INCOME TAX REVIEWER I. Definition Of Income Tax

Income tax is referred to as -

A tax on all yearly profits arising fr. property, professions, trades or offices, or

A tax on a person’s income, emoluments, profits & the like.

It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year.

A. Nature of Income TaxIncome tax is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the RIGHT of a person to receive income or profits.

B. Purpose of Income tax: Fiscal/Non-fiscal1. to provide large amounts of revenue;

1. to offset regressive sales & consumption taxes;

2. To mitigate the evils arising fr. the inequalities in the distribution of income & wealth w/c are considered deterrents to social progress, by a progressive scheme of taxation.

Income tax is regarded as the best measure of a person’s ability to pay.

C. Brief Historical Background of Phil. Income Tax

1. United States Revenue Act of 1913

Extended to the Phils. w/c was then a territorial possession of the US

administered & enforced by internal revenue officers of the Phil. Government

2. Revenue Act of 1916, War Revenue Act of 1917

amended Revenue Act of 1913

3. Act No. 2833

enacted by the Phil. legislature under authority conferred by 1917 Act

4. CA No. 466 ( National Internal Revenue Code of 1939)

revised, amended & codified into a single tax code all the internal revenue laws embodied in

the 1939 NIRC & amendatory laws & decrees

was amended several times

5. PD 1158 ( NIRC of 1977)

consolidated & codified into a single tax code all the internal revenue laws embodied in the NIRC & amendatory laws & decrees

6. PD 1994 (NIRC of 1986)

income tax law of the Phils. today

enacted to simplify & restructure certain provisions of the NIRC

VAT Law (E.O. 39, 1987) : first attempt to restructure tax system, tax administration (FAILED)

SNITS (1992) : another attempt at restructuring

D. Sources of Income Tax Law: NIRC as amended

II. Meaning Of Income/ Sources/ Kinds

A. Definition of income/ differentiate fr. capital

Sec. 36, Rev. Reg. 2

Income in the broad sense - all wealth w/c flows into the taxpayer other than as a mere return of capital; includes the forms of income specifically described as gains & profits, including gains derived fr. the sale or other disposition of capital assets.

Gross Income - income ( in the broad sense) less income w/c is by statutory provision or otherwise exempt fr. the tax imposed by law.

Net Income - gross income less statutory deductions

Income means -

accession to wealth gain flow of wealth

Conwi vs. CTA 213 SCRA 83Facts: Pets., Filipino citizens & employees of P&G, were assigned to work abroad in 1970 & 1971, during w/c they were paid US $ as compensation. When they filed their ITR in 1970 & 1971, they computed the tax due by applying the $-P conversion based on the floating rate ordained under BIR Ruling No. 70-027. In 1973 however, they filed amended ITRs for ‘70 & ‘71 using the par value of the peso as prescribed in RA # 265. They thus claim tax refunds or tax credits, w/c was denied by CTA. It is to be noted that Pets. did not remit any portion of their income into the Phils. during their stints abroad.Issue: WON income of Pets. were still taxable in the absence of remittances or acceptance of their salaries into the countryHeld: Yes the foreign earnings are taxable. Income may be defined as an amount of money coming to a person or corporation w/in a specified time, whether as payment for services, interest or profit fr. investment. The $ earnings of Pets. are the fruit of their labors in the foreign subsidiaries of P&G. It was a

APP 1

INCOME TAX REVIEWER definite amount of money w/c came to them w/in a specified period of time of 2 years as payment for their services. Sec. 21 of the NIRC states that a tax shall be imposed upon taxable net income received during each taxable year fr. all sources by every individual, whether a citizen of the Phils. residing therein or abroad.

CIR vs. BOAC 149 SCRA 395Facts: British Overseas Airways Corp. is a 100% British-owned corp. organized & existing under the laws of the UK. It had no landing rights in the Phil. & had no CPCN . Although it did not carry passengers &/or cargo to or fr. the Phil., it maintained a general sales agent , Warner Barnes & Co. Ltd. & later Qantas Airways w/c was responsible for selling BOAC tickets covering passengers & cargoes. CIR assessed deficiency taxes w/c was protested by BOAC.Issue: WON the revenue derived by BOAC fr. sales of tickets in the Phil. for air transportation, while having no landing rights here, constitute income fr. Phil. sources & accordingly taxableHeld: Income means “ cash received or its equivalent”. It is the amount of money coming to a person w/in a specific time. It is distinct fr. capital, for while the latter is a fund, income is a flow. As used in our laws, income is a flow of wealth. The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming fr. the Phil., it is sufficient that income is derived fr. activity w/in the Phils. In BOAC’s case, the sale of tickets in the Phils. is the activity that produces the income. The tickets exchanged hands here & payments were made in Phil currency. Thus, the flow of wealth should share the burden of supporting the government.

Madrigal vs. Rafferty 38 Phil 414Facts: In Madrigal’s ITR, he declared his total net income to be P 296T. Subsequently, he submitted a claim that said amount was the income of the conjugal partnership existing between himself & his wife, & that in computing & assessing the additional income tax provided by act of Congress, the income declared should be divided into two equal parts.Issue: WON additional income tax should be assessed by dividing income into two equal parts, bec. of the conjugal partnership existing between the Madrigal spouses

Held: NO. A wife may make a separate return of her own income only when she has a separate estate managed by herself as her own separate property & receives an income of more than P 3T. The essential difference between capital & income is that capital is a fund of property existing at an instant time; income is a flow of services rendered by that capital by the payment of money fr. it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. Capital is wealth, income is service of wealth.

Fisher vs. Trinidad 43 Phil 973Facts: The Philippine American Drug Co. was a duly organized corp. existing under Phil. laws. Fisher was a stockholder of said corporation w/ a share of stock dividends worth P 24,800 in 1919. He was made to pay under protest w/ the CIR.Issue: WON the stock dividends are income & thus taxableHeld: NO. Stock dividends are not income. An income is the return in money fr. one’s business, labor or capital invested. Only when a cash dividend is given or such that dividend normally payable in money, & when so paid, then only does the stockholder realize a profit or gain; w/c becomes his separate property, & thus derive an income fr. the capital that he invested. Until that is done, the increased assets belong to the corporation & not to the individual stockholders. The stockholder who receives a stock dividend has received nothing but a representation of his increased interest in the capital of the corporation.

B. Sources of Income1. Capital/labor/exchange of capital

Query: What produces income?

Answer:

Commissioner vs. BOAC, supraHeld: The source of income is the property, activity or service that produced the income. For the source of income to be considered as coming fr. the Phil., it is sufficient that the income is derived fr. activity w/in the Phil. In the case of BOAC, the sale of tickets in the Phil. is the activity that produces the income. The tickets exchanged hands here & payments for fares were also made in Phil. currency. The site of the source of income is the Phil. & the flow of wealth proceeded fr., & occurred w/in Phil. territory, enjoying the protection accorded by the Phil. government. Thus, said flow of wealth should share the burden of supporting the government.

APP 2

INCOME TAX REVIEWER

2. Income derived fr. whatever source

SEC. 32. Gross Income. -

(A)  General Definition. - Except when otherwise provided in this Title, gross income means all income derived from whatever source, x x x

The words used in the law disclose a legislative policy to include all income not expressly exempted w/in the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, & whether derived fr. legal or illegal sources.

Income tax is source blind.

Queries: Why is income tax source blind? Are the ff. items income?

1. found treasure

2. punitive damages/damages for breach of promise or alienation of affection

3. worthless bad debts subsequently collected

4. tax refund

5. non-cash benefits

6. income fr. illegal sources

7. psychological benefits of work

8. give-away prizes/scholarships/fellowships

C. Kinds/ Classification of Income or Gain (not in Ma’am’s SPIT outline but I think she just omitted it bec. she proceeded to letter D. Ella)

1. Passive Income

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

Ex. dividends, royalties, prizes & winnings

Sec. 22(z), RA 8424 The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1).

The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of property which is not a capital asset.

2. Capital Gain/Ordinary Gain

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

CAPITAL GAIN is the gain derived fr. the sale or exchange of capital assets.

ORDINARY GAIN is gain derived fr. the sale or exchange of an asset w/c is not capital. (see S20(z) supra)

SEC. 39. Capital Gains and Losses. -  

(A) Definitions. - As used in this Title -

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. 

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.

(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and

(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 

(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, 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 the sale or exchange of a capital asset held for not more than twelve (12) months. 

(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

(F) Gains or losses from Short Sales, Etc. - For purposes of this Title - 

(1) Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and

APP 3

INCOME TAX REVIEWER (2) Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses.

Sec. 6 (e), NIRC Authority of the Commissioner to prescribe real property values.

The Commissioner is hereby authorized to divide the Philippines into different zones or areas & shall, upon consultation w/ competent appraisers both fr. private & public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be w/cever is higher of:

1. The fair market value as determined by the Commissioner, or

2. The fair market value as shown in the schedule of values of the Prov’l. or City Assessors.

Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of property. No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,-

1. Between members of a family (whole or half siblings, spouse, ancestors & lineal descendants);

2. Between an individual & a corporation more than 50% in value of the outstanding stock of w/c is owned, directly or indirectly by or for such individual except in the case of distributions in liquidation;

3. Between two corporations more than 50% in value of the outstanding stock of each of w/c is owned, directly or indirectly, by or for the same individual, if either one of the corps. w/ respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, except in the cases of distributions in liquidation;

4. Between a grantor & a fiduciary of any trust;

5. Between the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w/ respect to each trust; or

6. Between a fiduciary of a trust & a beneficiary of such trust.

Sec. 131, Rev. Reg. 2 Losses fr. wash sales of stock or securities

a) A taxpayer cannot deduct any loss claimed to have been sustained fr. the sale of stock or securities, if, w/in a period beginning thirty days before the date of such sale or disposition & ending thirty days after such date he has acquired, or has entered into a contract to acquire, substantially identical stock or securities. However, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of business of such dealer XXX

Sec. 132, Rev. Reg. 2 Definition of capital assets.

The law provides that the term capital assets shall be held to mean property held by the taxpayer (WON connected w/ his trade or business) . . . Same as Sec. 33, NIRC.

The term capital asset includes all classes of property not specifically excluded by S30 (a).

The exclusion fr. the term “capital assets” by property used in the trade or business of the taxpayer of a character w/c is subject to the allowance for depreciation in S30 (f) NIRC -

is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange (&)

it has no application to gains or losses arising fr. the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished fr. depreciable improvements upon the land.

To such gain or loss allocable to the land, the limitations of 34(b) & (c) apply ( such limitation may be inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to customers in the ordinary course of his trade or business, not bec. the land is subject to the allowance for depreciation provided in 30 (f) NIRC), will not be subject to the percentage provisions of 34(b) & losses fr. such transactions will not be subject to the limitations on losses provided in 30 (c).

Tuazon vs. Lingad 58 SCRA 170

Facts: In 1948, pet. inherited 2 parcels of land, w/c he subdivided into 29 lots & leased 28. In 1950, he sold the lots on an installment basis to their occupants. Lot 29 was subsequently subdivided & paved, & were also sold on a 10 yr. annual amortization basis. He reported his income fr. the sale of the lots as long-term capital gain. In 1957, he treated his income fr. the sale of the small lots as capital gains & included only 1/2 as taxable income. He deducted the real estate dealer’s tax he paid in 1957 due to the rentals fr. his 28 lots & other properties. BIR charged him w/ deficiency income, considering the sale as ordinary gains & not capital.

Issue: WON properties inherited by petitioner should be regarded as capital assets

Held: NO. When pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlative right to receive & enjoy the fruits of the business & the property w/c the decedent had established. Also, pet. owned other properties w/c he rented out, fr. w/c he periodically derived a substantial income, & for w/c he had to pay the real estate dealer’s tax, w/c he used to deduct fr. his gross income. Under the circumstances, pet’s sale of the lots forming part of his rental business cannot be characterized as other than sales of non-capital, or ordinary assets. (remember exceptions in S33).

Calasanz vs. Com. 144 SCRA 644

Facts: Petitioner inherited fr. her father an agricultural land in Rizal. In order to liquidate her inheritance, she had the land surveyed, introduced improvements thereon & sold the lots at a profit. In their joint ITR, they disclosed a profit of P 31,060 fr. the sale of the subdivided lots, & reported 50% thereof as taxable capital gains. Revenue examiner

APP 4

INCOME TAX REVIEWER adjudged pets. as engaged in business as real estate dealers, required them to pay real estate dealer’s tax & assessed a deficiency income tax on profits derived fr. the sale based on the rates for ordinary income.

Issue: WON pets. are real estate dealers liable for real estate dealer’s tax

WON gains realized fr. the sale of the lots are taxable as ordinary income

Held: YES in both . The activities of pet. are no different fr. those invariably employed by one engaged in the business of selling real estate. There was extensive development such that pets. did not sell the land in the condition in w/c they acquired it. A considerable amount was expended to cover the cost of the improvements. It has been held that a property ceases to be a capital asset if the amount expended to improve it is double its original cost, as in the CAB, for the extensive improvements indicates that the seller held the property primarily for sale to its customers in the ordinary course of business. And since they are engaged in the business of real estate, it follows that the property sold falls w/in the exception in the definition of capital assets in S33, NIRC.

Gonzales vs. CTA 14 SCRA 79

Facts: Expropriation proceedings were conducted on property owned by petitioners, w/c they inherited fr. their mother. Upon the amounts received fr. the government, the pets. were ascertained to have made a capital gain of P 213,328.82 & each of them to have received the amount of P 89T as share in the interest. Petitioners were each credited the amount of P 86T as payment of their income tax. Subsequently, pets. asked for a refund of the amount of P 24T saying that the P 89T they received as share in the interest would have been computed as capital gain & not ordinary gain.

Issue: WON P 89T received as interest on the value of the land expropriated is taxable as ordinary income

Held: YES. The acquisition by the gov’t. of private prop. through the exercise of eminent domain is embraced w/in the meaning of the term “sale” or “disposition of property” & the definition of gross income in S 29. The transfer of property through condemnation proceedings is a sale or exchange & the profit fr. the txn constitutes capital gain. However, for income tax purposes, interest does not form part of the price paid by the gov’t. & thus not part of capital gain. Interest is the

compensation for the delay in the return of such capital.

D. Taxable Income

1. Requisites for taxability

1. There must be gain.

There must be in fact income. A txn whereby nothing of exchangeable value comes to or is received by the taxpayer does not give rise to taxable income.2. The gain must be realized or received.

The increase in value, i.e., the gain, can be taxed only when a disposition of the property has occurred, w/c is of such nature as to constitute a realization of such gain fr. the original capital invested in the property.

The realization of income may take the form of actual receipt of cash or property or constructive receipt of the income.3. The gain must not be excluded by law fr.

taxation.

Incomes that are exempt fr. the tax by law are not considered in determining gross income.

Deductions, in contrast, are subtracted fr. gross income to arrive at taxable net income.

2. Recognition/ Realization of income for tax purposes

Queries: When is income realized?

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

 

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

Sec. 51, Rev. Reg. No. 2 When income is to be reported.

APP 5

INCOME TAX REVIEWER Gains, profits, & income are to be included in the gross

income for the taxable year in w/c they are received by the taxpayer, UNLESS they are included when they accrue to him in accordance w/ the approved method of accounting followed by him.

If a person sues in one year on a pecuniary claim or for property, & money or property is received on a judgment therefor in a later year, income is realized in THAT YEAR, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement.

Bad debts or accounts charged off subsequent to March 1, 1913, bec. of the fact that they were determined to be worthless, w/c are subsequently recovered, whether or not by suit, constitute income for THAT YEAR IN WHICH RECOVERED, regardless of the date when amounts were charged off.

Sec. 52, Rev. Reg. No. 2 Income constructively received.

Income w/c is

credited to the account of, or

set apart for

a taxpayer & w/c is drawn upon him at any time is subject to tax for the YEAR DURING WHICH SO CREDITED OR SET APART, although not actually reduced to possession.

To constitute receipt in such a case, the income must be credited to the taxpayer w/o any substantial limitation or restriction as to the -

time or manner of payment or

condition upon w/c payment is to be made.

A BOOK ENTRY, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer.

When a corporation contingently credits Ees w/ bonus stock, BUT the stock is not available to such Ees until some future date, the mere crediting on the books of the corporation does NOT constitute receipt.

Sec. 53, Rev. Reg. No. 2 Examples of constructive receipt

(1) Interest Coupons. When interest coupons -

have matured &

are payable,

but have not been cashed,

such interest payment, though not collected when due & payable, -

is nevertheless available for the taxpayer &

should therefore be included in his gross income for the YEAR DURING WHICH SUCH COUPONS MATURED.

This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in w/c paid.

(2) Share of profits. The distributive share of the profits of a partner in a gen. partnership duly registered is regarded as received by him, although not distributed.

(3) Interest on bank deposits. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days’ notice in advance of cashing depositors’ checks, is INCOME TO THE DEPOSITOR WHEN CREDITED.

(4) Credit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc., when such credit passes w/o restriction to the shareholder,

has a taxable status as INCOME FOR THE YEAR OF THE CREDIT. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is INCOME FOR THE YEAR OF THE MATURITY OF THE SHARE.

Limpan vs. Com. 17 SCRA 703

Facts: Limpan Investment Co., a corp. engaged in leasing real properties, filed its ITRs for 1956 & 1957. After an investigation, the BIR found that pet. had underdeclared its rental incomes & had claimed excessive depreciation of its buildings. Thus deficiency income taxes & surcharges were demanded against them. Pet. argues that the rents in question were not received in 1957, but were turned over by the president to the company only in 1959 & that the rates of depreciation applied by the BIR were unfair & inaccurate.

Issue: WON the assessment of deficiency taxes were accurate

Held: The assessment was valid. Pet.’s denial & explanation of the non-receipt of the remaining unreported income for 1957 was not substantiated by the president nor by his 1957 personal income tax return in order to establish that the rental income w/c he allegedly collected & received in 1957 were reported therein. The w/drawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the refusal of pet, to accept the same, & was not the fault of its tenants. Pet. is thus deemed to have constructively received such rentals in 1957.

Republic vs. de la Rama 18 SCRA 861

Facts: In 1951, the estate of the late Esteban de la Rama filed its ITR for the year 1950. Later, BIR claims that the estate had received in 1950 cash dividends fr. the De La Rama Steamship Co. Inc. w/c was not declared in the ITR. BIR claims that the cash dividends were applied in the deceased’s account w/ the former & this constituted constructive receipt by the estate or heirs.

Issue: WON there was constructive payment & thus constructive receipt by the estate

Held: There was no constructive receipt of the dividends. Income tax is assessed on income that has been received. In this case, income was not received due to failure to deliver, either actually or constructively. The debts to w/c they were applied were not proven to have existed. The first debt was not proven to exist

APP 6

INCOME TAX REVIEWER & the second debt was due fr. Hijos de I. de la Rama, an entity separate & distinct fr. the principal owner thereof. Constructive delivery occurs only when it is shown that the debts to w/c the dividends were applied actually existed, were legally demandable & chargeable to the deceased.

a. When is income realized?

Realization of income for tax purposes

b. Tests to determine realization of income (Lukban, pp. 44-46)

Severance test

Substantial alteration of interest test

Flow of wealth test

c. Kinds/Classification of taxable income or gain

1. Capital gain (sale of capital asset)

2. Ordinary gain

3. Business income: Service concern/ Manufacturing/Merchandising

4. Income fr. trade or practice of profession

5. Passive income

6. Other forms of gain: ex. found treasure

3. Income Tax Base/ Meaning/ Kinds

a. Approaches in income recognition:

Schedular vs. global approach

Tan vs. del Rosario

Facts: These are two consolidated special civil actions for prohibition challenging: 1) the constitutionality of RA 7496, also known as the Simplified Net Income Taxation Scheme (SNITS), amending certain provisions of the NIRC; 2) the validity of Sec.6, Rev. Reg. No. 2-93 promulgated by the BIR pursuant to the said law. Petitioners are taxpayers claiming to be adversely affected by the implementation of the law. In the 1st case, the petitioners assert that the RA violates: 1) Art. VI, Sec. 26(1) w/c states, “Every bill passed by the Congress shall embrace only one subject w/c shall be expressed in the title thereof.”; 2) Art. VI, Sec. 28(1) w/c states, “The rule of taxation shall be uniform & equitable. The Congress shall evolve a progressive system of taxation.”; & 3) Art. III, Sec.1, w/c states, “No person shall be deprived of … property w/o due process of law, nor shall any person be denied the equal protection of the laws.” In the 2nd case, the petitioners contend that the

BIR exceeded its rule-making authority in implementing the Rev. Reg.

Held: RA is constitutional; Rev. Reg. is valid. Its title is sufficiently descriptive of the subject of the law. What may be apparent fr. the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers & to maintain the present global treatment on taxable corporations. This classification is neither arbitrary nor inappropriate. Further, the due process clause may be correctly invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is evident in the CAB.

b. Bases of income tax

i. Gross income/ receipts/ meaning in taxation/ in financial accounting

ii. Net income/ net taxable income/ in taxation/ in accounting

iii. Presumed gain/ income

Sec. 24 (D) Capital Gains from Sale of Real Property.

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further,

APP 7

INCOME TAX REVIEWER That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

c. Income tax rates

SEC. 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:  

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following schedule:  

Not over P10,000………………………………… 5%

Over P10,000 but not over P30,000…………P500+10% of the excess over P10,000

Over P30,000 but not over P70,000………P2,500+15% of the excess over P30,000

Over P70,000 but not over P140,000…… P8,500+20% of the excess over P70,000

Over P140,000 but not over P250,000… P22,500+25% of the excess over P140,000

Over P250,000 but not over P500,000… P50,000+30% of the excess over P250,000

Over P500,000 …………….……………… P125,000+34% of the excess over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby

imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:  

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;

Ten percent (10% beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000…………………………….. 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -

APP 8

INCOME TAX REVIEWER (1) In General. - The provisions of Section 39(B)

notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(3) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the

distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%.

 

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional

APP 9

INCOME TAX REVIEWER operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

 

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

CHAPTER IV - TAX ON CORPORATIONS

 

SEC. 27. Rates of Income tax on Domestic Corporations. -

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999,

the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.

 

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not

APP 10

INCOME TAX REVIEWER substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.  

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

 

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000…………………………. 5%

Amount in excess of P100,000…………….. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

 Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

 (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

 (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.  

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service

APP 11

INCOME TAX REVIEWER such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.  

SEC. 28. Rates of Income Tax on Foreign Corporations.

(A) Tax on Resident Foreign Corporations. –

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder: 

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.

 

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with

offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.  

 (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000………………………… 5%

APP 12

INCOME TAX REVIEWER On any amount in excess of P100,000……. 10%

(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

 

(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

 (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

 (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –

 

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of

stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000…………..………………… 5%

On any amount in excess of P100,000………… 10%

SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -

(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -

(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:

(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and

(c) Insurance companies.

(C) Evidence of Purpose to Avoid Income Tax. -

(1) Prima Facie Evidence. - the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.

(2) Evidence Determinative of Purpose. - The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove to the contrary.

(D) Improperly Accumulated Taxable Income. - For purposes of this Section, the term 'improperly accumulated taxable income' means taxable income' adjusted by:

(1) Income exempt from tax;

(2) Income excluded from gross income;

(3) Income subject to final tax; and

(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:

(1) Dividends actually or constructively paid; and

(2) Income tax paid for the taxable year.

Provided, however, That for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of December 31, 1997. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax, shall be reckoned, as of the end of the month comprising the twelve (12)-month period of fiscal year 1997-1998.

APP 13

INCOME TAX REVIEWER Classification of tax payers: INDIVIDUAL/ CORPORATION/ ESTATE and TRUST

SEC. 31. Taxable Income Defined. - The term taxable income means the pertinent items of gross income specified in this 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.

INDIVIDUAL: citizens: resident (NET/WORLDWIDE)

non resident (NET/ WITHIN)

OCW (NET/WITHIN)

alien: resident (NET/WITHIN)

non-resident engaged in trade or business (NET/WITHIN)

non-resident not engaged in trade/ business (GROSS/ WITHIN)

CORPORATIONS: domestic (NET/WORLDWIDE)

foreign resident doing business (NET /WITHIN)

non-resident (not doing business) GROSS/ WITHIN

ESTATES and TRUSTS – treated as ind. TP

tax rate on ordinary income/ tax rate for capital gain

regular tax rate/ special tax rates

final tax – creditable tax

withholding tax

flat rate/ graduation of tax rates

min marginal rate / max marginal rate

automatic increase of tax rates by 1999 and 2000

4. Accounting periods & methods of accounting for taxable income & deductible expenses

a. Calendar year/ fiscal year

Accounting period: The accounting period is the taxable year. It is a fixed period of time, consisting of 12 months, upon the basis of w/c the taxable income is computed & the income tax imposed.

Sec. 22. Definitions. –

(P) The term 'taxable year' means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the commissioner, the period for which such return is made.

(Q) The term 'fiscal year' means an accounting period of twelve (12) months ending on the last day of any month other than December.

(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title.

CHAPTER VIII - ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar year.

SEC. 44. Period in which Items of Gross Income Included. - The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under Section 43, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

SEC. 45. Period for which Deductions and Credits Taken. - The deductions provided for in this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred', dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.

SEC. 46. Change of Accounting Period. If a taxpayer, other than an individual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the approval of the Commissioner, be computed on the basis of such new accounting period, subject to the provisions of Section 47.

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.

(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from

APP 14

INCOME TAX REVIEWER fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made.  

When is income to be reported?

Income constructively received

Sec. 51, Rev. Reg. No. 2 When income is to be reported.

Gains, profits, & income are to be included in the gross income for the taxable year in w/c they are received by the taxpayer, UNLESS they are included when they accrue to him in accordance w/ the approved method of accounting followed by him.

If a person sues in one year on a pecuniary claim or for property, & money or property is received on a judgment therefor in a later year, income is realized in THAT YEAR, assuming that the money or property would have been income in the earliest year if then received. This is true of a recovery for patent infringement.

Bad debts or accounts charged off subsequent to March 1, 1913, bec. of the fact that they were determined to be worthless, w/c are subsequently recovered, whether or not by suit, constitute income for THAT YEAR IN WHICH RECOVERED, regardless of the date when amounts were charged off.

Sec. 52, Rev. Reg. No. 2 Income constructively received.

Income w/c is

credited to the account of, or

set apart for

a taxpayer & w/c is drawn upon him at any time is subject to tax for the YEAR DURING WHICH SO CREDITED OR SET APART, although not actually reduced to possession.

To constitute receipt in such a case, the income must be credited to the taxpayer w/o any substantial limitation or restriction as to the -

time or manner of payment or

condition upon w/c payment is to be made.

A BOOK ENTRY, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer.

When a corporation contingently credits Ees w/ bonus stock, BUT the stock is not available to such Ees until

some future date, the mere crediting on the books of the corporation does NOT constitute receipt.

Sec. 53, Rev. Reg. No. 2 Examples of constructive receipt

(1) Interest Coupons. When interest coupons -

have matured &

are payable,

but have not been cashed,

such interest payment, though not collected when due & payable, -

is nevertheless available for the taxpayer &

should therefore be included in his gross income for the YEAR DURING WHICH SUCH COUPONS MATURED.

This is true if the coupons are exchanged for other property instead of eventually being cashed. Defaulted coupons are income for the year in w/c paid.

(2) Share of profits. The distributive share of the profits of a partner in a gen. partnership duly registered is regarded as received by him, although not distributed.

(3) Interest on bank deposits. Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require so many days’ notice in advance of cashing depositors’ checks, is INCOME TO THE DEPOSITOR WHEN CREDITED.

(4) Credit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc., when such credit passes w/o restriction to the shareholder, has a taxable status as INCOME FOR THE YEAR OF THE CREDIT. Where the amount of such accumulations has not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is INCOME FOR THE YEAR OF THE MATURITY OF THE SHARE.

Revenue Regulation #2 Provisions

Sec. 166. General Rule. – The method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed w/ respect to the time as of w/c items of gross income & deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting w/c clearly reflects his income, the computation shall be made in such manner as in the opinion of the Commissioner of Internal Revenue clearly reflects it.

Sec. 167. Methods of accounting. – It is recognized that no uniform method of accounting can be prescribed for all taxpayers, & the law contemplates that each taxpayer shall adopt such forms & systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Any approved standard method of accounting w/c reflects taxpayer’s income may be adopted. Among the essentials are the following:

In all cases in w/c the production, purchase, or sale of merchandise of any kind is an income-producing factor, inventories of the merchandise on hand (including finished goods, work in process, raw materials, & supplies) should be taken at the beginning & end of the year & used in computing the net income of the year in accordance w/ sections 144 to 151 of these regulations.

Expenditures made during the year should be properly classified as between capital & income; that is to say,

APP 15

INCOME TAX REVIEWER expenditures for items of plant, equipment, etc., w/c have a useful life extending substantially beyond the year should be charged to a capital account & not to an expense account; &

In any case in w/c the cost of capital assets is being recovered through deductions for wear & tear, depletion, or obsolescence, any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reserve & not to current expenses.

Sec. 168. Changes in accounting methods. – The true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subject to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year & for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change

A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner of Internal Revenue. For the purposes of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change fr. cash receipts & disbursements method to the accrual method, or vice versa; a change involving the basis of valuation employed in the computation of inventories; a change fr. the cash or accrual method to the long-term contract method, or vice versa; a change in the long-term contract method fr. the percentage of completion basis to the complete contract basis, or vice versa; or a change involving the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method of accounting employed & the basis upon w/c the return is made shall be filed w/in 90 days after the beginning of the taxable year to be covered by the return. The application shall be accompanied by a statement specifying all amounts w/c would be duplicated or entirely omitted as a result of the proposed change. Permission to change the method of accounting will not be granted unless the taxpayer & the Commissioner of Internal Revenue agree to the terms & conditions under w/c the change will be effected.

Sec. 169. Accounting period. – Income tax returns, whether for individuals or for corporations, associations, or partnerships, are required to be made & their income computed for each calendar year ending on December 31st of every year. However, corporations, associations, or partnerships may w/ the approval of the Commissioner of Internal Revenue first secured, file their returns & compute their income on the basis of a fiscal year w/c means an accounting period of twelve months ending on the last day of any month other than December. But in no instance shall individual taxpayers be authorized to establish a fiscal year as basis for filing their returns & computing their income.

Sec. 170. When included in gross income. – Except as otherwise provided in section 39 in the case of the death of a taxpayer, gains, profits, & income are to be included in the gross income for the taxable year in w/c they are received by the taxpayer, unless they are included as of a different period in accordance w/ the

approved method of accounting followed by him. If a taxpayer has died, there shall also be included in computing net income for the taxable period in w/c he died amounts accrued up to the date of his death if not otherwise properly includible [allowable] in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books & made his returns on the basis of cash receipts & disbursements.

Sec. 171. “Paid or incurred” & “paid or accrued”. – The terms “paid or incurred” & “paid or accrued” will be construed according to the method of accounting upon the basis of w/c the net income is computed by the taxpayer. The deductions & credits must be taken for the taxable year in w/c “paid or accrued” or “paid or incurred”, unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in w/c it was “paid or accrued” or “paid or incurred”, he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner of Internal Revenue together w/ a complete statement of the facts upon w/c he relies. However, in his income tax return he shall take the deduction or credit only for the taxable period in w/c it was actually “paid or incurred”, or “paid or accrued”, as the case may be. Upon the audit of the return, the Commissioner of Internal revenue will decide whether the case is w/in the exception provided by the law, & the taxpayer will be advised as to the period for w/c the deduction or credit is properly allowable.

The provisions of paragraph (a) of this section in general are not applicable w/ respect to the taxable period during w/c the taxpayer dies. In such case, there shall also be allowed as deductions & credits for such taxable period amounts accrued & credits for such taxable period amounts accrued up to the date of his death if not otherwise allowable w/ respect to such period or a prior period, regardless of the fact that the decedent was required to keep his books & make his returns on the basis of cash receipts & disbursements.

Sec. 172. Change of accounting period. – If a corporation, including a duly registered general co-partnership, desires to change its accounting period fr. fiscal year to calendar year or fr. calendar year to fiscal year, or fr. one fiscal year to another, it shall at any time not less than thirty days prior to the date fixed in section 46(b) of the Code for the filing of its return on the basis of its original accounting period submit a written application to the Commissioner of Internal Revenue designating the proposed date for the closing of its new taxable year, together w/ a statement of the date on w/c the books of account were opened & closed each year for the past three year, the date on w/c the taxable year began & ended as shown on the returns filed for the past three years, & the reasons why the change in accounting period is desired.

b. How is income recognized under the ff. situations:

i. Long-term contracts

SEC. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be reported for tax purposes in the manner as provided in this Section. As used herein, the term 'long-term contracts' means

APP 16

INCOME TAX REVIEWER building, installation or construction contracts covering a period in excess of one (1) year. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. There should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

ii. Installment sales

SEC. 49. Installment Basis. –

(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price.

(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term 'initial payments' means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded.

SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or

controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

iii. Termination of

leasehold

RR # 2. Sec. 49. Improvements by lessees---When buildings are erected or improvements made by a lessee in pursuance of an agreement w/ the lessor & such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefr. upon either of the following bases:

(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (completion basis)

(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease & report as income for each of the lease an adequate part thereof. (Pro-rated basis)

If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the prop. prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the year in w/c the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the bldg. or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction takes place the amount previously reported as income bec. of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the bldgs. or improvements destroyed were acquired prior to March 1, 1013, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance.

c. Recording income & expense/ Keeping of books

i. Computing gross/ net income

ii. Allocating income & expense

iii. Matching principle/ cash method/ accrual/ mixed

iv. Acctg. method w/c clearly reflects income

APP 17

INCOME TAX REVIEWER Sec. 22 (R), NIRC. The terms 'paid or incurred' and

'paid or accrued' shall be construed according to the method of accounting upon the basis of which the net income is computed under this Title.

v. Differences bet. tax acctg./ financial acctg.

III. ITEMS OF GROSS INCOME AND EXCLUSIONS

Sec. 31. Taxable income Defined. – The term “taxable income” means the pertinent items of gross income specified in this Code, less the deductions, and/ or personal and additional exemptions if any, authorized by such types of income by this Code or other special laws.

Sec. 32. Gross Income. –

(a) General definition. – Gross income means all income fr. whatever source derived, including (but not limited to) the following items:

1.Compensation for services in whatever form paid, including fees, salaries, wages, commissions, & similar items;

2.Gross income derived fr. the conduct of trade or business or the exercise of profession;

3.Gains derived fr. dealings in property;

4.Interests;

5.Rents;

6.Royalties;

7.Dividends;

8.Annuities;

9.Prizes & winnings;

10. Pensions; &

11. Partner’s distributive share of the gross income of general professional partnership.

(b) Exclusions fr. gross income. – The following items shall not be included in gross income & shall be exempt fr. taxation under this Title:

1. Life insurance. – The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

(2)  Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

(3)  Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

(4)  Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

(5)  Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

(6)  Retirement Benefits, Pensions, Gratuities, etc.-

(a)  Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

(b)  Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.

(c)  The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions, private or public.

(d)  Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.

(e)  Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.

(f)  Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

(7)  Miscellaneous Items. –

(a)  Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

(b)  Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

(c)  Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:

APP 18

INCOME TAX REVIEWER (i)  The recipient was selected without any action

on his part to enter the contest or proceeding; and

(ii)  The recipient is not required to render substantial future services as a condition to receiving the prize or award.

(d)  Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations.

(e)  13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:

(i)  Benefits received by officials and employees of the national and local government pursuant to Republic Act No. 6686;

(ii)  Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;

(iii)  Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and

(iv)  Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.

(f)  GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.

(g)  Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five (5) years.

(h)  Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of this Code.  

A. Income fr. whatever source derived

1. Income tax is source blind.

2. Treatment of special items:

a. Recovery of accounts previously written off

b. Forgiveness of indebtedness

(Sec. 50 RR 2)

c. Tax refunds

d. Found treasure

3. Items of gross income

A. Compensation for services, including fees, commission & similar items

1. Taxable compensation income

Pursuant to an Er-Ee relationship

Sec.32 (A), NIRC. See above.

Sec. 2.78 1 (A) RR 2-98

De Leon: Compensation for personal services is usually

made in money but it may also be paid for in kind, or both in money & kind

If payment is made in cash, the full amount received is subject to tax.

If services are paid for w/ something other than money, the FMV of the thing taken in payment is the amount to be included as income.

If the services were rendered at a stipulated price, in the absence of evidence to the contrary, such price shall be presumed to be the FMV of the compensation received.

Examples of compensation in kind:1. Compensation paid in company stocks is to

be treated as if the company had sold the stock for its FMV & paid the EE in cash.

2. Where living quarters are furnished in addition to a cash salary, the rental value should be reported as income.

3. When meals are given an EE, the value thereof constitutes income subject to tax.

4. Promissory notes &/or other evidences of indebtedness constitute income according to the amount of their FMV.

a. Factors to consider in income recognition:

i. Convenience of the employer rule

Sec. 2.78 1(A-2, 6a) , RR 2-98

ii. Factor of restricted preference

iii. Forced savings / forced consumption

b. Treatment of the following compensation income:

i. Fringe benefits to managerial & supervisory Ee’s EXCLUDED FR. COMPENSATION INCOME/ taxed separately.

SEC. 33. Special Treatment of Fringe Benefit.-

APP 19

INCOME TAX REVIEWER (A)  Imposition of Tax.- A final tax of thirty-four

percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25.

(B)  Fringe Benefit defined.- For purposes of this Section, the term 'fringe benefit' means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following:

(1)  Housing;

(2)  Expense account;

(3)  Vehicle of any kind;

(4)  Household personnel, such as maid, driver and others;

(5)  Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted;

6)  Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;

(7)  Expenses for foreign travel;

(8)  Holiday and vacation expenses;

(9)  Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.

(C)  Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:

(1)  fringe benefits which are authorized and exempted from tax under special laws;

(2)  Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans;

(3)  Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and

(4)  De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into account the peculiar nature and special need of the trade, business or profession of the employer.

Revenue Regulation 3-98

ii. Fringe benefits not taxable: See Sec. 33 C above.

iii. Treatment of the ff. items for rank & file Ee’s:

1. Non-cash benefits: free use of facilities

2. Meals & lodging/ living quarters

3. Imputed rent/ use of household durable

4. transportation / representation & living allowance

5. other fringe benefits

Meaning of rank & file:

Sec. 22 (AA), NIRC. The term 'rank and file employees' shall mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Philippines, as amended.

Sec. 2.78-1 RR 2-98

Exempt fr. Tax

Collector vs. Henderson

Facts: Arthur Henderson is the president of the American International Underwriters for the Philippines w/c represents a group of American insurance companies engaged in the business of general insurance (except life insurance). He receives a basic annual salary of P30,000 & allowance for house rental & utilities (light, water, telephone, etc.). Although he & his wife are childless & are only two in the family, they lived in a large apartment provided for by his employer. As company president, he & his wife had to entertain & put up houseguests for the company. The BIR now seeks to collect taxes on the allowances for rental & utilities expenses.

Held: The exigencies of Henderson’s high executive position, not to mention social standing, demanded & compelled them to live in a more spacious & pretentious quarters like the ones they had occupied. Although entertaining & putting up houseguests & guests of the ER were not Henderson’s predominant occupation as president, he & his wife had to do so. That is why his ER

APP 20

INCOME TAX REVIEWER (corporation) had to grant him allowances for rental & utilities in addition to his annual basic salary in order to take care of those extra expenses for rental & utilities in excess of their personal needs. Hence, the fact that the taxpayers had to live or did not have to live in the apartments chosen by the ER is of no moment, for no part of the allowances in question redounded to their personal benefit or was retained by them. Their bills for rental & utilities were paid directly by the ER to the creditors. Henderson is entitle to a ratable value of the allowances, & only a reasonable amount they would have spent for house rentals & utilities should be the amount subject to tax, & the excess considered as expenses of the corporation.

Pirovano vs. Commissioner

Facts: Pirovano was president & general manager of the De la Rama Steamship Company until the time of his death. The company had insured his life w/ various insurance companies for a total sum of P1,000,000, w/ itself as the beneficiary. After Pirovano’s death, the company renounced its rights over the proceeds of the insurance policies in favor of Pirovano’s children. The CIR collected a donee’s gift tax fr. the children. The latter contest the imposition on the ground that the act of the company was not motivated solely by its sense of gratitude but was made for compensation for Pirovano’s services to the company.

Held: A donation made out of gratitude for past services is subject to the donee’s gift tax. Art. 726, NCC provides that “when a person gives to another a thing on account of the latter’s merit or of the services rendered by him provided they do not constitute a demandable debt, the conveyances remain a gift or donation.” In the CAB, it was emphasized in the Director’s resolution that the company decided to give the heirs the proceeds “out of gratitude”.

c. Income earner & the applicable tax rates

i. Regular compensation income modified gross

Only ind. taxpayers earn comp. income

Applicable rates:

Citizens, Res Alien & Non-Res. Alien engaged in trade or business:

SEC. 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:

 

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following schedule:  

Not over P10,000………………………………… 5%

Over P10,000 but not over P30,000…………P500+10% of the excess over P10,000

Over P30,000 but not over P70,000……… P2,500+15% of the excess over P30,000

Over P70,000 but not over P140,000……..8,500+20% of the excess over P70,000

Over P140,000 but not over P250,000… P22,500+25% of the excess over P140,000

Over P250,000 but not over P500,000… P50,000+30% of the excess over P250,000

Over P500,000 ……………………………… P125,000+34% of the excess over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income

APP 21

INCOME TAX REVIEWER received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:  

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;

Ten percent (10% beginning January 1, 2000.

 

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000…………………………….. 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of

conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

5% - 34% (1998) 33% (1999) 32% (2000)/ modified gross

Non-resident Alien NETB 25% gross compensation income (no deductions/ exemption allowed)

Note: special cases: alien employed by regional HQ of multination, offshore banking units/ petroleum service contractor 15% final tax

i. Final tax on fringe benefit (NON-RANK and FILE) at the ff. rates:

34% 1998, 33% 1999, 32% 2000 based on the grossed up monetary value of fringe benefit. The FINAL TAX w/held & pd. by Ee’s at ff. rates:

1. Res. Cit & Res. Aliens – 34% 1998; 33% 1999; 32% 2000.

2. Aliens employed by regional HQ of a multinational corp. 15%

3. Non-res. alien NOT engaged in trade or business: 25%

TAX BASE: grossed up monetary value of fringe benefits

APP 22

INCOME TAX REVIEWER Note: The grossed up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the tax rate.

Please read: Rev. Reg. 3-98

2. Exclusions fr. gross income

a. Compensation for injuries or sickness

Sec. 32 (b,4), NIRC. Compensation for injuries or sickness. – Amounts received, through Accident or Health Insurance or under Workmen’s Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received whether by suit or agreement on account of such injuries or sickness.

b. Income exempt under treaty

Sec. 32 (b,5), NIRC. Income exempt under treaty. – Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

Garrison vs. CA

Held: The exemption granted to the petitioners by the Military Bases Agreement fr. payment of income tax is not absolute. By the explicit terms of the MBA, it exists only as regards income derived fr. their employment “in the Philippines in connection w/ the construction, maintenance, operation or defense of the bases”; it does not exist in respect of other income, i.e. obtained or proceeding fr. Philippine sources or sources other than U.S. sources. Obviously, w/ respect to the latter form of income, the petitioners & all other American nationals who are residents of the Philippines are legally bound to pay the tax thereon.

BIR Rulings:

031-91 (Feb. 25, 1991)

Facts: The Refugee Services Philippines, Inc. (RSP), through Josefina Mendoza, requested for tax exemption fr. the BIR on the ground that it is a non-stock, non-profit organization implementing projects for the United Nations High Commissioner for Refugees (UNHCR).

Held: Tax exemption denied. Art. 18 of the Convention on the Privileges & Immunities of the United Nations is specific as to who are the employees or officials entitled to tax exemption. Only officials of the United Nations & of the specialized agencies of the UN whose names are included in the list of officials w/c shall fr. time to time be communicated & made known to the governments of the member-nations are exempt fr. the payment of income tax. In this case, there is no showing that the RSP & its employees had been included in such list. The amounts that RSP receives fr. the UN represent the consideration for the services it renders under a contract w/ it. Such being the case, RSP’s relationship w/ UNHCR is by virtue of a contract, & not as conferred under the provisions of the UN Charters.

042-91 (March 13, 1991)

Facts: The Consuelo Zobel Alger Foundation (CZAF), a U.S. corporation not engaged in business in the Philippines, requested for confirmation of its opinion to the effect that the gross amount of interest derived by it fr. its Philippine currency bank deposits in the Philippines is subject to a 15% w/holding tax.

Held: Pursuant to Sec. 25(b)(1), NIRC, foreign corporations not engaged in trade or business in the Philippines shall pay a tax equal to 35% of gross income received during each taxable year fr. all sources w/in the Philippines such as interest, dividends, rents, royalties, etc. However, Art. 12(2) of the RP-US Tax Treaty provides that “interest derived by a resident of one of the contracting States fr. sources w/in the other contracting State shall not be taxed by the other contracting State at a rate in excess of 15% of the gross amount of such interest.” Such being the case, the CZAF’s interest income derived fr. its Philippine currency bank deposits is subject to a 15% tax rate pursuant to Art. 12(2) of the RP-US Tax Treaty.

Read at least one tax treaty.

c. 13th month pay & other benefits

Sec. 32 (B, 7, e).  13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover:  

APP 23

INCOME TAX REVIEWER (i)  Benefits received by officials and employees of the

national and local government pursuant to Republic Act No. 6686;

(ii)  Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986;

(iii)  Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and

(iv)  Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year.

i. Items to be included/ Limitation

ii. Requirements for exclusion

B. Pensions/ Retirement benefits/ Separation pay

1. Taxable items : Pensions

2. Exclusions

Sec. 32 (B,6, 1-f).  Retirement Benefits, Pensions, Gratuities, etc.-

(a)  Retirement benefits received under Republic Act No. 7641 and those received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

(b)  Any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.

(c)  The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the

Philippines from foreign government agencies and other institutions, private or public.

(d)  Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration.

(e)  Benefits received from or enjoyed under the Social Security System in accordance with the provisions of Republic Act No. 8282.

(f)  Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by government officials and employees.

Sec. 2.78.1 (B, 1-12) RR 2-98 

a. Retirement benefits under RA 7641 and

Retirement benefits received by officials & Ee’s of pvt. firms fr. a reasonable plan.

b. Separation pay/ cause beyond Ee’s control (question of fact/ must be determined on the basis of prevailing facts & circumstances)

must not be asked for or INITIATED by the Ee

was not of his own making

c. Similar benefits received fr. foreign govt.

d. Benefits recvd fr. US Veterans Admin

e. Benefits fr. SSS/GSIS

Commissioner vs. CA

Facts: GCL Retirement Plan is an EE trust maintained by the ER. Purpose of the plan is to provide for retirement pensions, disability & death benefits to the EE. GCL made investments but 15% of that was w/held as final w/holding tax. Is GCL entitled to refund.

Held: RA 4917 specifically provides that retirement benefits received by officials & Ees of private firms are exempt from all taxes. In so far as Ees trusts are concerned, RA 4917 should be read together w/ Sec 53(b) w/c provides that the tax imposed by this Title shall not apply to ee’s trusts w/c forms part of a pension, stock bonus, or income-sharing plan of an ER. for the benefit of the some or all of his EE’s. EE’s trust & benefit plans provide eco. assistance to EE’s upon occurrence of some contingency. The tax advantage was conceived in order to encourage the formation

APP 24

INCOME TAX REVIEWER & establishment of such private plans for the benefit of EE’s.

Employees TrustsThe tax imposed on estates & trusts does not apply to income of an EE’s trust provided the ff. conditions are satisfied:

1. The EE’s trust forms part of a

pension

stock bonus or

profit-sharing plan

of the ER (Corp. or business partnership) for the benefit of some or all of its EE’s

2. Contributions made to the trust by such ER, EE or both for the purpose of distributing to such EE’s the earnings & principal of the fund accumulated by the trust in accordance w/ such plan;

3. Such contributions were made for the purpose of distributing the earnings & principal of the fund accumulated by the trust; &

4. The trust instrument makes it impossible, at any time prior to the satisfaction of all liabilities w/ respect to EE’s under the trust, for part of the corpus or income to be (w/in the taxable year or thereafter)

used for or

diverted to

purposes other than for the exclusive benefit of the EE’s

Zialcita case

Facts: On Aug. 23, 1990, a resolution of the ct. en banc was issued regarding the amounts claimed by Atty. Zialcita on the occasion of his retirement. “ The terminal leave pay of Atty. Zialcita received by virtue of his compulsory retirement can never be considered a part of his salary subject to the payment of income tax but falls under the phrase “other similar benefits received by retiring Ees & workers... & thus exempt fr. the payment of IT. “

The dispositive portion of the Res. provides that Atty. Z is to be refunded the amt. w/c was deducted fr. his terminal leave pay & the ct. declared that “henceforth, no w/holding tax shall be deducted by any office of this Court fr. the terminal leave pay benefits of all retirees similarly situated...”

CIR filed a motion for clarification &/or reconsideration.

Held: Terminal leave pay is exempt fr. IT. W/in the purview of the NIRC provisions, compulsory retirement may be considered as a “cause beyond the control of said official or Ee.” Consequently, the amt. he received by way of commutation of his accumulated leave credits fall w/in Sec. 28 (b, 7b) NIRC. Or it may likewise be viewed as a “retirement gratuity received by gov’t officials & Ees” w/c is

another exclusion fr. gross income under Sec. 28(b,7f).

1. BIR Ruling # 014-91 & 029-91, 085-91, & 020-91

Under Sec. 28(b) (7) (B) of the NIRC, any amt. received by an official or employee by his heirs fr. his employer as a consequence of separation of such official or EE fr. the ER’s service due to death, sickness, or other physical disability or for any cause beyond the control of the said official or Ee is exempt fr. taxes regardless of age or length of service. The phrase “for any cause beyond the control of the said official or Ee” connotes involuntariness on the part of the official or EE. The separation fr. the service of the official or EE must not be asked for or initiated by him.

2. BIR Ruling # 021-91

Amounts paid specifically either as advance or reimbursements for transportation, representation & other bona fide ordinary & necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subject to w/holding tax if the ff., conditions are satisfied:

a. It is ordinary & necessary traveling & representation or entertainment expenses paid or incurred by the Ee in the pursuit of the trade or business of the ER

b. The EE is required to & does, make an accounting/liquidation for such expense in accordance w/ the specific req.’s of substantiation for each category of expense.

If the reimbursements or advances exceed the actual expenses, the excess if not returned to the ER constitutes taxable compensation.

C. PASSIVE INCOME

1. Interest income (Sec. 32 A, 4)

a. Taxable interest income

i. Sources of interest income

1. interest on bank deposit/deposit substitute/ fr. trust fund & similar arrangement

2. interest on lending/interest income fr. bonds

3. interest on uncollected salary

4. Int. on foreign bonds/ gov’t. bonds

5. in on T-bills

6. int. earned fr. deposit maintained under FCD system

Rev. Reg. 10-98: interest income of pawnshop operators

ii. Meaning of the ff. items:

Sec. 22 (V) NIRC. The term 'bank' means every banking institution, as defined in Section 2 of RA No. 337, as amended, otherwise known as the General banking Act. A bank may either be a commercial bank, a thrift bank, a development bank, a rural bank or specialized government bank.

APP 25

INCOME TAX REVIEWER (Y) The term 'deposit substitutes' shall mean an

alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.

ex. promissory notes; repurchase agreements

exception: Debt instruments issued for interbank call loans w/ maturity of not more than 5 days.

iii. Treatment of bonds issued at a premium/ at a discount

adjustment to int. income/ recognition of income upon retirement of bond.

iv. Interest on insurance proceeds

b. Exclusions

Sec. 32 (b,7) NIRC.  Miscellaneous Items. –

(a)  Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by

(i) foreign governments,

(ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and

(iii) international or regional financial institutions established by foreign governments.

Com. vs. Mitsubishi Metal

Facts: Atlas Consolidated borrowed fr. Mitsubishi Metal the amount of $20 M. Atlas, in turn, undertook to sell Mitsubishi all the copper concentrates produced fr. said machine for a period of 15 years. Mitsubishi then borrowed fr. the Export-Import Bank of Japan. Atlas paid interest to Mitsubishi totaling P13,966.79 for the years ‘74 to ‘75. CIR imposed a 15% tax

thereon. Mitsubishi is now applying for a tax credit on the ground that it was merely a financing institution owned, controlled & financed by the Japanese Gov’t.

Held: The loan agreement is strictly between Mitsubishi as creditor & Atlas as seller of copper concentrates. The terms & the reciprocal nature of their obligations make it implausible that Mitsubishi was a mere agent of Eximbank. The loan & sales contract bet. Mitsu & Atlas does not contain any direct or inferential reference to Eximbank whatsoever. Therefore, the interest income fr. the loans extended to Atlas by Mitsu is NOT excludable fr. gross income taxation, is not exempt fr. w/holding tax.

cc. Applicable tax rate

i. Interest on bank deposit/ deposit substitute

From trust fund & similar arrangement (PESO-deposit) – Within

20% (FINAL TAX) w/held by payer-bank Citizen/ resident alien

25% (FINAL) Nonresident alien NETB

20% (FINAL) corp.

ii. interest income fr. long term deposit or investment in the form of savings, common ind. trust fund, deposit substitutes, investment management accounts & other investment evidenced by certificates in such form prescribed by the BSP shall be exempt fr. tax imposed under this Subsection.

* Denomination P10,000 issued by banks ONLY

Sec. 22 (FF), NIRC. The term 'long-term deposit or investment certificates' shall refer to certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.

Sec. 24 (B,1). Rate of Tax on Certain Passive Income.

APP 26

INCOME TAX REVIEWER (1) Interests, Royalties, Prizes, and Other Winnings. - A

final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%.

Sec. 25 (A,2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and

other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

 

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%.

Note:

Exemption applies only to ind. TP’s except nonresident alien NETB. They are taxed at 35%. For corporate taxpayers, no exemption.

Pre-termination will subject the interest to tax/ tax rate based on the remaining maturity.

iii. Interest earned by non-stock non-profit educational institutions

Finance Dept. Order 137-87

Educ. inst. means a non-stock, non-profit corporation association duly registered under Phil. law, & operated exclusively for educational purposes, maintained & administered by private individual or group offering formal education issued permit to operate by the DECS.

Revenues derived fr. & assets used in the operation of cafeterias/canteens, dormitories, bookstores are exempt fr. taxation provided they are owned & operated by the educational institution as ancillary activities & the same are located w/in the school premises.

Dept. of Finance Order 149-95 Re: Exemption of Non-stock Non-Profit Educational Entities

Amending Finance department Order 137-87

Non-stock, non-profit educational institutions are exempt fr. taxes on all their revenues & assets used actually, directly & exclusively for educational purposes. However, they shall be subject to internal revenue tax on such educational institution of its educational purposes or function.

Interest income shall be exempt fr. taxation only when used directly, exclusively for educational purposes. To substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the Board resolution on the proposed project to be funded out of the money deposited in banks.

iv. Other interest income

interest fr. lending (business) – regular tax rate interest income fr. bonds – final tax rate interest on uncollected salary – regular rate interest on foreign bonds – regular if taxable interest on government bonds – 20% final interest on T-bills – 20% final

APP 27

INCOME TAX REVIEWER int. earned fr. deposit maintained under FCD

(foreign currency) system – 7 ½ % int. on foreign loan contracted by a nonresident

foreign corp. on or after Aug. 1, 1986 – 20% Final tax.(Sec. 28 B, 5-a) NIRC.

2. Rentals/Leases

a. Lease of tangible personal property

Operating lease/finance lease Leasehold Improvements

Rev. Regulation No. 19-86

Sec. 2.01/1 Operating lease, defined.--- An “operating lease” is a contract under w/c the asset is not wholly amortized during the primary period of the lease, & where the lessor DOES NOT rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs & for the rest of his profits fr. the sale or re-lease of the returned assets at the end of the primary lease period.

Sec. 2.01/2 Finance lease, defined--- “Finance lease” or “full payout lease” is a contract involving payment over an obligatory period (also called primary or basic period) of specified rental amounts for the use of a lessor’s property, sufficient in total to amortize the capital outlay of the lessor & to provide for the lessor’s borrowing costs & profits. The obligatory period refers to the primary or basic non-cancelable period of the lease w/c in no case shall be less than 730 days. The lessee, not the lessor, exercises the choice of the asset & is normally responsible for maintenance, insurance, & such other expenses pertinent to the use, preservation & operation of the asset. Finance leases may be extended, after the expiration of the primary period, by non-cancelable secondary or subsequent periods w/ the rentals significantly reduced. The residual value shall in no instance be less than five per centum (5%) of the lessor’s acquisition cost of the leased asset.

Sec. 4.02/2 Compelling persuasive factors. A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasive factors are present:

(A) The lessee is given the option to purchase the asset at any time during the obligatory period of the lease, notw/standing that the option price is equivalent to or higher than the current fair market value of the asset;

(B) The lessee acquires automatic ownership of the asset upon payment of the stated amount of “rentals” w/c under the contract he is required to make;

(C) Portions of the periodic rental payments are credited to the purchase price of the asset;

(D) The receipts of payment indicate that the payments made were partial or full payments of the asset.

Sec. 4.03/3 Absence of compelling persuasive factors. In the absence of the above compelling persuasive factors or contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase & sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present:

(a) Portions of the periodic payments are made specifically applicable to an equity to be acquired by the lessee.

(b) The prop. may be acquired under a purchase option, at a price w/c is nominal in relation to the value of the prop. at the time when the option may be exercised, as determined at the time of entering into the original agreement, or w/c is a relatively small amount when compared w/ the total payments w/c are required to be made.

b. Lease of real property

c. Tax treatment of

i. Advance rental/ long-term lease

ii. Taxes & other obligations assumed by the lessee

iii. Leasehold improvements by the lessee

When is rental income recognized?

Rev. Regulation No. 2

Sec. 74. Rentals---Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an adequate part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for business property are ADDITIONAL RENT & constitute a deductible item to the tenant & TAXABLE INCOME to the landlord; the amount of the tax being deductible by the latter. The cost borne by the lessee in erecting buildings or making permanent improvements on ground of w/c he is a lessee is held to be a capital investment & not deductible as a business expense. In order to return to such taxpayer his investment of capital, an annual deduction may be made fr. gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the term of the lease, & such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life value of the buildings erected, or of the improvements made, this deduction shall take the form of an allowance for depreciation.

Sec. 49. Improvements by lessees---When buildings are erected or improvements made by a lessee in pursuance of an agreement w/ the lessor & such buildings or improvements are not subject to removal by the lessee, the lessor may at his option report the income therefr. upon either of the following bases:

(a) The lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings or improvements subject to the lease. (completion basis)

(b) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of the lease & report as income for each of the lease an adequate part thereof. (Pro-rated basis)

If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the prop. prior to the time originally fixed for the termination of the lease, the lessor receives additional income for the

APP 28

INCOME TAX REVIEWER year in w/c the lease is so terminated to the extent that the value of such buildings or improvements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the premature termination of the lease shall be included. Conversely, if the bldg. or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction takes place the amount previously reported as income bec. of the erection of such buildings or improvements, less any salvage value subject to the lease to the extent that such loss was not compensated for by insurance. If the bldgs. or improvements destroyed were acquired prior to March 1, 1013, the deduction shall be based on the cost or the value subject to the lease to the extent that such loss was not compensated for by insurance.

iv. VAT added to the rental/ paid by the lessee

Limpan vs. Commissioner

Facts: The BIR discovered that Limpan Investment Co. underdeclared its rental incomes for taxable years 1956 & 1957. Limpan, however, argued that it was not supposed to declare said rental income for ‘56 bec. the previous owners of the leased bldg. still have to collect part of the total rentals. It also claimed that only a part of the amount of P81,690.00 for ‘57 was turned over to the company by their President, Isabelo Lim. Also, one of its tenants deposited in court his rentals amounting to P10,800.00.

Held: Limpan, having admitted through its own witness that it had NOT declared more than 1/2 of the amt. found by the internal revenue examiners as unreported rental income for ‘56 & more than 1/3 of the amount ascertained by the examiners as unreported rental income for ‘57 contrary to its original claim to the revenue authorities.

d. Applicable rate

i. Normal/ regular rate

ii. Except the ff. nonresident foreign corps.

Sec. 28, (B), NIRC. Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d):

Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

 (2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

 (3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

 (4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

 (5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -  

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000…………..………………… 5%

On any amount in excess of P100,000………… 10%.

Nonresident cinematographic film owner LESSOR or distributor 25% of gross income

Nonres owner or lessor of vessels chartered by Phil. nationals 4 ½% of gross rentals

Nonres owner/ lessor of aircraft, machinery & other equipmt. 7 ½ % gross rentals or fees.

3. Royalties

a. What are royalties?

b. How are royalties earned?

APP 29

INCOME TAX REVIEWER c. Applicable rates:

Individual taxpayers

Sec. 24 (B,1) NIRC. (B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%.

Sec. 25 (A,2), NIRC. Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions

shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; &

Less than three (3) years - 20%.

i. all royalties 20% FINAL tax

ii. except: royalties on books, as well as other literary works & musical composition – 10% FINAL tax

iii. 25% - nonres alien NETB

iv. For domestic & resident foreign corp.

Sec. 27 (D,1). Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

Sec. 28 (7,a) Tax on Certain Incomes Received by a Resident Foreign Corporation. –

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

APP 30

INCOME TAX REVIEWER 20% FINAL tax

v. for nonres foreign corp.

34% - 1998 33% - 1999 32% - 2000

4. Dividends

a. What is dividend income?

i. How is dividend income earned

ii. Kinds of dividend income

a. Cash dividend

b. Stock dividend/ stock rights

c. Property dividends

d. Liquidating dividends

b. Disguised dividend/ payments equivalent to dividend distribution

excessive compensation/ rental in lieu of dividends

Sec. 73 (C), NIRC.  Dividends Distributed are Deemed Made from Most Recently Accumulated Profits. - Any distribution made to the shareholders or members of a corporation shall be deemed to have been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received.

(D)  Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.

Rev. Reg. 2, Secs. 250-253

The distinction between a stock dividend w/c does not, & one w/c does , constitute income taxable to the shareholder is the distinction between a stock dividend w/c works no change in the corporate entity, the same interest in the same corp. being represented after the distribution by more shares of precisely the same character, & a stock dividend where there either has been a change of corporate identity or a change in the nature of the shares issued as dividends whereby the proportional interest of the shareholders after the distribution is essentially different fr. his former interest. A stock dividend constitutes income if it gives the shareholder an interest different fr. that w/c his former stock holdings represented. A stock dividend does not constitute income if the new shares confer no different rights or interest than did the old - the new certificates + the old representing the same proportionate interest in the net assets of the corp. as did the old.

A true stock dividend is not subject to tax on its receipt in the hands of the recipient. Nevertheless, if a corporation after the distribution of a stock dividend, proceeds to cancel or redeem its stock at such time & in such manner as to make the distribution & cancellation or redemption essentially equivalent to the distribution of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend.

Republic vs. Dela Rama

Facts: The estate of the late Esteban de la Rama was the subject of Special Proceedings of the CFI of Iloilo. The exec-administrator, Hervas, filed on March 12, 1951 income tax returns of the estate corresponding to tax yr. 1950 declaring a net income of P22, 796.59. P3,919.00 was assessed & paid as income tax. The BIR later claimed that it had found out that there had been received by the estate in 1950 fr. the Dela Rama Steamship Co. cash dividends amounting to P86,800 & was not declared in the ITR. The BIR then made an assessment as deficiency IT vs. the estate P56,032.50 (37355.00 as deficiency & 18,677.50 as 50% surcharge).

The Collector of IR wrote a letter 2/29/56 to Mrs. Lourdes de la Rama -Osmena informing her of the assessment & asking payment thereof. On 3/13/56, the latter’s counsel contended that the assessment should be sent to Leonor de la Rama who was appointed as administratrix of the estate. CIR sent the assessment to Leonor asking for payment. The assessment not being paid, the Dep. Comm. of IR again sent a letter to Lourdes & again it said that they should assess Leonor. The DCIR demanded Leonor to pay the tax but still was not paid. hence, the Rep. filed w/ CFI a complaint vs. the heirs of Esteban seeking to collect fr. each heir the proportionate share in the IT liability of the estate.

Held: Where the dividends were not received by the estate or the heirs; neither of them is liable for the payment of income tax therefor. There would be constructive receipt of the dividends if the debts to w/c they were applied really exist. In CAB, no constructive receipt as the first debt was contested, & the second debt was due fr. “Hijos de la Rama” an entity separate & distinct fr. Esteban.

Commissioner vs. Manning

Facts: MANTRASCO has authorized capital stock dividend into 25,000 common shares, 24,700 owned by Reese; & the rest at 100 shares owned by Manning, McDonald, & Simmons. Pursuant to a Trust Agreement, after Reese died, the 24,700 shares were reacquired

APP 31

INCOME TAX REVIEWER by Mantrasco. Consequently, the same shares were distributed equally to M, M & S while payment to the estate of Reese fr. the companies profit was gradually made fr. 1953-63.

Held: Where corporate earnings are used to purchase outstanding stock treated as treasury stock as a technical but prohibited device to avoid effects of income taxation, distribution of said corporate earnings in the form of stock dividends will subject stockholders receiving them to income tax. When the company parted w/ a portion of their earnings “to buy” the corporate holdings of Reese, they were in ultimate effect & result making a distribution of such earnings to M, M & S.

Note: Distribution of partner’s share in the net income of a taxable partnership is equivalent to distribution of dividends in a corp.

c. Exclusions

i. Income exempt under a tax treaty

ii. Passive income of foreign government

Sec. 32 (B, 7, a), NIRC. Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

5. Annuities & proceeds fr. life insurance

a. Taxable income/computation

Art. 2021 NCC. The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once w/ the burden of the income.

Sec. 32 (a,8) NIRC. Gross income. (a) General definition. - Gross income means all income fr. whatever source derived, including ( but not limited to ) the following items:

(8) Annuities

b. Exclusions

i. Proceeds of Life insurance

What is insurance? Is casualty insurance a life insurance contract?

Are proceeds of non-life or property insurance taxable? Pre-need contracts?

Sec. 32 (b,1) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income & shall be exempt fr. taxation under this Title:

(1)  Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income.

Sec. 62 Rev. Reg. 2. Proceeds of life insurance are excluded fr. gross income bec. they partake more of indemnity or compensation rather than gain to the recipient. In case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein only the actual value of such consideration & the amount of the premiums & other sums subsequently paid by the transferee shall be tax-exempt.

ii. Return of premium paid

What is cash surrender value? Computing income in annuity contracts

Sec. 32 (b,2) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income & shall be exempt fr. taxation under this Title:

(2)  Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.

iii. Compensation for injuries or sickness

Sec. 32. B. (4)  Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness.

Sec. 63 RR 2.

6. Prizes & winnings/ Awards/ Rewards

a. Taxable items

i. gambling winnings/contests/raffle prizes

ii. small town lottery winnings

iii. rewards under Sec. 282 NIRC/ informer’s reward 10% FINAL w/holding tax

Sec. 32 (a, 9) NIRC. Gross income. (a) General definition. - Gross income means all income fr. whatever source derived, including ( but not limited to ) the following items:

APP 32

INCOME TAX REVIEWER (9) Prizes & winnings

b. Exclusions/ Exemptions

i. Phil. Charity Sweepstakes and lotto winnings

Sec. 24. (B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

ii. Prizes and awards in sports competition

Sec. 32 (b, 7d) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income & shall be exempt fr. taxation under this Title:

(7) Miscellaneous items:

(d)  Prizes and Awards in sports Competition. - All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations.

iii. Prizes & awards/ religious/ charitable/ scientific/ artistic/ literary

Requisites for exclusion

Sec. 32 (b, 7c) NIRC. Exclusions fr. gross income. - The ff. items shall not be included in gross income & shall be exempt fr. taxation under this Title:

(7) Miscellaneous items:

(c)  Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if:  

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and

(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

7. Gifts/Bequests/Devises

Tax treatment of remunerative donation Extended/ but income from such property

taxable

Sec. 32 (B, 3) NIRC.

3. Gifts, Bequests, and Devises. _ The value of property acquired by gift, bequest, devise, or descent: Provided, however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income.

8. Other types of passive income

a. Found treasure – regular rate

b. Refund of tax or recovery of bad debt previously deducted – regular tax rate

c. Damages

C. Gains derived from dealings in property

SEC. 39. Capital Gains and Losses. -  

(A) Definitions. - As used in this Title -

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. 

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges of

APP 33

INCOME TAX REVIEWER capital assets over the gains from such sales or exchanges.  

(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and

(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 

(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, 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 the sale or exchange of a capital asset held for not more than twelve (12) months. 

(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

(F) Gains or losses from Short Sales, Etc. - For purposes of this Title - 

1. Gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets; and

2. Gains or losses attributable to the failure to exercise privileges or options to buy or sell

1. Types of gain/kinds of property

a. Kinds/Classification of taxable income or gain

What is capital gain? What is ordinary gain/ income?

(Z) The term 'ordinary income' includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). Any gain from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary income' shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other provisions of this Title, as 'ordinary loss' shall be treated as loss from the

sale or exchange of property which is not a capital asset.

b. What is NET capital gain? NET capital loss?

(I can’t find Sec. 16 (e) in the CTRA and Sec. 22 (Z) is repetition… its coming back to me… repetition… the only thing I can see… Obiter Master™)

Sec. 122, Rev. Reg. 2 Losses fr. sales or exchanges of property. No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,-

7. Between members of a family (whole or half siblings, spouse, ancestors & lineal descendants);

8. Between an individual & a corporation more than 50% in value of the outstanding stock of w/c is owned, directly or indirectly by or for such individual except in the case of distributions in liquidation;

9. Between two corporations more than 50% in value of the outstanding stock of each of w/c is owned, directly or indirectly, by or for the same individual, if either one of the corps. w/ respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, except in the cases of distributions in liquidation;

10. Between a grantor & a fiduciary of any trust;

11. Between the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w/ respect to each trust; or

12. Between a fiduciary of a trust & a beneficiary of such trust.

Sec. 132, Rev. Reg. 2 Definition of capital assets.

The law provides that the term capital assets shall be held to mean property held by the taxpayer (WON connected w/ his trade or business) . . . Same as Sec. 33, NIRC.

The term capital asset includes all classes of property not specifically excluded by S30 (a).

The exclusion fr. the term “capital assets” by property used in the trade or business of the taxpayer of a character w/c is subject to the allowance for depreciation in S30 (f) NIRC -

is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange (&)

it has no application to gains or losses arising fr. the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished fr. depreciable improvements upon the land.

To such gain or loss allocable to the land, the limitations of 34(b) & (c) apply ( such limitation may be inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to customers in the ordinary course of his trade or business, not bec. the land is subject to the allowance for depreciation provided in 30 (f) NIRC), will not be subject to the percentage provisions of 34(b) & losses fr. such transactions will not be subject to the limitations on losses provided in 30 (c).

APP 34

INCOME TAX REVIEWER c. Short term asset/ long term

asset

(A) Definitions. - As used in this Title -

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. 

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.  

Tuazon vs. Lingad 58 SCRA 170

Facts: In 1948, pet. inherited 2 parcels of land, w/c he subdivided into 29 lots & leased 28. In 1950, he sold the lots on an installment basis to their occupants. Lot 29 was subsequently subdivided & paved, & were also sold on a 10 yr. annual amortization basis. He reported his income fr. the sale of the lots as long-term capital gain. In 1957, he treated his income fr. the sale of the small lots as capital gains & included only 1/2 as taxable income. He deducted the real estate dealer’s tax he paid in 1957 due to the rentals fr. his 28 lots & other properties. BIR charged him w/ deficiency income, considering the sale as ordinary gains & not capital.

Issue: WON properties inherited by petitioner should be regarded as capital assets

Held: NO. When pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlative right to receive & enjoy the fruits of the business & the property w/c the decedent had established. Also, pet. owned other properties w/c he rented out, fr. w/c he periodically derived a substantial income, & for w/c he had to pay the real estate dealer’s tax, w/c he used to deduct fr. his gross income. Under the circumstances, pet’s sale of the lots forming part of his rental business cannot be characterized as other than sales of non-capital, or ordinary assets. (remember exceptions in S33).

Calasanz vs. Com. 144 SCRA 644

Facts: Petitioner inherited fr. her father an agricultural land in Rizal. In order to liquidate her inheritance, she had the land surveyed, introduced improvements thereon & sold the lots at a profit. In their joint ITR, they disclosed a profit of P 31,060 fr. the sale of the subdivided lots, & reported 50% thereof as taxable capital gains. Revenue examiner adjudged pets. as engaged in business as real estate dealers, required them to pay real estate dealer’s tax & assessed a deficiency income tax on profits derived fr. the sale based on the rates for ordinary income.

Issue: WON pets. are real estate dealers liable for real estate dealer’s tax

WON gains realized fr. the sale of the lots are taxable as ordinary income

Held: YES in both . The activities of pet. are no different fr. those invariably employed by one engaged in the business of selling real estate. There was extensive development such that pets. did not sell the land in the condition in w/c they acquired it. A considerable amount was expended to cover the cost of the improvements. It has been held that a property ceases to be a capital asset if the amount expended to improve it is double its original cost, as in the CAB, for the extensive improvements indicates that the seller held the property primarily for sale to its customers in the ordinary course of business. And since they are engaged in the business of real estate, it follows that the property sold falls w/in the exception in the definition of capital assets in S33, NIRC.

Rodriguez vs. Collector

Facts: The Gov’t. paid P1,238,204.00 to E. Rodriguez Inc. as payment for its land w/c was expropriated by the gov’t. Of the said amount, P625,315.90 were in the form of tax-exempt gov’t. bonds. Nung bayaran na ng tax, E. Rodriguez Inc. did not include the sum of P625 thou, believing it to be exempt fr. taxation. Ergo, the CIR assessed E. Rodriguez w/ a deficiency income tax.

Held: There can be no question that E. Rodriguez is taxable on its income derived fr. the sale of its prop. to the Gov’t. The fact that a portion of the purchase price of the prop. was paid by the Gov’t. in the form of tax exempt bonds does not operate to exempt said income fr. tax. The income fr. the sale of the land in question & the bonds are 2 different & distinct taxable items so that the exemption does not operate to exempt the

APP 35

INCOME TAX REVIEWER other, unless the law expressly so provides. The tax here is on the income derived fr. the sale of E. Rodriguez’s prop. to the Gov’t. not the income derived fr. the sale or exchange of the bonds.

2. Computation of gain/loss

SEC. 40. Determination of Amount and Recognition of Gain or Loss. - 

(A) Computation of Gain or Loss. - The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received; 

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property. - The basis of property shall be - 

(1) The cost thereof in the case of property acquired on or after March 1, 1913, if such property was acquired by purchase; or

(2) The fair market price or value as of the date of acquisition, if the same was acquired by inheritance; or

(3) If the property was acquired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the fair market value of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market value; or

(4) If the property 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; or

(5) The basis as defined in paragraph (C)(5) of this Section, if the property was acquired in a transaction where gain or loss is not recognized under paragraph (C)(2) of this Section.

(C) Exchange of Property. - 

(1) General Rule. - Except as herein provided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. 

(2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -  

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or 

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided,

That stocks issued for services shall not be considered as issued in return for property.

(3) Exchange Not Solely in Kind. -  

(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain.

(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.  

(4) Assumption of Liability. -  

(a) If the taxpayer, in connection with the exchanges described in the foregoing exceptions, receives stock or securities which would be permitted to be received without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property, subject to a liability, then such assumption or acquisition shall not be treated as money and/or other property, and shall not prevent the exchange from being within the exceptions.

(b) If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subject exceed the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be.  

(5) Basis -  

(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided,

APP 36

INCOME TAX REVIEWER finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities.

(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.  

(6) Definitions. -  

(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration. 

(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor.

(c) The3term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.

(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the purpose 'substantially all' and for the proper implementation of this Section.

a. Cost of basis of the property sold

SEC. 39. Capital Gains and Losses. -  

(A) Definitions. - As used in this Title -

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.

(2) Net Capital Gain. - The term 'net capital gain' means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges. 

(3) Net Capital Loss. - The term 'net capital loss' means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.  

(B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into

account in computing net capital gain, net capital loss, and net income:

(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and

(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

b. Cost or basis of prop. exchanged in corporate readjustment

Section 39 (C, 5) NIRC---Basis.--

(a) The basis of the stock or securities received by the transferor upon the exchange specified in the above exception shall be the same as the basis of the property, stock or securities exchanged, decreased by (1) the money received, and (2) the fair market value of the other property received, and increased by (a) the amount treated as dividend of the shareholder and (b) the amount of any gain that was recognized on the exchange: Provided, That the property received as 'boot' shall have as basis its fair market value: Provided, further, That if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or acquires form the latter property subject to a liability, such assumption or acquisition (in the amount of the liability) shall, for purposes of this paragraph, be treated as money received by the transferor on the exchange: Provided, finally, That if the transferor receives several kinds of stock or securities, the Commissioner is hereby authorized to allocate the basis among the several classes of stocks or securities.

(b) The basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer.  

c. Recognition of gain/loss in exchange of prop.

i. General rule

Sec. 39 (C). Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 

Sec. 136 RR 2.

ii. Exception: Where no gain or loss shall be recognized

APP 37

INCOME TAX REVIEWER Sec. 40(C, 2) Exception. - No gain or loss shall be

recognized if in pursuance of a plan of merger or consolidation-  

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or 

(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property.

Meaning of merger/ consolidation/ control/ securities

Sec. 40 (C, 6) Definitions. -  

(a) The term 'securities' means bonds and debentures but not 'notes" of whatever class or duration. 

(b) The term 'merger' or 'consolidation', when used in this Section, shall be understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition by one corporation of all or substantially all the properties of another corporation solely for stock: Provided, That for a transaction to be regarded as a merger or consolidation within the purview of this Section, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation: Provided, further, That in determining whether a bona fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: Provided, finally , That in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term 'property' shall be taken to include the cash assets of the transferor.

(c) The3term 'control', when used in this Section, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.

(d) The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to issue rules and regulations for the purpose 'substantially all' and for the proper implementation of this Section.

Commissioner vs. Rufino

Facts: There are two corporations in this case---both are named Eastern Theatrical Co. We will call them E1 for the old corporation & E2 for the new corpo. In a special meeting of stockholders of E1, a resolution was passed authorizing E1 to MERGE w/ E2 by transferring its business, assets, goodwill, & liabilities to the latter. In exchange, E2 would issue &

distribute to the shareholders of E1 one share for each share held by them in the said corpo. The merger was necessary to continue the exhibition of moving pictures at the Lyric & Capitol Theaters even after the corporate existence of E1, in view of its pending booking contracts & CBA w/ its Ees. The CIR declared that the merger was not undertaken for a bona fide business purpose but merely TO AVOID LIABILITY for the capital gains tax on the exchange of the old for the new shares of stock. CIR then imposed deficiency assessments on capital gains taxes on the stocks received by the shareholders of E1.

Held: No taxable gain was derived by the shareholders fr. the transaction. There was a valid merger although the actual transfer of the properties subject of the Deed of Assignment was not made on the date of the merger. The merger in question involved a pooling of resources aimed at the continuation & expansion of business & so came under the letter & intendment of the NIRC, as amended, EXEMPTING fr. the capital gains tax exchanges of property effected under lawful corporate combinations. The fact is that the merger merely deferred the claim for taxes w/c may be asserted by the gov’t later, when gains are REALIZED & benefits are distributed among the stockholders as a result of the merger.

Collector vs. Binalbagan Estate

Facts: Binalbagan & Isabela Sugar Co. proposed to MERGE their assets to form a NEW CORP., BISCOM, w/ a capital stock of 400 Thous Non Par value shares. The assets of both merging companies were assessed & the market value of Binalbagan’s tangible assets was fixed as P2,541,134.69, & the sugar quota at P5/picul or P1,482,629.28. On the basis of such, the merger was realized w/ Binalbagan being allocated 216,000 shares in exchange for its tangible assets & sugar quota. In 1948, Binalbagan’s equity was reduced to 176,945 when it gave away 29,055 shares to 3 small sugar centrals. In 1951, these shares were sold for P6.1 M payable in installments--- (P1.5 in ‘51; P350 Thous + interest in ‘52; A total of P15 thou for ‘53). The income tax was paid. For 1951, Binalbagan deducted the book value of its tangible assets at P824,559.91 fr. the initial payment of P1.5 M. 50% of the remainder was reported as income or gain fr. the sale of capital assets. In ‘54, CIR assessed deficiency income tax for ‘51, ‘52, & ‘53.

Held: Where 2 corporations merged their assets to form a new corporation, each receiving non par value shares corresponding to their assets contributed, it is held that the basis in computing the taxable gain fr. the sale of its shares of stock in the new corporation is

APP 38

INCOME TAX REVIEWER the fair market value of its assets given in exchange for said shares at the time of said exchange.

Revenue Memo Order 26-92

On Dec. 26, ‘91 & Jan. 3, ‘92, Revenue Reg. No. 1-92 & Rev. Mem. Circ. No. 1-92 were respectively issued by this Office clarifying that the increased basic personal & additional exemptions under the amendatory provisions of RA 7167 shall apply to earnings/income of individual taxpayers starting taxable year ‘92 (& NOT ‘91) w/c shall be declared for income tax purposes in their tax returns to be filed on or before April 15, ‘93. Likewise, Rev. Reg. No. 1-92 shall take effect on compensation income earned or received fr. Jan. 1, ‘92.

However, in a decision in the consolidated cases of Reynaldo V. Umali vs. Hon. Jesus P. Estanislao, Sec. of Finance & Hon. Jesus U. Ong, CIR & Rene B. Gorospe, et al, vs. CIR, promulgated May 29, ‘92, the Supreme Court held that---

“WHEREFORE, Secs. 1, 3 & 5 of Rev. Reg. No. 1-92 w/c provide that the regulations shall take effect on compensation income earned or received fr. 1 Jan. ‘92 are hereby SET ASIDE. They should take effect on compensation income earned or received fr. 1 Jan. ‘91.

“Since this decision is promulgated after 15 April ‘92, the individual taxpayers entitled to the increased exemptions on compensation income earned during a calendar year ‘91 who may have filed their income tax returns on or before 15 April ‘92 (later extended to 24 April 1992) w/o the benefit of such increased exemptions, are entitled to the corresponding tax refunds &/or credits, & respondents are ordered to effect such refunds &/or credits. No costs.”

The BIR is filing a motion for recon of the aforementioned decision.

Accordingly, pending resolution of our Motion for Recon, the basic personal & additional exemptions allowable to individual taxpayers for income tax purposes under Sec. 29 (L) of the NIRC before its amendment by RA No. 7167 shall still apply for purposes of w/holding of income tax on wages as well as in the computation of the second installment payable on or before July 15, ‘92 of individual income tax for taxable year ‘91.

iii. Exception: Where gain is recognized but not the loss

aa. Exchange not solely in kind

Sec. 39 (C, 3) NIRC Exchange Not Solely in Kind.

(a) If, in connection with an exchange described in the above exceptions, an individual, a shareholder, a security holder or a corporation receives not only stock or securities permitted to be received without the recognition of gain or loss, but also money and/or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market value of such other property received: Provided, That as to the shareholder, if the money and/or other property received has the effect of a distribution of a taxable dividend, there shall be taxed as dividend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation; the remainder, if any, of the gain recognized shall be treated as a capital gain.

(b) If, in connection with the exchange described in the above exceptions, the transferor corporation receives not only stock permitted to be received without the recognition of gain or loss but also money and/or other property, then (i) if the corporation receiving such money and/or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but (ii) if the corporation receiving such other property and/or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not distributed.

bb. Other transactions where gain is recognized but not the loss

Wash sales/ compared w/ short selling

SEC. 38. Losses from Wash Sales of Stock or Securities. -  

(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 

(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. 

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed by

APP 39

INCOME TAX REVIEWER the Secretary of Finance, upon recommendation of the Commissioner.

Transactions bet. related taxpayers Who are related taxpayers?

Sec. 36 NIRC. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly –

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or 

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or 

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or 

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 

(6) Between a fiduciary of a trust and beneficiary of such trust.

Illegal transactions

iv. Gains & losses attributable (to) taxpayer’s failure to exercise privileges or options to buy/sell prop.

d. Exclusions:

Gains derived fr. buying & selling shares of stock listed & traded through the local exchange

excluded/ exempt from income tax but subject to percentage tax

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed & Traded through the Local Stock Exchange or through initial Public Offering-

(A) Tax of Sale, Barter or Exchange of Shares of Stock Listed & Traded Through the Local Stock Exchange

There shall be levied, assessed & collected on every

sale, barter, exchange

or other disposition of

shares of stock

listed & traded through the local stock exchange

other than the sale by a dealer in securities,

a tax at the rate of

1/2 of 1% of the gross selling price or

gross value in money of the shares of stock

sold, bartered, exchanged or otherwise disposed

w/c shall be paid by the seller or transferor.

(B) Tax on Shares of Stock Sold or Exchanged through Initial Public Offering -

There shall be levied, assessed & collected on every

sale, barter, exchange or other disposition

through initial public offering of shares of stock

in closely held corporations, as defined herein,

a tax at the rates provided hereunder

based on the gross selling price or

gross value in money of

the shares of stock

sold bartered, exchanged or otherwise disposed in accordance w/ the proportion of shares of stock sold, bartered, exchanged or otherwise disposed

to the total outstanding shares of stock after the listing in the local stock exchange:

Up to 25% : 4%

Over 25% but not over 33 1/3% : 2%

Over 33 1/3% : 1%

The tax herein imposed shall be

paid by the issuing corporation in primary offering

or by the seller in secondary offering.

For purpose of this Section,

the term ‘closely held corporation’ means

any corporation at least 50% in value of the outstanding capital stock or

at least 50% of the total combined voting power of

all classes of stock entitled to vote

is owned directly or indirectly by or for not more than 20 individuals.

For purposes of determining whether the corporation is a closely held corporation insofar as such determination is based on stock ownership, the following rules shall be applied:

(1) Stock Now Owned by Individuals –

Stock owned

directly or indirectly

by or for a corporation, partnership, estate or trust

shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.

(2) Family & Partnership Ownership –

An individual shall be considered as owning the stock owned,

directly or indirectly,

by or for his family,

or by or for his partner.

For purposes of this par.,

the ‘family of an individual’

APP 40

INCOME TAX REVIEWER includes only his brothers & sisters (whether by

whole or half-blood),

spouse, ancestors & lineal descendants.

(3) Options - If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option & each one of a series of options shall be considered as an option to acquire such stock.

(4) Constructive Ownership as Actual Ownership -

Stock constructively owned by reason of the application of paragraph (1) or (3) hereof shall,

for purposes of applying paragraph (1) or (2),

be treated as actually owned by such person;

but stock constructively owned by the individual

by reason of the application of paragraph (2) hereof

shall not be treated as owned by him

for purposes of again applying such paragraph

in order to make another

the constructive owner of such stock.

(C) Return on Capital Gains Realized fr. Sale of Shares of Stocks -

(1) Return on Capital Gains Realized fr. Sale of Shares of Stock Listed & Traded in the Local Stock Exchange –

It shall be the duty

of every stock broker who effected the sale

subject to the tax imposed herein

to collect the tax & remit the same

to the Bureau of Internal Revenue

w/in five (5) banking days fr. the date of collection thereof &

to submit on Mondays of each week

to the secretary of the stock exchange,

of w/c he is a member,

a true & complete return

w/c shall contain a declaration of all his transactions

effected through him during the preceding week &

taxes collected by him & turned over

to the Bureau of Internal Revenue.

(2) Return of Public Offering of Shares of Stock –

In case of primary offering,

the corporate issuer shall

file the return & pay the corresponding tax

w/in thirty (30) days fr. the date of listing of the shares of stock in the local stock exchange.

In the case of secondary offering,

the provision of Subsection (C)(1) of this Section

shall apply as to the time & manner of the payment of the tax.

(D) Common Provisions –

Any gain derived

fr. the sale, barter, exchange or other disposition

of shares of stock

under this Section

shall be exempt fr. the tax imposed

in Sections 24(C), 27(D)(2), 28(A)(8)(c), & 28(B)(5)(c) of this Code &

fr. the regular individual or corporate income tax.

Tax paid under this Section shall not be deductible for income tax purposes .

e. Applicable tax rate

SEC. 24. Income Tax Rates.

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:  

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following schedule:  

Not over P10,000………………………………… 5%

Over P10,000 but not over P30,000…………P500+10% of the excess over P10,000

Over P30,000 but not over P70,000………P2,500+15% of the excess over P30,000

Over P70,000 but not over P140,000…….P8,500+20% of the excess over P70,000

Over P140,000 but not over P250,000…P22,500+25% of the excess over P140,000

Over P250,000 but not over P500,000…P50,000+30% of the excess over P250,000

Over P500,000 ………………………………P125,000+34% of the excess over P500,000 in 1998.

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%).

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical

APP 41

INCOME TAX REVIEWER compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:  

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;

Ten percent (10% beginning January 1, 2000.  

Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000…………………………….. 5%

On any amount in excess of P100,000………… 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the

sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.

(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.

SEC. 25. Tax on Nonresident Alien Individual. -

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer;

APP 42

INCOME TAX REVIEWER interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%.  

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in

international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

 

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

CHAPTER IV - TAX ON CORPORATIONS

 

SEC. 27. Rates of Income tax on Domestic Corporations. -

(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur.

APP 43

INCOME TAX REVIEWER Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.

 

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the

Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

 

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000…………………………. 5%

Amount in excess of P100,000…………….. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

 Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

 (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

 (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain

APP 44

INCOME TAX REVIEWER presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.  

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.  

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:  

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.  

(4) Offshore Banking Units. - The provisions of any law to the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

APP 45

INCOME TAX REVIEWER Any income of nonresidents, whether individuals or

corporations, from transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.  

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.  

7. Tax on Certain Incomes Received by a Resident Foreign Corporation. –  

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000………………………… 5%

On any amount in excess of P100,000……. 10%

(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.  

(B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -  

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57 (A) of this Code, subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for 1998, eighteen percent (18%) for 1999, and seventeen percent (17%) thereafter, which represents the difference between the regular income tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998, and thirty-three percent (33%) in 1999, and thirty-two percent (32%) thereafter on corporations and the fifteen percent (15%) tax on dividends as provided in this subparagraph;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000…………..………………… 5%

APP 46

INCOME TAX REVIEWER On any amount in excess of P100,000………… 10%

i. Special rates:

Stock transactions – sale of domestic shares classified as capital assets but not traded and listed in the Phil. Stock Exch. 5% - 10%

Sale of real prop classified as capital asset – 6% FINAL TAX based on gross selling price or zonal value whichever is higher

Sale of land and building by a corp. 6% FINAL TAX based on gross selling price or zonal value whichever is higher

ii. Regular tax on NET CAPITAL GAIN

D. Gross income derived from the Conduct of Trade or Business or the Exercise of a Profession;

1. Computation of taxable income fr. business/ conduct of trade or profession.

Sec. 43, Rev. Reg. 2. Gross income fr. business. – In the case of a

a) manufacturing,

b) merchandising, or

c) mining business,

“gross income” means the total sales, less the cost of goods sold, plus any income fr. investments & fr. incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold.

Sec. 45, Rev. Reg. 2. Gross income of farmers. - A farmer reporting on the basis of receipts & disbursements (in w/c no inventory to determine profits is used) shall include in his gross income for the taxable year

1. the amount of cash or the value of merchandise or other property received fr. the sale of livestock & produce w/c were raised during the taxable year or prior years,

2. the profits fr. the sale of any livestock or other items w/c were purchased, &

3. gross income fr. all other sources. xxx xxx xxx

Sec. 27 (E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

a. Merchandising

Gross Sales less returns and discounts less Cost of Sales less Expenses = NET INCOME

b. Manufacturing

Gross sales less returns and discounts less cost of goods manufactured and sold less expenses = NET INCOME

c. Service concern/ Conduct of trade

Gross receipts less cost of service less expenses = NET INCOME

d. Practice of Profession

Gross professional fees less expenses = NET INCOME

e. Farming/Agribusiness

APP 47

INCOME TAX REVIEWER

f. Performance of the functions of a public office

(Sec.22 (s) , NIRC – supra.)

g. other types of business

2. Exclusions

a. Income exempt under a treaty

Sec. 32 (B 5)—  Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines.

b. Income derived by the gov’t. or its political subd. fr. the exercise of any essential gov’t. function.

Sec. 32 (B 7) NIRC

(7)  Miscellaneous Items. -

(a)  Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii) international or regional financial institutions established by foreign governments.

(b)  Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof.

P.D. 1931

SECTION 1. The provisions of special or general law to the contrary notw/standing, all exemptions fr. the payment of duties, taxes, fees, imposts & other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby w/drawn.

SEC. 2. The President of the Philippines &/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions w/drawn by Sec. 1 above or otherwise revise the scope & coverage of any applicable tax & duty, taking into account, among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the

revenue generation effort;

3) The nature of the activity in w/c the corporation is

engaged in; or

4) In general, the greater national interest to be served.

SEC. 3. The Ministry of Finance shall promulgate the necessary rules & regulations to effectively implement the provisions of this Decree.

PD 1955

SECTION 1. The provisions of special or general law to the contrary notw/standing, all exemptions fr. or any preferential treatment in the payment of duties, taxes, fees, imposts & other charges heretofore granted to private business enterprise &/or persons engaged in any economic activity are hereby w/drawn, except those enjoyed by the following:

(a) Those registered by the Board of Investments under PD No. 1789, as amended by BP Blg. 391, & those registered by the Export Processing Zone Authority under PD No. 66, as amended by PD Nos. 1449, 1776, 1776-A, & 1786;

(b) The copper mining industry in accordance w/ the provisions of LOI 1416;

(c) Those covered by international agreements to w/c the Philippines is a signatory;

(d) Those covered by the non-impairment clause of the Constitution; &

(e) Those that will be approved by the President of the Philippines upon the recommendation of the Minister of Finance.

E.O. 93

SECTION 1. The provisions of any general or special law to the contrary notw/standing, all tax & duty incentives granted to the government & private entities are hereby w/drawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective international agreements to w/c the Gov’t. of the Rep. of the Phil. is a signatory;

c) those enjoyed by enterprises registered w/:

(i) the Board of Investments pursuant to PD No. 1789, as amended;

(ii) the Export Processing Zone Authority pursuant to PD No. 66, as amended;

(iii) the Phil Veterans Investment Development Corporation Industrial Authority pursuant to PD 358 as amended;

d) those enjoyed by the copper mining industry pursuant to the provisions of LOI No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff & Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.

SEC. 2. The Fiscal Incentives Review Board, created under PD No. 776, as amended, is hereby authorized to:

a) restore tax &/or duty exemptions w/drawn hereunder in whole or in part;

b) revise the scope & coverage of tax &/or duty exemption;

c) impose conditions for the restoration of tax &/or duty exemption;

d) prescribe the date or period of effectivity of the restoration of tax &/or duty exemption;

e) formulate & submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination w/ the restoration of tax & duty exemptions or

APP 48

INCOME TAX REVIEWER preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries & the terms & conditions for the grant thereof taking into consideration the international commitments of the Philippines & the necessary precautions such that the grant of subsidies does not become the basis for countervailing action.

Sec. 4 (3), Art XIV, Constitution--All revenues & assets of non-stock, non-profit educational institutions used actually, directly & exclusive for educational purposes shall be exempt fr. taxes & duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Sec. 4 (4), Art. XIV, Constitution-- Subject to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, & exclusively for educational purposes shall be exempt fr. tax.

Sec. 28 (3), Art. VI, Constitution--Charitable institutions, churches & parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, & all lands, buildings, & improvements, actually, directly & exclusively used for religious, charitable or educational purposes shall be exempt fr. taxation.

Finance Dept. Order 137-87

Educ. inst. means a non-stock, non-profit corporation association duly registered under Phil. law, & operated exclusively for educational purposes, maintained & administered by private individual or group offering formal education issued permit to operate by the DECS.

Revenues derived fr. & assets used in the operation of cafeterias/canteens, dormitories, bookstores are exempt fr. taxation provided they are owned & operated by the educational institution as ancillary activities & the same are located w/in the school premises.

Dept. of Finance Order 149-95 Re: Exemption of Non-stock Non-Profit Educational Entities

Amending Finance department Order 137-87

Non-stock, non-profit educational institutions are exempt fr. taxes on all their revenues & assets used actually, directly & exclusively for educational purposes. However, they shall be subject to internal revenue tax on such educational institution of its educational purposes or function.

Interest income shall be exempt fr. taxation only when used directly, exclusively for educational purposes. To substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the Board resolution on the proposed project to be funded out of the money deposited in banks.

10. Partner’s distributive share of the gross income of gen. professional partnership

What is a gen. prof. partnership?

“… exercising their common profession, no part of the income is derived from engaging in any trade or business.”

Sec. 22. (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

IV. Situs of the sources of income A. Meaning of situs in income

taxation/determining factors in fixing the situs of income under Phil. tax law

1. Classification of income as to source

SEC. 42. Income from Sources Within the Philippines.- 

(A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: 

(1) Interests. - Interests derived from sources within the Philippines, and interests on bonds, notes or other interest-bearing obligation of residents, corporate or otherwise; 

(2) Dividends. - The amount received as dividends:  

(a) from a domestic corporation; and

(b) from a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section; but only in an amount which bears the same ration to such dividends as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross income from all sources.  

(3) Services. - Compensation for labor or personal services performed in the Philippines;

(4) Rentals and royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for -  

(a) The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);

APP 49

INCOME TAX REVIEWER (e) The supply of services by a nonresident person or his

employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and

(g) The use of or the right to use:  

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.  

(5) Sale of Real Property. - gains, profits and income from the sale of real property located in the Philippines; and 

(6) Sale of Personal Property. - gains; profits and income from the sale of personal property, as determined in Subsection (E) of this Section.  

(B) Taxable Income From Sources Within the Philippines. -

(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. 

(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines.  

(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section;

(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section;

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and

(5) Gains, profits and income from the sale of real property located without the Philippines.  

(D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall

be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines.   

(E) Income From Sources Partly Within and Partly Without the Philippines.- Items of gross income, expenses, losses and deductions, other than those specified in Subsections (A) and (C) of this Section, shall be allocated or apportioned to sources within or without the Philippines, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. Where items of gross income are separately allocated to sources within the Philippines, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be included in full as taxable income from sources within the Philippines. In the case of gross income derived from sources partly within and partly without the Philippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Philippines may be determined by processes or formulas of general apportionment prescribed by the Secretary of Finance. Gains, profits and income from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly from sources within and partly from sources without the Philippines.

Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely form sources within the country in which sold: Provided, however, That gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely form sources within the Philippines regardless of where the said shares are sold. The transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless: (1) the transferor has filed with the Commissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains derived from such transfer, or (2) the Commissioner has certified that the taxes, if any, imposed in this Title and due on the gain realized from such sale or transfer have been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to advise the transferee of this requirement.

(F) Definitions. - As used in this Section the words 'sale' or 'sold' include 'exchange' or 'exchanged'; and the word 'produced' includes 'created', 'fabricated,' 'manufactured', 'extracted,' 'processed', 'cured' or 'aged.'

a. Gross/ taxable Income fr. sources w/in the Phils.

APP 50

INCOME TAX REVIEWER

Sec. 42. (B) Taxable Income From Sources Within the Philippines. -

(1) General Rule. - From the items of gross income specified in Subsection (A) of this Section, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income: Provided, That such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. The remainder, if any, shall be treated in full as taxable income from sources within the Philippines. 

(2) Exception. - No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection (A) unless indebtedness was actually incurred to provide funds for use in connection with the conduct or operation of trade or business in the Philippines.

Commissioner vs. JAL, supra

Com. vs. BOAC , supra

NDC vs. Com.

Facts: NDC made 14 promissory notes for the balance of the purchase price of 12 vessels it had contracted a Tokyo firm to build. Said balance & interests were timely remitted in Tokyo. NDC w/held no tax. The CIR assessed it liable for interest tax. The CTA affirmed. NDC now contends no tax was due as all the related acts. in the transxn. were done in Tokyo.

Held: Income fr. sources w/in the Phils. include interest & other interest-bearing obligations of residents, corporate or otherwise. The law speaks of “source” w/c, in CAB, is the NDC, a resident domestic corporation. Nothing in the law speaks of the “act or activity” of non-resident corps. in the Phils. or the place where the contract is signed. The residence of the obligor who pays the interest & not the physical location of the securities, bonds or notes, or the place of payment, is the determining factor of the source of interest income. Thus, if the obligor is a Phil. resident, the interest payment he made can have sources other than w/in the Phils. The interest is paid not by the bond, note or other interest-bearing obligations but by the obligor.

Howden vs. Collector

Facts: Commonwealth, a domestic corporation, entered into reinsurance contracts w/ British reinsurance companies not engaged in trade or business in the Phils., whereby former agreed to cede to the latter a portion of the premiums on indemnity insurances it had underwritten in the Phils. Howden, another

British corporation, not engaged in trade or business in the Phils. represented said British companies. Contracts were prepared & signed by the British in London, & sent to Manila for Commonwealth’s signing. Thus, Commonwealth remitted P798,297 w/ accrued interest at P4,985 as Howden’s gross income. Howden filed refund claim for P65,115. Howden agreed to pay P977 as income tax on the P4,985 accrued interest. He invoked a CIR ruling exempting fr. w/holding tax reinsurance premiums received fr. a domestic insurance company by foreign insurance companies not authorized to do business here. Its action to recover was denied by the CTA.

Held: The income source is the property, service or activity that produced it. Reinsurance premiums remitted to Howden had for their source the undertaking (an activity ) to indemnify Commonwealth. This took place in the Phils. The risks originally underwritten by Commonwealth on w/c the reinsurance premiums & indemnity were based were all situated in the Phils. The latter contracts were perfected in the Phils. under Art. 11 thereof, the parties intended Phil. law to govern by providing for arbitration in Manila. Also, the contract provided for the use of Phil. currency as a medium of exchange & tax payment.

Appellant should not confuse activity that creates income w/ business in the course of w/c an income is realized, for activity may consist of a single act while business implies continuity of transactions. An income may be earned by a corp. in the Phils. although such corp. conducts all its business abroad. The Tax Code does not require a foreign corp. to be engaged in business in the Phils. for its income fr. sources w/in the Phils. to be taxable.

b. Gross/ Taxable Income fr. sources w/o the Phils.

Sec. 42. (C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section;

(2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section;

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill,

APP 51

INCOME TAX REVIEWER trademarks, trade brands, franchises and other like properties; and

(4) Gains, profits and income from the sale of real property located without the Philippines.

Sec. 24. (D) Taxable Income From Sources Without the Philippines. - From the items of gross income specified in Subsection (C) of this Section there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. The remainder, if any, shall be treated in full as taxable income from sources without the Philippines.

2. General principles of income taxation in the Philippines and situs of sources of income

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

CIR vs. BOAC AND THE CTA

FELICIANO, J. dissenting:

Whether the foreign corporate taxpayer is doing business in the Philippines & therefore a resident foreign corporation, or not doing business in the Philippines & therefore a non resident foreign corporation, IT IS LIABLE TO INCOME TAX ONLY TO THE EXTENT THAT IT DERIVED INCOME FROM SOURCES WITHIN THE PHILIPPINES.

SOURCE OF INCOME RELATE TO THE PROPERTY, ACTIVITY OR SERVICE WHICH PRODUCED THE INCOME, not to the flow of money or site of payment

Where income taxation of services in involved, the income is sources in the PLACE WHERE THE SERVICE IS RENDERED.

. Income fr. transportation or other services done outside the Philippine must be treated as derived entirely fr. sources outside the Philippines

. Income of a foreign airline for carriage of passengers & cargo between points located outside the Philippines is not an income fr. sources w/in the Philippines although the tickets are sold here, such tickets being merely evidence of the contract of carriage.

Under P.D. 1355, international carriers issuing passage documentation in the Philippines for uplifts between points outside the Philippine are not charged any Philippine income tax on their Philippine billings. In place thereof, a 2.5% excise tax on billings in respect of passengers & cargoes originating fr. the Philippine regardless of embarkation or debarkation is imposed.

V. Allowable deductions in determining taxable income

A. General Principles Governing Tax Deductions

SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

(A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional Expenses.-

(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including:  

(i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid;

(ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor;

APP 52

INCOME TAX REVIEWER (iv) A reasonable allowance for entertainment,

amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.  

(b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

(c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.  

(2)  Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.  

(B) Interest.-

(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax:  

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%) beginning January 1, 2000;  

 (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:  

(a)  If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance

through discount or otherwise: Provided, That such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;

(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or

(c)If the indebtedness is incurred to finance petroleum exploration.  

(3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

 

(C) Taxes.-

(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

 Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.  

(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:  

(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and

(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.

An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph.  

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:  

APP 53

INCOME TAX REVIEWER (a) The amount of the credit in respect to the tax paid or

incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.  

(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.

(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:  

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such credits.  

(D) Losses. -

(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:  

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate

rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return.  

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that -  

 (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (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.

"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year.

Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.  

(4) Capital Losses. -  

APP 54

INCOME TAX REVIEWER (a) Limitation. - Loss from sales or Exchanges of capital

assets shall be allowed only to the extent provided in Section 39.

(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

 

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38.

(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions.

(7) Abandonment Losses. -  

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.  

(E) Bad Debts. -

(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.  

(F) Depreciation. -

(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned

between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each.

(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods:  

(a) The straight-line method;

(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1);

(c) The sum-of-the-years-digit method; and

(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.  

 (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement:

Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection.

(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor.

However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. 

The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. 

Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. 

(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows:  

APP 55

INCOME TAX REVIEWER (a) At the normal rate of depreciation if the expected life

is ten (10) years or less; or 

(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used.

(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines.

(G) Depletion of Oil and Gas Wells and Mines. -

(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. 

'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection. 

Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. 

(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. 

The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. 

'Net income from mining operations', as used in this Subsection, shall mean gross income from operations

less 'allowable deductions' which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation.

In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. 

The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. 

The term 'development expenditures' means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. 

(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines.  

(H) Charitable and Other Contributions. -  

(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. 

(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full;  

(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That

APP 56

INCOME TAX REVIEWER any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; 

(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization' means a non profit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; 

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and 

(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. 

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: 

(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.  

An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.  

(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. 

(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.    

(I) Research and Development.-

(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 

(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses:  

(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;

(b) Not treated as expenses under paragraph 91) hereof; and

(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. 

In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). 

The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election.  

(3) Limitations on deduction. - This Subsection shall not apply to:  

(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and 

(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.  

(J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the taxable year in excess of such

APP 57

INCOME TAX REVIEWER contributions, but only if such amount (1)has not theretofore been allowed as a deduction, and (2) 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.   

(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code.  

(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.  

(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - the amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. 

Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2)effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.

1. Meaning Of Deductions/ Differentiated From Other Terms

DEFINITION. Deductions are items or amounts w/c the law allows to be deducted fr. gross income in order to arrive at taxable income.

2. Basic Principles In Governing Deductions/ Requisites

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

deductions are allowed only when there is a clear provision in the statute for the deduction claimed.

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

As a rule, if the taxpayer does not w/in any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them form the income o the next or any succeeding year.

BUSINESS EXPENSE VS. CAPITAL EXPENSE

Business expenses deductible fr. gross income are the ordinary & necessary expenses paid or incurred during the taxable year in carrying on the taxpayer’s trade, profession or business.

Capital expenses are expenses that result in obtaining benefits of a permanent nature such as lands, buildings, & machinery.

DIFFERENTIATED FROM EXEMPTION / EXCLUSION : basically the taxpayer does not have to pay at all for items excluded/exempt fr. tax FROM TAX CREDIT: it is the taxpayer’s rt. to deduct fr. income tax due the amt. of tax he has paid to a foreign country subject to limitations.

Zamora Vs. Collector

Facts: Zamora, owner of Bay View Hotel & Farmacia Zamora filed his ITR for ‘51 & ‘52. The Collector found that he failed to file his return of the capital gains derived fr. the sale of certain real properties & claimed ded’ns w/c were not allowed. Z appealed to the SC arguing the CTA erred when it (1) disallowed P10,478.50 as promotion expenses incurred by wife for promoting hotel & pharmacy (1/2 of alleged P20,957 bus. expense);(2) disallowed 3.5% per annum rate of depreciation ;(3) disregarded the price in deed of sale, as costs of Mla. prop. for det. alleged cap. gains, & (4) applied the Ballantyne Scale of Values in det. the cost of said prop.

Held: PROMOTION EXPENSES constitute one of the deductions in conducting a business & shld. satisfy the requirements of the Tax Code Sec.30 w/c provides the in computing net inc. there shall be allowed as ded’ns all the ord. & nec. expenses paid or incurred during the taxable year in carrying on any trade or business/c must be substantiated by records. Mrs. Z went abroad on a combined business &

APP 58

INCOME TAX REVIEWER medical trip. Not all of her expenses came under the ord. & nec. expenses. (Only half of it are deductible). The SC upheld the CTA when it based its decision on the US 1955 PH Federal Taxes Par.14 160-K w/c is based on scientific studies & observations for a long period regarding the useful life of a hotel bldg. The sale of the properties in JPN notes partly realized a capital gain when converted to PHP Peso.

3. Kinds Of Deductions

i. Itemized – individual/ corps.

ii. Optional Standard – ind. taxpayer only

iii. Special deductions

4. Limitations Imposed By Law

Example:

Sec. 34 (H) Charitable and Other Contributions.

(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. 

5. Substantiation Requirements

 Sec. 34 (1,b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer.

6. Allocation of expenses and deductions

SEC. 50. Allocation of Income and Deductions. - In the case of two or more organizations, trades or

businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business.

B. Allowable deduction from business income/ trade or practice of profession

1. Ordinary/ Necessary Business Expenses

SEC. 34. Deductions from Gross Income. - Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;

(A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional Expenses.-

(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including:

A. Salaries, wages, and other forms of compensation for personal services

services actually rendered factors to consider to determine

reasonableness of amount.

Sec. 34 (A, 1, a, i). A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided, That the final tax imposed under Section 33 hereof has been paid;

Rev. Reg. 6-82 as amended by Rev. Reg. 12-87

This covers the collection at the source of the Y tax on compensation Y of employed individual taxpayers. The only impt. sections in this RR cover the defn. of Compensation (AS INCOME FOR THE EE AND AS DEDUCTIBLE EXPENSE FOR THE ER) & its other forms (traveling, representation, etc.)

Secs. 70-73 Rev. Reg. 2

Section 70. Compensation for personal services.

Among the ordinary & necessary expenses paid for incurred in carrying on any trade or business maybe included a reasonable allowance for salaries or other compensation for personal services actually rendered.

APP 59

INCOME TAX REVIEWER The test of deductibility in the area of compensation payments is whether they –

Are reasonable &

Are, in fact, purely for service.

This test & its practical application may be further stated & illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price services, is not deductible.

An ostensible salary paid by a corporation may be distribution of dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, & the excessive payments corresponds or bear a close holding to the relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that excessive payments are a distribution of earnings upon the stock.

An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells our a corporation, the farmer partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the farmer partners are not merely for services, but in part constitute payment of the transfer of the business.

The form of method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different fr. that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer & the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that a securing on fair & advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount w/c would ordinarily be paid.

In any event the allowance for compensation paid may not exceed what is reasonable under the circumstances. It is in general just to assume the reasonable & true compensation is only such amount as would ordinarily be paid for like services by are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.

Section 71. Treatment of excessive compensation –

The income tax liability of the recipient in respect of an amount of ostensible paid to him as compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. Thus, in the case of payments by corporations, if such payments –

Corresponds or bear a close relationship to stockholdings, &

Are found to be distribution of earnings or profits, the excessive payments will be treated as dividend

If such payments constitute payment for property, they should be treated by the payer as capital expenditure & by the recipient as part of the purchase price.

Section 72. Bonuses to employees. Bonuses to employees will constitute allowable deductions fr. gross income when such payments are made –

in good faith &

as additional compensation for the services actually rendered by the employees, provided such payments, when added to the stipulated salaries do not exceed a reasonable compensation for the service rendered.

It is immaterial whether such bonuses are paid –

in cash or

in kind or

partly cash & partly in kind.

Donations made to employees & others , w/c –

do no have in them the element of compensation or

are in excess of reasonable compensation for services, are not deductible fr. gross income.

Section 73. Pensions, compensations for injuries. – Amounts paid –

for pensions to retired employees or to their families or others dependent upon them or

on account of injuries received by employees & lump-sum amounts paid or accrued as compensations for injuries,

are proper deductions as ordinary & necessary expenses

Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs in recognition of the services rendered by the individual, such payments may be deducted. Salaries paid by ER to employees –

who are absent in the military, naval, or other service of the government

but who intent to return at the conclusion of such service, are allowable deductions. (relative to pension trust.)

Additional deduction under the Productivity Incentive Act.

Sec.7 . Benefits & tax incentives -

(a) Subject to the provs. of Sec.6 hereof (defined what a productivity incentive program [PIP]is), a bus. enterprise w/c adopts a PIP , duly & mutually agreed upon by the parties to the labor-mgt committee, shall be granted a special deduction fr. gross Y equivalent to 50% of the total productivity bonuses given to Ees under the program over & above the total allowable ord. & nec. bus. ded’n for said bonuses under the NIRC...

(b) Grants for manpower training & special studies given to rank-&-file Ees pursuant to a program prepared by the labor-mgt. committee for the devt. of skills identified as nec. by the appropriate govt. agency shall also entitle the bus. enterprise to a special ded’n fr. gross Y equiv. to 50 % of the total grants over & above the allowable ...

C.M. HOSKINS VS. COMMISSIONER

Facts: H was the chairman of the Bd. of Dirs. of the corp. w/c bears his name. He owns 99.6% of the capital stock. He was also a salesman-broker for his co. receiving 50%

APP 60

INCOME TAX REVIEWER share on the sales commission earned by the co. besides his monthly salary for a total annual compensation of P45,000 plus annual salary bonus of P40,000 & free use of the co. car & receipt of other allowances & benefits. He also received the add’l Y of P99,977.91 as his 50% share of the supervisor’s fee received by the co. as managing agent of a real estate project.

Held: As a general rule bonuses to Ees are deductible as such as add’l compensation for the services actually rendered by the Ees when such payments when added to the stipulated salaries do not exceed a reasonable compensation for the services rendered. In CAB, the petitioner fails the tests of reasonableness.

KUENZLE VS. COMMISSIONER

Facts: Comm. assessed K deficiency Y tax on the grd. that the bonuses paid to the Ees were not reasonable.

Held: Not reasonable. In arriving at the conclusion, the CT. gave due consideration to all the material factors (SEE ENUMERATION ABOVE)that to decide accordingly. Policy of giving bonuses in not unreasonable but net loss resulting fr. it is.

AGUINALDO IND. VS. COMMISSIONER

Facts: Pet. was engaged in 2 businesses: fishnet mfg. & furniture mfg. It bought a pc. of land in Munti. for the fishnet industry & then sold it to move to another location in Mka. They cited bonuses given to officers of Pet. as their share of the profit realized fr. the sale was a deductible expense.

Held: Not deductible> Sale was effected through a broker who was paid a commission. There is no evid. of any service incurred by pet’s officers w/c cld. be the basis of the grant to them of a bonus out of the gain realized fr. the sale. Doctrine: The taxpayer must show that its claimed deductions must clearly come w/in the language of the law, since allowances, like exemptions, are matters of legislative.

COMMISSIONER VS. ALGUE, supra.

b. TRAVEL EXPENSES

here and abroad while away from home in the pursuit of trade, business or profession

Sec. 34. (A, 1, a). (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession;

Sec. 66. Rev. No. 2 Traveling expenses.

Traveling expenses as ordinarily understood, include

transportation expenses & meals & lodging.

If the trip is undertaken for other than business purposes, -

the transportation expenses are personal expense, & the meals & lodgings are living expenses, & therefore, not deductible.

If the trip solely on business, the reasonable & necessary traveling expenses, including transportation expenses, meals & lodging, becomes business instead of personal expenses.

If then, an individual whose business requires him to travel, -

receives a salary as full compensation for his services w/o reimbursement for traveling expenses, or

is employed on a commission basis w/ no expenses allowance,

his traveling expenses, including the entire amount expended for meals & lodging are deductible fr. gross income.

If an individual

receives a salary &

is also repaid his actual traveling expenses,

he shall include in gross income, the amount so repaid & may deduct such expenses.

If an individual –

receives a salary &

also an allowance for meals & lodging,

xxx the amount of the allowance should be included in gross income & the cost of such meals & lodging may be deducted therefr.. Xxx

c. Repairs

to maintain efficient working condition does not prolong life or add value repair and maintenance expense v. capital

expense

Sec. 34., see above na lang please.

Sec. 68. Rev. Reg. No. 2. Repairs.

The cost of incidental repairs w/c neither –

materially add to the value of the property nor

appreciably prolong its life

but keep it in an ordinary/efficient operating condition

may be deducted as an expense, provided the plans or property account is not increased by the amount of such expenditure.

Repairs in the nature of replacement, to the extent that they

APP 61

INCOME TAX REVIEWER arrest deterioration, &

appreciably prolong the life of the property

should be charged against the depreciation reserves if such an account is kept.

Commissioner Vs. Soriano

Held: Expenditures for replacements, alterations & improvs./additions w/c either prolong the life of the property or increase its value are capital in nature & are not deductible.

GUTIERREZ VS. COLLECTOR

Facts: G was primarily engaged in the business of leasing property for w/c he paid real estate brokers privilege tax. He claimed ded’ns for electrical supplies, paint, labor, cement, tiles, gravel, masonry & labor used to repair the taxpayer’s rental apartments did not increase the value nor prolong its life, but merely kept the apartments in an ordinary operating condition, hence necessary expenditures for the maintenance of his business.

Held: Expenses for watching over laborers in construction work are not deductible. The activity is more akin to construction work than running a business. Construction costs are capital expenditure.

d. RENTALS/LEASE and/or other payments which are required as a condition for the continued use or possession

for purposes of the trade, business or profession,

of property to which the taxpayer has not taken or is not taking title or

in which he has no equity other than that of a lessee, user or possessor

Sec. 34. A, 1, a. (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor;

Advanced rental/ deposit:

Sec. 74, RR No. 2. Rentals.

Where a leasehold is acquired for business purposes for a specified sum, the purchaser may take as deduction in his return & adequate part of such sum each year based on the number of years the lease has to run.

Taxes paid by a tenant to or for a landlord for business property –

are additional rent &

constitute a deductible item to the tenant & taxable income to the landlord;

the amount of the tax being deductible by the latter.

The cost borne by the lessee in –

erecting buildings or

making permanent improvements

on ground of w/c he is lessee is held to be capital investment & not deductible as a business expense.

In order to return such taxpayer to his investment of capital, an annual deduction may be made fr. gross income of an amount equal to the cost of such improvements divided by the number of years remaining of the terms of the lease, & such deduction shall be in lieu of deduction for depreciation. If the remainder of the term of the lease is greater that the probable life of the buildings erected or of the improvements made, his deduction shall take the form of an allowance for depreciation.

Rev. Reg. 19-86… wala akong kopya eh.

Operating lease/ finance lease/ conditional sale

e. Entertainment/ Presentation Expense

Sec. 34. A. 1. a. (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.

When deductible: REQUISITES:

1. Incurred during the taxable year;

2. Directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade, business or exercise of a profession;

3. Not to exceed such ceilings as the Sec of Fin may, by rules & regs prescribe, upon recommendation of the Commissioner, taking into acct the needs as well as the special circumstances, nature & character of the industry, trade, business or profession of the taxpayer.

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

APP 62

INCOME TAX REVIEWER ROXAS vs. CTA

Facts: Roxas Y Cia. a partnership formed to manage the prop. left by Do Pedro Roxas deducted fr. its gross Y P40 for tickets to a banquet in honor of Don Sergio Osmena & P28 for beer given as gifts to various persons, claimed as representation expenses.

Held: Representation expenses are deductible fr. gross Y as expenditures incurred in carrying on a business or trade under the Tax Code , provided the taxpayer proves that they are reasonable in amt., nec., incurred in connection w/ the bus. Not proven in this case.

f. Expenses Of Farmers/ Those Engaged In Agribusiness

A farmer who operates a farm for profit is entitled to deduct amounts actually expended in carrying on the business. Deductible: Cost of (1) tools of short life or small cost & (2)of feeding & raising livestock in so far as it represents actual outlay but not including the value of the farm produce grown upon the farm & (3) of gasoline or fuel, repairs & upkeep of the transportation eqpt. NOT deductible: (1) costs of farm machinery, eqpt & farm bldgs. & (2) amts. expended in the dev’t. of farm orchards & ranches, prior to the time when the productive state is reached. Such are regarded as investments of capital or capital expenditures & may be depreciated.

GANCAYCO VS. COLLECTOR

Facts: Deficiency Y taxes levied. Gancayco claims farming expenses are deductible (for the devt. & cultivation of his prop).

Held: No evid. presented as to the nature of the farming expenses, other than G’s statement. Collector claims that the expense was for clearing & devt., nec. to place it in a productive state. It is not an ordinary expense but a capital expenditure.

g. Other business expenses.

Treatment of the ff.:

1. Advertising expense

2. Promotional expense

3. Litigation expense

4. Capitalization/ reorganization expense

h. Special Deductions For Educational Institutions : Sec. 29 (2) NIRC

Sec. 34. A. (2).  Expenses Allowable to Private Educational Institutions. - In addition to the

expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof.

2. INTEREST EXPENSE

Sec. 34. (B) Interest.-

(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax:  

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%) beginning January 1, 2000;

(2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:  

 (a)  If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;

(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or

(c)If the indebtedness is incurred to finance petroleum exploration.

 

(5) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

a. REQUISITES FOR DEDUCTION.

i. paid or incurred during the taxable year;

ii. On indebtedness in connection w/ the taxpayer’s profession, trade or business however

iii. Subject to limitation:

APP 63

INCOME TAX REVIEWER Interest paid on back-to-back loan shall be reduced by an amount = to the ff. percentages of the in. income subj. to final tax:

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%) beginning January 1, 2000;

b. NON-DEDUCTIBLE INTEREST

c. INTEREST PAID IN ADVANCE/ INTEREST PERIODICALLY AMORTIZED.

Sec. 34.  (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs:  

 (a)  If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year;

(b)If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or

(c)If the indebtedness is incurred to finance petroleum exploration.

d. Optional treatment of interest expense.

Sec. 34. B. (3) Optional Treatment of Interest Expense. - At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

3. TAXES

Sec. 34 C. Taxes.

(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

 Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.  

(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:  

(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and

(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.

An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph.  

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:  

(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.  

(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.

(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon

APP 64

INCOME TAX REVIEWER the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:  

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such credits.

COMMISSIONER VS. PALANCA

Facts: Palanca donated shares of stock to his son. He was assessed a gift tax, surcharge & interest for failure to file a return. He claimed a ded’n for interest paid on the donee’s gift tax. The BIR then considered the transfer as made in contemplation of death & was assessed inheritance & estate taxes.

Held: Although taxes already due have not the same concept as debts strictly speaking, they are obligations w/c may be considered as such. In CIR vs. Prieto, it was held that the distinction bet. taxes & debts is recognized in this jurisdiction, the variance in their legal conception does not extend to the interest paid on them. Requisites are (1) to (4) given above. Indebtedness, as used in the Tax Code, is the unconditional & legally enforceable oblign. for the payment of money. As Such, a tax may be deemed as an indebtedness.

COMMISSIONER VS. PRIETO

Facts: Prieto gave gifts of real prop. to her 4 kids. CIR assessed gift taxes, interests & compromises thereon. P now claims the interest as ded’n.

Held: For interest to be allowed as ded’n fr. gross Y, it must be shown that there be indebtedness, interest upon such & that what is claimed as int. ded’n should have been paid or incurred w/in the yr. RR No. 2, implementing 30(a) providing that no ded’n shld. be allowed for amts. representing interest, surcharge & penalties incident to DQ is inapplicable to cases where the taxpayer seeks to come under 30(b) w/c provides for ded’n of interest on indebtedness.

KUENZLE VS. COLLECTOR

Facts: Kuenzle is a domestic corp. engaged in the importation of textiles, hardware, etc. It deducted fr. its gross Y certain items such as interest on earned but unpaid salaries & bonuses of its Ees.

Held: Under the law, in order that interest may be deductible , it must be paid on “indebtedness”. It is imperative that there is an existing indebtedness w/c may be subject to the payment of interest. The unclaimed salaries & bonuses do not constitute indebtedness w/in the meaning of the law.

a. IN GENERAL.

Taxes paid or incurred within the taxable year in connection w/ the taxpayer’s profession, trade or business, shall be allowed as deduction.

b. NOT DEDUCTIBLE:

i. Phil. income tax

ii. Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of tax credit.

iii. Estate and donor’s taxes, and

iv. Taxes assessed vs. local benefits of a kind tending to increase the value of the property assessed.

c. Treatment of tax deducted and subsequently credited or refunded shall be included as part of gross income in the year of receipt.

d. Limitations on Deductions

Nonresident alien/ resident foreign corp. connected w/ income fr. sources w/in the Phils.

e. Tax CREDIT.

Sec. 34. C. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:

(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and

(b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional

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INCOME TAX REVIEWER partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title.

An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph.  

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:  

(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.

 

(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.

(6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

(7)Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:  

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

(d) All other information necessary for the verification and computation of such credits.

i. Tax credit v. tax deduction

ii. Taxpayers entitled to tax credit

iii. Taxes allowed as credit.

iv. Limitations on credit.

Tax Credit- refers to the tax payers right to deduct fr. the income tax due the amount of the tax he has paid in a foreign country subject to limitation. It is allowed to lessen the rigor of Int’l double or multiple taxation

Distinct fr. Tax Deduction

TAX CREDIT TAX DEDUCTION

Tax deducted fr. income tax itself

tax deducted fr. computing the taxable income

all taxes, as a general rule are allowed as deduction w/ the exception of the 7 kinds of taxes expressly excluded

only three kinds of foreign taxes may be claimed as credits against Phil. income tax i.e. foreign income, war-profits & excess- profits tax.

Sec. 34. C. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:  

(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.

v. Other requirements.

When there are adjustments on payment of incurred taxes.

vi. When crediting allowed.

vii. Substantiation requirements/ Proof of credit.

Secs. 80-83 Rev. Reg. 2

Sec. 80. RR No. 2. Taxes in General.- As a general rule, taxes are deductible w/ the exception of those w/ respect to w/c the law does not permit deduction. However, in the case of a nonresident alien individual & a foreign corporation, deduction is allowed only if &

APP 66

INCOME TAX REVIEWER to the extent that the taxes for w/c deduction is claimed are connected w/ the income fr. sources w/in RP.

Import duties paid to the proper customs officers, & business occupation, license privilege, excise & stamp taxes & any other taxes of every name & nature paid directly to the Government of the RP or to any political sub. thereof, are deductible. The word “taxes” means taxes. Proper & no deduction should be allowed for amounts representing interest, surcharge or penalties incident to delinquency.. Postage is not a tax. Automobile registration fees are considered taxes. “taxes are deductible as such only by the person upon whom they are imposed.” Thus the merchant’s sales tax imposed by law upon sales is not deductible by the individual purchaser even though the tax may be billed to him as a separate item.

In computing the net income of an individual, no deduction is allowed for the tax is imposed upon his interest as a shareholder of a bank or other corporation. w/c are paid by the corporation w/o reimbursements fr. the taxpayer. The amount s paid should not be included in the income of the shareholder.

In the case of corporate bonds or other obligations containing a tax-free covenant clause, the corporation paying the tax or any part of it, for someone else, pursuant to its agreement is not entitled to deduct such payment fr. gross income on any ground.

Sec. 81. RR. No. 2. Income tax imposed by the government.- The law does not permit the deduction of the income tax paid or accrued in favor of the government & in no case may the taxpayer avail of such deduction.

Sec. 82. RR No. 2 Income, war-profits & excess profits taxes imposed by the authority of a foreign country. – Income, war-profits & excess-profits taxes imposed by the authority of a foreign country are allowed as deductions only if the taxpayer does not signify in his return his desire to have to any extent the benefits of the provisions of law allowing credits against the tax for taxes of foreign countries.

Sec. 83. RR No. 2 Estate inheritance & gift taxes; taxes assessed against local benefits.-Estate, inheritance & gift taxes are not deductible.

So-called taxes, property assessments paid for local benefits such as street, sidewalk & other improvements imposed bec. of & measured by some benefit inuring directly to the property against w/c the assessment is to be levied, do not constitute an allowable deduction fr. gross income tax. A tax is considered assessed against local benefits when the property subject to the tax is limited to the property benefited.

COMMISSIONER VS. LEDNICKY

Facts: The Lednicky spouses are American citizens living in the Phils. & have derived all their Y fr. Phil. sources for the taxable year in question. In their amended ITR for ‘56 they claimed a deduction of P205,939 as paid in 1956 to the US Gov’t. as federal Y tax for said year. Requested for refund of P112,437.

Held: No deduction nor tax credit allowed. Alien residents who derive their income fr. sources w/in the Phils. solely may not deduct

fr. gross Y the Y tax paid to his home country for the taxable year. Such rt. is given only as an alternative to his rt. to claim a tax credit for such foreign Y taxes, such that unless he has a right to claim such a credit if he chooses, he is precluded fr. such deduction. To allow a resident alien to deduct fr. his taxes whatever he pays to his gov’t amounts to conferring upon him the power to reduce the tax due to the Phil gov’t simply by increasing the tax rates on the alien resident.

5. LOSSES.

Sec. 34. (D) Losses. –

(1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:  

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return.  

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction

APP 67

INCOME TAX REVIEWER under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that -  

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or

(ii) Not less than seventy-five percent (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.

"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year.

Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.

(4) Capital Losses. -  

(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39.

(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

 

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38.

(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions.

(7) Abandonment Losses. -  

(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

a. Definition

Sec. 34. D. (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:  

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

b. Types/ Classification of Losses

1. Ordinary Losses:/ Business Loss

2. Casualty Loss

3. Capital Loss

Special kinds of losses:

1. Losses fr. wash sales of stock or securities;

2. Losses due to involuntary removal of buildings, machinery, etc. incident to renewal or replacement;

3. Losses of the useful value of capital assets due to some change in business conditions; &

4. Abandonment losses in petroleum operations.

Secs. 94 – 100 / 104 of rev. Reg. No. 2 are incorporated in the following topics:

c. Requisites for deductibility

1. Must be that of the taxpayer

2. Must be actually sustained & charged off w/in the taxable year

3. Must be evidenced by a closed & completed transaction

4. Must not be compensated for by insurance or other form of indemnity

5. A sworn declaration must be filed w/in 45 days after the date of the occurrence of casualty or robbery, theft or embezzlement

6. The taxpayer must prove the elements of the loss claimed, such as the actual nature & occurrence of the event & amount of the loss; &

7. The loss must be connected w/ the trade or business of the taxpayer.

A casualty loss is not deductible even though the above requisites are present, if it has been claimed as a deduction for estate tax purposes in the estate tax return. (Sec. 93 RR2)

Closed & completed transaction (Sec. 96 RR 2)

The law requires that the loss should be sustained during the taxable year. A loss is actually sustained

APP 68

INCOME TAX REVIEWER when it is evidenced by a closed & completed transaction. There should be an identifiable event w/c justifies the loss, such as when there is a complete destruction of property or when insurance proceedings are finally settled & the loss not recoverable therein is finally ascertained.

i. CASUALTY LOSS

ii. NIRC provision:

Sec. 34. D. 1. b. x x x

The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return.  

(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and

iii. Net operating loss carry-over.

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that -  

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (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.

"For purposes of this subsection, the term 'not operating loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year.

Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years.

iv. CAPITAL LOSS.

Sec. 34. D. (4) Capital Losses. -  

(a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39.

(b) Securities Becoming worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

Losses fr. sales or exchange of capital assets Securities becoming worthless.

FERNANDEZ HERMANOS v. COMM.

In this case, the SC held that there was adequate basis for allowance of the writing off as worthless securities the stock of a lumber company, it appearing that it had closed operations although it still had its sawmill & equipment of some value, for even assuming that the company would later somehow realize some proceeds fr. its sawmill & equipment & such proceeds would later be distributed to its stockholders, the amount so received by the taxpayer would then be properly reportable as income of the taxpayer in the year it is received. In the meantime, it may properly be claimed as loss in his tax return pursuant to Sec. 29 d,4,b or Sec. 29, e (Bad debts).

v. Other kinds of losses:

Sec. 34. D.

(5) Losses From Wash Sales of Stock or Securities. - Losses from 'wash sales' of stock or securities as provided in Section 38.

(6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions.

(7) Abandonment Losses. -  

APP 69

INCOME TAX REVIEWER (a) In the event a contract area where petroleum

operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

Losses fr. wash sales of stock or securities wagering losses abandonment losses (petroleum operations.)

Plaridel Surety V. Collector of IR

Facts: The Collector of Internal Revenue disallowed a LOSS deduction by the petitioner, said deduction was for the payment of a performance bond w/c Plaridel previously issued on behalf of certain debtor/principals who defaulted on their obligation.

Held: The Court upheld the CIR in disallowing the deduction bec. the loss sustained by Plaridel Surety was compensated for (by insurance or) otherwise &, therefore, it has not in fact & in law suffered any loss. The alleged deductible loss was covered by a judicially enforceable right based on a contract – an indemnity agreement signed by the debtor/principals in favor of the Surety Co., w/c had not yet exhausted all its available remedies under the indemnity agreement.

CU UNJIENG v. Board of Tax Appeals

Facts: Petitioner claimed war losses (actually incurred in the years 1945 to 1947) in its 1950 return, after it was advised by the War Damage Commission that no other payments would be available other than those already effected. CIR disallowed the deduction & assessed deficiency taxes.

Held: Petitioner could not deduct the said losses beyond the years when they were actually sustained. [The word] “Otherwise” should be construed to refer to compensation due under a title analogous or similar to insurance. The loss sustained by the taxpayer must be covered by judicially enforceable right arising fr. any of the sources of obligations, namely: law, contract, quasi-contract, tort or

crime, in order that it may be considered “compensated for otherwise than by insurance.” The approval of the Phil. rehabilitation Act in 1946 did not authorize the petitioner to postpone for another year, its claim for deduction arising fr. the war losses in question.

COMM. v. PRISCILLA ESTATE INC.

Facts: Priscilla Estate had a barong-barong in one of its lots, w/c was being rented at P3,730 per month. The City Engineer of Manila declared the property a fire hazard & forced the company to demolish it. The value of the property was consequently declared by the Co., as a loss. The Commish of IR disallowed the deduction & claims that the amount should form part of the cost of the new bldg., constructed in the place of the old structure.

Held: The CIR’s contention is erroneous bec. the removal of the barong-barong was forced upon the corporation, the fact that the latter was earning fr. the said structure & that it had no funds to construct a new one belied any intention to demolish the old one. Since the demolished bldg., was not compensated for by insurance or otherwise, its loss should be charged as a deduction fr. gross income.

6. BAD DEBT

Sec. 34. (E) Bad Debts. -

(1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

(2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.

Sec. 36. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly –

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or 

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock

APP 70

INCOME TAX REVIEWER of which is owned, directly or indirectly, by or for such individual; or 

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or 

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 

(6) Between a fiduciary of a trust and beneficiary of such trust.

a. What are bad debts?

b. Who are related taxpayers?

c. Requisites for deduction.

1. Debts due taxpayer

2. Actually ascertained to be worthless

3. Charged off w/in the taxable year

4. Connected w/ profession, trade or business

5. Not those sustained in a transaction entered into bet. related parties.

d. Treatment recovered bad debts previously allowed as deduction.

included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

e. Securities becoming worthless.

1. ascertained to be worthless and

2. charged off w/in the taxable year

3. are capital assets

4. the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust co. incorporated under the laws of the Phils. a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss fr. the sale or exchange, on the last day of such taxable year, of capital assets.

FERNANDEZ HERMANOS v. COMM

Facts: FH Inc., gave advances to a subsidiary mining company w/c the latter could not repay due to its difficulties. FH Inc., wrote off said advances w/c were disallowed by the CIR & sustained by the Court.

Held: Under the memorandum agreement, the mining company was to pay FH Inc., 15% of its net income, the advances were not loans but investments of FH Inc., w/c gave the advances

w/o actually expecting repayment as debts. The loss cannot be written off bec. there is no valid & subsisting debt.

Ascertainment of worthlessness. Before a debt can be ascertained to be worthless, the creditor must take reasonable steps to collect the debt w/in the period of prescription. The duty of ascertainment requires proof of two facts:

That the taxpayer did in fact ascertain the debt to be worthless in the year for w/c deduction was sought; & That in doing so acted in good faith.

COLLECTOR v. GOODRICH

Facts: Goodrich claimed deductions on several bad debts. Most of the debtors were merely sent demand letters. Some debtors mad partial payments, others later paid the debt in full. The CIR disallowed these as deductions.

Held: The claimed deductions should be rejected. The requirement of ascertainment needs proof of two facts (see above discussion). Good faith on the part of the taxpayer is not enough. He must show also that he had reasonably investigated the relevant facts & had drawn a reasonable inference fr. the information thus obtained by him. Respondent herein has not adequately made such showing. The payments made, some in full, after the accounts had been characterized as bad debts, merely stresses the undue haste w/ w/c the same had been written off.

PRC v. CA

Facts: Phil. Refining Company protested the disallowance by the CIR of bad debts & interest expenses w/c the former listed as deductions in its return.

Held: These particular bad debts were not allowable deductions bec. they do not meet the requirements stated in the Goodrich case. There was lack of proof or evidence of good faith & reasonable ascertainment of collection. Among the accounts disallowed as deductions were the ff.:

1. Remoblas store & CM Variety store – not a single document was offered to show that the stores were indeed burned, even just a police report. PRC did not even send demand letters.

2. Aboitiz Shipping Corp. – no proof was given of PRC policy that gives rebates to clients in case of loss arising fr. fortuitous events, w/c it now passes off as uncollectible debts;

3. AFPCES – the mere fact that AFPCES is a govt. agency does not preclude P fr. filing

APP 71

INCOME TAX REVIEWER suit since the agency was discharging proprietary functions.

The taxpayer must be able to demonstrate that the debt is not only uncollectible as of the taxable year but also at any time in the future. So when the recovery is merely doubtful, the deduction is not allowed.

Usually the ff. steps are required:

1. Sending of statements of accounts;

2. Sending of collection letters;

3. Giving the account to a lawyer for collection; &

4. Filing a collection case in court.

Deduction of bad debt subsequently collected – A debt w/c was previously found to be worthless & written off in a prior year & subsequently collected does not render the deduction unallowable or illegal. The amount of the debt must be reported as income in the taxable year in w/c it is received.

7. DEPRECIATION

Sec.34 (f) NIRC Depreciation. -

(1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each.

(2) Use of Certain Methods and Rates. - The term 'reasonable allowance' as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods:  

(a) The straight-line method;

(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1);

(c) The sum-of-the-years-digit method; and

(d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner.  

 (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the

national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement:

Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection.

(4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor.

However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straight-line method. 

The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. 

Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. 

(5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows:  

(a) At the normal rate of depreciation if the expected life is ten (10) years or less; or 

(b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used.  

(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines.

a. What is depreciation? what is obsolescence?

For the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property

APP 72

INCOME TAX REVIEWER Definition: (Basilan Estates Inc., v. Comm & Secs. 110 – 115 RR 2)

Depreciation - the gradual diminution in the useful value of tangible property used in the trade or business resulting fr. exhaustion, wear & tear, & normal obsolescence

The term is also applied to amortization of the value of intangible assets the use of w/c in the trade or business is definitely limited in duration.

The necessity for depreciation allowance arises fr. the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. By using the property, a gradual sale is made of it; & the depreciation charged is the measure of the cost w/c has been sold. When then the property is disposed of after years of use, it is no longer the whole thing originally used.

b. Requisites for deductibility:

1. The allowance for depreciation must be reasonable.

2. It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year.

3. It must be charged off during the taxable year.

4. A statement on the allowance must be attached to the return.

“Reasonable allowance” as used in the Tax Code, includes (but is not limited to) an allowance computed in accordance w/ the regulations prescribed by the Finance Secretary under any of the ff. methods:

1. Straight-line method;

2. Declining balance method;

3. Sum-of-the-years digits method; &

4. Any other method prescribed by the Sec. of Finance upon recommendation of the Commissioner.

c. Who may deduct depreciation expense?

In the case of property held by one person for life with remainder to another person

in the case of property held in trust

d. COMPUTATION / methods allowed.

LIMPAN INC., v. COMM.

Facts: Limpan is the owner of several apartment units. CIR assessed deficiency taxes & reduced depreciation expense at the rate stated in the petitioner’s return bec. these were excessive. Petitioner’s witness tried to establish that some of its buildings were old &

out of style, hence they were entitled to higher rates of depreciation.

Held: Findings of the CIR & the CTA should be upheld, the deductions claimed by Limpan were excessive. Depreciation is a question of fact & is not measured by theoretical yardstick but should be determined by a consideration of actual facts.

BASILAN ENTERPRISES INC., v. COMM.

Facts: BEI claimed deductions for the depreciation of its assets up to 1949 on the basis of their acquisition cost. As of Jan. 1950, it changed the depreciable value of said assets by increasing it to conform w/ the increase in cost for their replacement. Accdgly, for its 1950 – 1953 returns, it deducted fr. gross income, the value of depreciations computed on the reappraised value.

Held: The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence a deduction over & above such cost cannot be claimed or allowed. The reason is that deductions fr. gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law. Moreover, the recovery, free of income tax , of an amount, more than the invested capital in an asset, will transgress the underlying purpose of depreciation allowance. For then, what the taxpayer would recover would be, not only the acquisition cost, but also some profit. Recovery in due time through depreciation of investment made is the philosophy behind depreciation, the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.

Illustration:A machine w/ a cost of P50,500 w/c has an

estimated useful life of 10 years & salvage value of P500 after its useful life should have an annual depreciation of P5,000 computed as follows:

COST P50,500

Less – Salvage Value (500)

Amount subject to depreciation P50,000

=======

Annual depreciation will be:

P50,000

10 years = P5,000

** No depreciation will be allowed in the case of property w/c has been amortized to its scrap value & is no longer in use. (Sec. 108, RR 2)

Property not subject to depreciation –

1.Inventories or stock in trade;

APP 73

INCOME TAX REVIEWER 2.Land, apart fr. the improvements or physical

development added to it;

3.Bodies of minerals w/c through the process of removal suffer depletion already subj. to depletion allowance);

4.Automobiles solely for personal purposes;

5.Intangibles, the use of w/c in business or trade is not of limited duration; &

6.Incidental repairs w/c neither materially add up to the value or prolong the life, but keep it in an ordinary efficient operating condition. Property kept in repair may nevertheless, be subject of a depreciation allowance.

e. Agreement as to useful life/ economic life conditions/ restrictions

f. Special types of depreciable properties

i. Properties used in petroleum operations

ii. Properties used in mining operation

iii. Depreciation of properties used by nonresident aliens engaged in trade or business or resident foreign corps.

8. DEPLETION

Depletion is the exhaustion of natural resources like mines & oil & gas wells as a result of production or severance fr. such mines or wells.

Sec. 34. (G) Depletion of Oil and Gas Wells and Mines. -

(1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. 

'Intangible costs in petroleum operations' refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances

for depreciation on such property shall be deductible under this Subsection. 

Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. 

(2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. 

The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. 

'Net income from mining operations', as used in this Subsection, shall mean gross income from operations less 'allowable deductions' which are necessary or related to mining operations. 'Allowable deductions' shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation.

In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. 

The term 'exploration expenditures' means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit. 

The term 'development expenditures' means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. 

(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines.

a. Depletion of oil and gas wells and mines

b. Method allowed: COST DEPLETION

I. When depletion shall equal the capital invested/ no more deduction

APP 74

INCOME TAX REVIEWER II. Treatment of intangible

costs in petroleum products

c. Option to deduct exploration and development expenditures

What are exploration expenditures? development expenditures?

d. Amount deductible by a nonresident alien individual or foreign corporation

Persons entitled to claim depletion allowance (Sec. 3, Rev. Reg. 5-76)

Allowed only to mining entities w/c own an economic interest in mineral deposits

Economic interest – the taxpayer has acquired by investment any interest in mineral & secures it, by any form of legal relationship, such as but not limited to, operating agreement & service contract agreement, income derived fr. the extraction of mineral, to w/c it must look for the return of its capital

A corporation w/c has no capital investment in the mineral deposit does not possess an economic interest merely bec. through a contractual relation it possesses a mere pecuniary advantage derived fr. production.

A resident foreign corporation is entitled only to deduct depreciation allowance for oil & gas wells located w/in the Philippines.

Consolidated Mines V. CTA

Facts: Consolidated is a domestic mining corp. w/c claimed deductions for depletion, the rates of w/c pet’r & the CIR disagreed on.

Held: The Tax Code provides in case of mines for a deduction on depletion - a reasonable allowance not to exceed the market value of the product thereof w/c has been mined & sold during the year for w/c the return was made.

The formula for computing the rate of depletion is:

Cost of mine property

Estimated ore deposit = Rate of depletion per unit of product mined & sold

Cost of mine property :

1. Mine cost

2. Expenses of development before production

As an income tax concept, depletion is wholly a creation of the statute, “solely a matter of legislative grace”, hence the pet’r has the burden of justifying the allowance of any deduction claimed. The company must provide the evidence for its assertion that CIR erred.

9. RESEARCH AND DEVELOPMENT EXPENSE

Sec. 34. (I) Research and Development.-

(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 

(2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses:  

(a) Paid or incurred by the taxpayer in connection with his trade, business or profession;

(b) Not treated as expenses under paragraph 91) hereof; and

(c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. 

In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). 

The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election.  

(3) Limitations on deduction. - This Subsection shall not apply to:  

(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and 

(b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

a. What items are treated as R& D expenses?

b. How deduction is computed

c. Treated as deferred expenses (optional) of some R and D expense

conditions and limitationsd. Limitations on deduction/ R & D

provisions shall not apply to:

APP 75

INCOME TAX REVIEWER i. Any expenditure for the acquisition or

improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and

ii. Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas.

10.CHARITABLE AND OTHER CONTRIBUTIONS

REV. REG. 13-98.

Sec. 34. (H) Charitable and Other Contributions.

(1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. 

(2) Contributions Deductible in Full. - Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; 

(a) Donations to the Government. - Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations. - donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; 

(c) Donations to Accredited Nongovernment Organizations. - the term 'nongovernment organization' means a non profit domestic corporation:

 

(1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual;

(2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; 

(3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and 

(4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. 

Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: 

(i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized.

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized.  

An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds.  

(3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. 

(4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

a. What donations or gifts are deductible?

b. Deduction with limitation

APP 76

INCOME TAX REVIEWER c. Contributions deductible in full.

d. Treatment of the ff. donations:

i. Donations to the gov’t.

ii. Donations to certain foreign institutions or int’l organizations

iii. Donations to accredited non-gov’t. organizations

e. valuation of donation

f. Proof of donation for tax deduction purposes

Roxas V. CTA

Facts: Supra

Held: Contributions to the Christmas Fund of the Pasay City Police & Firemen & the Baguio City Police are not deductible for the reason that Christmas Funds were not spent for public purposes but as gifts to the families of the members of said entities. Under the Tax Code, a contribution to a govt. entity is deductible when used exclusively for public purposes.

Contributions to the Phil. Herald’s fund for Manila’s neediest families were disallowed on the ground that PH is not a corporation or assn. Contemplated in the Tax Code. It should be noted however, that the contributions were not made to the PH but to a group of civic-spirited citizens organized by the PH solely for charitable purposes.

11.CONTRIBUTION TO A PENSION TRUST

Sec. 34. (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1)has not theretofore been allowed as a deduction, and (2) 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. 

Deduction of lump-sum contribution REQUISITES FOR DEDUCTIBILITY

C. ITEMS THAT CANNOT BE DEDUCTED

SEC. 36. Items not Deductible.-

(A) General Rule. - In computing net income, no deduction shall in any case be allowed in respect to

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate; 

This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations which are deductible under Subsection (G) (1) of Section 34 of this Code. 

(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. 

(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly -

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or 

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or 

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or 

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 

(6) Between a fiduciary of a trust and beneficiary of such trust.

1. Personal living and other family expenses

Examples: tuition fees, groceries and other household expense

Sec. 119 Rev. Reg. 2 Personal, living, & family expenses are not deductible.

(1) Insurance paid on a dwelling owned & occupied by a taxpayer is a personal expense & not deductible.

(2) Premiums paid for life for life insurance are not deductible.

In the case of a professional man who –

Rents a property for residential purposes

But incidentally receives his clients, patients, or callers in connection w/ his professional work (his place of business being elsewhere),

no part of the rent is deductible as a business expense.

If, however, he uses part of the house for his office, such portion of the rent as is properly attributed to such office is deductible.

APP 77

INCOME TAX REVIEWER Where the father is legally entitled to the services of his

minor children, any allowances w/c he gives them whether said to be in consideration of services or otherwise, are not allowable salary deductions in his returns of income.

Alimony & an allowance paid under a separation agreement are not deductible fr. gross income.

COLLECTOR VS. JAMIR

Facts: Jamir claimed as ded’n the salary of his driver. The CIR assessed the tax due. CTA allowed 3/4s of the salary to be deducted.

Held: It appears that the driver was used for personal & business purposes. The SC is not inclined to disturb the finding of the court the Jamir used the car “more for business than for personal purposes”.

2. Capital Expenditure

i. Acquisition of asset

ii. Repairs that prolong life and add value

iii. Addition/ improvement on an existing asset

iv. Compare/ differentiate with ordinary expense

Sec. 120 Rev. Reg. 2. Capital expenditure

No deduction fr. gross income may be made –

For any amounts made for the new buildings or for permanent improvements or betterments made to increase the value of the taxpayer’s property, or

For any amount expended in restoring property or in making good the exhaustion thereof for w/c an allowance of depreciation expended for securing a copyright & plates, w/c remain the property of the person making the payments, are investment of capital.

The cost of defending of perfecting title of property, constitutes a part of the cost on the property & is not a deductible expense.

The amount expended for architect’s services is part of the cost of the building.

Commissions paid in purchasing securities are an offset against the selling price.

Expenses of the administration of an Estate, such as –

court costs attorney’s fee & executor’s commissions are chargeable against the “corpus” of the estate &

are not allowable deductions.

Amounts –

to be assessed & placed under an agreement between bondholders or shareholders of a corporation.

to be used in a reorganizing of the corporation,

are investments of capital an not deductible for any purpose in return of income.

In the case of a corporation, expenses for organizations, such as -

incorporation fees

attorney’s fees accountants’ charges, are ordinary capital expenditures,but where such expenditures are limited to purely

incidental expenses, a taxpayer may be charge such item against income in the year in w/c they are incurred.

A holding company w/c guarantees dividend at a specified rate on the stock of the subsidiary corporation for the purpose of –

securing new capital for the subsidiary &

increasing the value of its stockholdings in the subsidiary

may not deduct amounts paid in carrying out this guarantee in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.

Commissioner Vs. Soriano

Facts: The taxpayer had a piece of land in Mla. To carry out a project, it hired an architect as a contractor for pile-driving lumber into the grd. The taxpayer sold the prop. & later claimed as deductible the amt. paid to the architect & service fee for pile-driving.

Held: Expenses constitute capital expenditure w/c the owner/taxpayer was entitled to consider as part of the total cost of its property in det. the amt. of profit it realized fr. the sale. Expenditures for replacements, alterations & improvements/additions w/c either prolong the life of the prop. or increase its value are capital in nature & therefore are part of the cost. Not deductible.

3. Insurance premium payment

When deductible When NOT deductible Insurance premium as fringe benefit

4. Losses between related taxpayers

Sec. 36. (B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly -

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or 

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or 

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with

APP 78

INCOME TAX REVIEWER respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or 

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or 

(6) Between a fiduciary of a trust and beneficiary of such trust.

5. Losses on wash sales

SEC. 38. Losses from Wash Sales of Stock or Securities. -  

(A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 

(B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. 

(C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the non-deductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

Sec. 101 Rev. Reg. 2. Capital losses on wash sales of stock or securities

Losses on sale or exchange of capital assets are allowed to the extent provided in Sec 34 of the Code. If any securities w/c are capital assets become worthless during the taxable year, the loss resulting, therefr. shall be considered as a low fr. the sale or exchange on the last day of such taxable year, of capital losses assets. Losses on “wash sales” of stock or securities are treated in Sec. 33 of Code 1.

6. Illegal expense

Calanoc Vs. Collector

Facts: By authority of a solicitor’s permit, Calanoc financed & promoted a boxing match to solicit contributions for orphans & destitute children. Included in the expenditures was an amt. for police protection.

Held: The expenditure is disallowed as it is illegal. It is a consideration given for the performance of the police of functions required of them to be rendered under the law.

Sec. 34. 1. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a government-owned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback.

OTHERS:i. Protection money

ii. Ransom paid to kidnappers for the release of a corporate officer

iii. Revolutionary tax paid to NPA

D. DEDUCTIONS ALLOWED FOR SPECIAL CORPORATIONS

SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether Domestic or Foreign. -

(A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release. 

(B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income received by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. 

(C) Mutual Marine Insurance Companies. - Mutual marine insurance companies shall include in their return of gross income, gross premiums collected and received by them less amounts paid to policyholders on account of premiums previously paid by them and

APP 79

INCOME TAX REVIEWER interest paid upon those amounts between the ascertainment and payment thereof. 

(D)Assessment Insurance Companies.- Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds.

1. Insurance companies

2. Mutual insurance companies

3. Mutual marine insurance companies

4. Assessment insurance cos.

E. DEDUCTIONS ALLOWED TO INDIVIDUAL TAXPAYERS.

1. Optional standard deduction.

Sec. 34. (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.

in lieu of itemized deductions not exceeding 10% of his gross income What is gross income?

Sec. 27. E. (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

How to avail of the optional deduction Who is entitled?

2. Premium payments on health and/or hospitalization insurance of an individual taxpayer.

Sec. 34. (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - the amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. 

a. Limitation/ ceiling/ conditions for deductions

b. Who is entitled?

F. PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER.

SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -  

(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be allowed a basic personal exemption as follows:

For single individual or married individual judicially decreed as legally separated with no qualified dependents                                              P20,000

For Head of Family                               P25,000

For each married Individual                           P32,000

In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. 

For purposes of this paragraph, the term 'head of family' means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twenty-one (21) years of age, unmarried and not gainfully employed or where such children, brothers or

APP 80

INCOME TAX REVIEWER sisters, regardless of age are incapable of self-support because of mental or physical defect.   

(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of Eight thousand pesos (P8,000) for each dependent not exceeding four (4). 

The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. 

In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed.

For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.  

(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year.

If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. 

If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.  

(D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title.

1. Basic personal exemption

Sec. 2.79 (I) 1. a. Rev. Reg. 2-98.

a. Single individual or

married individual judicially decreed as

legally separated w/ no qualified dependents P20,000

b. Head of family P 25,000

Dependent Sec. 2.79 (B) (1) (d) Rev Reg. 2-98

Benefactors of senior citizens

Single unmarried parent?

c. Each (legally) married individual 32,000

2. Additional exemption for dependents

Sec. 2.79 (I) (1) (b) Rev Reg. 2-98

a. How many dependents are allowed?

b. Who are the qualified dependents? Are senior citizens qualified dependents? Are spurious children covered?

Dependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 21 years of age, unmarried & not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

c. Amount allowed P8,000 each max of 4 dependents

d. Who may claim the additional exemption? Maya single parent claim the deduction?

3. Change of status of the taxpayer and the dependent

marriage death reaching the age of 21 gainfully employed having children

4. personal exemption allowable to nonresident alien individual

reciprocity requirements

VI. CLASSIFICATION OF INCOME TAXPAYERS.

A. GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHILS.

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

APP 81

INCOME TAX REVIEWER (A) A citizen of the Philippines residing therein is taxable

on all income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

B. CORPORATIONS

1. Definition of corp./ corporate taxpayer

Sec. 22. (B) The term 'corporation' shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

PARTNERSHIP : includes gen. partnerships & limited partnerships, whether registered or not, BUT not gen. professional partnerships

JOINT STOCK COMPANIES: constituted when one a group of individuals, acting jointly, establish & operate a business enterprise under an artificial name, w/ an invested capital divided into transferable shares, an elected board of directors, & other corporate characteristics, BUT w/out formal governmental authority.

JOINT ACCOUNTS (CUENTAS EN PARTICIPACION): constituted when one interests himself in the business of another by contributing capital thereto, & sharing in the profits or losses in the proportion agreed upon; not subject to any formality & may be privately contracted orally or in writing.

ASSOCIATIONS: include all orgs. w/c have substantially the same features of a corporation (substantial resemblance in purpose, gen. form & mode of operations.

JOINT VENTURE: commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single project; its duration is limited to the period in w/c the goods are soled or the project is carried on.

Who are large taxpayers?

Revenue Reg. 1-98

Exceptions – general professional partnership

Sec. 22 (B), supra.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

SEC. 73. Distribution of dividends or Assets by Corporations. –

(D)  Net Income of a Partnership Deemed Constructively Received by Partners. - The taxable income declared by a partnership for a taxable year which is subject to tax under Section 27 (A) of this Code, after deducting the corporate income tax imposed therein, shall be deemed to have been actually or constructively received by the partners in the same taxable year and shall be taxed to them in their individual capacity, whether actually distributed or not.

BIR ruling 254-91, 26-11-1991

Empire Stateland & Resources, INC (Empire), a domestic corp. entered into a business tie-up w/ Uniphil Marketing (Uniphil) another domestic corp., whereby both firms agreed to pool their resources together for the purpose of developing & constructing condominium units & selling them to the public. Uniphil was to contribute the lot, materials & labor, while Empire was to supply labor & materials. The development & construction of the units & the eventual sale thereof was to be undertaken & managed by Uniphil Empire Venture (Venture), an entity put up by the contracting parties solely for that venture. Empire will receive 30% of the profits of the Venture while Uniphil will receive 70%. Empire argues that the

APP 82

INCOME TAX REVIEWER respective shares of Uniphil & Empire in the net profits is not subject to income tax, the same having been taxes in the hands of Venture o.w. the same income would be subjected to 35% tax each in the hands of Venture, Uniphil & Empire or a total tax of 70%

ISSUE: What is the tax status of Venture? Is it considered a joint venture (JV) & therefore taxable as a domestic corp.?

What is the tax treatment of the distributive shares of Uniphil & Empire in the respective amount of 70% & 30%?

RULING: To constitute a JV, certain factors are essential:

each party must make a contribution, not necessarily of capital, but by way of services, skill, knowledge, material or money

profits must be shared amount the parties;

there must be a JOINT PROPRIETARY INTEREST, & the right of mutual control over the subject matter of the enterprise;

usually there is a single business TXN rather than a general or continuous TXN

Likewise, a JV was created when 2 corps. while registered & operating separately where placed under one sole management w/c operated the business affairs of said co.'s as though they constituted as single entity thereby obtaining substantial economy & profits in the operation. (Collector vs. BTC)

Thus the Venture w/c has been constituted as a single entity whereby Empire & Uniphil agreed to pool their resources for the dev't of a parcel of land, is a JV w/c is subject to the 35% under Sec. 24 of the Tax Code. However, the shares of Uniphil & Empire from the profits of the JV are NOT SUBJECT to income tax since said profits are in the nature of dividends w/c are not subject to tax under Sec. 24(e).

2. Ordinary partnership as a corporate taxpayer

a. Test whether an entity is a taxable partnership

a partnership no matter how organized

Sec. 22 (B), supra.

Sec. 73 (D), supra.

Ona vs. Commissioner

Facts: When Bonales died, she left her husband & 5 children. The heirs partitioned the estate in such a way that they had a 1/2 undivided interest in 10 lots, 6 houses & an

undetermined amount of damages fr. the Water Damage Commission. Although the project of partition was approved by the court. the property remained undivided & the husband managed the properties. He either sold the property or leased them, & then invested the proceeds in real estate & securities. From these investments, the Onas received income. They did not, however, actually receive their shares in the yearly income as it was left in the hands of their father who invested them in real properties & securities.

Held: The heirs formed an unregistered partnership. From the moment they allowed not only the incomes from their respective shares in the inheritance but even the inherited properties themselves to be used by the husband as a common fund in undertaking several TXN's or in business, w/ the intention of deriving profit to be shared by them proportionally, such act was tantamount to actually contributing such income to a common fund &, in effect, they thereby formed an unregistered partnership w/in the purview of the NIRC.

Gatchalian vs. Collector

Facts: This is case where the pets. contributed to buy a sweepstakes ticket.

Held: The pets. organized a partnership of a civil nature bec. each of them put up money to buy a ticket for the sole purpose of dividing equally the prize w/c they may win, as they did in fact in the amount of Php 50,000. The partnership was not only formed, but also, upon winning the prize, one of the pets., in his capacity as a co-partner, collected the prize. These circumstances repel the idea that the one formed & organized among them was a community of property.

Having organized a partnership, the said entity is one bound to pay the income tax. The tax should not be pro-rated among them & paid individually resulting in their exemption from corporate taxes.

Evangelista vs. Collector

Facts: The pets. (siblings I suppose) borrowed money from their father w/c they used together w/ their own money to buy real properties. Their father was appointed by them to manage their properties w/ full power to lease; collect rents, etc. Then the CIR demanded payment of income tax on corps., real estate dealer’s fixed tax & corporation residence tax for a period of 9 years.

APP 83

INCOME TAX REVIEWER Held: Yes, a partnership was formed. According to the Civil Code (A1767), the essential elements of a partnership are:

an agreement to contribute money, property or industry to a common fund; &

intent to divide the profits among the contracting parties.

The first element is present in this case. The petitioners agreed to contribute to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts & circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate for monetary gain & divide it among themselves, because:

Said common fund was not something they found already in existence. It was not property inherited by them pro-indiviso. They created it purposely. They borrowed a substantial portion thereof in order to establish the common fund.

They invested the same, not merely in one TXN but in a series of TXN.

The properties bought by them were not devoted to residential purposes, or to other personal uses. Instead, they were leased.

For over a decade, these conditions existed.

Pascual vs. Com.

Facts: Pascual & Dragon bought a total of five lots in 2 sales. They then sold these lots. From these sales they earned profits. They paid capital gains tax but the Com. demanded they pay corp. income tax for being an unregistered partnership?

Held: In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, & that they intended to divide the profits among themselves. Respondent commissioner &/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land & became co-owners thereof.

In Evangelista, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not

sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after w/c they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.

b. Unregistered partnership distinguished from Co-ownership for tax purposes.

Obillos. vs. Com.

Facts: Jose Obillos bought two parcels of land w/c he transferred to the names of his children. After a year, the children sold them for a profit, for w/c they paid capital gains tax. The CIR demanded payment of corp. income tax & considered the share of each child as his distributive dividend. This was based on the theory that the children formed an unregistered partnership.

Held: They formed a co-ownership & not a partnership. The Civil Code provides that the sharing of gross returns does not of itself establish a partnership, WON the persons sharing them have a joint or common right or interest in any of the property from w/c the returns are derived. There must be an unmistakable intention to form a partnership or JV.

All co-ownerships are not deemed unreg. partnership. Co-owners who own properties w/c produce income should not automatically be considered partners of an unregistered partnership or a corp. w/in the purview of the income tax law.

In the CAB, they had no such intention. They were co-owners pure & simple. To consider them as partners would obliterate the distinction between co-ownership & partnership. The pets. were not engaged in a JV by reason of that isolated TXN. Their original plan was to divide the lots for residential purposes. If later they found it not feasible to build their residences on the lots bec. of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership w/c was in the nature of things a temporary state.

Reyes vs. Com

APP 84

INCOME TAX REVIEWER Facts: Father & son tandem bought a lot & a building. The building were occupied by tenants. Father & son divided the income coming from the tenants. They even hired an administrator to collect rents. The Com. assessed them corp. income tax, surcharge & compromise for a period of 5 years.

Held: Partnership (Evangelista vs. Coll) applies. However, the difference w/ that case & the CAB is that in the latter a single TXN occurred. But the SC ruled that such minor differentiation does not relieve them from the Evangelista ruling.

Moreover, the case satisfies one of the req’t of partnerships -- an agreement to contribute money, property or industry to a common fund.

c. Tax liability of partnership & partners

Revenue Reg. 1 - 89.

Except as herein otherwise provided, there shall be w/held a creditable income tax at the rates herein specified for each class of payee from the ff. items of income payments to persons residing in the Phils.

Any amount paid or payable periodically or at the end of the taxable year by a gen. professional partnership to the partners, such as-

drawings

advances

sharings

allowances

stipends, etc.

15%,

EXCEPT the amount paid to a partner who is a non-resident alien whether or not engaged in trade or business in the Phils. w/c shall be subject to a final w/holding tax of 30&.

SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

Sec. 73 (D), supra.

d. Joint venture unincorporated/ inc.

BIR Ruling 254-91 supra (Case of Empire Uniphil & the Uniphil Empire JV)

Queries: How is a JV created?

What is the tax treatment of a JV for the purposes of income taxation?

3. Classification of Corporate Taxpayers/ Income Tax Base

a. Domestic (NET WORLDWIDE)

Sec. 22. (C) The term 'domestic,' when applied to a corporation, means created or organized in the Philippines or under its laws.

SEC. 27. Rates of Income tax on Domestic Corporations. –

A. In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied:

1. A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

2. A ratio of forty percent (40%) of income tax collection to total tax revenues;

3. A VAT tax effort of four percent (4%) of GNP; and

4. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.

For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all

APP 85

INCOME TAX REVIEWER business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods' sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof: Provided, that if the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A 'Proprietary educational institution' is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

(C) Government-owned or Controlled-Corporations, Agencies or Instrumentalities. - The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in s similar business, industry, or activity.

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000…………………………. 5%

Amount in excess of P100,000…………….. 10%

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

 Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

 (4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

 (5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.  

(E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

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INCOME TAX REVIEWER (4) Gross Income Defined. - For purposes of applying the

minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

b. Foreign

Sec. (D) The term 'foreign,' when applied to a corporation, means a corporation which is not domestic.

SEC. 25. Tax on Nonresident Alien Individual. –

(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.

(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarter of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer;

interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:  

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%.  

(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or

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INCOME TAX REVIEWER branch offices in the Asia-Pacific Region and other foreign markets.

(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.

Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.

i. Resident (NET FR. SOURCES W/IN ONLY)

Sec. 22 (h). The term “resident foreign corporation,” applies to a foreign corporation engaged in trade or business w/in the Philippines.

Com. vs. BOAC

Facts: Supra

Held: In order that a foreign corp. may be regarded as doing business w/in a state, there must be continuity of conduct & intention to establish a continuous business, such as the appointment of a local agent & not one of a temporary character. BOAC, although it does not operate any airplane in the Phils., is a resident foreign corp. It maintains a general sales agent in the country w/c is engaged in selling & issuing tickets, receiving fare, etc.- activities in the exercise of the functions normally incident to, & are in progressive pursuit of, the purpose & object of its organization as an international carrier.

ii. Non-resident (GROSS FR. SOURCES W/IN ONLY)

Sec. 22 (I). The term “non-resident foreign corp.” applies to a foreign corporation NOT engaged in trade or business w/in the Philippines.

Marubeni vs. Com.

Facts: Marubeni is a Japanese corp. duly licensed in the Phils. to do business. M had equity investments w/ Atlantic, Gulf & Pacific. A,G & P declared & paid cash dividends to M by directly remitting the cash dividend to M’s Tokyo office net of the 10% final intercorporate dividend tax & 15% branch profit remittance tax. M argues that following the principal-agent relationship theory, it is a resident foreign corp., subject only to the 10% final tax on dividends. It argues that must be considered a resident foreign corp. because it is engaged in business in the Phils. through its Phil. branch. It reasons that the Phil. branch & the Tokyo head office are one & the same corp. entity, whoever made the investment in A,G, & P.

Held: The gen. rule that a foreign corp. is the same juridical entity as its branch office in the Phils. cannot apply here. This rule is based on the premise that the business of the foreign corp. is conducted through its branch office, following the principal-agent theory. It is understood that the branch becomes its agent here. So that when the foreign corp. transacts business independently of its branch, the prin.-agent relationship is set aside. The TXN becomes one of the foreign corp., not of the branch. Consequently, the taxpayer is the foreign corp., not the branch or resident foreign corp. Corollarily, is the business TXN is conducted through the branch office the latter becomes the taxpayer & not the foreign corp.

In the CAB, the investment was made for the purposes peculiarly germane to the conduct of the corporate affairs of M, but certainly not of the branch in the Phils. It is thus clear that M, having made the independent investment attributable only to the head office, cannot now claim the increments as ordinary consequence of its trade or business in the Phils.

Com. v. Procter & Gamble 204 S 277

Facts: P&G Phil’s declared dividends payable to its parent company & sole stockholder, P&G USA; fr. w/c the 35% w/holding tax at source was deducted. P&G Phil’s claimed a refund based on 24(b) (1) allowing a reduced rate at 15% if the country of the domicile of the foreign stockholder corporation “shall allow” such corp. a tax credit for taxes deemed paid in the Phil’s.

Held: Sec. 24(b)(1) does not require that the US must give a deem paid tax credit for the dividend tax waived by the Phil. to make the

APP 88

INCOME TAX REVIEWER preferred rate applicable. the law only requires that the US shall allow tax credit in an amount equivalent to 20 % percentage points. the court interpreted the US Tax Code & ruled that the US allow such tax credit.

A requirement relating to administrative implementation is not property imposed as a condition for the applicability, as a matter of law, of a particular rate. Nor an interpretation of a tax statute that produces a revenue flow for the gov’t is not, for that reason alone, nec. the correct reading of the statute.

Com. v. Procter & Gamble 160 S 560

Facts: P&G- Phil. declared dividends in favor of P&G USA, w/c was subjected to the 35% tax in 1975. In 1977, P%G Phil. sought a refund of 20% invoking the tax sparing credit provision under Sec. 24(b) of NIRC.

Held: P&G Phil’s is not entitled to the refund. It is merely a w/holding agent of the gov’t. the real party to file the claim should have been P&G USA. P&G Phil. also failed to meet certain req’ts in order that the dividends received by its non-resident for. com. may be subj. to preferential tax rate of 15%.

1. It did not show actual amount credited to P&G USA by US gov’t against the income tax due on the dividends received by it fr. the Phil’s.

2. Failed to present ITR of mother co. when dividends were received.

3. Failed to submit a duly authenticated doc. showing that the US gov’t credited the P&G USA the 20% tax deemed paid in the Phil’s.

Wander Philippines

Facts: Wander Phil’s is a domestic corp. organized under Phil. laws. It is wholly owned subsidiary of the Glaro SA ltd, a Swiss Corp. not engaged in trade or business in the Phil’s. It claimed a preferential tax rate on dividends remitted to Glaro. Under Swiss law, no tax is imposed on dividends received by the Swiss Corp. fr. corp. domiciled in foreign countries.

Held: While it is true that the claims for refund are construed strictly against the claimant, nevertheless, the fact that Switzerland did not impose any tax on the dividends received by Glaro should be considered as a full satisfaction of the given condition.

Domestic

sources w/in sources w/o

Net Income

tax base

Foreign

Sources w/o sources w/in

resident non-resident

net income gross income

c. Branch & Subsidiary of a Foreign Corporation for income tax purposes

Marubeni v. Commissioner

Facts: Marubeni is a foreign corp. organized under the laws of Japan. It invested in a construction business in the Phil’s. in AG&P. AG&P remitted the profits to Marubeni w/holding the 15% profit remittance tax. The CIR ruled that the profit remitted to Marubeni shld. not be subject to the 15% profit remittance tax bec. only profits remitted abroad to its head office w/c are effectively connected w/ its trade or business in the Phil’s. are subj. to the tax. Marubeni is now claiming a refund of the 15% tax paid.

Held: Marubeni is not liable to pay the 15% profit remittance tax bec. the profits remitted to it were not income effectively connected w/ its business in Japan. ( Note: MC was liable to pay other kind of tax, as it derived income fr. source w/in the Phil’s. but not a profit remittance tax).

C. INDIVIDUAL TAXPAYERS

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from

APP 89

INCOME TAX REVIEWER sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

1. Citizens

a. Resident (NET from SOURCES WITHIN AND WITHOUT)

b. Non-resident citizen (NET from sources WITHIN ONLY)

Sec. 22. (E) The term 'nonresident citizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

Sec. 23 (B). A nonresident citizen is taxable only on income derived from sources within the Philippines;

Revenue Reg. 1-79. Regulations Governing the taxation of non-resident citizens

Sec. 2. Who are considered as non resident citizens. The term “non-resident citizen”-

means one who establishes to the satisfaction of the CIR the fact of his physical presence abroad w/ the definite intention to reside therein &

shall include any Filipino who leaves the country during the taxable year as :

1. Immigrant one who leaves the Phils. to reside abroad as an immigrant for w/c a foreign visa as such has been secured.

2. Permanent EE

one who leaves the Phils. to reside abroad for employment on a more or less permanent basis.

2. Contract one who leaves the Phils. on

worker account of a contract of employment w/c is renewed from time to time w/in or during the taxable year under such circumstances as to require him to be physically present abroad most of the time during the taxable year

(physically present abroad most of the time during the taxable year = outside of the Phils. for not less than 180 days during such taxable year

Sec. 3. Proof of Intention

Sec. 4. Manner of filing returns. xxx

(1) What to include as gross income. The gross income of a non-resident citizen derived from sources outside of the Phils. includes all income enumerated under Sec. 29 of NIRC, WON such income is exempted from the income tax in the foreign country where it was derived.

2.) Rate of tax.

Y $6000 1%

$6000 Y $20,000

$60 plus 2% if excess over $6000

Y$20,000 $340 plus 3% of excess over $20,000

(3) Computation of gross income

Gross income less:

Personal exemptions ($2000 if single or married but legally separated)

total amt. of national income tax actually paid to the national gov’t of the foreign country of his residence.

= GROSS ADJUSTED INCOME

Conwi vs. IAC

Facts: Petitioners are employees of Procter & Gamble-Phils. & were assigned to other subsidiaries of P & G in other countries. The question is : what exchange rate should be used. Cir: prevailing free market exchange rate. Pets: par value of the peso as per CB circular:

Held: For the proper enforcement of the NIRC, the Sec. of Finance is empowered to promulgate all needful rules & regulations to effectively enforce its provisions. Pursuant to this authority, RMC 7-71 & 41-71 were issued to provide a uniform rate of exchange for $ & Php for internal tax revenue purposes.

Pets. argue that since there were no remittances & acceptances of their salaries & wages in $ into Phils. they are exempt from the coverage of such circulars. Pets. forge that they are citizens of the Phils. & their

APP 90

INCOME TAX REVIEWER income, w/in or w/o & in this case wholly w/o, are subject to income tax.

c. Filipino overseas workers (NET from SOURCES WITHIN ONLY)

Sec. 23. (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

2. Aliens (not Filipino citizens)

a. Resident alien (NET from SOURCES WITHIN ONLY)

Sec. 22. (F) The term 'resident alien' means an individual whose residence is within the Philippines and who is not a citizen thereof.

b. Non-resident alien

Sec. 22. (G) The term 'nonresident alien' means an individual whose residence is not within the Philippines and who is not a citizen thereof.

i. Engaged in trade or business (NET from SOURCES WITHIN ONLY)

180 day test

Sec. 25. (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

ii. not engaged in trade or business (GROSS from SOURCES WITHIN ONLY)

Sec. 25. (B) supra.

iii. Special Aliens

employed by:1. regional HQ’s or area HQ’s of multinational

corps.

2. off-shore banking units

3. petroleum service contractors.

D. Fiduciary Taxpayers: Estates & Trusts

1. Definition of taxable estate & trust/ exception

Sec. 22. (J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator or any person acting in any fiduciary capacity for any person.

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the income of estates or of any kind of property held in trust, including:

(1) 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 of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.  

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.  

(C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable trusts) and Section 64 (relating to income for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax provided in this Section computed on such

APP 91

INCOME TAX REVIEWER consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the several trusts.

 

SEC. 61. Taxable Income. - The taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions mentioned in Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries.

2. Taxable income of fiduciary taxpayers

SEC. 61. Taxable Income. - supra.

3. Trust exempt from income tax

SEC. 60. Imposition of Tax. -

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1) if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee.  

Commissioner v. CA

Facts: Castaneda retired fr. the gov’t service in 1982. He received benefits including terminal benefits pay fr. w/c the CIR w/held income tax. Castaneda filed a claim for refund contending that the cash equivalent of his terminal leave is exempt fr. tax.

Held: The terminal leave pay received by a gov’t official or employee is not subj. to w/holding income tax. In the exercise of sound policy. the gov’t encourages unused leaves to be accumulated. The gov’t recognizes that for most public servants, retirement pay is always less than generous. It is not a part of the gross salary or income of the gov’t official but a retirement benefit not subj. to income tax.

4. Deductions allowed

SEC. 62. Exemption Allowed to Estates and Trusts. - For the purpose of the tax provided for in this Title, there shall be allowed an exemption of Twenty thousand pesos (P20,000) from the income of the estate or trust.

5. Revocable trust

SEC. 63. Revocable trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested (1) in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor.

6. Income for benefit of grantor

SEC. 64. Income for Benefit of Grantor.-

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or (2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor, or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the discretion of the grantor,

APP 92

INCOME TAX REVIEWER either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.

E. REGISTRATION and TAX IDENTIFICATION NO. of taxpayers

Sec. 236 (A) Requirements. Every person subject to any internal revenue tax shall register once w/ the appropriate Rev. Dist. Officer:

1. Within 10 days fr. date of employment, or

2. On or before the commencement of the business, or

3. Before payment of any tax due, or

4. Upon filing of a return, statement or declaration as required in this Code.

The registration shall contain the taxpayer’s name, style, place of residence, business, and such other information as may be required by the commissioner in the form prescribed therefor.

A person maintaining the head office, branch or facility shall register w/ the RDO having jurisdiction over the head office, branch or facility. For purposes of this Section, the term facility may include but not be limited to sales outlets, places of production, warehouses or storage places.

Sec. 236 (J). Supplying of TIN. Any person required under the authority of this Code to make, render or file a return, statement or other document shall be supplied with or assigned a TIN which shall indicate in such return, statement or doc filed w/ the BIR for his proper identification for tax purposes, and w/c shall indicate in certain docs, such as, but not ltd. to, the ff.:

1. sugar quedans, refined sugar release order or similar instruments;

2. domestic bills of lading;

3. docs to be registered w/ the Register of Deeds or Assessor’s office;

4. registration cert. of transportation equipment by land, sea or air;

5. docs to be registered w/ the SEC;

6. bldg. construction permits;

7. application for loan w/ banks, financial institutions, or other financial intermediaries;

8. application for mayor’s permit;

9. application for business license w/ the DTI; &

10. such other docs w/c may hereafter be required under rules and regs to be promulgated by the Sec. of Finance, upon recommendation of the Commissioner.

In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance w/ subsection A hereof & a new TIN shall be supplied in accordance w/ the provision of this Sec.

In the case of a nonresident decedent, the exec or admin of the estate shall register the estate w/ the RDO where he is registered; Provided, however, That in case such exec or admin is not registered, registration of the estate shall be made w/ … & the TIN supplied by the RDO having jurisdiction over his legal residence.

Only one TIN shall be assigned to a taxpayer. Any person who shall secure more than one TIN shall be criminally liable x x x.

Rev. Memo. Circular 63-91. Issuance of the new TIN to taxpayers and its use on documents and receipts.

Use of new TIN. Only persons required to make, render, or file a return, statement or document w/ the BIR shall be supplied w/ or assigned a TIN to be indicated on such documents. In addition to the persons enumerated in RMO 23-91, Filipinos who are immigrants to other countries may apply for the issuance of a TIN.

The new TIN shall replace the existing

TAN

VAT reg. numbers

non-VAT reg. numbers &

w/holding tax agent identification numbers.

Therefore, only the TIN shall be reflected on all documents, papers, &/or records that previously required the indication/reflection of any of the aforementioned numbers.

VII. EXEMPTION AND APPLICABLE TAX RATES.

A. Corporations

1. TAX-EXEMPT CORPS.

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

(C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members;

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person;

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

APP 93

INCOME TAX REVIEWER (J) Farmers' or other mutual typhoon or fire insurance

company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

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

REVIEW: EXEMPTIONS UNDER THE CONSTITUTION

Sec. 28 (3) Art. VI . Charitable institutions, churches, & parsonages or convents appurtenant thereto, mosques, non-profit cemeteries & all lands, buildings & improvements actually, directly & exclusively used for religious, charitable or educational purposes shall be exempt form taxation.

Sec. 4 (3,4) Art. XIV. All revenues & assets of non-stock non-profit educ. institutions used A,D,E for educ. purposes shall be exempt fr. taxes & duties. X X X

Proprietary educ. institutions including those cooperatively owned may be entitled to such exemptions subject to the limitations provided by law…

Subject to conditions prescribed by law, all grants, endowments, donations or contributions used A,D, E, for educ, purposes shall be exempt fr. tax.

BIR RULINGS

(173 – 88) Non-stock non-profit educ. institutions, they are exempted fr. internal revenue taxes & customs duties, in appropriate cases imposed by natl. govt. on all revenues & assets used A,D,E, for educational purposes.

Exempt fr. tax – tuition, matriculation & other similar fees; income fr. bank deposit interests & money market placement incident to school operations; canteen owned & operated by the school as ancillary activity & located w/in the school premises; value-added tax on sale of books, school supplies, uniform, & other school related items & sale of misc. school items like car stickers.

Not exempt fr. tax – income fr. trade, business or other activity not related to the exercise of its educational purpose or function (i.e. school canteen operated by a concessionaire)

(171 – 88 ) A technical/vocational school accepting jobs fr. the public in order to fully utilize its machines, income derived is not exempt fr. tax.

(105 – 91) The National Tobacco Admin., an attached agency of the Dept of Agriculture is not exempted fr. paying income tax on gains to be derived fr. the sale of

its properties w/c are no longer needed for its operations. (It is not among those specifically exempted by the Tax Code, Sec. 26) As such it is liable to the 5% creditable w/holding tax based on gross selling price or total amount of consideration or its equivalent paid to the NTA as seller, gross selling price being, sale price on the document, the fair market value, or zonal value w/cever is higher.

(042 – 91) The amount of tax to be paid by a non-resident foreign corporation (non-stock foundation, duly organized under the laws of the State of Hawaii) , not engaged in business in the Philippines as to its income derived fr. Phil. currency bank deposit = shall be 35% of gross income received during the taxable year fr. all sources w/in the Philippines such as interest, dividends, rents, royalties etc. except capital gains.

However, under the RP-US Tax Treaty, Art. 12; Interest derived by a resident of the Contracting States fr. sources w/in the other Contracting State shall not be taxed by the other CS at a rate in excess of 15 % of the gross amount of such interest. Thus, said income fr. its Phil, currency bank deposit is to be taxed at 15% of gross income.

(011 – 91) Municipal corporation is not exempt form tax on interest income fr. time & savings deposits. PD 1931, (6/11/84), has w/drawn all the tax & duty privileges, including preferential tax treatment of all units of government; the Natl. govt., all its agencies & political subdivisions as well as GOCCs. Also EO 93 (3/10/87) w/drew all tax & duty incentives granted to govt., & private entities subject to certain exceptions. With tax exemption laws strictly construed, the burden is on the claimant to prove he is w/in the terms of the statute. In the absence of a clear grant of exemption, the Mun. is subject to 20% final w/holding tax on its interest income on bank deposits.

Hospital de San Juan de Dios v. Pasay City

Facts: Pet’r paid under protest electrical & inspection fees allegedly due the City by virtue of an Ordinance that was passed. The hospital claimed that as a charitable institution, it was exempt fr. the payment of the inspection fees provided in the ordinances. But the Mayor refused to issue a building permit if the said fees were not paid.

Held: The lower court erred in not considering the hospital as a charitable institution & thus exempt fr. the payment of the fees under Sec. 5 of the said ordinance. The articles of incorporation of the hospital show that it has no capital stock & that no part of the net income inures to the benefit of any individual. A ruling by the Workmen’s Compensation Commissioner said it is a charitable institution exempt fr. the scope of the Act. Also, the hospital cashier attested that it maintains 2 free wards at 60 beds each & 6 free beds at the pediatric ward. Thus there is sufficient evidence that the hospital doles out charity & should therefore be exempt.

APP 94

INCOME TAX REVIEWER Note: The fact that the hospital is charging fees for paying beds does not make it lose its character as a charitable institution if the same were used to partly finance the expenses of the free wards maintained by the hospital. The mere charging of medical & hospital fees fr. those who could afford to pay does not make an institution one established for profit or gain.

1. Minimum Corporate Income Tax On Domestic & Resident Foreign Corps. (MCIT)

Sec. 27. (E) Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and

employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months covered by the new rates within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option to be taxed at fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A).

(2) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection.

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as defined hereunder:  

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

(b) International Shipping. - 'Gross Philippine Billings' means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.  

APP 95

INCOME TAX REVIEWER (4) Offshore Banking Units. - The provisions of any law to

the contrary notwithstanding, income derived by offshore banking units authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code: provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.

(6) Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. 

(a) Regional or area headquarters as defined in Section 22(DD) shall not be subject to income tax. (b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax of ten percent (10%) of their taxable income.  

 (7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -  

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided, however, That interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.

(b) Income Derived under the Expanded Foreign Currency Deposit System. - Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten percent (10%) of such income.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange. - A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the

sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange:

Not over P100,000………………………… 5%

On any amount in excess of P100,000……. 10%

(d) Intercorporate Dividends. - Dividends received by a resident foreign corporation from a domestic corporation liable to tax under this Code shall not be subject to tax under this Title.

REVENUE REGULATION 9-98.

a. When imposed

Sec. 2.27 (E) (1) RR 9-98

Conditions:

beginning on the 4th taxable year immediately ff. the year in w/c such corp. commenced its business operations,

when the min income tax is greater than the tax regular tax

Specific rules:

Sec. 2.77 (E) (5) RR 9-98.

b. tax rate – 2% of gross income as of the end of the taxable year

Sec. 27 (E). (4) Gross Income Defined. - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of 'goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, 'cost of services' shall include interest expense.

“normal tax rate” defined in Sec. 2.27 (E) (1) RR 9-98

APP 96

INCOME TAX REVIEWER c. Carry forward of excess min tax –

for the 3 immediately succeeding taxable years.

Sec. 27 E. (2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

See illustration in RR 9-98

d. Relief fr. the MCIT

Sec. 27 (E) (3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.

When corp. suffers losses on account of prolonged labor dispute,

Or because of force majeure, Or because of legit business reverses.

e. Exceptions:

Sec. 2.27 (E) (8) RR 9-98

Sec. 2.28 (A) (2) RR 9-98

3. IMPOSITION OF IMPROPERLY ACCUMULATED EARNINGS TAX.

a. Gen. rule

SEC. 29. Imposition of Improperly Accumulated Earnings Tax. –

(A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

b. Tax rate: 10% of the improperly accumulated taxable income

c. When applicable

Sec. 29. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. -

(1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:  

(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and

(c) Insurance companies.

(d) Exceptions.

Publicly-held corps., Banks and other nonbank financial

intermediaries; and Insurance companies.

e. Evidence of purpose to avoid income tax

f. Evidence to determine reasonable needs of business

g. Improperly accumulated taxable income means taxable income adjusted by:

Income exempt fr. tax, Income excluded fr. gross income; Income subject to final tax; & The amount of net operating loss carry-over

deducted;

And reduced by the sum of:

Dividends actually or constructively paid; and Income tax paid for the taxable year.

F. INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX

1. Senior citizens

RA 7432.

Sec. 5 The gov’t shall provide the ff. assistance to those caring for & living w/ the senior citizen:

a) the senior citizen shall be treated as dependents provided in the NIRC & as such, individual tax[payers caring for them, be they relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned.

APP 97

INCOME TAX REVIEWER b) Ind. or non-governmental institutions establishing

homes, residential communities or retirement villages solely for the senior citizens shall be accorded the ff.:

1. realty tax holiday for the first 5 years starting fr. the first year of operation;

2. Priority in the bldg. &/ or maintenance of prov. or mun. roads leading to the aforesaid home, res. com. & retirement village.

Rev. Reg. 2-94 §7. A qualified senior citizen living w/ & taken care of by a benefactor whether related to him or not, shall be treated as a personal exemption of P12,000 as head of the family.

For the purpose of claiming personal exemption as head of the family w/ dependent senior citizen, the identification card number issued by the OSCA (Office for Senior Citizens Affairs) shall be indicated in the Income Tax Return to be filed by the benefactor who will be granted the exclusive right to claim him as dependent for tax purposes.

Caring for a dependent senior citizen shall not, however, entitle the benefactor to claim additional exemption allowable to a married woman or head of a family w/ qualified dependent children under Section 29 (l) 2.

In Short: Senior citizen as a qualified dependent to enable “single” benefactor to claim exemption as head-of-the-family.

2. Exemptions granted under International Agreements and tax treaty

Reagan v. Com,: supra

Com. v. Robertson

Facts: The Robertsons are Phil. born US citizens working in the US bases in Subic. They are claiming exemptions under the RP US Mil. Bases Agreement of 1947 fr. income tax. The BIR ruled that the Robertsons are not entitled to the exemption as they are born in the Phil’s.

Held: The Robertsons are exempt fr. taxation by virtue of the treaty. In order to avail oneself of the tax exemption under the RP US mil. Bases Agreement: he must be a national of the US employed in connection w/ the const., maintenance, operation or defense of the bases residing in the Phil’s. by reason of such employment & the income derived is fr. the US Gov’t. The obli. to fulfill in GF a treaty engagement requires that the stipulations be observed in their spirit as well as accdg. to their letter & that what has been promised be performed w/o evasion or subterfuge.

VIII. FILING OF TAX RETURN/ PAYMENT OF TAX/ COMPLIANCE REQUIREMENTS.

A. INDIVIDUAL.

Sec. 2.83 (4) RR 2-98

SEC. 51. Individual Return. -

(A) Requirements. -

(1)  Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.  

(2) The following individuals shall not be required to file an income tax return;

(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and

(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

 

(3) The forgoing notwithstanding, any individual not required to file an income tax return may nevertheless be required to file an information return pursuant to rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(4) The income tax return shall be filed in duplicate by the following persons:

(a) A resident citizen - on his income from all sources;

(b) A nonresident citizen - on his income derived from sources within the Philippines;

(c) A resident alien - on his income derived from sources within the Philippines; and

(d) A nonresident alien engaged in trade or business in the Philippines - on his income derived from sources within the Philippines.

 

(B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the

APP 98

INCOME TAX REVIEWER Commissioner.  

(C) When to File. -

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.  

(D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year.  

(E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax.

 (F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.  

(G) Signature Presumed Correct. - The fact that an individual's name is signed to a filed return shall be prima facie evidence for all purposes that the return was actually signed by him.

1. Individual taxpayers

SEC. 51. Individual Return. -

(A) Requirements. -

(1)  Except as provided in paragraph (2) of this Subsection, the following individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of profession in the Philippines.  

(2) The following individuals shall not be required to file an income tax return;

(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in

business or practice of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return: Provided, further, That an individual whose compensation income derived from sources within the Philippines exceeds Sixty thousand pesos (P60,000) shall also file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this Code; and

(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

a. Required to file

b. Exempt fr. filing return

2. Filing of return by husband & wife/ consolidated but computing separately

Sec. 51. (D) Husband and Wife. - Married individuals, whether citizens, resident or nonresident aliens, who do not derive income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the Bureau for purposes of verification for the taxable year.  

Sec. 2.83 (40 (C) RR 2-98

3. When and where to file regular/ special return/ annual adjusted return/ quarterly returns

Sec. 51. (B) Where to File. - Except in cases where the Commissioner otherwise permits, the return shall be filed with an authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner.  

(C) When to File. -

(1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.

(2) Individuals subject to tax on capital gains;

(a) From the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under Section 24(c) shall file a return within thirty (30) days after each transaction and a final consolidated return on or before April 15 of each

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INCOME TAX REVIEWER year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D) shall file a return within thirty (30) days following each sale or other disposition.

SEC. 74. Declaration of Income Tax for Individuals. - 

(A)  In General. - Except as otherwise provided in this Section, every individual subject to income tax under Sections 24 and 25(A) of this Title, who is receiving self-employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April 15 of the same taxable year. In general, self-employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident Filipino citizens, with respect to income from without the Philippines, and nonresident aliens not engaged in trade or business in the Philippines, are not required to render a declaration of estimated income tax. The declaration shall contain such pertinent information as the Secretary of Finance, upon recommendation of the Commissioner, may, by rules and regulations prescribe. An individual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.

(B)  Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed.

(C)  Definition of Estimated Tax. - In the case of an individual, the term 'estimated tax' means the amount which the individual declared as income tax in his final adjusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this Title against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any interval of installment payment dates.

Revenue Regulation 7-93 Re: Filing of quarterly return & payment of income tax quarterly by self-employed taxpayers

Sec. 1 Self-employment income refers to income from the practice of profession or conduct of trade or business carried on as a sole proprietor or by general partnership of which he is a member, taxable under SNITS.

Sec. 2 A return of summary declaration of gross income and deductions for each of the first 3 quarters of the calendar year, and a final or adjustment return shall be filed by the individual.

Sec. 3 This is lieu of the filing of a declaration of estimated income for the current taxable year and the payment of estimated tax under Sec. 67 NIRC.

The tax returns shall be filed on or before:

First quarterly return : May 15 of the current year

Second quarterly return : August 15 of the current year

Third quarterly return : Nov. 15 of the current year

Final return : April 15 of the following year

Sec. 5 To determine the taxable income to be reported in the quarterly returns, the gross income and deductions shall be computed on a cumulative basis. The gross income to be reported are those subject to tax under Sec. 21 (f) NIRC. The deduction shall be computed on a cumulative basis. The gross income to be reported are those subject to tax under Sec. 21 (F) NIRC. The deductions that shall be allowed for the first 3 quarters shall not include the amount for the personal and additional exemptions of the individual. It is only in the last quarter when these amounts for exemptions can be claimed as deduction.

Income tax due every quarter shall be computed in accordance with Sec. 21 (f) based on the cumulative taxable income for the quarters. The amount if income tax to be paid shall be the balance of the income tax after deducting therefrom the total quarterly tax previously paid and any taxes withheld.

Any excess of the total quarterly payment and taxes withheld over the income tax computed in the final return shall at the option of the taxpayer, either be (1) issued a tax refund or tax credit certificate, or (2) treated as a credit for the succeeding year.

Revenue Regulation 14-93 payment of taxes by checks & banks debit memo

Sec. 2 “Payment of the internal revenue taxes amounting to P10,000 or more shall be made in check or bank debit memos. However, payment for capital gains tax and creditable withholding tax by individuals on sales or transfers of real property classified as capital assets as well as doc stamp tax shall be made only by or through Manager’s or Cashier’s check or BDM regardless of amount. Provided, that, in the case of check payment, the taxpayer shall issue a separate check for each kind and nature of tax to be paid. If the payment is through a BDM, the kind and nature of the tax to be paid should also be separately identified by the bank and reflected in its reports.

Only checks specially issued and drawn for credit to BIR and collectible within the local clearing facilities of the CB, the Phil. Clearing House Corp., other established clearing channels may be accepted as payment for national internal revenue taxes. However, the following checks are not acceptable:

a) Accommodation checks - issued/drawn by a party other than the taxpayer except the following:

1. Manager’s or cashier’s checks.

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INCOME TAX REVIEWER 2. Checks drawn against joint or multiple accounts for

the payment purposes by anyone of them or either himself or in behalf of other members thereof.

3. Checks issued by either of the spouses to pay the tax liability of anyone of them.

4. Checks issued by a parent for the tax liability of his/her child or vice-versa.

5. Checks drawn by a corp./partnership for the tax liability of its officers/partners only; and

6. Other special; arrangements duly approved by the BIR.

b) Out of town checks - drawn on banks outside the local area coverage of the CB? PCHC clearing house

c) Stale checks - dated more than 6 months prior to presentation

d) postdated checks

e) unsigned checks; and

f) checks with unauthorized erasure/alternations

Sec. 3 “…Checks, including manager’s or cashier’s checks, shall be made payable to the BIR and parenthetical reference to the payor and the kind of tax to be paid.”

4. Income of minor children and disabled

Sec. 51. (E) Return of Parent to Include Income of Children. - The income of unmarried minors derived from properly received from a living parent shall be included in the return of the parent, except (1) when the donor's tax has been paid on such property, or (2) when the transfer of such property is exempt from donor's tax.

(F) Persons Under Disability. - If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property, the principal and his representative or guardian assuming the responsibility of making the return and incurring penalties provided for erroneous, false or fraudulent returns.

5. General professional partnership

SEC. 55. Returns of General Professional Partnerships. - Every general professional partnership shall file, in duplicate, a return of its income, except income exempt under Section 32 (B) of this Title, setting forth the items of gross income and of deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN), addresses and shares of each of the partners.  

6. Fiduciary taxpayers: Estate and trust

7. Payment of tax

SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -

(A) Payment of Tax. -

(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time the return is filed. In the case of tramp vessels,

the shipping agents and/or the husbanding agents, and in their absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due.

(2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties.

(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return prescribed therefor is filed by the person liable thereto: Provided, That if the seller submits proof of his intention to avail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be required : Provided, further, That in case of failure to qualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subject to the penalties prescribed under applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax, submits such proof of intent within six (6) months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon verification of his compliance with the requirements for such exemption.

"In case the taxpayer elects and is qualified to report the gain by installments under Section 49 of this Code, the tax due from each installment payment shall be paid within (30) days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid.  

(B) Assessment and Payment of Deficiency Tax. - After the return is filed, the Commissioner shall examine it and assess the correct amount of the tax. The tax or deficiency income tax so discovered shall be paid upon notice and demand from the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term 'deficiency' means:

(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned or otherwise repaid in respect of such tax; or

(2) If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously

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INCOME TAX REVIEWER abated, credited returned or otherwise repaid in respect of such tax.

Installment payment special returns

B. Corporation.

1. Filing quarterly returns/ final adjusted return

SEC. 52. Corporation Returns. -

(A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer.

(B) Taxable Year of Corporation. - A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47 of this Code.

(C) Return of Corporation Contemplating Dissolution or Reorganization. - Every corporation shall, within thirty (30) days after the adoption by the corporation of a resolution or plan for its dissolution, or for the liquidation of the whole or any part of its capital stock, including a corporation which has been notified of possible involuntary dissolution by the Securities and Exchange Commission, or for its reorganization, render a correct return to the Commissioner, verified under oath, setting forth the terms of such resolution or plan and such other information as the Secretary of Finance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of Dissolution or Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.

(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in the Local Stock Exchange. - Every corporation deriving capital gains from the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under Sections 24 (c), 25 (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30) days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth (15th) day of the fourth (4th) month following the close of the taxable year.

 

SEC. 53. Extension of Time to File Returns. - The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income (or final and adjustment returns in case of corporations), subject to the provisions of Section 56 of this Code.  

SEC. 54. Returns of Receivers, Trustees in Bankruptcy or Assignees. - In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as such organization is hereinbefore required to make returns, and any tax due on the income as returned by receivers, trustees or assignees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody or control.

SEC. 75. - Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year.

 

SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:

(A)Pay the balance of tax still due; or

(B)Carry-over the excess credit; or

(C)Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

 

SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

(A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.

(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the

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INCOME TAX REVIEWER fourth (4th) month following the close of the fiscal year, as the case may be.

(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

SEC. 47. Final or Adjustment Returns for a Period of Less than Twelve (12) Months.

(A) Returns for Short Period Resulting from Change of Accounting Period. - If a taxpayer, other than an individual, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adjustment return shall be made for the period between the close of the last fiscal year for which return was made and the following December 31. If the change is from calendar year to fiscal year, a separate final or adjustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adjustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

(B) Income Computed on Basis of Short Period. - Where a separate final or adjustment return is made under Subsection (A) on account of a change in the accounting period, and in all other cases where a separate final or adjustment return is required or permitted by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adjustment return is made.

2. When and where to file

SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

(A)Place of Filing. -Except as the Commissioner other wise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required I Section 76 shall be filed with the authorized agent banks or Revenue District Officer or Collection Agent or duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept.

(B)Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.

(C)Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the declaration or return is filed in a manner prescribed by the Commissioner.

Com. v. TMX Sales

Facts: TMX filed its quarterly return in the first quarter of 1981 & paid the income tax due thereon. However, in its Annual Income Tax filed for year ended Dec. 31, 1981, it declared a net loss. TMX is now claiming a refund on the tax it paid during the first quarter of 1981. The CIR denied the same on the ground that the claim is now already barred considering that two years have already elapsed between the time of payment, May, 15, 1981 & the filing of the claim, March 14, 1984.

Held: the two year prescriptive period commenced fr. the date of filing the final annual return on Apr. 15, 1982, not fr. the filing on May 15, 1981. The audit is to be conducted yearly, it is the final adjusted return where the figures of the gross receipts & deductions have been audited & adjusted that is truly reflective of the results of the operations of a business enterprise. Thus, it is only when the adjustment return covering the whole year is filed that the taxpayer would know whether a tax is still due or refund can be claimed based on the adjusted & audited figures.

The filing of quarterly ITRs req. by Sec. 68 & payment of quarterly income tax should be considered mere installments of the annual tax due. these payments w/c are computed based on the cumulative figures of gross receipts & deductions in order to arrive at net taxable income shld. be treated as advances on portions of annual income tax due, to be adjusted at the end of the fiscal year.

ACCRA Investment v. CA

Facts: Petitioner ACCRA is a domestic Corporation engaged in bus. of real estate invest. & management consultancy. On Apr. 15, 1982, pet. filed w/ BIR annual corp. income tax return for cal. year ending Dec. 31, 1981 ( The end of fiscal year of the corp. ). The corp. declared a net loss of 2,957,142.00 & declared all taxes w/held at source by w/holding agents in the total amount of 82, 751.01. The w/holding agents remitted the w/held taxes to the BIR fr. Feb. to Dec. 1981. The corp. is now claiming a refund as it had no tax liability against w/c to credit the amounts w/held ( the corp. declared a loss), as overpaid income taxes. The CTA dismissed the pet. on the ground that the claim for refund had already prescribed .

Held: Claims for tax refunds, accdg. to Sec. 8 of Rev. Reg. 13-78 shall be given in due course only when it is shown on the return that the income payment received was declared as part of the gross income & the fact of w/holding is

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INCOME TAX REVIEWER established by a copy of the statement. Furthermore, the return contemplated under the REV. Reg. is not the quarterly ret. filed by corp. but the final adjusted return filed after the close of the fiscal year. Obviously, the corp. cannot claim a tax refund UNLESS it files its return first so that it can be det. WON it is really entitled to the refund. Thus, the tow year period should commence, at the latest, fr. the time of filing the final adj., return, w/c in CAB, on Apr. 15, 1981.

San Carlos Milling Co. v. Com.

Facts: SCM is a domestic corp. & paid its taxes for 1982. It an overpayment reflected as creditable income tax in its annual final adj. return. In 1984, SCM informed the CIR of its intent to apply the total creditable amount against the 1984 tax dues consistent w/ Sec. 86 coupled w/ a comforting alternative request for a refund or tax credit. The CIR disallowed the automatic credit scheme & held that prior authority fr. the CIR is nec. before a taxpayer could avail of the provisions of Sec. 86 of the Tax Code.

Held: The choice of a corporate taxpayer for an automatic tax credit does not ipso facto confer on it the right to immediately avail of the same. prior approval by the CIR of the tax credit is nec. An opportunity must be given to the internal rev. branch of the gov’t to investigate & confirm the veracity of the claims of the taxpayer.

C. Withholding of INCOME tax

Rev. Reg. 2-98.

SEC. 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be

credited against the income tax liability of the taxpayer for the taxable year.

(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.  

SEC. 58. Returns and Payment of Taxes Withheld at Source. -

(A) Quarterly Returns and Payments of Taxes Withheld. - Taxes deducted and withheld under Section 57 by withholding agents shall be covered by a return and paid to, except in cases where the Commissioner otherwise permits, an authorized Treasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within twenty-five (25) days from the close of each calendar quarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the quarter during which withholding was made: Provided, That the Commissioner, with the approval of the Secretary of Finance, may require these withholding agents to pay or deposit the taxes deducted or withheld at more frequent intervals when necessary to protect the interest of the government.

(B) Statement of Income Payments Made and Taxes Withheld. - Every withholding agent required to deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts during the calendar quarter or year, a written statement showing the income or other payments made by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the request of the payee, but not late than the twentieth (20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of the following year in the case of individual payee for creditable withholding taxes. For final withholding taxes, the statement should be given to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. - Every withholding agent required to deduct and withhold taxes under Section 57 shall submit to the Commissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be required by the Commissioner. In the case of final withholding taxes, the return shall be filed on or before January 31 of the succeeding year, and for creditable

APP 104

INCOME TAX REVIEWER withholding taxes, not later than March 1 of the year following the year for which the annual report is being submitted. This return, if made and filed in accordance with the rules and regulations approved by the Secretary of Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the requirements of Section 68 of this Title in respect to the income payments.

The Commissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return required in this Subsection.

(D) Income of Recipient. - Income upon which any creditable tax is required to be withheld at source under Section 57 shall be included in the return of its recipient but the excess of the amount of tax so withheld over the tax due on his return shall be refunded to him subject to the provisions of Section 204; if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent.

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid: Provided, however, That the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds in the Transfer Certificate of Title or Condominium Certificate of Title: Provided, further, That in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with Section 40, the information as may be required by rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, shall be annotated by the Register of Deeds at the back of the Transfer Certificate of Title or Condominium Certificate of Title of the real property involved: Provided, finally, That any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code.  

 

SEC. 59. Tax on Profits Collectible from Owner or Other Persons. - The tax imposed under this Title upon gains, profits, and income not falling under the foregoing and not returned and paid by virtue of the foregoing or as otherwise provided by law shall be assessed by personal return under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The intent and purpose of the Title is that all gains, profits and income of a taxable class, as defined in this Title, shall be charged and assessed with the corresponding tax prescribed by this Title, and said tax shall be paid by the owners of such gains, profits and income, or the proper person having the receipt, custody, control or disposal of the same. For purposes of this Title, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a return is required to be rendered.

1. Items of gross income/ payments placed under the w/holding system

SEC. 57. Withholding of Tax at Source. - (A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

Sec. 2.57.1 RR 2098

2. Items exempt from w/holding tax

SEC. 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations the Secretary of Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income tax return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E), 27(D)(!), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. - The Secretary of Finance may, upon the recommendation of the Commissioner, require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.

(B) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or provisions by which the obligor agrees to pay any portion of the tax imposed in this Title upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon or to retain therefrom under any law of the Philippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the Philippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the Philippines.

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INCOME TAX REVIEWER SEC. 78. Definitions. - As used in this Chapter:

(A)  Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid:

(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or

(2) For domestic service in a private home, or

(3) For casual labor not in the course of the employer's trade or business, or

(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.

If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an employer to an employee for services performed during more than one -half (1/2) of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages.

SEC. 79. Income Tax Collected at Source.-

(A)  Requirement of Withholding. - Every employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner: Provided, however, That no withholding of a tax shall be required where the total compensation income of an individual does not exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month, whichever is higher.

3. Finality of the tax on compensation income

Sec. 79. (H)  Year-end Adjustment. - On or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with Section 24(A). The difference between the tax due from the employee for the entire year and the sum of taxes withheld from January to November shall either be withheld from his salary in December of the current calendar year or refunded to the employee not later than January 25 of the succeeding year.

4. Final tax v. creditable w/holding tax

Sec. 2.57 RR 2-98

5. Persons required to deduct and w/hold

Sec. 2.57.3 RR 2-98.

Prayer before Examination

My Jesus, who listened so attentively to the doctors in the temple, humbly asked them questions, & aroused their admiration by prudent answers, grant me the light to seek out & remember important matters of this subject I am studying for Your greater honor & glory.

O God, I ask Your help, as I approach the coming examination with some anxiety, that I may be able to pass the test successfully, if it is Your will, O Lord.

Enlighten my mind, O Heavenly Dispenser of Grace, God the Holy Spirit, that I may understand rightly the questions to be answered by me, that I may see clearly the solution of problems put before

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INCOME TAX REVIEWER

me; & that I may avoid the pitfalls of superficial, hasty & wrong answers; that I may keep my cool in the face of trying circumstances, & thus avoid confusion w/c may disturb my thinking power & obfuscate my memory.

Then, O Lord, guide also my teachers that they may form their questions clearly & intelligently that I may be able to answer them in such a way as it is expected of me. And after the test, O Lord, Eternal Wisdom, illuminate the mind of the correctors & open their eyes that they may be able to read my handwriting & understand my answers & evaluate them fairly & justly.

O loving Mother, who are called by your children “Seat of Wisdom,” assist me in my examination that I may pass them. If it is the will of your Divine Son, the Incarnate Wisdom, and all you my dear patron saints, be with me during these crucial moments of my examination which mean so much to me in reaching my goal.

Lord, we pray to You, let our doings be prompted by Your inspiration & furthered by Your help, so that every prayer & work of ours may begin from You & through You be accomplished. Amen.

Based on the outline of Prof. J. Ricalde and as UPDATED BY ELLA C.H. DEL ROSARIO, THE

Obiter Master™

With input from: Ricky Sandoval, Dennis Quintero, Dinah dela Pena, Jig Fado, Lourie

Garcia, Marisa Mauricio, Mamay Quitain, Chip Perdon, Sharon Rivera, Abbie Santiago, Fritzie

Tangkia, & Marc Aseoche .

APP 107