductionduring the taxable year when paid or incurred.

a) Amortization of Certain Research and Development ExpendituresThe taxpayer may also elect to treat the following research and development expenditures as deferredexpenses:

i.

Paid or incurred by the taxpayer in connection with his trade, business or profession;ii. Not treated as expense; andiii.

Chargeable to capital account but not chargeable to property of a character which is subjectto depreciation or depletion.

b) Nondeductible Research and Development Expendituresi.

Amount spent for the acquisition or improvements of land or for the improvement ordevelopment of natural resources.

ii.

Amount paid or incurred for the purpose of ascertaining the existence, location, extent orquality of any natural resources like deposits of ore or other materials including oil or gas.

10.Contribution to Pension Trustsa)

Contributionsi.

Current year the contribution is considered as ordinary & necessary expenses fully

deductible.ii.

Past years if it refers to the services rendered for the past 10 years, the contribution isdeductible but apportioned over the next 10 years (i.e., 1/10 deductible every year).

b) Requisites for Deductibility of Contributions to Pension Trustsi.

There must be a pension or retirement plan established by the employer;ii. The pension must be reasonable and actuarially sound;iii.

Contribution must be given by the employer to that pension plan;iv. The amount contributed must no longer be subject to the control or disposition of the

employer;


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v. The payment has not yet been allowed as a deduction;vi.

This must be for the benefit of the employees; andvii. The deduction is apportioned in equal parts over a period of ten (10) consecutive years

beginning with the year in which the transfer or payment is made.

G.

Tax Rates

Classification Sources Tax Base Entitled Deduction Tax Rate

DC Within & without Taxable Income Yes 30%RFC Within Taxable Income Yes 30%NRFC Within Gross Income No 30%

1. RulesGeneral Rule: 30% effective January 1, 2009 (except in special cases)

Optional:Domestic Corporations and Resident Foreign Corporations have the option to be taxed at15% of gross income, provided certain conditions are satisfied. This is available to firms whose ratio ofcost of sales to gross sales or receipts from all sources do not exceed 55%. Once elected by thecorporation, the option shall be irrevocable for the 3 consecutive years.

Exception to the General Rule:a.

MCITa minimum corporate income tax of 2% of the gross income as of the end of the taxable year.It is imposed on a taxable corporation beginning on the 4thtaxable year immediately following the yearin which such corporation commenced its business operations, when the minimum income tax isgreater than the normal income tax. The 30% tax rate may not be applied if it is lower than the 2% ofgross income of such corporate taxpayer.

b.

Special Rates

2.

Conditions to be satisfied to avail of the 15% optional corporate tax:a. A tax effort ratio of 20% of the Gross National Product (GNP)b.

A ratio of 40% of income tax collection to total tax revenuesc. A VAT tax effort ratio of 4% of the GNPd. A 0.9% ratio of the Consolidated Public Sector Financial Position to GNP

3. 2% Minimum Corporate Income Tax

The minimum corporate income tax rate of 2% gross income means that the corporate taxpayer mustpay corporate income tax not lower than 2% of its gross income. If the actual corporate income tax islower than the 2% tax that is supposed to be paid, it is the 2% minimum.

Relief from the MCIT under certain conditions:The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers losseson account of (1) prolonged labor dispute; (2) force majeure; and (3) legitimate business reverses.

Definition of Terms

Gross Income derived from business shall equivalent to gross sales less sales returns, discounts andallowances and cost of goods sold. (Section 27A and 27E)

For taxpayers engaged in sale of service, gross income means gross receipts less sales returns,allowances and discounts. (Section 27A)

For taxpayers engaged in sale of service, gross income means gross receipts less sales returns,allowances and discounts, and cost of services. (Section 27E)

Cost of goodsshall include all business expenses directly incurred to produce the merchandise to bringthem to their present location and use. (Section 27A and 27E)

For trading concern: Cost of goods soldshall include the invoice cost of the goods sold, plus importduties, freight in transporting the goods to the place where the goods are actually sold, includinginsurance while the goods are in transit. (Section 27A and 27E)For a manufacturing concern: Cost of goods manufactured and sold shall include all costs ofproduction of finished goods, such as raw materials used, direct labor and manufacturing overhead,


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freight cost, insurance and other costs incurred to bring the raw materials to the factory/warehouse.(Section 27A and 27E)For a service concern: Cost of servicesshall mean all direct costs and expenses necessarily incurredto provide the services required by the customers and clients including (A) salaries and employeebenefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilitiesdirectly utilized in providing the service such as depreciation or rental of equipment used and cost ofsupplies. Provided, however, that in case of banks, cost of services shall include interest expense.

Carry Forward of Excess Minimum TaxAny excess of the minimum corporate income tax over the normal income tax shall be carried forward andcredited against the normal income tax for the 3 immediately succeeding taxable years.

4.

Special Rules

a.

Special Domestic Corporations

Sources Tax Base Tax rate

1. Proprietary EducationalInstitution

Within and without Taxable Income 10% or 30%

Proprietary Educational Institution any private school maintained and administered by private

individual or group with an issued permit to operate from the DECS or CHED, or TESDA, as the casemay be.Tax rates: 10% if its income derived from unrelated trade, business or activity does not exceed

50% of its total gross income.30% ordinary tax rate if its income from unrelated, trade or business or activity exceeds50% of its gross income.


2. Non-Profit Hospital Within and without Taxable Income 10% or 30%

Same principle (10% or 30%) applied in proprietary educational institution.

b. Special Resident Foreign Corporations


1. International AirCarrier

2. International Shipping

WithinWithin

Gross Phil. BillingsGross Phil. Billings

2.5%2.5%

For purposes of International Air Carrier, Gross Philippine Billings refer to the amount of grossrevenue derived from carriage of persons, excess baggage, cargo and mail originating from thePhilippines in a continuous and uninterrupted flight irrespective of the place of sale or issue, andthe place of payment of the ticket or passage document. Tickets revalidated, exchanged and/orendorsed to another international airline form part of the Gross Philippine Billings if the passengerboards a plane in a port or point in the Philippines.For purposes of International Shipping, Gross Philippine Billings means gross revenue whetherfrom passenger, cargo or mail originating from the Philippines up to final destination, regardlessof the place of sale or payments of the passage or freight documents.

3.

Offshore Banking Units Within Income derived from

foreign currencytransactions withnonresidents,offshore bankingunits in the Phils.,local commercialbanks, inc. branchesof foreign banks thatmay be authorized bythe BSP to transactbusiness with the

Exempt


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OBUs,

Income derived fromforeign currencyloans granted toresidents.

Income of non-residents (individual/corporation) fromOBUs

10%

Exempt

4. Tax on Branch ProfitsRemittances

Total profits appliedor earmarked forremittance, withoutdeduction for the taxcomponents thereof.Read: ING Bank,ManilaBranch vs. CIR, CTACaseNo. 6017, March 11,2002

15%

5.

RAHQs N/A Exempt

6.

ROHQs Within Taxable Income 10%

c. Special Non-Resident Foreign Corporations


1.

Non ResidentCinematographic FilmOwner, Lessor orDistributor

Within Gross Income 25%

2.

Non Resident Owner orLessor of Vessels

Chartered to FilipinoNationals orCorporationsThe Charter Agreement ofwhich is approved byMaritime Industry

Authority

Within Gross Rentals, Leaseor Charter Fees

4.5%

3.

Non Resident Owner orLessor of Aircraft,Machinery andEquipment

Within Gross Rentals or Fees 7.5%

5. Passive Income (These incomes must be derived from the Philippines)

DC RFC NRFC

1. Interest Income on BankDeposit

20% 20% This should beincluded in its grossincome subject to30%* tax. BUT inthe case of intereston loans which havebeen made on orafter August 1, 1986,the same is subject


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to 20% final tax.

2.

Interest Income on BankDeposit Under the ExpandedForeign Currency Dep. System

7.5% 7.5% Tax-exempt

3.

Royalties Derived Within thePhilippines

20% 20% 30%

4. Capital Gains Derived from Its

Sale of Shares of Stocka. If it is listed and tradedthru local stock exchange:

of 1% of the GrossSelling Price

b.

If it is NOT listed or tradedthru local stock exchange:

Not over P100,000: 5%Over P100,000: 10%

This rule applies BOTH to corporate and individualtaxpayers.

5. Capital Gains Derived from theSale of Real Property which isNot Used in Trade or Business

6% of theGSP or ZVwhichever ishigher

Should be treated as OTHER INCOMESUBJECT to 30%

6. Branch Profit Remitted by a

Branch Office

NotApplicable

Subject to

Branch ProfitRemittanceTax of 15%,the basis ofthe tax is theamountapplied for orearmarked forremittance

Not applicable

7.

Dividends Received fromDomestic Corporation

Exempt Exempt

These dividendsreceived from DC byNRFC is subject to15% Final Tax IF:the foreign govt. of

that foreign corp.allows a tax credit atleast 15% of thetaxes deemed paid inthe Philippines byNRFC.

Tax Sparing Credit[Sections 28B(5)b] - 15%Purpose: To attract investors in the PhilippinesThere is no statutory provision that requires actual grant of tax credit by the foreign government.Neither is there a Revenue Regulation requiring actual grant. It is clear that the provision of the lawsays allows. So, it is enough to prove that the foreign government allows a tax credit. It is notincumbent upon the foreign government to prove the amount actually granted.

H. Tax on Improperly Accumulated Earnings, Section 29, Tax Code. See also similar provision in the

Corporation Code.In addition to the other income taxes, there is hereby imposed for each taxable year on the improperlyaccumulated taxable income of each corporation an improperly accumulated earnings tax equal to 10% of theimproperly accumulated taxable income.

1. CoverageFor corporations using the calendar basis, the accumulated earnings tax shall not apply on improperlyaccumulated income as of December 31, 1997.For corporations adopting the fiscal year accounting period, the improperly accumulated income notsubjected to this tax shall be reckoned as of the end of the month comprising the 12-month period of FY1997-98.


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2.

Corporations Subject to Improperly Accumulated Earnings Tax (IAET)The IAET shall apply to every corporation formed or availed for the purpose of avoiding the income taxwith respect to shareholders or the shareholders of any other corporation, by permitting earnings andprofits to accumulate instead of being distributed or divided.

3. Exceptions to IAETThe IAET shall not apply to:a.

publicly held corporationsb. banks and other non-bank financial intermediariesc. insurance companiesd. Revenue Regulations No. 2-01

4. Evidence of Purpose to Avoid Income TaxPrima Facie Evidence:The fact that any corporation is a mere holding company or investment companyEvidence Determinative of Purpose:the fact that the earnings or profits of a corporation are permitted toaccumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoidthe tax upon its shareholders or members unless the corporation, by clear preponderance of evidence, shallprove to the contrary. The term reasonable needs of the business includes the reasonably anticipatedneeds of the business.

5. Computation of Improperly Accumulated Taxable IncomeTaxable Income adjusted by:a.

Income exempt from taxb. Income excluded from gross incomec.

Income subject to final taxd. Amount of net operating loss carry-over deducted (NOLCO)

And reduced by the sum of:a. Dividends actually or constructively paid; andb.

Income tax paid for the taxable year.

Part IV- Capital Transactions

A. Introduction

Capital Transaction- involves capital asset

Capital Asset- property held by the taxpayer whether or not connected with his trade or business exceptordinary assets.

Capital Gain- gain from the sale or exchange of capital asset

Capital Loss- loss incurred from the sale or exchange of capital asset

Net Capital Gain- the excess of capital gain over capital loss

Net Capital Loss- the excess of capital loss over capital gain

B.

Assets

1.

Ordinary Assets, Section 39 (A)(1)a. Stock in trade of a taxpayer or other real property of a kind 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 inprocess]

b.

Real property primarily held for sale to customers in the ordinary course of trade or business.c. Property used in trade or business subject to depreciation, which means that this must be depreciable property.d.

Real property used in trade or business.

2.

Ordinary Assets- When Converted into a Capital Asset


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The properties of a taxpayer engaged in real estate business are considered as ordinary assets. If the taxpayerdies, these properties will be transmitted to the heirs. Should the heirs discontinue the real estate business of

the deceased parent, such properties which are ordinarily held for sale to customers maybe converted into capitalassets.

3.

Capital Assetsa. Properties not included in those above enumerated in no.1b.

Properties used in trade or business classified as capital assets:i.

Accounts receivableii. Property for investment in stockiii. Subdivision of lots to tenants at the instance of the governmentiv. Interest of a partner in partnership. The partner may transfer that interest to another and he may derive

gain therefrom, that is considered as Capital Transaction.

Note: all properties not used in trade or business are considered Capital Assets.

4.

Capital Assets- When Converted into an Ordinary AssetLand inherited by the heirs from their deceased parents is considered as capital asset. In the event that thisproperty is substantially improved by the heirs and sold at a profit, said capital asset may be converted into anordinary asset. The profit derived from the sale of land is already considered as ordinary gain.

5. Rules on Real Properties of:a)

Taxpayers engaged in the real estate business (dealer, developer or lessor)b)

Taxpayers not engaged in the real estate businessc) Taxpayers changing from real estate business to non-real estate businessd)

Taxpayers originally registered to be engaged in the real estate business but failed to subsequently operate

6.

Treatment of Abandoned and Idle Real Properties of:a) Taxpayers engaged in the real estate businessb)

Taxpayers not engaged in the real estate business

7.

Treatment of Real Properties Transferred, whether the Transfer is through Sale, Barter or Exchange,Inheritance, Donation or Declaration of Property Dividends

8. Treatment of Real Property Subject of Involuntary Transfer

C.

Special Capital Transactions1. Failure to exercise option or privilege to buy or sell property2.

Distribution of assets or shares of stock to stockholder upon liquidation of a corporation3. Readjustment of partners interest in a partnership4.

Retirement of bonds5. Wash Sale

61 days sale- 30 days before the sale, the seller acquired substantially identical securities OR 30 days afterthe sale, he acquired identical or substantially the same stocks or securities. Sale may also include exchange or

option to sell securities.

Tax Consequence:The gain is taxable as capital gain, because the seller is not engaged in such business (the seller here is not adealer in securities). 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. A different

rule applies if it is entered into by a dealer in securities, as it becomes a transaction made in the regular courseof trade or business.

6. Short SaleA transaction wherein a person sells securities which he does not own yet (provided however, that he hasownership of the securities at the time of delivery- he has the right to transfer ownership)

Tax Consequence:Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges ofcapital assets. If there is a gain, the gain is taxable. If there is a loss, the loss is deductible.


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Wash Sale vs. Short Sale-both may be classified as capital transactions-in wash sale, the loss that may be incurred is not deductible, whereas in short sale, the loss is deductible

D. Rules Governing Capital Transactions

1. Holding Period RuleApplies only to individual taxpayers:-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 has been held for a period of more than 12 months, the gain or loss is 50% recognizedCapital gains derived from capital transaction of corporate taxpayers is always 100% recognized irrespective

of the number of months during which the property was in the possession of the corporatetaxpayer.

2. Capital Loss Limitation RuleApplies to both individual and corporate taxpayers [except: banks and trust companies as they are considered

as dealer in securities]- Capital losses are deductible only to the extent of capital gains

3.

Net Capital Loss Carry-Over RuleApplies only to individual taxpayers-If any individual taxpayer sustains in any taxable year a net capital loss, such loss (in an amount not in excess

of the net income for such year) shall be treated in the succeeding taxable year as a loss from t

01 taxation law outline

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