16884100 taxation reviewer

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ATENEOCENTRALBAROPERATIONS 2007

Taxation LawSUMMER REVIEWER

QuickTime and aTIFF (U d) d

PART I GENERAL PRINCIPLES

TAXATION power inherent in every sovereignState to impose a charge or burden upon persons,properties, or rights to raise revenues for the use andsupport of the government to enable it to dischargeits appropriate functions

SCOPE OF TAXATIONTAXATION IS: Unlimited, Far-reaching, Plenary Comprehensive Supreme

STAGES OF TAXATION: (LAP)

1. Levy2. Assessment3. Payment

Basic Principles of a Sound Tax System1. Fiscal Adequacy2. Theoretical Justice3. Administrative Feasibility

INHERENT LIMITATIONS (SPING)1) Situs or territoriality of taxation2) Must be for a Public purpose

Test is whether proceeds will beused for something which is theduty of the State to provide.

Legislature is not required toadopt a policy of all or none.

Incidental benefit to individual

does not defeat exemption3) International comity

Property of a foreign State ofgovernment may not be taxed byanother

4) Non-delegability of the taxing power

Contemplates power tod t i ki d bj t t t

to the other

Applies only to entities exercisinggovernment functions (acta jureimperii)

CONSTITUTIONAL LIMITATIONSA. Direct

1) Due process

Should not be harsh, oppressive,or confiscatory (Substantive)

By authority of valid law(Substantive)

Must be for a public purpose(Substantive)

Imposed within territorialjurisdiction (Substantive)

No arbitrariness in assessmentand collection (Procedural)

Right to notice and hearing(Procedural)

2) Equal protection

All persons subject to legislationshall be treated alike, under likecircumstances and conditionsboth in privileges conferred andliabilities imposed.

Power to tax includes power toclassify provided:(a) Based on substantial

distinction(b) Apply to present and future

conditions(c) Germane to purpose of law(d) Apply equally to all members of

the same class

3) Non-impairment clause Rules

(a) When government is party tocontract granting exemption cannot be withdrawnwithout violating non-impairment clause


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Taxation Law Summer Reviewer

ATENEOCENTRALBAROPERATIONS2007

Uniform: all articles or properties

of the same class taxed at samerate

Equity: apportionment must bemore or less just in the light oftaxpayers ability to shoulder taxburden

5) Non-imprisonment for non-paymentof poll tax

Taxpayer may be imprisoned fornon-payment of other kinds oftaxes where the law so expresslyprovides.

6) Congress shall evolve a progressivesystem of taxation

As resources of the taxpayerbecomes higher, his tax ratelikewise increases (ex. Incometax)

Constitution does not prohibit

regressive taxes; this is adirective upon Congress, not a

justiciable right.7) All appropriation, revenue or tariff bills shall

originate exclusively in the House ofRepresentatives, but the Senate maypropose or concur with amendments

It is the bill, not the law, that mustoriginate from House; bill may undergo

extensive changes in Senate Rationale: members of House are more

sensitive to local needs.8) Freedom of religion

Activities simply and purely forpropagation of faith are exempt (e.g. saleof bibles and religious articles by non-stock, non-profit organization at minimalprofit).

Tax is unconstitutional if it operates as aprior restraint on exercise of religion

Income even of religious organizationsfrom any activity conducted for profil orfrom any of their property, real orpersonal, regardless of disposition ofsuch income, is taxable

9) F d f / i

ACTUALLY, DIRECTLY and EXCLUSIVELY

USED for charitable, religious andeducational purposes shall be exempt fromtaxation

Pertains only to real estate tax.

Test of exemption: actual use of theproperty, not ownership

Use of word exclusively meansprimarily rather than solely.

Exemption extends to property incidentalto or reasonably necessary for theaccomplishment of the purposesmentioned.

11) Tax exemption ofall revenues and assets of(a) non-stock, non-profit educational

institutions(b) used ACTUALLY, DIRECTLY AND

EXCLUSIVELY for educationalpurposes

Exemption covers income, property,

donors tax, and customs duties(distinguish from previous which pertainsonly to property tax)

Revenue must both be (a) derived froman activity in pursuance of educationalpurpose; and (b) proceeds must be usedfor the same purpose (ex. hospitaladjunct to medical school tax exempt)(ex. Interest income not exempt).

Income exempt provided it is used formaintenance or improvement ofinstitution.

Distinguish from tax treatment of (a)proprietary educational institutions(Preferential Tax); and (b) governmenteducational institutions (exempt, ex. UP)

12) Delegated authority of President to imposetariff rates, import and export quotas,

tonnage and wharfage dues delegated by Congress

through a law

subject to Congressional limits andrestrictions

within the framework of nationaldevelopment program


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15) Special purpose - special fund for said

purpose, balance goes to general funds16) Veto power of the President - revenue/tariffbill

17) Power of review of the SC18) Power of Local Government to create their

own sources and levy taxes, fees, charges19) Just share of local government in national

revenue which shall be automaticallyreleased.

20) Tax exemption of all revenues and assets of

(a) proprietary or cooperative educationalinstitutions

(b) subject to limitations provided by law21) Tax exemption of grants, endowments,

donations or contributions USEDACTUALLY, DIRECTLY and EXCLUSIVELYfor educational purposes

CIR v. CA (298 SCRA 85)

Facts: YMCA is a non-stock, non-profit institution,which conducts various programs and activitiesbeneficial to the public pursuant to its religious,educational and charitable objective. In 1980, YMCAearned an income of more than P600K from leasingout a portion of its premises to small shop ownersand P47K from parking fees.

Issue: Is the rental income from real property ownedby the YMCA subject to income tax?

Held: YES, the exemption claimed by YMCA isexpressly disallowed by the last paragraph of then27 of the NIRC. Furthermore, Art. XIV, 4 (3) of theConstitution only exempts YMCA from property taxesNOT income tax. YMCA cannot be considered as aneducational institution within the purview of theabove-cited article. The term educational institution

under the Education Act of 1982 refers to schools.The school system is synonymous with formaleducation, which refers to hierarchically structuredand chronologically graded learnings organized andprovided by the formal school system and for whichcertification is required in order for the learner toprogress through grades or more to higher levels

(c) without regard to their property,

occupation or businessEx. Community Tax (Cedula)2) property tax

(a) imposed on property, real or personal(b) in proportion to its value or other

reasonable method of apportionmentEx. Real estate tax

3) excise, privilege tax - (different from theexcise tax in Taxation II)(a) imposed upon performance of an act, the

enjoyment of a privilege or the engagingin an occupation, profession or business

Ex. Income tax, VAT, estate tax, donors taxB. As to who bears the burden

1) Direct the tax is imposed on the personwho also bears the burden thereofEx. Income tax, community tax, estate tax

2) Indirect imposed on the taxpayer whoshifts the burden of the tax to another

Ex. VAT, specific tax, percentage tax,customs duties

C. As to determination of amount1) Specific tax imposed and based on a

physical unit of measurement, as by head,number, weight, length or volumeEx. Tax on distilled spirits, fermentedliquors, cigars

2) Ad Valorem - tax of a fixed proportion of thevalue of property with respect to which thetax is assessed; requires intervention ofassessor.Ex. Real estate tax, excise tax on cars, non-essential goods

D. As to purpose1) General, fiscal or revenue - imposed for the

general purpose of supporting thegovernmentEx. Income tax, percentage tax

2) Special or regulatory - imposed for aspecial purpose, to achieve some social oreconomic objectivesEx. Protective tariffs or customs duties onimported goods intended to protect localindustries

E. As to authori ty imposing the tax


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F. As to graduation of rate (Three systems of

taxation)1) Proportional - based on a fixed percentage

of the amount of the property, income orother basis to be taxedEx. Real estate tax, VAT, percentage tax

2) Progressive or graduated - tax rateincreases as the tax base or bracketincreasesEx. Income tax, estate tax, donors tax

3) Regressive - tax rate decreases as the taxbase increases

4) Degressive - increase of rate is notproportionate to the increase of tax base

SITUS OF TAXATION - the place of taxation, thecountry that has the power to levy and collect thetax.

TAX DISTINGUISHED FROM POLICE POWER

TAX POLICE POWER (inthe form of a FEE)

Purpose Raise revenue Exercise to promotepublic welfare throughregulation

Amount ofexaction

No limit Limited to the cost ofregulation, issuance

of license, orsurveillance

Superiorityofcontracts

Contracts maybe impairedunless (a)government isparty tocontractgranting

exemption; or(b) involvesfranchise

Contracts may beimpaired

Transferofpropertyrights

Taxes paidform part of thepublic funds

Allows merely therestraint on theexercise of propertyrights

taxes accrue

to the generalbenefit of thecitizens of thetaxing State

is given the owner

of the expropriatedproperty

Personsaffected

Applies to allpersons,property andexcises thatmay be

subjectthereto

Only particularproperty iscomprehended

TAX DISTINGUISHED FROM LICENSE FEE

TAX LICENSE FEE

Source Exercise ofTaxing power

Emanate from the policepower of the State

Purpose Raise

revenue

Regulation

Object Persons,property andprivilege

Right to exercise aprivilege

Amount no limit only necessary to carryout regulation

Distinction lies in the primary purpose:

License fee if primary purpose is toregulate and the excess of the amountcollected from the cost to carry out theregulation is minimal and incidental.

Tax if primary purpose, or at least one ofthe real and substantial purposes is toraise revenue.

If amount is too high for regulation, it wouldbe a tax; unless imposed on non-usefuloccupations or businesses.

Purpose of distinction: limitations andexemptions apply only to one and not to theother (ex. Exemption from taxation does notinclude exemption from fee)

TAX DISTINGUISHED FROM DEBT


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Generally not

subject tocompensation/set-off

May be the subject

ofcompensation/set-off

Imprisonment issanction for non-payment

No imprisonmentfor non-payment

GENERAL RULE: Taxes cannot be the subject ofcompensation or set-off* A person cannot refuse to pay a tax on the groundthat the government owes him an amount equal to orgreater than the tax being collected. The collection oftax cannot await the results of a lawsuit against thegovernment.

Reasons:

a) lifeblood theoryb) taxes are not contractual obligation (absence

of consent of taxpayer)c) taxpayer and government are not mutual

debtors and creditors of each other

EXCEPTIONS:1) Both claims already became overdue and

demandable as well as fully liquidated there

must have already been an act of appropriationby the government (legislative) of funds forpayment of the debt.

2) Tax overpayment (BIRs obligation to refund orset-off arises from time tax was paid)

3) If the case involves local government taxes

TAX DISTINGUISHED FROM SPECIALASSESSMENT

TAX SPECIALASSESSMENT

Imposedon

persons,properties, etc.

Only on land

Whyimposed

regardless ofpublic

Public improvementthat benefits the land

TAX DISTINGUISHED FROM TOLL

TAX TOLL

Kind ofdemand

Demand ofsovereignty

Demand ofownership

Purpose support ofgovernment

Collection for theuse of property

Amount no limit dependson need of the

government

Fair return of thecost of the property

or improvement

TAX DISTINGUISHED FROM CUSTOMS DUTY

TAX CUSTOMSDUTY

Coverage More comprehensivethan customs duty

kind of tax

Object Persons, prop, etc goods importedor exported

DOCTRINE OF EQUITABLE RECOUPMENT1) refund of a tax illegally or erroneously collected

or overpaid by a taxpayer2) such tax refund is barred by prescription3) tax presently being assessed against a taxpayer4) may be recouped or set-off against the tax barred

by prescriptionnot allowed in Philippines, reason - LIFE BLOOD

CONCEPT OF DOUBLE TAXATIONKinds of Double Taxation

A. DIRECT DUPLICATE

taxing same person, property or righttwice

for the same purpose

by the same taxing authority within the same jurisdiction or taxing

district

within the same taxable period

and they must be of the same kind orcharacter of tax

B INDIRECT DUPLICATE


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TAX TREATY AS A MODE OF ELIMINATINGDOUBLE TAXATION:

1) EXEMPTION METHOD the income or capitalwhich is taxable in the state of source or situs isexempted in the state of residence, although insome instances it may taken into account indetermining the rate of tax applicable to the taxpayers remaining income or capital (ex. TaxSparing Credit scheme)

2) CREDIT METHOD the tax paid in the state ofsource is credited against the tax levied in thestate of residence

Af isco Insurance Corp v. CA (G.R. No. 112675,Jan. 25, 1999)

Petitioners are local non-life insurance corps. Whichformed a pool in order to enter into a ReinsuranceTreaty with a German company. BIR assesseddeficiency taxes against the pool on the ground thatit is considered a partnership taxable as a corp.

Petitioners insist that the pool is a mere agent, notacting on its own and therefore, cannot be taxed as acorp., there being no risk undertaken by the pool, nocommon fund and no control exercised by its board inthe management of its fund.

Issue (1) : Is the Pool Taxable as a Corp?

Held (1): YES. Pursuant to 24 of the NIRC, the

pool is included within the definition of domesticcorps. Which comprises even unregisteredpartnerships and associations. In this case, theceding cos. Entered into an association that wouldhandle all business under the Treaty. It has acommon fund and an executive board to manage itsaffairs. Moreover, even if the pool itself did not issueany policies on its own, its work was indispensable tothe business of the ceding companies and theGerman Co,

Issue (2): Is there double taxation?

Held(2): NO. Double taxation means taxing thesame person twice by the same jurisdiction for thesame thing. The pool is a taxable entity distinct fromthe individual corporate entities of the ceding

taxpayers property. As long as the power to tax

does not violate any constitutional or statutoryprovisions, said power can be a power to destroy.

But for all its plenitude, the power to tax is notunconfined as there are restrictions. Adverselyeffecting as it does property rights, both the dueprocess and equal protection clauses of theConstitution may properly be invoked to invalidate inappropriate cases a revenue measure. If it wereotherwise, there would be truth to the dictum that the

power to tax involves the power to destroy. The webor unreality spun from Justice Marshalls famousdictum was brushed away by one stroke of Mr.Justice Holmes pen, thus: The power to tax is notthe power to destroy while this Court sits. So it is inthe Philippines. [Reyes v. Almanzor (1991), citingSison v. Ancheta (1984); Obillos v. CIR (1985)].

Tax Avoidance (Tax Minimization) tax saving

device that is legally permissible

Tax Evasion (Tax Dodging) connotes fraudthrough the use of pretenses and forbidden devicesto lessen or defeat taxes; must be willful andintentional.

CIR vs. The Estate of Benigno Toda, GR No.

147188, Sept. 14, 2004

Facts: This Court is called upon to determine inthis case whether the tax planning scheme adoptedby a corporation constitutes tax evasion that would

justify an assessment of deficiency income tax.CIC authorized Toda, Jr., President and owner

of 99.991% of its issued and outstanding capitalstock, to sell the Cibeles Building and the two

parcels of land on which the building stands for anamount of not less than P90M. Toda thenpurportedly sold the property for P100 M to Rafael

Altonaga, who, in turn, sold the same property onthe same day to RMI for P200M. These 2transactions were evidenced by Deeds of AbsoluteSale. For the sale of the property to RMI, Altonagapaid capital gains tax in the amount of P10M


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NATURE OF TAX AMNESTY1) general or intentional overlooking by the State of

its authority to impose penalties on personsotherwise guilty of evasion or violation of arevenue or tax law

2) partakes of an absolute forgiveness or waiver ofthe Government of its right to collect

3) to give tax evaders, who wish to relent & arewilling to reform a chance to do so

RULES ON TAX AMNESTY

1) Tax amnesty(a) like tax exemption, never favored nor

presumed(b) construed strictly against the taxpayer (must

show complete compliance with the law)2) Government not estopped from questioning the

tax liability even if amnesty tax payments were

particular accused and not the character ofthe acts charged in the information

PART II THE NATIONAL INTERNAL REVENUECODE OF 1997

TITLE I. ORGANIZATION AND FUNCTION OF THEBUREAU OF INTERNAL REVENUE (BIR)

POWERS AND DUTIES OF THE BIR (ACEEGA)1) Assessment and Collection of national internal

revenue:(a) taxes(b) fees(c) charges

2) Enforcement of all(a) forfeitures

(b) fines and(c) penaltiesconnected therewith

3) Execution of all judgments decided in BIRs favorby(a) the Court of Tax Appeals (CTA) and(b) the ordinary courts

4) Give effect to andAdminister the supervisory andpolice powers conferred to it by NIRC or by otherlaws. (Sec. 2)

Officials of the BIR1) one chief - Commissioner of Internal Revenue

(Commissioner)2) four assistant chiefs - Deputy Commissioners

(Sec. 3)*E.O. 430 (July 28, 1997) designates each of the

4 Deputy Commissioners to head the followingfunctional groups:

(a) Operations group(b) Legal Enforcement Group(c) Information Systems Group(d) Resource Management Group

Powers of the CommissionerA. Power to interpret tax law and decide tax


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laws or portions thereof administered bythe BIR subject to the exclusive appellate

jurisdiction of the CTA

B. Power to obtain information, summon,examine and take testimony of persons (Sec.5)1) For the Commissioner to ascertain:

(a) correctness of any return or in making areturn where none has been made

(b) liability of any person for any internal

revenue tax or in correcting such liability(c) tax compliance

The Commissioner is authorized:2) to Examine any relevant Book, paper, record

or other data3) to Obtain any Information (costs, volume of

production, receipts, sales, gross income,etc), on a regular basis from:

(a) any person other than the person underinvestigation or(b) any office or officer of the national/local

government, government agencies andinstrumentalities (Bangko Sentral,GOCCs)

4) To Summon(a) the person liable for tax or required to file

a return or(b) any officer or employee of such person

or(c) any person having in his

possession/custody/ care1. the books of accounts2. accounting records of entries relating

to the business of the person liablefor tax or any other person

5) to Produce such books, papers, records and

other data and to give testimony6) to take the Testimony of the person

concerned, under oath as may be relevant tothe inquiry

7) To cause revenue officers and employees tomake a Canvass of any revenue district orregion

tax due -(a) After a return has been filed the

Commissioner or his representative mayauthorize

i. the Examination of any taxpayer;and

ii. the Assessment of the correctamount of tax;

(b) Failure to file a return shall not preventthe Commissioner fromauthorizing the examination of any

taxpayer;

Any tax or deficiency tax so assessed shall bepaid upon notice and demand from theCommissioner or his representative.

Any return, statement or declaration filed in anyauthorized office shall not be withdrawn; butwithin THREE YEARS from date of filing, the

same may be modified, changed or amended;provided that no notice for audit or investigationof such return, has in the meantime, beenactually served upon the taxpayer.

2) Failure to submit required returns and otherdocumentsIf a person(a) fails to file a required return or report at

the time prescribed or(b) Willfully or otherwise files a false or

fraudulent return,The Commissioner shall Make or Amend thereturn from

(a) his own knowledge or(b) from such information as he can obtain

through testimony or otherwisewhich shall be prima facie correct and sufficientfor all legal purposes

3) Inventory-taking, Surveillance, PresumptiveGross Sales(a) Commissioner may, at any time during

the taxable year1. order the Inventory taking of goods

of any taxpayer; or


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(b) Commissioner may prescribe a Minimumamount of gross receipts, sales andtaxable base (taking into account thesales and income of other personsengaged in similar business) :1. When a person has failed to issue

receipts as required by Sec. 113(Invoice requirements for VAT-registered persons) and Sec. 237(Issuance of Receipts or CommercialInvoices); or

2. When the books of accounts orrecords do not correctly reflect thedeclarations made or required to bemade in a return,

such minimum amount shallbe prima facie correct

4) Terminate taxable period -Commissioner shall declare the tax period of

a taxpayer terminated and send notice to thetaxpayer of such decision with a request forimmediate payment of the tax, when it hascome to the knowledge of the Commissioner:(RIRHO)(a) that a taxpayer is Retiring from business

subject to tax or(b) is Intending to leave the Philippines or(c) to Remove his property therefrom or(d) to Hide or conceal his property or(e) is performing any act tending to Obstruct

the proceedings for the collection of tax

5) Prescribe Real Property Values -The Commissioner is authorized to:(a) divide the Philippines into different zones

or areas and(b) determine the fair market value of real

properties located in each zone or area

For tax purposes, the value of the propertyshall be whichever is higher of:(a) Fair market value as determined by the

Commissioner; or(b) Fair market value as shown in the

schedule of values of the provincial andcity assessors.

The taxpayers application for compromiseshall not be considered unless he waives inwriting his privilege under RA 1405 and othergeneral or special laws. Such waiver shallauthorize the Commissioner to inquire intohis bank deposits.

7) Authority to Register tax agents -(a) The Commissioner shall Accredit and

Register, individuals and generalprofessional partnerships and their rep.

who prepare and file tax returns andother papers or who appear before theBIR

(b) The Commissioner shall create nationaland regional accreditation boards

Those who are denied accreditation mayappeal the same to the Sec. of Finance whoshall rule on the appeal within 60 days from

receipt of such appeal. Failure of the Sec. ofFinance to rule on the appeal within the saidperiod shall be deemed as approval foraccreditation.

8) Authority to Prescribe AdditionalRequirements-

The Commissioner may prescribe themanner of compliance with any documentaryor procedural requirement for the submissionor preparation of financial statementsaccompanying tax returns.

D. Authority to delegate power (Sec. 7)

The Commissioner may delegate the powers vestedin him to subordinate officials with rank equivalent toDivision Chief or higher, subject tolimitations/restrictions imposed under the rules and

regulations EXCEPT, (the following powers shallNOT be delegated): (RIR CoA A)

1) power to Recommend the promulgationof rules and regulations by the Sec. ofFinance

2) power to Issue rulings of first impressionor to Reverse, revoke, modify any


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determined by the rules

Regional Evaluation Board is composedof:

i. Regional Director as Chairmanii. Asst. Regional Directoriii. Heads of the Legal, Assessment and

Collection Div.iv. Revenue District Officer having

jurisdiction over the taxpayer

4) power to Assign or reassign internalrevenue officers to establishments wherearticles subject to excise tax are kept

E. Assignment of Internal Revenue Officers(Secs. 16 &17)

The Commissioner may assign/ reassign internalrevenue officers:1) involved in excise tax functions as often as the

exigencies of revenue service may require;provided that he shall in no case stay in hisassignment for more than 2 years (Sec. 16)

2) without change in rank and salary, to other orspecial duties connected with the enforcementand administration of internal revenue laws asthe exigencies of the service may require;provided that officers assigned to performassessment or collection functions shall notremain in the same assignment for more than 3years; assignment of officers and employees tospecial duties shall not exceed 1 year (Sec. 17)

F. Internal Revenue Distric ts (Sec. 9)The Commissioner, with approval of the Sec. of

Finance, shall divide the Philippines into suchnumber of revenue districts for administrativepurposes. Each district shall be under the supervisionof a Revenue District Officer.

Duties of the Commissioner: (PASO)1) To Prescribe, provide and distribute to the proper

3) To Submit reports to the appropriate committeeof Congress upon its request and in aid oflegislation, which information or report shallinclude, but not be limited to:

(a) industry audits(b) collection performance data(c) status reports in criminal actions initiated

against persons(d) taxpayers returnsprovided, any return or information which canbe associated with or identifies, directly or

indirectly a particular taxpayer, shall befurnished to the appropriate committee ofCongress only when sitting in ExecutiveSession, unless the taxpayer consents inwriting to such disclosure

4) Submit reports to the Oversight Committeethrough the Chairman of the Committee on Waysand Means of the Senate and House ofRepresentatives, on the exercise of his powers of

abatement and compromise of taxes (Sec. 204)every 6 months of each calendar year. (Sec. 20)

NATIONAL INTERNAL REVENUE TAXES: (Sec.21) (I VEE DOO)1) Income tax2) Estate and Donors tax3) Value-Added tax4) Other percentage tax5) Excise tax6) Documentary stamp tax7) Such Other taxes as are or hereafter may be

imposed and collected by the BIR

TITLE II. TAX ON INCOME

DEFINITION OF TERMS1) Person an individual, a trust, estate or corp.2) Corporation include partnerships (distinguish

between ordinary and general professionalpartnership)

3) General professional partnership partnerships formed for the sole purpose ofexercising their common profession no part of its


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5) Taxpayer any person subject to tax6) Taxable Year can either be calendar year (Jan

1 to Dec 31), or the fiscal year7) Fiscal Yearan accounting period of 12 months

ending on the last day of any month other thanDecember (ex. Feb 1 to Jan 31)

8) Paid or incurred (cash method) or Paid oraccrued (accrual method) payment actuallymade or if not paid, actually liable for theexpense

TAXABLE INCOME

REQUISITES FOR INCOME TO BE TAXABLE:1) There must be a gain or addition to net worth2) The gain must be realized or received, actually or

constructively; recipient must have completedominion

3) The gain must not be excluded by law or treatyfrom taxation

Note:

Not recognized as income - when fundswere merely entrusted/held money in trust (withobligation to return) to taxpayer becausetaxpayer acquires no control and does notreceive economic benefit from it.

Proceeds of embezzlement/swindling areincome because embezzler/swindler alreadyhas complete dominion over them and can usesuch for his economic benefit.

Increase in the value of property is notrecognized as income; this only constitutesan unrealized increase which becomes taxableincome only upon disposition and realization ofgains. Same situation for stocks and stockdividends.

Deposit with no interest does not produce

income for the depositary; there is no flow ofwealth.

In a debt/loan situation it is important todetermine whether there was an originalintention to pay/consensual recognition of anobligation to repay.

If yes then the liability that

Income can be realized actually andconstructively.

Assignment of Income Doctrine Ex: A isentitled to his salary of P10m but assigns it to Bfor unknown reasons. In this case, both A andB realize income. A constructively receivedincome (because he was able to assign thushas complete control/dominion over it) and Bactually received it. The income is taxable inthe hands of both A and B.

Doctrine of Constructive Receipt Ex: A was

informed that his check dated December 16 isalready available and he can get it anytime. Adid not get the check until January 30. In thiscase, A constructively received income inDecember and is taxable in that taxable period.

Not recognized as income if proceeds aremerely a return of capital. Ex. Creditor lendsdebtor x amount. Debtor repays x amount plusy interest. Creditor does not have income on x

amount as this is merely return on capital; hehas income only with respect to the amount ofy interest.

COMPUTATION OF TAXABLE INCOME

1) Taxpayer earning purely compensatoryincomeGross Compensation

less : Personal Exemptionpremium payments on health and/orhospital insurance amounting to P2,400per year

equals: Taxable income

2) Taxpayer doing business, whether individualor corporation (domestic or FC doingbusiness)Gross Revenue/Sales

less: Cost of Salesequals: Gross Incomeless : Allowable Deductionsequals: Taxable Income for individuals, an additional deduction for

personal exemptions is allowed


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ITEM SOURCE

Interest Residence of the debtor

Compensation forpersonal services

Place of performance

Rent and royalty Location of property

Gain from sale ofreal property

Location of property

Gain from sale ofpersonal property

Place of sale

Gain from sale ofshares of stock ofdomesticcorporation

Philippine source

Dividend income (a) From a domestic corp. deemed income from withinPhil.(b) From a foreign corp. deemed income from without

provided more than 50% of thecorp.s worldwide income is notderived from Phil. sources

Al locat ion of Unallocated Deduct ions (partly Phi l.partly foreign)

GI, Philippines x Unallocated = Phil deductionsGI, Worldwide deductions

GI, Outside Phil x Unallocated = ForeignGI, Worldwide deductions deductions

Income from sale of personal property derived fromsources partly within and partly without the Phils.

Gain from sale of personal property produced in

whole or in part in one country and sold in anothercountry, where one of the countries is the Philippinesis income derived from sources partly within andpartly outside the Philippines.

Gains from the purchase of personal property withinand sold without the Philippines or the purchase of

Taxpayer Tax Base Taxable onincome

Resident Citizen TaxableIncome

Within andwithout thePhilippines

Nonresident Citizen TaxableIncome

Within thePhilippines

Resident Alien TaxableIncome


Nonresident Alien

engaged in trade orbusiness

Taxable

Income

Within the

Philippines

Nonresident Alien notengaged in trade orbusiness

GrossIncome


General ProfessionalPartnership

TaxableIncome

Withinor/andwithout thePhilippines

(dependingonclassificationof individualpartner)

Estate and Trust TaxableIncome

Same basisas anindividual(depending

onclassificationof decedent,if estate,trustor, iftrust)

Domestic Corporation TaxableIncome

Within andWithout thePhilippines

Resident ForeignCorporation

TaxableIncome


Non-resident Foreigncorporation

GrossIncome


*Taxable Income = Gross income (less) Deductions(less) Personal and additional exemptions


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gains)4) Fringe Benefits Tax (amount of benefits to

Managerial and Supervisory Employee paid byEmployer; Ee is taxed but burden is on Er)

5) Capital Gains Tax (Real property and stocks nottraded in stock market)

6) Optional Corporate Income Tax7) Minimum Corporate Income Tax (2% of GI)8) Improperly Accumulated Earnings Tax9) Preferential Rates (for special corporations)10) Branch Profit Remittance Tax

TYPES OF TAXPAYERS

A. Individuals

Kinds of Individuals1) Resident Citizen2) Nonresident Citizen = citizen of the

Philippines who:(a) Establishes the fact of his physicalpresence abroad with a definite intentionto reside therein

(b) Leaves the Philippines during the taxableyear to reside abroad, as immigrant or foremployment on a permanent basis

(c) Works & derives income from abroad &whose employment requires him to bephysically present abroad most of the

time (i.e. not less than 183 days) duringthe taxable year

(d) Previously considered as nonresidentcitizen & arrives in the Philippines at anytime during the taxable year to residepermanently in the Philippines

3) Resident Alien4) Nonresident Alien

a) Those engaged in trade or business in

the Philippines who come and stay in thePhilippines for an aggregate period ofmore than 180 days during any calendaryear

b) Those not engaged in trade or businessin the Philippines, which include non-resident aliens whose stay in the

TYPES OF INCOME1) General (part of gross income, subject to 5-

32%)a) Compensation Incomeb) Income from Businessc) Income from Exercise of Profession

2) Special Types of Income (not part of grossincome, subject to final tax)a) Interests, royalties, prizes and other

winnings subject to final tax (PassiveIncome)

b) Cash & property dividends (does notinclude stock dividends; these arerealized only upon their subsequent sale)(Passive Income)

c) Capital gains from sale of real propertyd) Capital gains from sales of shares of

stock not listed in the stock exchangee) Capital gains from sale of shares of stock

listed in stock exchange (subject to

percentage tax

B. Estates and Trusts

Estate: property, rights and obligations of aperson which are not extinguished by his deathand those that accrues thereto; taxed in the sameway as an individual provided it is irrevocable andearns income; what is taxed is not the propertythat constitutes the trust (this was already subject

to donors tax) but the income of such property.

Trust: arrangement created by agreement underwhich title to property is passed to another forconservation or investment with the income andthe corpus/principal distributed in accordancewith the directions of the creator; to be taxable asa separate entity, grantor must have absolutelyand irrevocably given up control and benefit over

the trust.

C. Corporation

A corporation shall include partnerships, no matterhow created or organized. Joint stock companies,

joint accounts, associations, and insurance


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the govt.

General Types:1) Domestic Corporation is created or

organized in the Philippines or under its laws2) Foreign Corporation is organized and

existing under the laws of a foreign country(a) Resident foreign corporation foreign

corp. engaged in trade or business withinthe Philippines

(b) Nonresident foreign corporation

foreign corp. not engaged in trade orbusiness within the Philippines

D. PartnershipsKinds of Partnerships1) General Professional Partnerships

Established solely for purpose of exercisingcommon profession and not part of incomederived from engaging in trade or business.

As an entity, it is not subject to income tax.Partners are liable for income tax on theirdistributive share (computed by dividing netincome of GPP). Each partner shall report hisdistributive share as part of his gross income.

2) Taxable/Business/Ordinary Partnership

All other partnerships no matter how createdor organized.

Includes unregistered joint ventures andbusiness partnerships.

Taxable as an entity ordinary corporateincome tax.

Joint ventures are not taxable ascorporations when its purpose if a)undertaking construction projects; b)engaged in petroleum, coal and other energyoperation under a service contract with thegovernment.

Partners are considered stockholders;

therefore, their distributive share is taxed asdividends.

TAX ON CORPORATIONS

I.DOMESTIC CORPORATIONS

B. Optional Gross Income Taxation

Effective Jan. 1, 2000: the President (uponrecommendation of the Sec of Finance) mayallow corporation an option to be taxed at 15% ofgross income after the ff. conditions aresatisfied:

Tax effort ratio 20% ofGNP

Ratio of IT collection to total taxrevenue

40%

VAT tax effort 4% of GNP

Ratio of Consolidated PublicSector Financial Position(CPSFP) to GNP

0.9%

Ratio of Cost of Sales to GrossSales from all sources

Does notexceed 55%

The election of the option shall be irrevocablefor 3 consecutive taxable years during which thecorp. is qualified under the scheme

Gross Income = Gross Sales( - ) Sales returns,discounts andallowances( - ) Cost of goods sold

Cost of Goods SoldTrading and Merchandising Concern

Invoice cost plus import duties andfreight in transporting goods to the placewhere actually sold, including insurancewhile in transit

Manufacturing concern

Cost of production of finished goods (rawmaterials, direct labor and manufacturing

overhead, freight cost, insurancepremiums, and other costs to bring theraw materials to the factory)

If taxpayer is engaged in sale of service: Gross Income = Gross receipts

( ) Sales returns


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nonprofit unrelated trade,business, or activityexceed 50% of totalincome

GOCC, AgenciesandIntrumentalities,includingPAGCOR

32%(2000-2005)35%(2006)

Same tax rate upontheir taxableincome in a similarbusiness, industry,or activity

GSIS/ SSS / PHIC/ PCSO

Exempt

Depository Banks 10% On interest incomefrom foreigncurrencytransactionsincluding interestincome fromforeign loans

Proprietary Educational Institutions & Hospitals(non-profit)

Proprietary educational institution anyprivate school maintained & administered byprivate individuals or groups with an issuedpermit to operate from DECS, or CHED orTESDA

Taxable at 10% on taxable income, except oncertain passive income (which are subject to finaltax)

Predominance Test: if GI from unrelatedtrade/business/other activity > 50% of the total GIfrom all sources, ENTIRE taxable income shallbe subject to the REGULAR corporate tax rate(35% Effective 2006)

Distinguish from non-profit non-stock educational

institutions which are exempt from tax onrevenues and assets Actually, Directly andExclusively used for educational purposes (Seeabove for discussion).

GOCCs

D. Rule for Corporations Exempt from Taxation

General Rule: those enumerated under section 30are exempt.

Exception: exempted corporations are subject toincome tax on their income from any of theirproperties, real or personal, or from any activitiesconducted for profit regardless of the disposition

made of such income. Ex. Non-stock, non-profit religious

organization is exempt from 35% ordinaryincome tax on corporations (by virtue ofsection 30 which uses as such) and from allproperty tax (by virtue of Constitution,provided ADE use for its religious purpose).However, if it derives income from itsproperty or conducts an activity that is for

profit (even if the proceeds will be used forthe religious purpose), the proceeds will betaxable.

Ex. For educational institutions, theproceeds, to be exempt, must be both a)realized from educational activities and b)used for educational activities.

E. Minimum Corporate Income Tax (MCIT)

1. MCIT Rate = 2% of gross income (GI)

When to begin/apply MCIT? Beginning on the4

thtaxable

year immediately following the year in

which such corporation commenced its businessoperation(Commencement of Business Operation:Upon Issuance of BIR Certificate of

Registration)

Imposed when on the 4th

taxable year, 2% ofthe corporations GI is greater than 35% of its TI.

Example: for 2006 calendar year

GI = P500 000 2% of GI = P10 000


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Excess of MCIT over the normal income tax shall

be carried forward & credited against normalincome tax for the 3 succeeding years

Example: (proceeding from above example)

Situation A: If regular income tax (35% of taxableincome) is greater than MCIT (2% of GI) PayRegular Income Tax

For 2007 calendar year:GI = P500,000 2% of GI = P10,000

TI = P50,000 35% of TI = P17,500

Income Tax payable for 2007= 17,500 (Regular Income Tax) 550 (MCITCarry Forward from 2006: 10,000-9450)= 16,950

NOTE: You can deduct MCIT Carry Forward only ifRegular Income Tax is greater than MCITY

Situation B: If regular income tax is less thanMCIT Pay MCIT

For 2007 calendar year:

GI = P500,000 2% of GI = P10,000

TI = P20,000 35% of TI = P7,000

Income Tax payable for 2007= 10,000

NOTE: MCIT carry forward as of 2007 is already3,550 (550 from 2006 and 3,000 from 2007).So if in 2008, Regular Income Tax is alreadygreater than MCIT, you may deduct 3,550from payable Regular Income Tax.

3. Relief from MCITMCIT may be suspended by the Sec ofFinance when corporations losses are dueto:

(a) prolonged labor dispute(b) force majeure(c) legitimate business reverses

( - ) Sales returns,discounts and

allowances( - ) Cost of Services

*means all direct costs and expensesnecessarily incurred to provide the servicesrequired by the customers including:a) salaries and employee benefits ofpersonnel, consultants and specialistsdirectly rendering the service;

b) costs of facilities directly utilized inproviding the service such as depreciation orrental of equipment used and costs ofsupplies

II. RESIDENT FOREIGN CORPORATION

A. In General (the rest is the same as domesticcorp.)

On taxable income from allsources within thePhilippines.

32% (2000-2005)35% (2006-2008)

30% (2009 onwards)

B. MCIT - same as domestic corp.

C. Special types of resident foreign corporations:

International Aircarriers

2.5% On Gross PhilippineBillings (see case ofAirCanada vs. CIR infra)

InternationalShipping

2.5% On Gross PhilippineBillings

Offshorebanking units

10% Any interest incomederived from foreigncurrency loans grantedto residents other thanoffshore banking units

or local commercialbanks, including localbranches of foreignbanks that may beauthorized by the BSPto transact businesswith offshore banking


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branches of foreignbanks that may beauthorized by the BSPto transact businesswith offshore bankingunits.

Regional/AreaHeadquarters

Exempt

RegionalOperatingHeadquarters ofMultinationalcompanies

10% On taxable income

Gross Philippine Billings

For international air carriers, refers to grossrevenue derived from carriage of persons,excess baggage, cargo, and mail originatingfrom the Philippines in a continuous and

uninterrupted flight, irrespective of the placeof sale or issue and the place of payment ofthe ticket or passage document

Provided, tickets revalidated, exchangedand/or indorsed to another internationalairline form part of the GPB if the passengerboards a plane in a port or point in thePhilippineso If the ticket is indorsed to another airline,

the GPB will be charged to thetransferee/indorsee

Provided, for a flight which orginates in thePhilippines but transshipment (transfer) ofpassenger takes place at any port outsidethe Philippine on another airline, only thealiquot portion of the cost of the ticketcorresponding to the leg flown from thePhilippines to the point of transshipment shallform part of the GPB.

o Note: Transfer of airline company, nottransfer of aircraft

GPB rule in the NIRC is a departure from theold rule which emphasized where ticketswere bought.

Now we adopt the originating rule meaningto form part of GPB passenger/cargo must

o Off line carriers: those without landingrights but may nevertheless be selling

tickets in the Phil subject to taxtreatment of ordinary resident foreigncorporation

Whats controlling is the amount stated in theticket and not the actual purchase value.

Air Canada vs. CIR, CTA Case No. 6572, Dec. 22,2004

It is evident that the definition of Gross PhilippineBillings under Section 28(A)(3)(a) of the 1997 TaxCode covers the gross revenue derived from thecarriage of persons, excess baggage, cargo and mailoriginating from the Philippines in a continuous anduninterrupted flight irrespective of the place or saleor issue and the place of payment of the ticket orpassage document. To originate would mean tocause the beginning of; to start (a person or thing) on

a course or journey; to begin, start. In other words,the flights carrying the passengers must haveoriginated or started from the Philippines. Verily,petitioner, being an off-line international carrier, asauthorized to operate by the CAB and having noflights originating from the Philippines in a continuousand uninterrupted flight, cannot be taxed pursuant toSection 28(A)(3)(a) of the 1997 Tax Code, that is,based on their Gross Philippine Billings.

However, although petitionerAir Canada is not

liable to pay the tax as an international air carrier(2.5% on gross Phil. Billings), it is still liable to payincome tax as a resident foreign corporation.

Under Section 22 of the 1997 Tax Code, the termresident foreign corporation applies to a foreigncorporation engaged in trade or business within thePhilippines, while the term non-resident foreigncorporation applies to a foreign corporation notengaged in trade or business within the Philippines.

However, with regard to the term doing or engagedin business, there is no fixed or specific criterion aswhat constitutes doing or engaging in business. Inthe case of The Mentholatum Co., Inc., et al. vs.Mangiliman, et al., 72 PHIL 524, the HonorableSupreme Court had thoroughly and clearly explainedthe term in this way:


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In order that a foreign corporation may beregarded as doing business, there must be continuity

of conduct and intention to establish a continuousbusiness, such as the appointment of a local agent,and not one of a temporary character. In otherwords, a foreign airline company selling tickets in thePhilippines through their local agents, whether liaisonoffices, agencies or branches, as in the case at bar,shall be considered as resident foreign corporationengaged in trade or business in that country for suchactivities show continuity of commercial dealings or

arrangements and performance of acts or works orthe exercise of some functions normally incident toand in progressive prosecution of commercial gain orfor the purpose and object of the businessorganization.

Branch Profit Remittance Tax

BPRT shall be imposed on any profit remittedby a branch to its head office.

Distinguish between a branch and asubsidiaryo If branch, subject to BPRTo If subsidiary amounts received by

non-resident foreign corporation wouldbe treated as dividends it becomespart of its Gross Income from withintaxable at 35%

Branch will first be subjected to ordinary

corporate tax as a resident foreigncorporation (35%). Afterwards, the profits forremittance shall then be subject to 15%BPRT. (Because branch assumespersonality of an RFC and is thereforetaxable as such)

Any remittance, so long as you can trace itfrom a branch to the foreign parentcorporation subject to BPRTo Ex. X foreign corp. has both regional

headquarters and branch in Philippines.Instead of remitting straight to X, branchpays amount to regional headquarterssupposedly for administrative supportservices The amount paid for theservices will still be subject to BPRTb h i i d f

reducing their tax liability in the Philippinesand in their residence countries.

Ex. Domestic corporation paid cash dividendto non-resident foreign corporation (NRFC)organized in Brazil. This shall form part ofNRFCs income therefore taxable also inBrazil. The dividend received shall only betaxed at 15% in the Phils (instead of 35%) ifBrazil will reduce/credit at least 20% of thetax imposed in the Phils. from its tax imposedin Brazil. [See Section 28(5)(b)]

If Brazil will credit/reduce less than 20% orwill not credit any amount, then the Phils willtax the dividend at 35% (ordinary incometax).

Phils. cannot give more than 15% tax creditbecause the law only allows such.

III. NONRESIDENT FOREIGN CORPORATION

A. In General

Gross Income from all sourceswithin the Philippines (exceptCapital Gains on sale ofdomestic shares subject to finaltax)

32% (2000-2005)35% (2006-2008)

30% (2009onwards)

Gross Income includes interest, dividends,

rents, royalties, salaries, premiums (exceptreinsurance prem.), annuities, emoluments orother fixed/determinable annual,periodic/casual gains, Capital Gains (notsubject to FT)

NON-RESIDENT FOREIGN CORPORATION

CinematographicFilm owner, lessor

or distributor

25% On gross income

Owner or lessorsof vessel chartedby Philippinenationals

4.5% On gross income

Owner or lessorsf i ft

7.5% On gross income


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Graduated rates of 5 to 32%.

B. Passive Income Please see exhibit

Capital Gains f rom Sale of Real Property

Final tax on gross selling price or current fairmarket value, whichever is higher.

Imposed upon capital gains presumed tohave been realized from the sale, exchange,or other disposition of real property located in

the Philippines, including pacto de retro salesand other forms of conditional sales.

Law presumes a gain, hence, even if the salewas at a loss (bought for 2M, sold for 1M),CGT will still be imposed on entire proceedsof the disposition; law does not talk about thenet gain, it only considers gross sellingprice/FMV whichever is higher.

Refers to real property held as capital asset

(not used for business/investment) asopposed to ordinary asset (used in ordinarycourse of business).

Special Rule for disposition to governmento Taxpayer has option of treating the

proceeds as (a) taxable income (5-32%on net gain) or as capital gains (6% finaltax on FMV/gross selling price).

o If second option is chosen: 6% final taxshall be based on actual considerationand not FMV since the former is usuallylower than FMV (BIR Ruling).

o If the disposition took nature ofexpropriation (no meeting of the minds,not voluntary), transaction is not subjectto CGT. Net gain (if any) will be treatedas part of GI. Includes disposition by

judicial order and other forms of forceddisposition.

Rule for Exchangeo FMV of the property exchanged/given up

shall be basis of CGT. (Ex. A exchangesproperty worth 1M for Bs property worth2M CGT on A will be based on 1M,CGT on B will be based on 2M)

E ti P i i l R id

utilization of the proceeds), the differencewill be subject to CGT.

o Exemption does not include exchange ofprincipal residence for a new principalresidence subject to rules onexchange above.

C. Special Tax Rates for Aliens Please seeexhibit

II. CORPORATIONS

A. In general2006-2008 35%2009-onwards 30%

B. Passive Income and other i ncomePlease seeexhibit

C. Tax rate for Resident Foreign Corporation Please see exhibit

D. Tax rate for special types of Resident ForeignCorporation Please see exhibit

IMPROPERLY ACCUMULATED EARNINGS TAX(IAET)(Sec. 29, as implemented by Rev. Reg. 2-2001

which prescribes rules governing the imposition ofIAET)

A. RuleThere is imposed for each taxable year, inaddition to other taxes, a tax equal to 10% of theimproperly accumulated taxable income ofdomestic and closely-held corporationsformed or availed of for the purpose of avoiding

the income tax with respect to its shareholders orthe shareholders of any other corporation, bypermitting the earnings and profits of thecorporation to accumulate instead of dividingthem among or distributing them to theshareholders (Ex. Holding company).


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tax on the earnings distributed to them.

C. ExceptionThe use of undistributed earnings and profits forthe reasonable needs of the business wouldnot generally make the accumulated orundistributed earnings subject to the tax. What ismeant by reasonable needs of the businessis determined by the Immediacy Test.

Immediacy Test It states that the

reasonable needs of the business are the1) immediate needs of the business; and2) reasonably anticipated needs (Ex.

Expansion)

How to prove the reasonable needs ofthe business: The corporation should provethat there is1) an immediate need for the accumulation

of the earnings and profits; or2) a direct correlation of anticipated

needs to such accumulation of profits.

D. Composition: The following constituteaccumulation of earnings for the reasonableneeds of the business: (ILL ABE)1) Allowance for the increase in the

accumulation of earnings up to 100% of thepaid-up capital of the corporation as of

Balance Sheet date, inclusive ofaccumulations taken from other years;

2) Earnings reserved for definite corporateexpansion projects or programs requiringconsiderable capital expenditure as approvedby the Board of Directors or equivalent body;

3) Earnings reserved for building, plants orequipment acquisition as approved by theBoard of Directors or equivalent body;

4) Earnings reserved for compliance with anyloan covenant or pre-existing obligationestablished under a legitimate businessagreement;

5) Earnings required by law or applicableregulations to be retained by the corporationor in respect of which there is legal

1. Closely-held corporations are those:

a) at least 50% in value of the outstanding capitalstock; or

b) at least 50% of the total combined voting powerof all classes of stock entitled to vote is owneddirectly or indirectly by or for not more than 20individuals. Domestic corporations not fallingunder the aforesaid definition are, therefore,publicly-held corporations.

F. Exempt Corporations: The IAET shall not applyto the following corporations:(BIG-PEN-T)1) Banks and other non-bank financial

intermediaries;2) Insurance companies;3) Publicly-held corporations;4) Taxable partnerships;5) General professional partnerships;6) Non- taxable joint ventures; and7) Enterprises that are registered:

(a) with the Philippine Economic ZoneAuthority (PEZA) under R.A. 7916;

(b) pursuant to the Bases Conversion andDevelopment Act of 1992 under R.A.7227; and

(c) under special economic zones declaredby law which enjoy payment of specialtax rate on their registered operations or

activities in lieu of other taxes, national orlocal.

G. Period for Payment of Dividend/IAET: Thedividends must be declared and paid or issuednot later than one year following the close ofthe taxable year, otherwise, the IAET, if any,

should be paid within fifteen (15) daysthereafter.

H. Determination of Purpose to Avoid IncomeTax1) The fact that a corporation is a mere holding

company or investment company shall be


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reasonable needs of the business.

I. Prima facie instances of accumulation ofprofits beyond the reasonable needs of abusiness and indicative of purpose to avoidincome tax upon shareholders

1) Investment of substantial earnings and profitsof the corporation in unrelated business orin stock or securities of unrelated business;

2) Investment in bonds and other long-term

securities; and3) Accumulation of earnings in excess of 100%

of paid-up capital, not otherwise intendedfor the reasonable needs of the business.The controlling intention of the taxpayer isthat which is manifested at the time ofaccumulation. A speculative and indefinitepurpose will not suffice. The mere recognitionof a future problem or the discussion ofpossible and alternative solutions is notsufficient. Definiteness of plan/s coupled withaction/s taken towards its consummation isessential.

Cyanamid Phils. vs. CA, GR No. 108067, Jan. 20,2000

Ideally, the working capital should equal thecurrent liabilities and there must be 2 units of currentassets for every unit of current liability, hence the so-

called "2 to 1" rule. A Debt-to-Equity ratio (CurrentAssets over Current Liabilites) of 2:1 is indicative ofthe liquidity of a corporation, and furtheraccumulation would expose it to the IAET.

I. GROSS INCOME

All income derived from whatever source, including

(but not limited to the following items) (GRIP CARDGPP)1) Gross income derived from the conduct of trade

or business or the exercise of a profession2) Rent Income3) Interest Income4) Prizes & winnings

partnerships is taxable as dividends; in this case,the ordinary partnership has already been subject

to ordinary corporate income tax)

All income from whatever source derived

Recovery of damages (compensation forinjury; from tortious acts)

Nottaxable

Recovery of items previously deductedfrom gross income (return of capital)

Taxable

Forgiveness of indebtedness (if effect ofentire transaction is a reduction ofpurchase price of property acquired inprior year)

NotTaxable

Income derived form illegal business(gain)

Taxable

Recovery of lost earnings Taxable

BIR Ruling #017-2003The transfer of land made by a person to another in

payment of services rendered in the form of attorneysfees shall be considered as part of the gross incomeof the latter valued at either the fair market value orthe zonal valuation, whichever is higher, in thetaxable year received.

II. EXCLUSIONS FROM GROSS INCOME (GIRLCRM)

1) Gifts, Bequests & devises

But, income from such property shall beincluded in GI

Must be characterized by disinterestedgenerosity and pure liberality

Difficult to establish gift situations if there isan Er-Ee relationship (A bonus/assistance asrecognition of service rendered is notexempt)

If given under a) constraining force of anymoral or legal duty or b) from the incentive ofc) an anticipated benefit of an economicnature or where it is a return for servicesrendered, proceeds cannot qualify as a gift.

Most critical consideration is the giversintention or motive.


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of the contract4) Life Insurance

Proceeds of life insurance policies paid to theheirs/beneficiaries upon the death of theinsured

If such amounts are held by the insurer underan agreement to pay interest, the interestpayments shall be included in the GI

Insured must die to avail of total exemption. Ifhe survives, there/s only partial exemption to the extent that the proceeds constitute

return of capital (total amount of premiumspaid).

5) Compensation for Injuries or Sickness

Received through Accident/Health Insuranceor Workmens Compensation Act, ascompensation for personal injuries/sickness+ amount of damages received on account ofsuch injuries/sickness

Damages will be exempt only if they arise

together with personal injury; however, ifdamages only amount to return of capital, itis exempt (Ex. Damages from car accidentexempt only if claim includes compensationfor personal injury. If no personal injury,damages for car wreckage will only beexempt to the extent of the amount of theactual damage return of capital)

Must be physical injury, not injury to rights.6) Retirement Benefits, Pensions, Gratuities

Formsa) RA 7641 or Reasonable Private

Benefit Plano See below for rules

b) Amount received as a consequenceof separation for any cause beyondcontrol (death, sickness or otherphysical disability)o Sickness must be job threatening

must render taxpayerincapable of working (Ex. Doesnot include STD)

o Benefits from separation due toretrenchment come underexemption (no choice/option; butif the Ee avails of an optional

resident citizens or aliens who residepermanently in the Philippines

d) Veterans benefitse) Benefits under SSSf) Benefits received from GSIS

2 Options under paragraph (a), Section32(B)(6)g) RA 7641

o Conditions: (i) at least 60 years old;(ii) 5 years of service at time of

retiremento Availed if there is no reasonable

private benefit plan (benefits underthis option is less)

o Limted exemption: month salaryfor every year of service. In RPBP,all is excludable.

h) Reasonable Private Benefit Plano Conditions: (i) at least 50 yrs old; (ii)

in the service of same employer forat least 10 years at time of retirement

o Must be approved by BIRo A pension, gratuity, stock bonus or

profit-sharing plan maintained by anER for the benefit of some or all ofhis officials/employees, whereincontributions are made by such ERfor the officials/employees, or both,for the purpose of distributing to such

officials & employees the earnings &principal of the fund thusaccumulated; & provided in the planthat no part of the income shall beused for/be diverted to any purposeother than for the exclusive benefit ofthe said officials & employees

Service must be continuous.

You can avail of the benefits only once

(once youve availed of RPBP, you cannotavail of another RPBP); but you can avail ofexemption under another groundo Ex. A government employee can claim

exemption for retirement benefitsreceived from the GSIS even afteravailing of RPBP taxpayer can claim


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Terminal Leave Pay: amount paid for thecommutation of leave credits

o Excludable only for governmentemployees (this exemption does not findsupport in NIRC but is backed by SCdecision and BIR Ruling #143-98)

7) Miscellaneous Items(a) income derived by foreign government (from

investments in Philippines in loans, stocks,bonds or other domestic securities)

Refers only to passive income. If theforeign government engages in trade,income is taxable.

(b) income derived by govt./its politicalsubdivisions (from public utility or exerciseessential governmental function)

Key: Income should accrue togovernment; if the income is retained bythe public utility, it is not exempt look

at charter of political subdivision/GOCCto determine whether its income accruesto the government or not.

(c) prizes, awards in sports competitionsanctioned by national sports associationswhether held in Philippines or abroad

Contemplates a particular competition,not a cumulative achievement (Ex.Sportsman of the year award does notqualify for exemption)

(d) prizes & awards in recognition of religious, charitable,

scientific, educational, artistic, literary orcivic achievement, but only if:

recipient was selected without any actionon his part

recipient not required to rendersubstantial future services as a conditionof receiving the prize/award

Example: Nobel prize award Construed strictly, take note of 7

categories. It does not include athleticachievement.

Contemplates a rational selectionprocess; cannot just be randomlyselected

BIR Ruling #125-98

The phrase shall not have availed of the privilegeunder a retirement benefit plan of the same oranother ER found in Sec. 32 (B) (6) (a) of the TaxCode means that the retiring official or EE must nothave previously received retirement benefits from thesame or another employer who has a qualifiedretirement benefit plan.

BIR Ruling #143-98

The terminal leave pay of government employeeswhose employment is coterminous is exempt since itfalls within the meaning of the phrase for any causebeyond the control of the said official or EE found inSec. 32(B) of the CTRP.

SPECIAL TREATMENT OF FRINGE BENEFIT

A. Fringe Benefi t

Any good, service or other benefit furnished orgranted in cash or in kind by an employer to anindividual employee (except rank and file employees)such as, but not limited to the ff:

1) housing2) expense account3) vehicle of any kind4) household personnel (such as maid, driver &

others)5) interest on loan at less than market rate to the

extent of the difference between the market rate& actual rate granted

6) membership fees, dues & other expenses borneby the employer for the employee in social &

athletic clubs or other similar organizations7) expenses for foreign travel8) holiday & vacation expenses9) educational assistance to the employee or his

dependents10) life or health insurance & other non-life insurance

i i il t i f h t


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1/1/99 33%1/1/00 32%

Fringe benefit is an income of the employee subjectto Fringe Benefit Tax but is payable by the Employer.Er can deduct FBT from its taxable income.

Fringe benefits are only for corporateofficers/management. For rank and file, it is called anallowance. Allowances (benefits to rank and file) arenot subject to FBT.

C. Fringe Benefits not subject to FBT

(a) FB authorized & exempted from tax underspecial laws

(b) Contributions of ER for the benefit of theemployee to retirement, insurance &hospitalizations benefit plan

(c) Benefits given to the rank & file employees,whether granted under a CBA or not

(d) De minimis benefits

De Minimis benefitsa) Monetized unused vacation leave credits of

private employees not exceeding 10 daysduring the year and monetized value of leavecredits paid to government officials andemployees

b) Medical cash allowance to dependents of

employees not exceeding P750 per semesteror P125 per month

c) Rice subsidy of P1,000 or 1 sack of 50 kgrice amounting to not more than P1,000

d) Uniform and clothing allowance notexceeding P3,000 per year

e) Actual yearly medical benefits not exceedingP10,000

f) Laundry allowance of P300 per month

g) Employee achievement awards, for length ofservice or safety achievement in the form oftangible personal property other than cash orgift certificate, with an annual monetary valuenot exceeding P10,000 received by theemployee under an established written planwhich does not discriminate in favor of highly

CONVENIENCE OF THE EMPLOYER RULE

When a fringe benefit is given solely for theconvenience of the employer, the fringebenefit is exempt from FBT because theemployee does not recognize income fromthe benefit.

Ex. Expenditure on housing of engineerwithin factory premises is not subject toFBT

General Rule: If housing is located

outside, it is subject to FBT. Exception: If the nature of the Ers

business is hazardous to health ofEe, housing can be located outsidethe factory without being subject toFBT.

Ex. If employee is given housing allowance incash, this will constitute compensation ofthe employee (income from whatever

source). However, if it qualifies as a FringeBenefit, then it will be subject to FBT andthe burden is shifted to Er (Tax on Ee,Burden on Er)

III. DEDUCTION FROM GROSS INCOME

Defined as: Items or amounts which the law allowto be deducted from gross income in order toarrive at the taxable income.

The basic principle governing deductions fromgross income apply to all taxpayers.

Because deductions are strictly construedagainst the taxpayer, one seeking a deductionmust point to some specific provisions of thestatute in which that deduction is authorized &must be able to prove that he is entitled to thededuction which the law allows.

Adequate records should be kept to support thedeductions.

The deduction claimed must have beensubjected to withholding tax, if required.

Deductions for income tax purposes partake ofthe nature of tax exemptions; hence, if tax


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(a) citizen(b) resident alien

(c) non-resident alien doing business in thePhilippines

(d) member of GPP2) Corporations

(a) domestic corp.(b) resident foreign corp.(c) proprietary educational institutions &

hospitals(d) GOCCs

WHO CANNOT AVAIL OF DEDUCTIONS FROMGROSS INCOME:

1. Citizens and resident aliens whose income ispurely compensation income (except forpremium payments on health and/orhospitalization insurance);

2. Non-resident aliens not engaged in trade orbusiness in the Philippines; and

3. Non-resident foreign corporation

THE FOLLOWING ARE THE ALLOWABLEDEDUCTIONS FROM GROSS INCOME BASED ONCLASSES OF TAXPAYER:1. Individuals with gross income from employee-employer relationship only (gross income only):

o Premium payments on health and/or hospitalinsurance (if requisites are complied with)

o Personal exemptions and additional

exemptions

2. Individuals with gross income from business orpractice of profession:

o Optional Standard Deduction (OSD) ORItemized deductions

o Optional Standard Deductions 10% of thegross income. May be availed only byindividuals (except nonresident aliens) who

are not purely compensation income earners.This is in lieu of the itemized deductions.o Premium payments on health and/or hospital

insurance (if requisites are complied with)o Personal and additional exemptions

3. Corporations

4) Taxes5) Depreciation

6) Interest7) Depletion of oil & gas wells & mines8) Charitable & other contributions9) Research & Development10) Pension trusts

1. EXPENSES (SEC 34A)

1) Ordinary & necessary trade, business or

professional expenses onlyREQUISITIES FOR DEDUCTIBILITY:a. Must be ordinary AND necessary (both

must be complied with)b. Must be paid or incurred during the

taxable yearc. Must be paid or incurred in carrying on or

which are directly attributable to, thedevelopment, management, operationand or conduct of the trade, business orexercise of a profession, includingreasonable allowance for:1. salaries, wages & other forms of

compensation for personal servicesactually rendered (including grossed-up monetary value of FB); but thefinal tax should have been paid

2. travel expenses in pursuit of trade,business/ profession

3. rentals &/or other payments aslessee, user or possessor

4. entertainment, amusement &recreation expenses directlyconnected to the devt., mgt. &operation & conduct of trade,business/ profession> The Regulations impose a limit of

0.50% of net sales (gross sales less sales

returns/allowances & sales discounts) fortaxpayers engaged in sale of goods orproperties; or 1% of net revenue (grossrevenue less discounts) for those engaged insale of services, including exercise ofprofession and use or lease of properties.(RR No. 10-02)


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evidence (i.e. official receipts, financialstatements or other adequate records) to

substantiate:(a) amt. of expense deducted(b) direct connection/relation of the expense

to the development, managementoperation &/or conduct of the trade,business or profession of the taxpayer

3) Bribes, Kickbacks & Other Similar Payments:not deductible

Ordinary expense normal or usual in relationto the taxpayers business and the surroundingcircumstance.

Necessary expense appropriate and helpful inthe development of taxpayers business and areintended to minimize losses or to increase profits.These are the day to day expenses.

While illegal income will form part of the incomeof the taxpayer, expenses which constitute bribe,

kickback, and other similar payment, beingagainst law and public policy are not deductiblefrom gross income (Sec. 34A1c).

Business expense expenditure related to thebusiness that is deductible in the year incurred, inthe same taxable year.

Capital expense expenditure that improves oradds to the value of your property or equipment.Not immediately deductible. It is deductible over

time, such as in the form of depreciation.

Expenses allowable to private educationalinstitutions: In addition to the expensesallowable as deductions, a private educationalinstitution has the option to elect either:

(a) to deduct as expense those otherwiseconsidered as capital outlays ofdepreciable assets for the expansion of

school facilities(b) to capitalize asset & deduct allowancefor depreciation

2. INTEREST

Requisites for deductibility, as implemented

incurred during the taxable year(f) interest must have been stipulated in

writing(g) interest must be legally due(h) interest payment arrangement must not

be between related taxpayers(i) interest must not be incurred to finance

petroleum operations(j) in case of interest incurred to acquire

property used in trade, business orexercise of profession, the same was not

treated as a capital expenditure(k) the interest id not expressly disallowedby law to be deducted from gross incomeof the taxpayer.

GENERAL RULE ON DEDUCTION- The amount of interest expensepaid or incurred within a taxable yearof indebtedness in connection withthe taxpayers trade, business, or

exercise of profession shall beallowed as a deduction from thetaxpayers gross income.

LIMITATION ON DEDUCTIONInterest expense shall be reduced by an amt.equal to the ff. % of interest incomesubjected to FT:

1/1/00 38%

1/1/061/1/09

42% (RA9337)33%

Example: Year 2006Int. exp. = P2,000 Int. income subjected toFT = P1,500Deduct as int. exp.: P2,000 - (P1,500 x 42%)

= P1,370

The objective of the limitation is to discourage taxarbitrage on back to back loans, the proceeds ofwhich are invested in income earning interest thatis subject to 20% final tax.

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1. interest on taxes, such as those paid fordeficiency or delinquency, since taxes are

considered indebtedness (provided that thetax is a deductible tax, except in the case ofincome tax). However, fines, penalties, andsurcharges on account of taxes are notdeductible. The interest on unpaid businesstax shall not be subjected to the limitation ondeduction.

2. Interest paid by a corporation on scripdividends.

3. Interest on deposits paid by authorized banksof the BSP to depositors, if it is shown thatthe tax on such interest was withheld.

4. Interest paid by a corporate taxpayer who isliable on a mortgage upon real property ofwhich the said corporation is the legal orequitable owner, even though it is not directlyliable for the indebtedness.

NON-DEDUCTIBLE INTEREST

(a) interest paid in advance through discountor otherwise(in case of cash basistaxpayer) allowed as deduction in the year the

debt is paid if indebtedness is payable in

periodic amortizations, int. isdeducted in proportion of the amt. ofthe principal paid.

(b) payments made:1. between members of a family

(include only brothers & sisters,spouse, ancestors, & linealdescendants)

2. between an individual & a corp. morethan 50% in value of outstandingstock is owned by such individual(except in case of distributions in

liquidation)3. between 2 corps. more than 50% invalue of outstanding stock owned bysame individual, if either one is apersonal holding co. or a foreignholding co. during the taxable yr.preceding the date of sale/exchange

reality is dividend9. interest on unpaid salaries and

bonuses10. interest calculated for cost keeping

on account of capital or surplusinvested in business which does notrepresent charges arising underinterest-bearing obligation

11. interest paid when there is nostipulation for the payment thereof

OPTIONAL TREATMENT OF INTERESTEXPENSE- at the option of taxpayer, interest

incurred to acquire property used in tradeor business may be allowed as:

(a) as expense (deduction)(b) as capital expenditure

3. TAXES- -the term taxes refers to national and local

taxes, and means TAXES PROPER, hence,no deductions are allowed for:

o a. Interestso b. surchargeso c. penalties or fines incident to

delinquency (sec. 80, Rev. Reg. 2)

DEDUCTIBLE TAXES- All taxes, national, or local, paid or incurred

during the taxable year in connection with thetaxpayers profession, trade or business, aredeductible from gross income.

REQUISITES FOR DEDUCTIBILITY:a. it must be paid or incurred within the

taxable yearb. it must be paid or incurred in

connection with the taxpayers trade,

profession or businessc. it must be imposed directly on thetaxpayer

d. it must not be specifically excludedby law from being deducted from thetaxpayers gross income

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a kind tending to increase the value ofthe property assessed

(e) final taxes, being in the nature of incometax

(f) special assessments

Taxes, when refunded or credited, shall beincluded as part of GI in the year of receipt tothe extent of income tax benefit of saiddeduction. (Tax Benefi t Rule)

For NRAETB and RFC, taxes paid or

incurred are allowed as deductions only ifand to the extent that they are connectedfrom income within the Philippines.

Exceptions to the rule that only such personson whom the tax is imposed by law can claimdeduction thereof:

a. taxes of shareholder upon hisinterest as such and paid by thecorporation withoutreimbursement from him, can be

claimed by the corporation asdeduction.

b. A corporation paying the tax forthe holder its bonds or otherobligation containing a tax-freecovenant clause cannot claimdeduction for such taxes paid byit pursuant to such covenant.

LIMITATIONS ON DEDUCTIONSIn case of a nonresident alien individualengaged in trade/business in the Philippines,taxes to be deducted shall be allowed only if& to the extent that they are connected withincome from sources w/in the Philippines

Tax Credit: a right of an income taxpayer to

deduct from income tax payable the foreignincome tax he has paid to his foreign countrysubject to limitation.

WHO CAN CLAIM?1. Citizen2. Domestic Corp

Limitation of Credit (SubstantiationRequirements)

-The tax credit shall be allowed onlyif the taxpayer establishes to the satisfaction ofthe Commissionerthe following:

a. The total amount of the income derivedfrom sources without the Philippines;

b. The amount of income derived from eachcountry, the tax paid or incurred to which isclaimed as a credit under said paragraph, such

amount to be determined under rules andregulations prescribed by the Secretary ofFinance; and

c. All other information necessary for theverification and computation of such credits.

What amount may be taken as tax credit: Theamount of tax credit allowed is equivalent to thetax paid or incurred to a foreign country duringthe taxable year but NOT TO EXCEED THEFOLLOWING LIMITS:

Per Country L imitation Amount of credit to taxpaid/incurred to any country shall not exceedsame proportion of the tax against which suchcredit is taken

Income from outside the Phils (per country)

Divided by Phil. IncomeSubtotalMultiplied by: TOTAL income from ALL sourcesLimitation per country

Global Limitation Total amount of credit shallnot exceed same proportion of tax which suchcredit is taken

Total income from OUTSIDE the Phils.Divided by total income from ALL sourcesSubtotalMultiplied by Philippine IncomeGlobal Limitation

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DIFFERENCES:Deduction: included in the gross income but later

deducted.Exclusion: not included in the computation of grossincome. Refers to income received or earned but isnot taxable as income because of exemption byvirtue of a law or treaty.Tax Credit: paid beforehand and is deducted from thetax liability of the taxpayer.

Example:

Particulars NetIncome Actual ForeignTax Paid inPhilippine

Peso

PhilIncomeTax due at

32%Country A P50,000 P18,000Country B 40,000 P11,000Phil-sourceincome

110,000

Total NI all

P200,000 P29,000 P64,000

A. PER COUNTRY LIMITATIONCountry A : [(50,000/200,000 x 64,000)] = 16,000Country B : [(40,000/200,000 x 64,000)] = 12,800

** maximum tax credit limit

B. GLOBAL LIMITATION[(90,000/200,000 x 64,000)] =

P28,800

Computation of Allowable tax creditTax Due on P200,000at 32%

P64,000

Less: Allowable Foreign Tax CreditCountry A P16,000Country B 11,000 27,000

Tax Still Due P37,000

** Cannot exceed maximum tax credit limitNOTE: For limitation A, Country A, 16K is lower thanthe actual; Country B, 11K (actual) is the loweramount; get the total of all per country amounts. Forlimitation B, 28.8K is lower than the total of the actualamount. Comparing the total of limitation A vs. B, theformer is the lower amount so that is the allowable tax

(d) incurred in trade, business or professionOR property connected w/ trade,

business or profession lost through fires,storm, shipwreck, or other casualties ORfrom robbery, theft or embezzlement

(e) evidenced by a completed transaction(f) not claimed as a deduction for estate tax

purposes(g) notice of loss must be filed with the BIR

within 45 days from the date of discoveryof the casualty or robbery, theft or

embezzlement

No loss shall be allowed as a deductionfor income tax purposes if such loss hasbeen claimed as a deduction for estatetax purposes.

The taxpayers failure to record in hisbooks the alleged loss proves that theloss had not been suffered, hence, notdeductible. (City Lumber Vs. Domingoand CA, January 30, 1964).

Category and Types of Losses1. Ordinary Losses

a. incurred in trade or business, or practice ofprofession

NET OPERATING LOSS CARRY-OVER (NOLCO)

- Refers to the excess of allowable deductions overgross income of the business for any taxable year,which has not been previously offset as deductionfrom gross income.REQUIREMENTS:1. the taxpayer was not exempt from income tax inthe year of such net operating loss;2. the loss was not incurred in a taxable year duringwhich the taxpayer was exempt from income tax, and

3. there has been no substantial change in theownership of the business or enterprise.

There is no substantial change in the ownership ofthe business when:

a. not < 75% in nominal value of outstandingissued shares is held by same persons

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MCIT, or that the individual availed ofthe 10% Optional Standard

Deduction

(b) Net Operating Loss = excess ofallowable deduction over the GI

(c) For mines other than oil & gas wells, ifloss incurred in any of the 1st 10 yrs. ofoperation, carry-over for the next 5 yrs.

b. of property connected with the trade,business, or profession, if the loss arisesfrom fires, storms, shipwreck or othercasualties, or from robbery, theft orembezzlement

16884100 taxation reviewer

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