expanded syllabus buslaw3

8/16/2019 Expanded Syllabus BUSLAW3

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I. General Principles of Taxation

A. Definition and Concept of TaxationTaxation- is a mode by whichgovernments make exactions forrevenue in order to support theirexistence and carry out their legitimateobjectives.

Taxes- are enforced proportionalcontributions from persons andproperty levied by the law-making bodyof the State by virtue of its sovereigntyfor the support of the government andall public needs.

B. Nature of the Power of Taxation inherent in sovereignty essentially a legislative function subject to constitutional and

inherent limitations

C. Characteristics of Taxation

1. enforced contribution2. generally payable in the form of

money, although the law mayprovide payment in kind

3. levied by the State which has jurisdiction or control over thesubject to be taxed.

4. levied by the law-making body ofthe State

5. levied for public purpose6. most taxes that they are commonlyrequired to be paid at regularperiods or intervals

D. Power of Taxation Compared WithOther Powers

E. Purpose of Taxation

1. Revenue-raising2. Non-revenue/special or regulatory

a) Taxation can strengthen anemicenterprises or provide incentive togreater production.

b) Taxes on imports may be increasedto protect local industries.

c) Taxes on imported goods may alsobe used as a bargaining tool.

d) Taxes may be used to controlspending power and inflation.

e) Taxes may be levied to reduceinequalities in wealth and incomes.

f) Taxes may be levied to promotescience and invention (see RA. No.5448) or to finance educationalactivities (see RA. No. 5447) or toimprove the efficiency of localpolice forces in the maintenance ofpeace and order through grant ofsubsidy (see RA.No. 6141.).

g) Taxation may be made as an

implement of the police power topromote the general welfare.

F. Principles of Sound Tax System

(1) Fiscal Adequacy - the sources(proceeds) of tax revenue shouldcoincide with, and approximate theneeds of, government expenditures.

(2) Administrative Feasibility - Tax lawsshould be capable of convenient, justand effective administration.

(3) Theoretical Justice or Equality - The taxburden should be in proportion to thetaxpayer’s ability to pay.

Note: The non-observance of the aboveprinciples will not necessarily render the taximposed invalid except to the extent that specificconstitutional limitations are violated. (De Leon)

G. Theory and Basis of Taxation

Lifeblood TheoryTaxes are the lifeblood of the government and

their prompt and certain availability is animperious need. [CIR v. Pineda]

Necessity TheoryThe power of taxation proceeds upon theorythat the existence of government is a necessity;that is cannot continue without means to pay itsexpenses; and that for those means it has theright to compel all citizens and property withinits limits to contribute.

Benefits-Protection Theory (SymbioticRelationship)This principle serves as the basis of taxation andis founded on the reciprocal duties of protectionand support between the State and itsinhabitants. Also called “symbiotic relation”between the State and its citizens.

Jurisdiction over subject and objectsThe limited powers of sovereignty are confinedto objects within the respective spheres ofgovernmental control. These objects are the


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BUSLAW 3_ATTY. KAREN ANDREA D. TORRES

proper subjects or objects of taxation and noneelse.

H. Doctrines in Taxation

Prospectivity of tax laws

General rule: Tax laws are prospective in

operation.Exception: Tax laws may be applied retroactively provided it is expressly declared or clearly the legislative intent.

Exception to the exception: a tax law should not begiven retroactive application when it would beso harsh and oppressive for in such case, theconstitutional limitation of due process wouldbe violated.

Non-retroactivity of Rulings (Sec. 246)

General rule: IF REVOCATION,MODIFICATION OR REVERSAL WILL BEPREJUDICIAL TO THE TAXPAYER Anyrevocation, modification, or reversal of any ofthe rules and regulations promulgated by theSecretary of Finance and rulings and circularspromulgated by the CIR shall NOT be givenretroactive effect.

Exceptions: (1) Where the taxpayer deliberately

misstates or omits material facts fromhis return or any document required ofhim by BIR;

(2) Where the facts subsequently gatheredby the BIR are materially different fromthe facts on which the ruling is based;OR

(3) Where the taxpayer acted in bad faith.

Imprescriptibility

Unless otherwise provided by the tax itself,

taxes are imprescriptible.Double taxation

Strict senseIn order to constitute double taxation in thestrict sense or direct duplicate taxation:

(1) the same property must be taxed twice when it should be taxed once;

(2) both taxes must be imposed on the same property or subject matter;

(3) for the same purpose;

(4) by the same State, Government, or taxingauthority;

(5) within the same territory, jurisdiction ortaxing district;

(6) during the same taxing period; and(7) of the same kind or character of tax.

Broad sense

Means taxing twice for the same tax period thesame thing or activity, when it should be taxedonce, for the same purpose and with the samekind of character of tax.

Constitutionality of double taxationThere is no constitutional prohibition againstdouble taxation in the Philippines. It issomething not favored, but is permissible,provided some other constitutional requirementis not thereby violated, such as the requirementthat taxes must be uniform. [Villanueva v. City ofIloilo (1968)]

Modes of eliminating double taxation(1) Allowing reciprocal exemption either by

law or by treaty;(2) Allowance of tax credit for foreign taxes

paid(3) Allowance of deduction for foreign

taxes paid(4) Reduction of Philippine tax rate.

Escape from taxation

1. Shifting of tax burden

SHIFTING - is the transfer of the burden of atax by the original payer or the one on whomthe tax was assessed or imposed to someoneelse. What is transferred is not the payment ofthe tax but the burden of the tax.

2. Tax avoidance

The exploitation by the taxpayer of legallypermissible alternative tax rates or methods ofassessing taxable property or income in order toavoid or reduce tax liability. It is politely called“tax minimization” a nd is not punishable bylaw.

3. Transformation

TRANSFORMATION – method of escape intaxation whereby the manufacturer or producerupon whom the tax has been imposed, fearingthe loss of his market if he should add the tax tothe price, pays the tax and endeavors to recoup


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himself by improving his process of productionthereby turning out his units of products at alower cost.

4. Tax evasion

TAX EVASION - is the use by the taxpayer ofillegal or fraudulent means to defeat or lessen

the payment of a tax. It is also known as “taxdodging.” It is punishable by law.

Elements of Tax Evasion(1) The end to be achieved(2) An accompanying state of mind(3) A course of action (or failure of action)

which is unlawful

Exemption from taxation

Strictly construed against the taxpayer.

Nature of tax exemption(1) Mere personal privilege.(2) General rule: revocable by the

government.Exception: It is founded on a contractwhich is protected from impairment.

(3) Implies a waiver on the part of the government of its right to collect taxesdue to it, and, in this sense, is prejudicialthereto.

(4) Not necessarily discriminatory, provided ithas reasonable foundation or rationalbasis.

(5) General rule: Strict construction againsttaxpayer claiming exemption.Exceptions:(a) tax exemptions in favor of a political

subdivision or instrumentality ofthe government (Maceda v.Macaraig), or of charitable,religious, and educationalinstitutions (De Leon).

(b) When the law itself expresslyprovides for a liberal construction.

(c)

Exemptions to traditional grantees,such as those in favor of religiousand charitable institutions.

(d) Exemptions from certain taxesgranted under special circumstancesto special classes of persons. (Vitugand Acosta)

Grounds for tax exemption(1) It may be based on contract.

(2) It may be based on some ground of public policy.

(3) It may be created in a treaty on groundsof reciprocity or to lessen the rigors ofinternational or multiple taxation.

But: equity is NOT a ground for tax exemption.Revocation of tax exemption

Generally revocable by the government.Contractual tax exemptions, however, may notbe unilaterally so revoked by the taxingauthority without thereby violating the non-impairment clause of the ConstitutionCompensation and Set-off

General rule: Taxes cannot be the subject of set-off or compensation. Reasons:

(1) This would adversely affect thegovernment revenue system.

(2) Government and the taxpayer are notcreditors and debtors of each other.

Exception: If the claims against the governmenthave been recognized and an amount has alreadybeen appropriated for that purpose, set-off orcompensation may be had. Where both claimshave already become due and demandable aswell as fully liquidated , compensation takesplace by operation of law under Art. 1200 inrelation to Articles 1279 and 1290 of the NCC,and both debts are extinguished to theconcurrent amount. [Domingo v. Garlitos]

Doctrine of Equitable Recoupment - a claim forrefund barred by prescription may be allowed tooffset unsettled tax liabilities. The doctrineFINDS NO application in this jurisdiction.(Collector v. UST).

Compromise

A contract whereby the parties, by makingreciprocal concessions avoid litigation or put an

end to one already commenced.Tax amnesty

A tax amnesty partakes of an absoluteforgiveness or waiver by the Government of itsright to collect what otherwise would be due it.

Scope and Limitation of Taxation

Inherent Limitations1. Public Purpose


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2. Inherently Legislative

Taxation may exceptionally be delegated,subject to such well-settled limitations as –

(1) not contravene any constitutionalprovision or the inherent limitations oftaxation;

(2) effected either by the Constitution or by

validly enacted legislative measures orstatute; and(3) The delegated levy power, except when

the delegation is by an expressprovision of the Constitution itself,should only be in favor of the locallegislative body of the local ormunicipal government concerned.[Vitug and Acosta]

Exceptions(1) Delegation to local governments(2) Delegation to the President to enter

into Executive agreements, and to ratifytreaties which grant tax exemptionsubject to Senate concurrence. TheCongress may, by law, authorize thePresident to fix within specified limits,and subject to such limitations andrestrictions as it may impose, tariff rates,import and export quotas, tonnage andwharfage dues, and other duties orimposts within the framework of thenational development program of theGovernment.

(3) Delegation to administrative agencies -Limited to the administrativeimplementation.

Note: Delegation to administrativeagencies is really not an exception to therule as no delegation of the strictlylegislative power to tax is involved.

3. Territorial

Situs of taxation refers to the place of taxation, or

the state or political unit which has jurisdictionto impose tax over its inhabitants.

General Rule: The taxing of a country is limitedto persons and property within and subject to its

jurisdiction.

Reasons:(1) Act of sovereignty could only be

exercised within a country’s territoriallimits.

(2) Taxes are paid for the protection andservices provided by the taxingauthority which could not be providedoutside the territorial boundaries of thetaxing State.

Exceptions:(1) Where tax laws operate outside

territorial jurisdiction.(2) Where tax laws do not operate withinthe territorial jurisdiction of the State.

(3) When exempted by treaty obligations.(4) When exempted by international

comity.

KIND OFTAX

SITUS

Property TaxReal property Where it is located (lex rei

sitae)

TangiblePersonalproperty

Where the property isphysically located althoughthe owner resides in another

jurisdiction.Intangiblepersonalproperty

Gen Rule: Domicile of theowner. Mobilia sequunturpersonam (movables followthe person)

Exceptions:(1) When property has

acquired a business situsin another jurisdiction;or

(2) When the law providesfor the situs of thesubject of tax (i.e., Sec104 NIRC)

Excise TaxIncome Source of the income,

nationality or residence of thetaxpayer (Sec 23 NIRC)

Donor’s Tax Location of the property;nationality or residence of thetaxpayer

Estate Location of the property;nationality or residence of thetaxpayer

VAT Where the transaction is madeOthersPoll,Capitation orCommunityTax

Residence of the taxpayer,regardless of the source ofincome or location of theproperty of the taxpayer

4. International Comity


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Comity is the respect accorded by nations toeach other because they are sovereign equals.Thus, the property or income of a foreign stateor government may not be the subject oftaxation by another state.

Reasons:

(1) Doctrine of Sovereign Equality(2) Doctrine of Diplomatic Immunity fromSuit, so it is useless to impose a taxwhich could not be collected.

(3) When a foreign sovereign enters theterritorial jurisdiction of another, it doesnot subject itself to the jurisdiction of theother.

5. Exemption of Government Entities,Agencies, and Instrumentalities

If the taxing authority is the National Government:General Rule: The government is exempt fromtax.

Exception: When it chooses to tax itself.

If the taxing authority is the local government unit:RA 7160 expressly prohibits LGUs from levyingtax on the National Government, its agenciesand instrumentalities and other LGUs.

Constitutional Limitations

1. Provisions Directly Affecting Taxation

a) Prohibition against imprisonment fornon-payment of poll tax

b) Uniformity and equality of taxationc) Grant by Congress of authority to the

President to impose tariff ratesd) Prohibition against taxation of religious,

charitable entities, and educationalentities

Test ofExemption

Use of the property, and notthe ownership

Nature of UseActual, direct and exclusiveuse for religious, charitable oreducational purposes.

Scope ofExemption

Real property taxes on facilitieswhich are(1) actual,(2) incidental to, or(3) reasonably necessary for

the accomplishment of saidpurposes. [Abra Valley College

v. Aquino]

e) Prohibition against taxation of non-stock, non-profit institutions

Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3Charitable institutions,

churches andparsonages or conventsappurtenant thereto,mosques, non-profitcemeteries, and alllands, buildings, andimprovements, actually,directly, and exclusively used for religious,charitable, oreducational purposes.

Non-stock, non-profit

educationalinstitutions.

Property taxes Income, property,

and donor’s taxes andcustom duties.

f) Majority vote of Congress for grant oftax exemptionNote:

(1) The LGU shall have theauthority to grant local taxexemption privileges. (Sec. 192,LGC)

(2) The President of the Philippinesmay, when public interest sorequires, condone or reducereal property taxes and interest.(Sec. 277, LGC)

g) Prohibition on use of tax levied forspecial purpose

h) President’s veto power onappropriation, revenue, tariff bills

i) Non-impairment of jurisdiction of theSupreme Court

j) Grant of power to the local governmentunits to create its own sources ofrevenue

k) Flexible tariff clausel) Exemption from real property taxesm) No appropriation or use of public

money for religious purposes

2. Provisions Indirectly Affecting Taxation

Due processDue Process in Taxation requirements:

(1) Tax must be for public purpose


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(2) It must be imposed within taxingauthority’s territorial jurisdiction

(3) Assessment or collection must not bearbitrary or oppressive

Equal protectionAll persons subject to legislation shall be treatedalike under similar circumstances and

conditions both in the privileges conferred andliabilities imposed.

Religious freedomThe free exercise clause is the basis of taxexemptions.

Non-impairment of obligations of contractsThe Contract Clause has never been thought as alimitation on the exercise of the State's power oftaxation save only where a tax exemption hasbeen granted for a valid consideration. [Tolentinov. Secretary of Finance]

I. Stages of Taxation

(1) Levy(2) Assessment and Collection(3) Payment(4) Refund

J. Definition, Nature, and Characteristicsof Taxes

K. Requisites of a valid tax

(1) It should be for a public purpose (2) The rule of taxation should be uniform (3) That either the person or property taxed

be within the jurisdiction of the taxingauthority

(4) That the assessment and collection be inconsonance with the due process clause

(5) The tax must not infringe on theinherent and constitutional limitationsof the power of taxation

L. Tax as distinguished from other formsof exactions

TariffTAXES TARIFFAll embracing term toinclude various kindsof enforcedcontributions uponpersons for theattainment of publicpurposes

A kind of tax imposedon articles which aretraded internationally

TollTAXES TOLLPaid for the support ofthe government

Paid for the use ofanother’s property.

Demand ofsovereignty

Demand ofproprietorship

Generally, no limit on

the amount collectedas long as it is notexcessive,unreasonable orconfiscatory

Amount paid depends

upon the cost ofconstruction ormaintenance of thepublic improvementused.

Imposed only by thegovernment

Imposed by thegovernment or byprivate individuals orentities.

License feeTAXES LICENSE AND

REGULATORY FEEImposed under thetaxing power of thestate for purposes ofrevenue.

Levied under thepolice power of thestate.

Forced contributionsfor the purpose ofmaintaininggovernment functions.

Exacted primarily toregulate certainbusinesses oroccupations.

Generally, unlimitedas to amount

Should notunreasonably exceedthe expenses of issuingthe license and ofsupervision.

Imposed on persons,property and toexercise a privilege.

Imposed only on theright to exercise aprivilege

Failure to pay does notnecessarily make theact or business illegal.

Penalty for non-payment: surchargesor imprisonment(except poll tax).

Failure to pay makesthe act or businessillegal.

Note: Taxes may also be imposed for regulatory purposes. It is called regulatory tax.

Special assessmentTAXES SPECIAL

ASSESSMENTImposed regardless ofpublic improvements

Imposed because of anincrease in value ofland benefited by


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public improvement.

Levied only on land.Contribution of ataxpayer for thesupport of thegovernment.

Contribution of aperson for theconstruction of apublic improvement

It has general

application both as totime and place.

Exceptional both as to

time and locality.

DebtTAXES DEBTBased on laws Generally based on

contract, express orimplied.

Generally cannot beassigned

Assignable

Generally paid inmoney

May be paid in kind.

Cannot be a subject ofset off Can be a subject of setoffNon-payment ispunished byimprisonment except inpoll tax

No imprisonment incase of non-payment(Art. III, Sec. 20 1987Constitution)

Governed by thespecial prescriptiveperiods provided forin the NIRC.

Governed by theordinary periods ofprescription.

Does not draw interestexcept only when

delinquent

Draws interest when itis so stipulated or

where there is default.Imposed only bypublic authority

Can be imposed byprivate individual

M. Kinds of Taxes

As to object

(1) Personal, Poll or Capitation Tax(2) Property Tax(3) Privilege/Excise Tax

As to burden or incidence

(1) Direct Taxes(2) Indirect Taxes

As to tax rates

(1) Specific Tax(2) Ad Valorem Tax(3) Mixed

As to purposes

(1) General Tax(2) Special Tax

As to scope or authority to impose

(1) National(2) Municipal or Local

As to graduation

(1) Proportional(2) Progressive(3) Digressive Tax Rate – progressive rate

stops at a certain point. Progressionhalts at a particular stage.

(4) Regressive – the rate of which decreasesas the tax base or bracket increases.There is no such tax in the Philippines.

II. National Internal Revenue Code of 1997 asamended (NIRC)

A. Income Taxation

1. Income Tax Systems

Global Tax System

All items of gross income, deductions, andpersonal and additional exemptions, if any, arereported in one income tax return, and one set oftax rates are applied on the tax base.

Schedular Tax System

Different types of incomes are subject todifferent sets of graduated or flat income taxrates.

Semi-schedular or semi-global tax system

The compensation income, business orprofessional income, capital gain and passiveincome not subject to final tax, and other income

are added together to arrive at the gross income,and after deducting the sum of allowabledeductions, the taxable income is subjected toone set of graduated tax rates or normalcorporate income tax.

NOTE: The Philippines, under EO 37 (1986) andRA 8424 (1998), follows a semi-schedular andsemi-global tax system.

2. Features of the Philippine IncomeTax Law


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a) Direct taxb) Progressivec) Comprehensived) Semi-schedular or semi-global

tax systeme) Of American Origin

3. Criteria in Imposing PhilippineIncome Tax

a. Citizenship or Nationality PrincipleA citizen of the Philippines is subject toPhilippine income tax(a) on his worldwide income, if he resides in thePhilippines; or(b) only on his income from sources within thePhilippines, if he qualifies as a nonresidentcitizen.

b. Residence Principle

A resident alien is liable to pay Philippineincome tax on his income from sources withinthe Philippines but exempt from tax on hisincome from sources outside the Philippines.

c. Source of Income Principle

An alien is subject to Philippine income taxbecause he derives income from sources withinthe Philippines, despite the fact that he has notset foot in the Philippines.

4. Types of Philippine Income Tax

1. graduated income tax on individuals2. normal corporate income tax on

corporations3. minimum corporate income tax on

corporations4. special income tax on certain

corporations5. capital gains tax on sale or exchange of

shares of stock of a domestic corp.

classified as capital assets6. capital gains tax on sale or exchange ofreal property classified as capital asset

7. final withholding tax on certain passiveinvestment income paid to residents

8. final withholding tax on incomepayments made to non-residents

9. fringe benefits tax on fringe benefits ofsupervisory or managerial employees

10. branch profit remittance tax

11. tax on improperly accumulatedearnings of corporations

5. Taxable Perioda) Calendar Periodb) Fiscal Periodc) Short Period

6.

Kinds of Taxpayers

PrimaryClassification Sub-Classification(s)

Individuals

Citizens ofthePhilippines

Residents of thePhilippinesNot Residents of thePhilippines

Aliens

Residents of thePhilippines

NotResidentsof thePhilippines

Engaged inTrade or

Business inthePhilippinesNotEngaged inTrade orBusiness inthePhilippines

SpecialClasses ofIndividuals

Individual Employed byRegional or AreaHeadquarters andRegional OperatingHeadquarters ofMultinationalCompaniesIndividual Employed byOffshore Banking UnitsIndividual Employed bya foreign servicecontractor or by aforeign servicesubcontractor engagedin petroleum operationsin the PhilippinesMinimum wage earner

Estates andTrusts

Partnerships General Business PartnershipGeneral Professional PartnershipCo-ownerships

Corporations

Domestic Corporations

ForeignCorporations

ResidentCorporationsNon-resident


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Corporations

Special Classes ofCorporations

Proprietaryeducationalinstitutions andnon-profithospitalsDomesticDepositary Bank

(ForeignCurrencyDeposit Units)ResidentinternationalcarriersOffshoreBanking UnitsResidentDepositary Bank(ForeignCurrency

Deposit Units)Regional or AreaHeadquartersand RegionalOperatingHeadquarters ofMultinationalCompaniesNon-residentcinematographicfilm owners,lessors or

distributorsNon-residentowners orlessors of vesselschartered byPhilippinenationalsNon-residentlessors ofaircraft,machinery andother equipment

Definition of Each Kind of Taxpayer

Taxpayer - any person subject to tax.

Person - means an individual, a trust, estate orcorporation.

I. Individuala. Citizeni. Residentii. Non- (1) establishes to the satisfaction of

resident the Commissioner the fact of hisphysical presence abroad with adefinite intention to reside therein.

(2) leaves the Philippines duringthe taxable year to reside abroad,either as an immigrant or foremployment on a permanent basis.

(3) works and derives income fromabroad and whose employmentthereat requires him to bephysically present abroad most ofthe time during the taxable year.

(4) has been previously consideredas nonresident citizen and whoarrives in the Philippines at anytime during the taxable year to residepermanently in the Philippines

shall likewise be treated as anonresident citizen for the taxableyear in which he arrives in thePhilippines with respect to hisincome derived from sourcesabroad until the date of his arrivalin the Philippines.

iii.OverseasContractWorker

OCW refer to Filipino citizensemployed in foreign countries,commonly referred to as OFWs,who are physically present in aforeign country as a consequenceof their employment thereat. Theirsalaries and wages are paid by anemployer abroad and is not borneby any entity or person in thePhilippines. To be considered asan OCW or OFW, theymust be duly registered as suchwith the Philippine OverseasEmployment Administration(POEA) with a valid OverseasEmployment Certificate (OEC).

Seafarers or seamen are Filipino

citizens who receive compensationfor services rendered abroad as amember of the complement of avessel engaged exclusively ininternational trade. To beconsidered as an OCW or OFWthey must be duly registered assuch with the Philippine OverseasEmployment Administration(POEA) with a valid OverseasEmployment Certificate (OEC)


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with a valid SeafarersIdentificationRecord Book (SIRB) or Seaman'sBook issued by the MaritimeIndustry Authority (MARINA).(Revenue Regulations No. 2-2011)

b. Aliensi. Resident Individual whose residence is

within the Philippines and who isnot a citizen thereof.

ii. Non-resident

Individual whose residence is notwithin the Philippines and who isnot a citizen thereof.

(RR 2-1940)- An alien actually present in the

Philippines who is not a meretransient of sojourner is aresident of the Philippines forpurposes of income tax,

Whether he is a transient ornot is determined by hisintentions with regard to thelength and nature of his stay.

- A mere floating intentionindefinite as to time to return toanother country is not sufficientto constitute him a transient.

- One who comes to thePhilippines for a definitepurpose which in its naturemay be promptlyaccomplished is a transient,but if his purpose is of such anature that an extended staymay be necessary for itsaccomplishment, and to thatend the alien makes his hometemporarily in the Philippines,he becomes a resident, thoughit may be his intention at alltimes to return to his domicileabroad when the purpose forwhich he came has beenconsummated or abandoned.

Loss of residence by alien- Anintention to change his residencedoes not change status; retainsstatus as resident until actualabandonment of residence.Engaged intrade orbusiness

A nonresidentalien individualwho shall come tothe Philippinesand stay therein

for an aggregateperiod of morethan one hundredeighty (180) daysduring anycalendar year.,regardless ofwhether he

actually engagesin trade orbusiness herein.

Not engagedin trade orbusiness

II. Corporatea.Domestic

Created or organized underPhilippine Laws

b. Foreign A corporation which is notdomesticResident

Foreign

Engaged in trade

or business withinthe PhilippinesNon- residentForeign

Not engaged intrade or businesswithin thePhilippines

7. Income Taxation

a. DefinitionIncome Tax is defined as a tax on all yearly

profits arising from property, professions,trades, or offices, or as a tax on the person’sincome, emoluments, profits and the like(Fisher v. Trinidad) .

b. NatureIncome tax is generally classified as an excisetax. It is not levied upon persons, property, funds or profits but upon the right of a personto receive income or profits.

c. General principles

Taxpayer Within WithoutResident CitizenNon-resident Citizen andOCW

X

Resident and Non-residentAlien

X

Domestic CorporationForeign Corporation X

8. Income


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a. DefinitionAll wealth which flows to the taxpayer otherthan a mere return of capital

b. Nature

Income includes earnings, lawfully or unlawfullyacquired, without consensual recognition, express or

implied, of an obligation to repay and withoutrestriction as their disposition.

c. When income is taxable

Existence of income1. There is INCOME , gain or profit2. RECEIVED or REALIZED during the

taxable year3. NOT EXEMPT from income tax

2) Realization of income

a) Tests of Realization

1. Realization Test2. Claim of right doctrine – Principle of

Constructive Receipt of Income3. Economic benefit test4. Severance test

b) Actual vis-à-vis Constructive receipt

1. Actual receipt2. Constructive receipt – Income which is

credited to the account of or set apart fora taxpayer and which may be drawnupon by him at any time is subject to taxfor the year during which it is so creditedor set apart, although not actually reducedto possession.

3) Recognition of incomeNOTE: Discussed below.

4) Methods of accounting

a) Cash method vis-à-vis Accrual methodIncome received follows the cash basis of

accounting, where income is recognized whenrealized and expenses are recognized whenpaid.

Income realized pertains to the accrual basis ofaccounting, when recognition of income in thebooks is when it is realized and expenses arerecognized when incurred. It is the right toreceive and not the actual receipt that

determines the inclusion of the amount ingross income

b) Installment payment vis-à-vis Deferredpayment vis-à-vis Percentage completion (inlong term contracts)

Personal Property Real PropertyDealer Dealer in personal property whoregularly sells ininstallment plan:Installment method

*held as ordinaryasset; regardless ofamount of percentageof initial payments

Installmentmethod;Provided,initial payments donot exceed25% of selling price

If exceeds25%--Deferred paymentmethod

CasualSale

Installment method;Provided:

1. Selling priceexceeds php1,000

2. Initial payments donot exceed25% ofselling price

If either of 2 or bothconditions not met—Deferred paymentmethod

Installmentmethod;Provided,initial payments donot exceed25% of selling price

If exceeds25%--Deferred paymentmethod

Percentage of completion This method is applicable in the case of

a building, installation or constructioncontract covering a period in excess ofone year whereby gross income derivedfrom such contract may be reported

upon the basis of percentage ofcompletion

d. Tests in determining whether income isearned for tax purposes

9. Gross Income

a. Definition


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GROSS INCOME means all income derivedfrom whatever source

b. Concept of income from whatever sourcederived

“income derived from whatever source” meansinclusion of all income not expressly exempted

within the class of taxable income under thelaws irrespective of the voluntary or involuntaryaction of the taxpayer in producing the gains,and whether derived from legal or illegalsources (i.e. gambling, extortion, smuggling,etc.).

c. Gross Income vis-à-vis Net Income vis-à-visTaxable Income

GROSS INCOME means all income derivedfrom whatever source

Net income – Means gross income lessdeductions and/or personal and additionalexemptions (Sec. 31, NIRC)

d. Classification of Income as to Source

1. Gross income and taxable income fromsources within the Philippines

2. Gross income and taxable income fromsources without the Philippines

3. Income partly within or partly without thePhilippines

e. Sources of income subject to tax

1) Compensation Income

Income arising from an ER-EE relationship.

GENERAL RULE: Fixed or variabletransportation, representation or otherallowances that are received by a public officeror employee of a private entity, in addition tothe regular compensation fixed for his positionor office is COMPENSATION subject towithholding tax. (Rev. Regs. 2-98)

EXCEPTION: any amount paid specifically,either as advances or reimbursements fortravelling, representation and other bona fideordinary and necessary expenses incurred orreasonably expected to be incurred by theemployee in the performance of his duties areNOT COMPENSATION provided the followingconditions are satisfied:

it is for ordinary and necessarytravelling and representation orentertainment expenses paid or incurredby the employee in the pursuit of theemployer’s trade, business orprofession; and

The employee is required to account or

liquidate for the foregoing expenses. (inaccordance with the specificrequirements of substantiation for eachcategory of expenses pursuant to sec. 34of the Tax Code)

The excess of actual expenses over advancesmade shall constitute taxable income if suchamount is not returned to the employer.

2) Fringe Benefits

a) Special treatment of fringe benefitsPersons liable

The Employer (as a withholding agent), whetherindividual, professional partnership or acorporation, regardless of whether thecorporation is taxable or not, or the governmentand its instrumentalities

Basic Rule: Convenience of the Employer Rule

Fringe benefit tax is imposed on fringe benefitsreceived by supervisory and managerial

employees . The fringe benefits of rank and fileemployees are treated as part of hiscompensation income subject to income tax andwithholding tax on compensation.

b) Definition

Fringe benefit means any good, service, or otherbenefit furnished or granted by an employer, incash or in kind, in addition to basic salaries, toan individual employee (except rank and fileemployees).

c) Taxable and non-taxable fringe benefits

Fringe Benefits NOT subject to Tax1. Fringe benefits not considered as gross

income – a. if it is required or necessary to the

business of employerb. if it is for the convenience or advantage

of employer2. Fringe Benefit that is not taxable under Sec.

32 (B) – Exclusions from Gross Income


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3. Fringe benefits not taxable under Sec. 33Fringe Benefit Tax:a. Fringe Benefits which are authorized

and exempted under special laws, suchas the 13th month Pay and OtherBenefits with the ceiling of P30,000.

b. Contributions of the employer for thebenefit of the employee to retirement,

insurance and hospitalization benefitplans;c. Benefits given to the Rank and File

Employees, whether granted under acollective bargaining agreement or not;and

d. The De minimis benefits – benefits whichare relatively small in value offered bythe employer as a means of promotinggoodwill, contentment, efficiency ofEmployees

Note: The term―Rank and File

Employees‖ shall mean all employeeswho are holding neither managerial norsupervisory position as defined in theLabor Code

In the case of rank and file employees,fringe benefits other than thoseexcluded from gross income under theTax Code and other special laws, aretaxable under the individual normal taxrate.

De minimis benefits (exempt from income tax):RR 13-98

a) Monetized unused vacation leavecredits of private employees notexceeding 10 days during the yearand the monetized value of leavecredits to government officials andemployees (RR 10-00)

b) Medical cash allowance todependents of employees notexceeding php750 per employee

per semester of Php125 per monthc) Rice subsidy of Php1500 or one sack

of 50-kg rice per month amountingto not more than Php1500 (RR5-08)

d) Uniforms and clothing allowancenot exceeding Php4,000 per annum (RR5-08)

e) Actual yearly medical benefits notexceeding Php10,000 per annum

f) Laundry allowance not exceedingPhp300 per month

g) Employee achievements awards,e.g., for length of service or safetyachievement, which must be in theform of tangible personal propertyother than cash or GC with an annualmonetary value not exceedingPhp10,000 received by the employeeunder an established written plan

which does not discriminate infavor of highly paid employees;h) Gifts given during Christmas (not

bonus) and major anniversarycelebrations not exceeding Php5,000per employee per annum ;

i) Flowers, fruits, books, or similaritems given to employees underspecial circumstances, e.g., onaccount of illness, marriage, birth ofa baby etc

j) Daily meal allowance for OT work

not exceeding25% of basic MW

HOUSINGHOUSING PRIVILEGE FRINGE BENEFIT

TAX BASE(MONETARYVALUE)

1. LEASE ofresidentialproperty for theresidential use ofemployees

MV= 50% of leasepayments

2. Assignment ofresidentialproperty owned byemployer for use ofemployees

MV= [5% (FMV orZV, whichever ishigher) x 50%]

3. Purchase ofresidentialproperty ininstallment basisfor the use of theemployee

MV= 5% x acquisitioncost x 50%

4. Purchase ofresidentialproperty andownership istransferred in thename of theemployee

MV= FMV or ZV,whichever is higher

Non-taxable housing fringe benefit:1. AFP, Philippine Army, Philippine Navy,

Philippine Air Force2. Situated inside of adjacent to the premises of

a business or factory maximum of 50


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meters from perimeter of the businesspremises

3. Temporary housing for an employee whostays in housing unit for three months orless

MOTOR VEHICLE MOTOR VEHICLE FRINGE BENEFIT

TAX BASE1. Purchased in thename of the employee

MV= acquisitioncost

2. Cash given toemployee to purchasein his own name

MV= cash given

3. Purchase oninstallment, in thename of employee

MV= acquisitioncost/ 5 years

Where acquisitioncost is exclusive ofinterest

4. Employee shoulderspart of acquisitioncost, name ofemployee

MV= amountshouldered byemployer

5. Employer maintainsfleet for use of thebusiness and ofemployees

MV= (AC/5) x 50%

6. Employer leases andmaintains a fleet forthe use of thebusiness and ofemployees

MV= 50% of rentalpayment

3) Professional Income Refers to fees received by a professional

from the practice of his profession,provided that there is NO employer-employee relationship between him andhis clients.

4) Income from Business Any income derived from doing

business Doing business : The term implies a

continuity of commercial dealings andarrangements, and contemplates, to thatextent, the performance of acts or worksor the exercise of some of the functionsnormally incident to, and in progressiveprosecution of, the purpose and objectof its organization.

5) Income from Dealings in Property

Taxable = Ordinary + Net Capital

NetIncome

NetIncome

Gains (otherthan thosesubject tofinal CGT)

a) Types of Properties

Capital v. Ordinary Asset

ORDINARY ASSETS CAPITAL ASSETS1. Stock in trade of thetaxpayer or otherproperty of a kindwhich would properlybe included in theinventory of thetaxpayer if on hand atthe close of the taxableyear.

2. Property held by thetaxpayer primarily forsale to customers inthe ordinary course ofhis trade or business

3. Property used in thetrade or business of acharacter which issubject to theallowance fordepreciation\

4. Real property used inthe trade or businessof the taxpayer.

Property held by thetaxpayer, whether ornot connected withhis trade or businesswhich is not anordinary asset.Generally, theyinclude:1. shares of stock of a

domesticcorporation notlisted in the stockexchange

2. real property ofindividuals orland/building ofcorporations

3. other types ofassets, includingshares of stock offoreigncorporation

b) Types of Gains from dealings in property

(1) Ordinary income vis-à-vis Capital gain

Note: Capital losses can only be deducted fromcapital gains; excess capital losses are to becarried over by INDIVIDUALS in thesucceeding taxable year against capital gains.

Note: Ordinary losses may be deducted fromcapital gains.

(2) Actual gain vis-à-vis Presumed gain

PRESUMED GAIN: In the sale of real propertyclassified as capital asset, the tax base is thegross selling price or fair market value,whichever is higher. The law presumes that theseller makes a gain from such sale.

ACTUAL GAIN : The tax base in the sale of realproperty classified as an ordinary asset is the


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actual gain. The ordinary gain shall be added tothe operating income and the net taxable incomeshall be subject to the graduated rates (ifindividual) or to 30% corporate tax or to 2%MCIT.

(3) Long term capital gain vis-à-vis Short termcapital gain

HOLDING PERIOD RULE: Only 50% of capitalgain or loss taken into account in computingCapital Gains Tax if asset (other than shares nottraded thru SE) is held as a long-term capitalasset.

Taxpayers Other than a Corporation (i.e.,individual taxpayers and taxpayers treated asindividuals, such as estates and trusts) :

100% of capital gain or loss if the capitalasset was held for not more than 12months (short-term capital asset)

50% of capital gain or loss if the capitalasset has been held for more than 12months (long-term capital asset)

General Rule: For purposes of computingcapital loss and capital gain, the actual holdingperiod is taken into account.

Exception: If securities become worthless duringthe taxable year and are capital assets, the lossresulting therefrom shall be considered as a lossfrom the sale or exchange, on the last day ofsuch taxable year, of capital assets.

HOLDING PERIOD RULE does not apply toCorporate Taxpayers – 100% of the capital gainor loss, regardless of the holding period.

HOLDING PERIOD RULE does not apply tosale of shares not traded thru stock exchange(Sec. 24 (C) and sale of real property (Sec. 24 (D)(1))―The provision of Section 39 (b) notwithstanding..‖

(4) Net capital gain, Net capital loss

Note: If subject to specific final income tax:

specific capital loss can only bededucted from specific capital gain.

If not subject to specific final income tax:capital loss and ordinary loss can bededucted from capital gain; BUT capitalloss cannot be deducted from ordinaryincome but may be carried over istaxpayer is an individual.

(5) Computation of the amount of gain or loss

Amount realized from sale or otherdisposition of property

Less: Basis or Adjusted BasisNET GAIN (LOSS)

Note: Amount realized from sale or otherdisposition of property = sum of moneyreceived + fair market value of the property(other than money) received

(a) Cost or basis of the property sold

In computing the gain or loss from the sale orother disposition of property, the BASIS shallbe as follows :

1. Property acquired by purchase – its cost,i.e., the purchase price plus expenses ofacquisition.

2. Property which should be included in theinventory – its latest inventory value[RR-2 sec 136]

3. Property acquired by devise, bequest orinheritance – its fair market price orvalue as of the date of acquisition

4. Property acquired by gift or donation – thesame as if it would be in the hands ofthe donor or at last preceding owner bywhom it was not acquired by gift,EXCEPT that if such basis is greaterthan the FMV of the property at the timeof the gift then, for the purpose ofdetermining loss , the basis shall be suchFMV

5. Property (other than capital asset) acquired for less than an adequate consideration inmoney’s worth – a) the amount paid bythe transferee for the property; or b) thetransferor’s adjust ed basis at the time ofthe transfer whichever is greater

(b) Cost or basis of the property exchanged incorporate readjustment

Sales or exchanges resulting in non-recognitionof gains or losses:1. Exchange solely in kind in legitimate mergers

and consolidation ; includes:a. Between the corporations which are

parties to the merger or consolidation(property for stocks);

b. Between a stockholder of a corporationparty to a merger or consolidation andthe other party corporation (stock forstock);


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c. Between a security holder of acorporation party to a merger orconsolidation and the other partycorporation (securities for securities)

SUBSTITUTED BASIS OF STOCK ORSECURITIES RECEIVED:Original basis of the property, stock or

securities exchangedLESS: (a) money received, if any; and

(b) FMV of the other property received.ADD: (a) the amount treated as

dividend of the shareholder; and(b) the amount of any gain that wasrecognized and the exchange.

The property received as “boot” shallhave as basis its FMV

If as part of the consideration to thetransferor, the transferee of property

assumes a liability of the transferor oracquires from the latter property subjectto a liability, such assumption oracquisition (in the amount of liability),shall be treated as money received bythe transferor on the exchange

The Commissioner may allocate thebasis among the several classes of stocksor securities received.

2. Transfer to a controlled corporation – exchange of property for stocks resulting inacquisition of corporate control by a person,alone or together with others not exceedingfour.

SUBSTITUTED BASIS OF PROPERTYTRANSFERRED:The basis of the property transferred in thehands of the transferee shall be the same asit would be in the hands of the transferorincreased by the amount of the gainrecognized to the transferor on the transfer.

(c) Recognition of gain or loss in exchange ofproperty

General ruleUpon the sale or exchange of property, theENTIRE amount of the gain or loss shall berecognized.

ExceptionsNo gain or loss shall be recognized:

(a) If in pursuance of a plan of merger orconsolidation:

a. A corporation, which is a partyto a merger or consolidation,exchanges property solely forstock in a corporation, which isa party to the merger orconsolidation;

b. A shareholder exchanges stockin a corporation, which is aparty to a merger orconsolidation, solely for thestock of another corporationalso a party to the merger orconsolidation; or

c. A security holder of acorporation, which is a party tothe merger or consolidation,exchanges his securities in suchcorporation, solely for stock or

securities in anothercorporation, a party to themerger or consolidation.

(b) If property is transferred to acorporation by a person in exchange forstock or unit of participation in such acorporation, of which as a result of suchexchange, said person, alone or togetherwith others not exceeding 4 persons,gains control of the corporation.

- Stocks issued for services shall notbe considered as issued in property.

(6) Income tax treatment of capital loss

(a) Capital loss limitation rule (applicable toboth corporations and individuals)

General Rule: Losses from sales or exchanges ofcapital assets shall be allowed only to the extentof the gains from such sales or exchanges.

EXCEPTION for Banks and Trust Companies: If abank or trust company incorporated under thelaws of the Philippines, a substantial part of

whose business is the receipt of deposits or thesale of bond, debenture, note, certificate or otherevidence of indebtedness, any loss resultingfrom such sale shall not be subject to theforegoing limitation and shall not be included indetermining the applicability of such limitationto other losses.

(b) Net loss carry-over rule (applicable only toindividuals)


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If an individual sustains in any taxable year anet capital loss, the loss (in an amount not inexcess of the net income for the year) shall betreated in the succeeding taxable year as a lossfrom the sale or exchange of a capital asset heldfor not more than 12 months.

(7) Dealings in real property situated in thePhilippines

Persons Liable and Transactions Affecteda) Individual taxpayers, estates and trusts

Sale or exchange or otherdisposition of real propertyconsidered as capital assets .

Includes "pacto de retro sale" andother conditional sale.

b) Domestic Corporation Sale or exchange or disposition of

lands and/or building which arenot actually used in business andare treated as capital asset .

Rate and Basis of Tax A final withholding tax of 6% is based

on the gross selling price or fair marketvalue or zonal value whichever ishigher .

Note: Gain or loss is immaterial, there beinga conclusive presumption of gain.

(8) Dealings in shares of stock of Philippinecorporations

1. Persons Liable to the Taxa) Individual taxpayer, whether citizen or

alien;b) Corporate taxpayer, whether domestic

or foreign; andc) Other taxpayers not falling under (a)

and (b) above, such as estate, trust, trustfunds and pension funds, among others.

2. Persons not liable a) Dealers in securitiesb) Investor in shares of stock in a mutual

fund companyc) All other persons who are specifically

exempt from national internal revenuetaxes under existing investmentincentives and other special laws.

(a) Shares listed and traded in the stockexchange

½ of 1% of the gross selling price of thestock

Note: In the nature of percentage taxand not income tax; exempt fromincome tax per Section 128 (d):

- “Any gain derived from thesale, barter, exchange or otherdisposition of share of stock

under this section shall beexempt from taxes imposed inSections 24(C), 27(D)(2),28(A)(8)(c), and 28(B)(5)(c) ofthis Code and from the regularindividual or corporate incometax.”

Note: Percentage tax paid isDEDUCTIBLE for income tax purposes.

(b) Shares not listed and traded in the stockexchange

Net capital gains derived during thetaxable year from sale, exchange, ortransfer shall be taxed as follows (on aper transaction basis):

Not over P 100,000 - 5% Over P 100,000 - 10%

(9) Sale of principal residence

Disposition of principal residence is exemptfrom Capital Gains Tax provided:

a. Sale or disposition of the old principalresidence;

b. By natural persons - citizens or aliens provided that they are residents taxableunder Sec. 24 of the Code (does notinclude an estate or a trust);

c. The proceeds of which is fully utilizedin (a) acquiring or (b) constructing anew principal residence within eighteen(18) calendar months from date of saleor disposition;

d. Notify the Commissioner within thirty(30) days from the date of sale ordisposition through a prescribed return

of his intention to avail the taxexemption;

e. Can only be availed of only once everyten (10) years;

f. The historical cost or adjusted basis ofhis old principal residence sold,exchanged or disposed shall be carriedover to the cost basis of his newprincipal residence

g. If there is no full utilization, the portionof the gains presumed to have been


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realized shall be subject to capital gainstax.

h. Portion of presumed gains subject toCGT: (Unutlized/GSP) x (higher or GSPor FMV)

(10) Passive Investment Income

a) Interest Incomeb) Dividend Income

Cash dividend and property dividend aresubject to income tax.

Stock dividend is generally exempt fromincome tax, EXCEPT:

a. It shall be taxable only if subsequentlycancelled and redeemed by the corporationand shares become treasury shares; or

b. It shall also be taxable if it leads to asubstantial alteration in the proportion of taxownership in a corporation.

Liquidating dividendIt is taxable or deductible loss, depending onwhether gain is realized or loss sustained by thestockholder upon the distribution of thecorporation of all its assts. The income is subjectto ordinary income tax rates and NOT to theFWT on dividends.

c) Royalty IncomeRoyalty is a valuable property that can be

developed and sold on a regular basis for aconsideration; in which case, any gain derivedtherefrom is considered as an active business incomesubject to the normal corporate tax

d) Rental Income

Actual rent itself: included in gross income(taxable); income recognition for tax purposesfollows income recognition for accountingpurposes

Payments by lessee of obligations of lessor tothird persons: considered as additional rentincome of the lessor, and therefore included ingross income (taxable).

Lease of personal propertyRental income on the lease of personal propertylocated in the Philippines and paid to a non-resident taxpayer shall be taxed as follows:

Non-Resident

Non-Resident

Corporation AlienVessel 4.5% 25%Aircraft,machineries andother Equipment

7.5% 25%

Other assets 30% 25%

Lease of real property

LESSOR TAX RATECitizenResident AlienNon-resident alienengaged in trade orbusiness in thePhilippines

Net taxable incomeshall be subject to thegraduated income taxrates

Non-resident alien notengaged in trade orbusiness in thePhilippines

Rental income fromreal property locatedin the Philippines shallbe subject to 25% finalwithholding tax unless

a lower rate isimposed pursuant toan effective tax treaty

Domestic CorporationResident ForeignCorporation

Net taxable incomeshall be subject to 30%corporate income taxor its gross income willbe subject to 2% MCIT

Non-resident ForeignCorporation

Gross rental incomefrom real propertylocated in thePhilippines shall be

subject to 30%corporate income tax,such tax to bewithheld and remittedby the lessee in thePhilippines

Tax treatment of:

(a) Leasehold improvements by lessee Income from leasehold improvements:

1. Outright methodincome recognizedwhen the improvement is completed at itsmarket value

2. Spread-out method- the estimated bookvalue of the leasehold improvement at theend of the lease is spread over the term of thelease and is reported as income for each yearof the lease an aliquot part thereof.

estimated BV at the end of the leasecontract/ lease term

(b) VAT added to rental/paid by the lessee


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If the lessee is VAT-registered, treat VAT paid asinput VAT;

If the lessee is not VAT-registered OR not liableto VAT, treat VAT paid as additional rentexpense deductible from gross income.

(c) Advance rental/long term lease

Note: Income recognition for income taxpurposes should follow income recognition foraccounting purposes. If accrual method isemployed by lessor, income is reported astaxable income when earned; if cash basis, whenreceived.

7) Annuities, Proceeds from life insurance orother types of insurance

8) Prizes and awards

Contest prizes and awards received aregenerally taxable. Such payment constitutesgain derived from labor.

The EXCEPTIONS are as follows:

Prizes and awards received inrecognition of religious, charitable,scientific, educational, artistic, literary orcivic achievements are EXCLUSIONS from gross income if:

a. The recipient was selected withoutany action on his part to enter acontest or proceedings; and

b. The recipient is not required torender substantial future servicesas a condition to receiving the prizeor award.

Prizes and awards granted to athletes inlocal and int’l sports competitions andtournaments held in the Philippines andabroad and sanctioned by their nationalassociations shall be EXEMPT from

income tax.9) Pensions, retirement benefit, or separationpay

10) Income from any source whatever

Forgiveness of indebtedness The cancellation or forgiveness of

indebtedness may have any of three possibleconsequences: a. It may amount to payment of income.

b. It may amount to a gift.c. It may amount to a capital transaction.

Recovery of accounts previously written off

Tax Benefit Rule – Bad debts claimed as adeduction in the preceding year(s) butsubsequently recovered shall be included as part

of the taxpayer’s gross income in the year ofsuch recovery to the extent of the income tax benefitof said deduction. There is an income tax benefitwhen the deduction of the bad debt in the prioryear resulted in lesser income and hence tax savings for the company. (Sec. 4, RR 5-99)

c) Receipt of tax refunds or credit

The following tax refunds are not to be includedin the computation of gross income: (CAP –IF–FED–VAT)

1. Philippine income tax, except the fringebenefit tax

2. Income tax imposed by authority of anyforeign country, if the taxpayer claimeda credit for such tax in the year it waspaid or incurred.

3. Estate and donor’s taxes 4. Taxes assessed against local benefits of a

kind tending to increase the value of theproperty assessed (Special assessments)

5. Value Added Tax6. Fines and penalties due to late payment

of tax7. Final taxes8. Capital Gains Tax

Note: The enumeration of tax refunds that arenot taxable (income) is derived from anenumeration of tax payments that are notdeductible from gross income.

d) “Income from any source whatever”

These words disclose a legislative policy toinclude all income not expressly exempted

within the class of taxable income under ourlaws, irrespective of the voluntary orinvoluntary action of the taxpayer in producingthe gains.

f. Source rules in determining income fromwithin and without

Sale of personal property


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General Rule: Gains, profits and income fromthe sale of personal property, subject to thefollowing rules:

Place ofPURCHASE

Place ofSALE

Treatment**

Philippines Abroad Income fromWithout

Abroad Philippines Income fromWithin

** in other words, treated as income from thecountry in which sold

Exceptions:1. Gain from the sale of shares of stock in a

domestic corporation treated as derived entirely from sources

within the Philippines regardless of wherethe said shares are sold.

2.

Gains from the sale of (manufactured)personal property:a. produced (in whole or in part) by the

taxpayer within and sold without thePhilippines, or

b. produced (in whole or in part) by thetaxpayer without and sold within thePhilippines

treated as derived partly fromsources within and partly fromsources without the Philippines.

Place ofPRODUCTION

Place ofSALE

Treatment

Philippines Abroad Partly within,partlywithout

Abroad Philippines Partly within,partlywithout

g. Situs of Income Taxation

INCOME SITUSInterest Residence of the debtorDividends Residence of the corporationServices Place of performanceRentals Location of the propertyRoyalties Place of exerciseSale of RealProperty

Location of realty

Sale ofPersonal

A. Tangible

1. Purchase and sale: Locationof Sale2. Manufactured w/in and

sold w/o: Partly w/in andpartly w/o3. Manufactured w/o and soldw/in: Partly w/in and partlyw/o

B. Intangible

General rule: Place of Sale

Exception: Shares of stock ofdomestic corporations: Placeof incorporation

Shares ofStock ofDomesticCorporation

Place of incorporation

h. Exclusions from Gross Income

Exclusions distinguished from deductions

Exclusions from gross income refer to a flow ofwealth to the taxpayer which are not treated aspart of gross income, for purpose of computingthe taxpayer’s taxable income.

Deductions, on the other hand, are the amountswhich the law allows to be deducted from grossincome in order to arrive at net income.

Exclusions pertain to the computation of grossincome, while deductions pertain to thecomputation of the net income. (Mamalateo)

1) Exclusion under the Constitution

a. Income derived by the government or itspolitical subdivisions from the exercise ofany essential governmental function

b. Income derived from any public utility orfrom the exercise of any essentialgovernmental function accruing to theGovernment of the Philippines or to anypolitical subdivision thereof.

2) Exclusions under the Tax Code

a) Proceeds of life insurance policiesb) Return of premium paidc) Amounts received under life insurance,

endowment or annuity contractsd) Value of property acquired by gift, bequest,

devise or descente) Amount received through accident or health

insurance


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f) Income exempt under tax treatyg) Retirement benefits, pensions, gratuities, etc.

a. RETIREMENT benefits under RA7641 or under a reasonable privatebenefit plan

b. TERMINAL payc. BENEFITS from foreign governments

d. VETERANS benefitse. Benefits under the Social Security Act f. GSIS and SSS benefits

3) Under a Tax Treaty

4) Under Special Lawsa. Income subject to final tax; b. PCSO and lotto winnings; c. Income already subjected to final tax, such

as gains from shares and real property

subject to capital gains tax.d. GAIN from buying and selling stocksclassified as capital asset listed and traded inthe PSE;

e. FRINGE benefits already subject to FBT;f. DE MINIMIS benefits. g. Tax Exempt EMPLOYEE’S TRUST under

Sec. 60B of the NIRC h. Tax Exempt EDUCATIONAL

INSTITUTIONSi. QUALIFIED SENIOR CITIZEN- The income

of a qualified senior citizen is exempt from the payment of income tax provided his annualtaxable income does not exceed the poverty levelof P60,000 per year, except interest income. [BIRRuling 066-2000; R. A. 7432; BIR Ruling 15-98]

j. Tax Exempt INVENTORS ANDINVENTIONS

k. Tax Exempt COOPERATIVE INCOMEl. BARANGAY MICRO BUSINESS

ENTERPRISES (BMBE)

i. Deductions from Gross Income

Conditions for Deductibility of BusinessExpenses:

1. must be ordinary and necessary2. paid or incurred during the taxable year3. directly attributable to the development,

management, operation and/or conductof the trade, business or exercise ofprofession

4. Supported by adequate invoices orreceipts

5. Not Contrary to law, public policy ormorals.

6. The tax required to be withheld on theamount paid or payable is shown tohave been paid to the BIR.

j. Return of capital (cost of sales or services)

a) Sale of inventory of goods bymanufacturers and dealers of propertiesIn sales of goods representing inventory, theamount received by the seller consists of returnof capital and gain from sale of goods orproperties. That portion of the receiptrepresenting return of capital is not subject toincome tax.

b) Sale of stock in trade by a real estate dealerand dealer in securitiesReal estate dealers and dealers in securities areordinarily not allowed to compute the amountrepresenting return of capital through cost ofsales. Rather they are required to deduct thetotal cost specifically identifiable to the realproperty or shares of stock sold or exchanged.

c) Sale of servicesTheir entire gross receipts are treated as part ofgross income.

TYPE OF TAXPAYER ALLOWABLEDEDUCTIONS

Individuals with gross

income from business/practiceprofession

Itemized deductions

OROptional StandardDeduction;Premium payments onhealth/hospitalizationinsurance [Sec. 34(M)];Personal/additionalexemptions

Individuals earning purely compensationincome (except non-resident aliens not

engaged in trade orbusiness)

Premium payments onhealth/hospitalizationinsurance [Sec. 34(M)];Personal/additional

exemptions

Corporations (exceptnon-resident foreigncorporations), generalprofessionalpartnerships, estatesand trusts engaged inbusiness, proprietaryeducationalinstitutions and

Itemized deductions


22/41


hospitals (non-profit),and GOCC Estates and Trusts Computed in the same

manner and on thesame basis as in thecase of an individual,except that, there shallbe allowed as

deduction in thecomputation of thetaxable income of theestate or trust:a) The amount of

income for thetaxable yeardistributedcurrently by thefiduciary to thebeneficiaries; and

b) Amount of income

collected byguardian of aninfant which is tobe held anddistributed as thecourt may direct.BUT the amountso allowed asdeduction shall beincluded incomputing thetaxable income ofthe beneficiarywhetherdistributed tothem or not.

c) Amount of theincome notpreviouslydistributed orcredited (henceinitially formedpart of income ofthe estate or trust)but subsequently

distributed orcredited; theamount allowed asdeduction shall beincluded incomputing thetaxable income ofthe legatee, heir orbeneficiary.

Additional P50,000

exemption [Sec. 62]

TAX-PAYER

PERSONALEXEMPTION

ADDITIONALEXEMPTION

OSD

Residentcitizen

Yes Yes Yes

Non-

residentCitizen

Yes Yes Yes

ResidentAlien

Yes Yes Yes

Non-residentalien(engaged intradeandbusiness

)

Subject tothe rule ofreciprocity

No No

Non-residentalien(Notengagedin tradeandbusiness)

No No No

3) Itemized deductionsa. Expensesb. Interestc. Taxesd. Lossese. Bad Debtsf. Depreciationg. Charitable and other contributionsh. Contributions to pension trusts

a) Expenses

Includes:a. Salaries, wages, compensation,

including the grossed-up monetaryvalue of fringe benefits subject to FBT

b. Travel expensesc. Rentalsd. Entertainment, recreation and

amusement expensese. Other expenses such as repairs or those

incurred by farmers and other personsin agribusiness

b) Interest


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Requisites for deductibility1. There is an INDEBTEDNESS.2. The indebtedness is that of the TAXPAYER.3. The indebtedness is connected with the

taxpayer’s TRADE, profession, or business. 4. The interest must be legally DUE.5. The interest must be stipulated in

WRITING.6. The taxpayer is LIABLE to pay interest onthe indebtedness.

7. The indebtedness must have been paid oraccrued DURING the TAXABLE YEAR.

8. The interest payment arrangement must notbe between RELATED taxpayers

9. The interest must not be incurred to financePETROLEUM operations.

10. In case of interest incurred to acquireproperty used in trade, business or exerciseof profession, the same was not treated as aCAPITAL expenditure,

LIMITATION : The taxpayer's allowablededuction for interest EXPENSE shall bereduced by an amount equal to 42% of theinterest INCOME subjected to final tax;provided, that effective January 1, 2009, thepercentage shall be 33%.

c) Taxes

General Rule: All taxes, national or local, paidor incurred during the taxable year inconnection with the taxpayer's profession, tradeor business, are deductible from gross income

Exceptions:1. Philippine income tax, except Fringe Benefit

Taxes;2. Income tax imposed by authority of any

foreign country; Exception to exception:

When the taxpayer does NOT signifyhis desire to avail of the tax credit fortaxes of foreign countries, the amountmay be allowed as a deduction subjectto the limitations set forth by law.

3. Estate and donor’s taxes 4. Taxes assessed against local benefits of a

kind tending to increase the value of theproperty assessed (Special Assessments)

5. Value Added Tax6. Fines and penalties7. Final taxes8. Capital Gains Tax9. Import duties

10. Business taxes11. Occupation taxes12. Privilege and license taxes13. Excise taxes14. Documentary stamp taxes15. Automobile registration fees16. Real property taxes17. Electric energy consumption tax under BP

36

Treatments of interests CIR v. Vda. de Prieto (1960): Although interestpayment for delinquent taxes is not deductibleas tax under… the Tax Code, the taxpayer is notprecluded thereby from claiming said interestpayment as deduction.

Treatment of special assessmentSpecial assessments and other taxes assessedagainst local benefits of a kind tending toincrease the value of the property assessed arenon-deductible from gross income.

(5) Tax credit vis-à-vis deduction

TAX CREDIT - Foreign income taxes paid orincurred which reduces the Philippine incometax to be paid.

The following may claim tax credits:1. Resident citizens2. Domestic corporations

3. Members of general professionalpartnerships

4. Beneficiaries of estates or trusts

The following may NOT claim tax credits:1. Non-resident citizens2. Resident aliens3. Non-resident aliens4. Foreign corporations

Limitations: 1) Per Country Limit ; AND

1. TaxableIncome perForeignCountryWorldwideTaxableIncome

xPhil.IncomeTax

=PerCountryLimit

2) Worldwide Limit


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2. TaxableIncome forall ForeignCountriesWorldwideTaxableIncome

XPhil.IncomeTax

= WorldwideLimit

Note: The second limitation applies where thetaxpayer derives income from more than oneforeign country.

d) Losses

REQUISITES FOR DEDUCTIBILITY:1. Loss must be that of the taxpayer (i.e. losses

of the parent corp. cannot be deducted by itssubsidiary);

2. Actually sustained during the taxable year;3. Connected with the trade, business or

profession;4. Evidenced by a close and completedtransaction;

5. Not compensated for by insurance or otherform of indemnity;

6. Not claimed as a deduction for estate taxpurposes;

7. In case of casualty, notice of loss must befiled with the Bureau of Internal Revenuewithin 45 days from the date of discovery of thecasualty or robbery, theft or embezzlement.

No loss is recognized in the following: 1. Merger, consolidation, or control

securities (where no gains arerecognized either);

2. Exchanges not solely in kind;3. Related taxpayers;

a. Between members of a familyb. Between an individual and

corporation more than fifty percent(50%) in value of the outstandingstock of which is owned, directly orindirectly, by or for such individual;or

c. Between two corporations morethan fifty percent (50%) in value ofthe outstanding stock of which isowned, directly or indirectly, by orfor the same individua l;

d. Between the grantor and a fiduciary of any trust;

e. Between the fiduciary of a trust andthe fiduciary of another trust if thesame person is a grantor withrespect to each trust;

f. Between a fiduciary andbeneficiary of a trust.

4. Wash sales;5. Illegal transactions

Other types of losses

(a) Capital losses

(b) Securities becoming worthless

(c) Losses on wash sales of stocks or securitiesWASH SALE - a sale or other disposition ofstock or securities where substantiallyidentical securities are acquired orpurchased within a 61-day period,beginning 30 days before the sale andending 30 days after the sale

GENERAL RULE: Not deductible fromgross incomeEXCEPT: If by a dealer in securities in thecourse of ordinary business, it is deductible.

(d) Wagering losses Deductible only to the extent of

wagering gains. A wager is made whenthe outcome depends upon CHANCE.

(e) NOLCO (Net Operating Loss Carry Over)

Net operating loss is the excess of allowabledeductions over gross income for any taxable

year immediately preceding the current taxableyear.

NOLCO : Net operating losses which have notbeen previously offset as deduction from grossincome shall be carried over as a deductionfrom gross income for the next three (3)consecutive taxable years immediately following theyear of such loss.

Exception : Mines other than oil and gas wells ,where a net operating loss incurred in any of the first ten (10) years of operation may be carried overas a deduction from taxable income for the nextfive (5) years immediately following the year ofsuch loss.

REQUISITES for NOLCO:

1. The taxpayer was not exempt from incometax the year the loss was incurred;

2. There has been no substantial change in theownership of the business or enterprisewherein:


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AT LEAST 75% of nominal value ofoutstanding issued shares is held by or onbehalf of the same persons;

orAT LEAST 75% of the paid up capital of thecorporation is held by or on behalf of thesame persons.

Taxpayers Entitled to NOLCOA. Individuals engaged in trade or business orin the exercise of his profession (includingestates and trusts);

Note: An individual who avails of optionalstandard deduction cannot simultaneouslyclaim deduction of NOLCO. However, thethree-year period shall continue to runduring such period notwithstanding theelection made by the taxpayer.

B. Domestic and resident foreign corporationssubject to the normal income tax (e.g.,manufacturers and traders) or preferential taxrates under the Code (e.g., private educationalinstitutions, hospitals, and regional operatingheadquarters) or under special laws (e.g, PEZA-registered companies).

Note: Corporations cannot avail of NOLCOas long as it is subject to MinimumCorporate Income Tax in any taxable year. However , the three-year period shallcontinue to run notwithstanding the factthat the corporation paid its income taxunder MCIT during such period.

e) Bad debts

Requisites for deductibility1. Existing indebtedness due to the taxpayer

which is valid and legally demandable;2. Debt is connected with the taxpayer's trade,

business or practice of profession;3. Debt was not sustained in a transaction

entered into between related parties;4. Actually ascertained to be worthless and

uncollectible as of the end of the taxableyear (taxpayer had REASONABLYASCERTAINED in GOOD FAITH usingsound business judgment); and

5. Actually charged off in the books ofaccounts of the taxpayer as of the end of thetaxable year

Tax Benefit rule on Bad Debts

Bad debts claimed as deduction in the precedingyear(s) but subsequently recovered shall beincluded as part of the taxpayer’s gross incomein the year of such recovery the extent of theincome tax benefit of said deuction. Also calledthe equitable doctrine of tax benefit.

f) Depreciation

There shall be allowed as a depreciationdeduction a reasonable allowance for theexhaustion, wear and tear (including reasonableallowance for obsolescence) of property used inthe trade or business.

Requisites for deductibility1. Must be for property used in the TRADE or

business, or those not being usedtemporarily during the year

2. A limited USEFUL life.3. Allowance must be REASONABLE.4. CHARGED OFF during the taxable ye ar

from the taxpayer’s books of accounts. 5. Does NOT EXCEED the cost of the property

g) Charitable and other contributions

Requisites for deductibility1. Actually paid or made to the ENTITIES

specified by law;2. Made within the TAXABLE year.3. It must be EVIDENCED by adequate

receipts or records.4. For Contributions Other than Money: The

amount shall be BASED on the acquisitioncost of the property (i.e., not the fair marketvalue at the time of the contribution).

5. For Contributions subject to the statutorylimitation: It must not EXCEED 10%(individual) or 5% (corporation) of thetaxpayer’s taxable income before charitablecontributions.

1) Contributions Deductible in Full: (FoNG)

a. Donations to the Government -Donations to the Government of thePhilippines or to any of its agencies orpolitical subdivisions, including fully-owned government corporations,exclusively to finance, to provide for, orto be used in undertaking PRIORITYACTIVITIES .

b. Donations to Certain Foreign Institutions or InternationalOrganizations


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c. Donations to Accredited Non- government Organizations - non-profitdomestic corporation organized andoperated exclusively for: (CRWSH CysChE Com)

- Scientific,- Research,- Educational,

- Character-building and youth andsports development,- H ealth,- social W elfare,- Cultural or- CH aritable purposes, or- a COM bination thereof,no part of the net income of whichinures to the benefit of any privateindividual ;

2) Contributions subject to the Statutory Limit(DNGS)

a. Contributions made to the Governmentor any of its agencies or politicalsubdivisions exclusively for publicpurposes (contributions for non-priorityactivities)

b. Contributions made to accreditedd omestic corporation or associationsorganized exclusively for religious,charitable, scientific, youth and sportsdevelopment, cultural or educationalpurposes or for the rehabilitation ofveterans

c. Contributions to social welfareinstitutions

d. Contributions to non-governmentorganizations . No part of the net incomeof which inures to the benefit of anyprivate stockholder or individual

Statutory Limit: Amount deductible must not be in excess of:

10% in the case of an individual,and

5% in the case of a corporation,

of the taxpayer's taxable incomederived from trade, business orprofession before the deduction forcontributions and donations.

The amount deductible is the actualcontribution or the statutory limitcomputed, whichever is lower .

h) Contributions to pension trusts

Pertains to PAST SERVICE COST, or theamount so transferred is apportioned anddeductible in equal parts over a period often (10) consecutive years beginning withthe year in which the transfer or payment ismade.

Requisites for deductibility1. It has not been claimed as a deduction, and2. Is apportioned in equal parts over a period

of ten (10) consecutive years beginning withthe year in which the transfer or payment ismade.

Premium Paid on Health or HospitalizationInsurance[Sec.34 (M)]

Amount of premium paid on health and/orhospitalization by an individual taxpayer(head of family or married), for himself andmembers of his family during the taxable year.

Requisites for Deductibility: 1. Insurance must have actually been taken2. The amount of premium deductible does

not exceed P2,400 per family or P200 permonth during the taxable ear.

3. That said family has a gross income of notmore than P250,000 for the taxable year.

4. In case of married individual, only the

spouse claiming additional exemption shallbe entitled to this deduction.

The following may avail of the deduction:1. Individual taxpayers earning purely

compensation income during the year.2. Individual taxpayer earning business

income or in practice of his profession.

4) Optional standard deduction

a) Individuals, except non-resident aliens

May be taken by an INDIVIDUAL in lieu ofitemized deductions EXCEPT those earningpurely compensation income.

Amount: 40% of GROSS INCOME. (underRA 9504, effective July 6, 2008)

Requisites: 1. Taxpayer is a citizen or resident alien;2. Taxpayer’s income is not entirely from

compensation;3. Taxpayer signifies in his return his

intention to elect this deduction; otherwise


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he is considered as having availed of theitemized deductions.

4. Election is irrevocable for the year in whichmade; however, he can change to itemizeddeductions in succeeding years.

b) Corporations, except non-resident foreigncorporations

The option to elect Optional Standard Deductiongranted is now granted to corporations ( domesticand resident foreign corporations) by virtue of RA9504.

5) Personal and additional exemption(Republic Act 9504 Minimum Wage EarnerLaw)

a) Basic personal exemptions

According to RA 9504 (effective July6, 2008) basic personal exemption isFifty thousand pesos (P50,000) foreach individual taxpayer, regardless whether single, married or head ofthe family.

* BUT note Sec 35(A) - In the case of marriedindividuals where only one of the spousesis deriving gross income , only such spouse shall be allowed the personal exemption.

b) Additional exemptions for taxpayer withdependents

Amount allowed as a deduction P25,000 per dependent child, butnot to exceed four children ( RA9504)

Who may claim additional exemptions? Married Individuals: Additional

exemptions are claimed by only onespouse.

Who is a dependent for purposes of

additional exemptions? 1. A taxpayer’s child, whetherlegitimate, illegitimate or legallyadopted child

2. chiefly dependent for support uponon the taxpayer

3. living with the taxpayer4. a) not more than 21 years old,

unmarried and not gainfullyemployed OR

b) regardless of age, is incapable ofself-support because of mental orphysical defect. (Sec 35 B, NIRC)

NOTE: Only children may beconsidered “dependent” for purposes ofadditional exemptions.

Who may claim personal exemptions? Citizens (whether resident or non-

resident) and resident aliens areallowed to avail of basic personaland additional exemptions.

Non-resident aliens engaged intrade or business are entitled tobasic personal exemptions only byway of reciprocity, but not toadditional exemptions. [Sec. 35,NIRC]o Limit of BPE Allowed to

NRAETB: An amount equal tothe exemptions allowed by thenon- resident alien’s country toFilipino citizens not residingtherein but deriving incometherefrom, but not to exceed theamount fixed by NIRC.[In otherwords, whichever is LOWER ]

Who may claim personal exemptions? Citizens (whether resident or non-

resident) and resident aliens areallowed to avail of basic personaland additional exemptions.

Non-resident aliens engaged intrade or business are entitled tobasic personal exemptions only byway of reciprocity, but not toadditional exemptions. [Sec. 35,NIRC]o Limit of BPE Allowed to

NRAETB: An amount equal tothe exemptions allowed by thenon- resident alien’s country toFilipino citizens not residingtherein but deriving incometherefrom, but not to exceed theamount fixed by NIRC.[In otherwords, whichever is LOWER ]

j. Exempt Corporations(CREB-CLEF-SMB)

The following organizations shall not betaxed in respect to income received bythem as such (e.g. membership fees) :


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1. LABOR , agricultural or horticulturalorganization not organized principallyfor profit

2. M UTUAL savings bank not having acapital stock represented by shares, andcooperative bank without capital stockorganized and operated for mutualpurposes and without profit

3. A BENEFICIARY society , order orassociation, operating for the exclusivebenefit of the memberssuch as a fraternalorganization operating under the lodgesystem, or mutual aid association or anon-stock corporation organized byemployees providing for the payment oflife, sickness, accident, or other benefitsexclusively to the membersof such society,order, or association, or non-stockcorporation or their dependents

4. CEMETERY company owned andoperated exclusively for the benefit ofits members

5. Non-stock corporation or associationorganized and operated exclusively for

RELIGIOUS, charitable, scientific,athletic, or cultural purposes , or for therehabilitation of veterans , no part of its netincome or asset shall belong to or inures tothe benefit of any member , organizer,officer or any specific person

6. BUSINESS league chamber ofcommerce , or board of trade, notorganized for profit and no part of thenet income of which inures to thebenefit of any private stock-holder, orindividual

7. CIVIC league or organization notorganized for profit but operatedexclusively for the promotion of socialwelfare

8. A non-stock and nonprofit EDUCATIONAL institution

9. Government EDUCATIONAL institution

10. F ARMERS' or other mutual typhoon or

fire insurance company, mutual ditch orirrigation company, mutual or cooperativetelephone company, or like organization of a purely local character , the income ofwhich consists solely of assessments,dues, and fees collected from membersfor the sole purpose of meeting itsexpenses and

11. Farmers', fruit growers', or likeassociation organized and o

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