293183315 mickey ingles ateneo taxation 1

7/26/2019 293183315 Mickey Ingles Ateneo Taxation 1

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Taxation One: Outline with Codals

Course OutlineTax I

Based on Atty. Monteros outline, with integrated notes from Atty. Salvadors review class,

Reyes, some Mamalateo, and the various reviewers in school.

A. In General...........................................................................................................1B. General Principles...............................................................................................1

C. Income Tax on Individuals..................................................................................2D. Definitions........................................................................................................17

E. Income Tax ates.............................................................................................1!". Proprietar# Educational Institutions and $ospitals...........................................1%

G. G&CCs...............................................................................................................2'$. Passive Income.................................................................................................21

I. (inimum Corporate Income Tax )(CIT*............................................................2+,. Income Tax on esident "orei-n Corporations..................................................2

/. Income Tax on 0onresident "orei-n Corporations...........................................2!. Improperl# Accumulated Earnin-s Tax )IAET*..................................................+2

(. Taxexempt Corporations.................................................................................+

0. Taxa3le Income................................................................................................+!P. "rin-e Benefits Tax )"BT4 56ut up4*.................................................................7. Deductions........................................................................................................81

. Capital Gains and osses )9ale or Exc6an-e of Propert#*.................................7+9. Determination of Gain or oss from 9ale or Transfer of Propert#......................77

T. 9itus of Taxation...............................................................................................!2:. Accountin- Periods and (et6ods......................................................................!7

;. Estates and Trusts............................................................................................%15. eturns and Pa#ment of Taxes.........................................................................%

5. 5it66oldin- Tax...............................................................................................%%

A. In General

Taxable Income The essential difference between capital and income is that capital is a fund; and

income is a flow. Capital is wealth, while income is the service of wealth.

ropert! is a tree, income is the fruit. "abor is a tree, income is the fruit. Capital is a

tree, income the fruit.

Income means profits or gains. #$adrigal v %affert!&

Income ma! be defined as the amount of mone! coming to a person or corporation

within a specified time, whether as pa!ment for services, interest or profit frominvestment.

o ' mere advance in the value of propert! of a person or a corporation in no

sense constitutes the (income) specified in the law. *uch advance constitutes

and can be treated merel! as an increase in capital. #isher v Trinidad&

Cash dividends is taxed as income because it has been realied-received, while stoc

dividends is not taxed as income because it is merel! inchoate as it is a mere

anticipation of income #it becomes income once !ou sell it&.

o One is an actual receipt of profits; the other is a receipt of a representation of

the increased value of the assets of a corporation. #isher v Trinidad&

When dealing with money or property, the questions you should as are!

o "s this capital or is this income#

o $as it %een reali&ed'received or is it merely inchoate#

$ice! Ingles'teneo "aw /01/'tt!. $ontero and some stuff from 'tt!. *alvador #"ast updated: $a! 12, /01/ 3 $ice!&

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B. General Principles*4C. /2. 5eneral rinciples of Income Taxation in the hilippines. 6 4xcept when otherwise provided in this Code:#'& ' citien of the hilippines residing therein is taxable on all income derived from sources within and without thehilippines;

#7& ' nonresident citien is taxable onl! on income derived from sources within the hilippines;#C& 'n individual citien of the hilippines who is woring and deriving income from abroad as an overseas contractworer is taxable onl! on income derived from sources within the hilippines: rovided, That a seaman who is a

citien of the hilippines and who receives compensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusivel! in international trade shall be treated as an overseas contract worer;#8& 'n alien individual, whether a resident or not of the hilippines, is taxable onl! on income derived from sources

within the hilippines;#4& ' domestic corporation is taxable on all income derived from sources within and without the hilippines; and#& ' foreign corporation, whether engaged or not in trade or business in the hilippines, is taxable onl! on incomederived from sources within the hilippines.

9ho are taxable on income derived from all sources, whether within or outside the

hilippines Taxed worldwide1. %esident citiens.

/. 8omestic corporations.

The other inds of taxpa!ers are subo

Overseas Contract 9orer =es >o

%esident 'lien =es >o

>on6resident 'lien =es >o

8omestic Corp =es =es

oreign Corp =es >o

C. Income Tax on Individuals(efinitions%esident citiens and resident aliens*ection // #& The term ?resident alien? means an individual whose residence is within the hilippines and who isnot a citien thereof.

%esident alien is an individual:

1. 9hose residence is within the hilippines

/. 9ho is not a citien

$ere ph!sical or bod! presence is enough. >ot intention to mae the countr! one)s

abode. #5arrison v C'&

'n alien actuall! present in the hilippines who is not a mere transient or so


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be his intention at all times to return to his domicile abroad when thepurpose for which he came has been consummated or abandoned. #%% /&

>on6resident citiens*ec // #4&. The term ?nonresident citien? means:#1& ' citien of the hilippines who establishes to the satisfaction of the Commissioner the fact of his ph!sicalpresence abroad with a definite intention to reside therein.#/& ' citien of the hilippines who leaves the hilippines during the taxable !ear to reside abroad, either as animmigrant or for emplo!ment on a permanent basis.#2& ' citien of the hilippines who wors and derives income from abroad and whose emplo!ment thereat re@uires

him to be ph!sicall! present abroad most of the time during the taxable !ear.#A& ' citien who has been previousl! considered as nonresident citien and who arrives in the hilippines at an!time during the taxable !ear to reside permanentl! in the hilippines shall liewise be treated as a nonresidentcitien for the taxable !ear in which he arrives in the hilippines with respect to his income derived from sourcesabroad until the date of his arrival in the hilippines.#B& The taxpa!er shall submit proof to the Commissioner to show his intention of leaving the hilippines to residepermanentl! abroad or to return to and reside in the hilippines as the case ma! be for purpose of this *ection.

$eaning of non6resident citien:

1. Citien who establishes to the satisfaction of the Commissioner the fact of hisph!sical presence abroad with a definite intention to reside therein

/. Citien who leaves the hilippines during the taxable !ear to reside abroad, either

as an immigrant or for emplo!ment on a permanent basis2. Citien who wors and derives from abroad and whose emplo!ment thereat

re@uires him to be ph!sicall! present abroad most of the time during the taxable

!earA. Citien who has been previousl! considered as nonresident citien and who

arrives in the hilippines at an! time during the taxable !ear to residepermanentl! in the hilippines shall liewise be treated as a nonresident citien

for the taxable !ear in which he arrives in the hilippines with respect to hisincome derived from sources abroad until the date of his arrival in the hilippines.

9ho are non6resident citiens #%% 16D&

1. Immigrant 3 one who leaves the hilippines to reside abroad as an immigrant forwhich a foreign visa has been secured

/. ermanent emplo!ee 3 one who leaves the hilippines to reside abroad foremplo!ment on a more or less permanent basis2. Contract worer 3 one who leaves the hilippines on account of a contract of

emplo!ment which is renewed from time to time under such circumstance as tore@uire him to be ph!sicall! present abroad most of the time #not less than 1E2

da!s&

>on6resident citiens who are exempt from tax with respect to income derived from

sources outside the hilippines shall no longer be re@uired to file information returns

from sources outside the hilippines beginning /001. #%% B6/001&

The phrase Fmost of the timeG shall mean that the said citien shall have sta!ed abroad

for at least 1E2 da!s in a taxable !ear.

The same exemption applies to an OC9 but as such worer, the time spent abroad is

not material for tax exemption purposes all that is re@uired is for the worer)s

emplo!ement contract to pass through and be registered with the O4'. #7I% %uling226/000&.

>on6resident aliens engaged in business in the hilippines*ec //. #5& The term ?nonresident alien? means an individual whose residence is not within the hilippines andwho is not a citien thereof.

9ho are non6resident aliens

1. 'n individual whose residence is not within the hilippines


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/. >ot a citien of the hilippineso 8etermination is b! his intention with regard to the length and nature of his sta!.

#*ec B, %% /&

"oss of residence b! alien

o 'n alien who has ac@uired residence in the hilippines retains his status until he

abandons the same and actuall! departs from the hilippines.

o ' mere intention to change his residence does not change his status. 'n alien whohas ac@uired a residence is taxable as a resident for the remainder of his sta! in the

hilippines. #*ec. H, %% /&$inimum wage earner*ec //. #55& The term (statutor! minimum wage) earner shall refer to rate fixed b! the %egional Tripartite 9ageand roductivit! 7oard, as defined b! the 7ureau of "abor and 4mplo!ment *tatistics #7"4*& of the 8O"4.

#& The term (minimum wage earner) shall refer to a worer in the private sector paid the statutor! minimumwage; or to an emplo!ee in the public sector with compensation income of not more than the statutor! minimumwage in the non6agricultural sector where he-she is assigned.

ixed b! the %egional Tripartite 9age and roductivit! 7oard.

$inimum wage earner:o rivate sector 3 paid the statutor! minimum wage

o ublic sector 3 not more than the statutor! minimum wage in the non6agricultural

sector where he-she is assigned

8ependent*ec 2B. #7& or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears ofage, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6support

because of mental or ph!sical defect.

8ependent is aJ

o "egitimate, illegitimate or legall! adopted child and living with the taxpa!er

o 9ho must be: >ot more than /1,

Knmarried, and

>ot gainfull! emplo!ed, O%

8ependent, regardless of age, is incapable of self6support because of

mental or ph!sical defect.

To summarie, individual taxpa!ers are classified into:

1. Citiens, who are divided into:

o %esident citiens 3 those citiens whose residence is within the hilippines; and

o >on6resident citiens 3 those citiens whose resident is not within the hilippines.

/. 'liens, who are divided into:

o %esident aliens 3 those individuals whose residence is within the hilippines andare not citiens thereof; and

o >on6resident aliens 3 those individuals whose residence is not within the

hilippines but temporaril! in the countr! and are not citiens thereof. The! are:

Those engaged in trade or business within the hilippines; and

Those who are not so engaged. #see *ec /26/B&

)inds of income and income ta* of individuals

Tax formula


A


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*4C. /A. Income Tax %ates. 6#'& %ates of Income Tax on Individual Citien and Individual %esident 'lien of the hilippines.#1& 'n income tax is hereb! imposed:#a& On the taxable income defined in *ection 21 of this Code, other than income sub


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e@uall! between them for the purpose of determining their respective taxableincome.

$inimum wage earners are exempt from the pa!ment of income tax on their taxable

income. olida! pa!, overtime pa!, night shift differential pa!, and haard pa! received

b! them are liewise exempt from income tax.

' non6resident alien individual engaged in trade or business in the hilippines is sub


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#C& Capital 5ains from *ale of *hares of *toc not Traded in the *toc 4xchange. 6 The provisions of *ection 2D#7&notwithstanding, a final tax at the rates prescribed below is hereb! imposed upon the net capital gains realiedduring the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domesticcorporation, except shares sold, or disposed of through the stoc exchange.>ot over 100,000JJJJJJJJJJJ........ BL

On an! amount in excess of 100,000JJJJ 10L

#8& Capital 5ains from *ale of %eal ropert!. 6#1& In 5eneral. 6 The provisions of *ection 2D#7& notwithstanding, a final tax of six percent #HL& based on thegross selling price or current fair maret value as determined in accordance with *ection H#4& of this Code,whichever is higher, is hereb! imposed upon capital gains presumed to have been realied from the sale, exchange,

or other disposition of real propert! located in the hilippines, classified as capital assets, including pacto de retrosales and other forms of conditional sales, b! individuals, including estates and trusts: rovided, That the taxliabilit!, if an!, on gains from sales or other dispositions of real propert! to the government or an! of its politicalsubdivisions or agencies or to government6owned or controlled corporations shall be determined either under*ection /A #'& or under this *ubsection, at the option of the taxpa!er.#/& 4xception. 6 The provisions of paragraph #1& of this *ubsection to the contrar! notwithstanding, capital gainspresumed to have been realied from the sale or disposition of their principal residence b! natural persons, theproceeds of which is full! utilied in ac@uiring or constructing a new principal residence within eighteen #1E&calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this*ubsection: rovided, That the historical cost or ad


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But what a%out dividends from foreign corporations for citi&ens

1not resident aliens2# 9ell, the income here enters into the

computation for *ec /A #a& tax calendar. or resident aliens, the!are not taxed since it)s income derived from abroad.

E. Interest on long6term deposit or investment in bans #with maturit! ofB !ears or more&

exempt

rie 3 the result of an effort #lie a prie in a beaut! contest&9inning 3 the result of a transaction where the outcome depends upon

chance #lie betting&8eposit substitute 3 a means of borrowing mone! from the public #/0 or

more individual or corporate lenders& other than b! wa! of deposit withbans through the issuance of debt instruments #lie baner)s

acceptances, promissor! notes, repurchase agreements, certificates ofassignment or participation&

Tax ate on Interest Income from "orei-n Currenc# Deposit )

1'%!*

1. Interest income actuall! received b! a resident citien or resident alien

from C8

.BL final

withholding tax/. If it was deposited b! an OC9 or seaman or nonresident citien 4xempt

2. If it was in a ban account in the


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ot6er Disposition of 96ares of 9toc? ) @2''!*

If shares of stoc are listed and traded through the local

stoc exchange

P of 1L #or .00BL& of the

gross selling price or grossvalue in mone! of the

shares of stoc

If shares not tradedthrough the local stoc exchange

o Capital gains not over 100,000o Capital gains in excess of 100,000

BL of the net capital gains10L of the net capital gains

9ho are liable

1. Individual taxpa!er, whether citien or alien;/. Corporate taxpa!er, whether domestic or foreign;

2. Other taxpa!ers not falling under #1& and #/& above, such as estate, trust, trustfunds and pension funds, among others.

9ho are exempt

1. 8ealers in securities/. Investors in shares of stoc in a mutual fund compan!, as defined in *ec // #77&,

and *ection /#s& of these %egulations, in ocnnection with the gains realied b! saidinvestor upon redemption of said shares of stoc in a mutual fund compan!l and

2. 'll other persons, whether natural or Exc6an-es> or Transfers or eal

Properties Classified as Capital Assets ) !%!*

*ale of real propert! in the hilippines HL of the gross sellingprice, or the current

maret value at the time

of sale, whichever ishigher

If sale was made to the government or to 5OCCs 4ither HL of the grossselling price-current

maret value or under

the normal income tax


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rate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es orTransfers of eal Properties classified as &rdinar# Assets

) !%!*

1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than B00,000o *elling price is B00,000 to /m

o *elling price is above /m

1.BL2L

BL of gross sellingprice-current maret

value, whichever ishigher

/. If the seller is not habituall! engaged in the real estatebusiness

.BL of gross sellingprice-current maret


2. If the seller is exempt from creditable withholding tax as per%% /6DE

Exempt

Conditions to 3e exempt from capital -ains tax of @ on t6e sale> exc6an-e> or

disposition of a principal residence ) 1+%%*1. The proceeds from the sale, exchange, or disposition of his principal residence must

be full! utilied in ac@uiring or construing a new principal residence within 1Emonths. There must be proof.

2. This can onl! be availed of O>"= O>C4 ever! 10 !ears

+. The historical cost of his old principal residence shall be carried over to the cost basis

of his new residence

. If there is no full utiliation, he shall be liable for the deficienc! capital gains tax of

the utilied portion

8. If the principal residence is disposed in exchange for a condo, and if it is used as his

new residence, then he is exempt

@. The HL capital gains tax otherwise due must be deposited in escrow with anauthoried agent ban, and can onl! be released when sufficient proof is shown that

the proceeds have been full! utilied within 1E months.

9hat is the principal residence an!wa! # 12'''*

o It is the dwelling house, where the husband or wife or unmarried individual

resides; actual occupanc! is not interrupted or abandoned b! temporar! absencedue to travel, studies, or wor abroad

o If the ownership of the land and the dwelling house belong to different persons,

onl! the dwelling house shall be treated as principal residence

a!ment of capital gains tax on foreclosure of mortgaged propert! # %%*

o If the mortgagor exercises his right of redemption within 1 !ear 3 no capital gains

tax because none has been derived and no transfer of propert! was realied

In case of non6redemption, the capital gains will be due based on the bid price of thehighest bidder

ersonal and 'dditional 4xemptions9EC. +8.Allowance of Personal Exemption for Individual Taxpayer. -

)A*In General. 6 or purposes of determining the tax provided in *ection /A #'& of this Title, there shall beallowed a basic personal exemption amounting to B0,000 for each individual taxpa!er.


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In the case of married individuals where onl! one of the spouses is deriving gross income, onl! such spouse shallbe allowed the personal exemption.)B*Additional Exemption for Dependents.6 There shall be allowed an additional exemption of twent! fivethousand pesos #/B,000& for each dependent not exceeding four #A&.

The additional exemption for dependent shall be claimed b! onl! one of the spouses in the case of marriedindividuals.

In the case of legall! separated spouses, additional exemptions ma! be claimed onl! b! the spouse whohas custod! of the child or children: rovided, That the total amount of additional exemptions that ma! be claimedb! both shall not exceed the maximum additional exemptions herein allowed.

or purposes of this *ubsection, a ?dependent? means a legitimate, illegitimate or legall! adopted childchiefl! dependent upon and living with the taxpa!er if such dependent is not more than twent!6one #/1& !ears ofage, unmarried and not gainfull! emplo!ed or if such dependent, regardless of age, is incapable of self6support

because of mental or ph!sical defect. #'mended b! %' DB0A&

Personal and additional exemption for individual taxpa#er

7asic personal exemption for each individual taxpa!er

o If married and onl! one of the spouses is deriving gross income,

onl! such spouse shall be allowed the personal exemption.

B0,000

'dditional exemption for each dependent, not exceeding four #A&

o Claimed b! onl! one spouse in case of married individuals

o If legall! separated, additional exemptions claimed onl! b!

spouse who has custod!; should not exceed maximumadditional exemptions allowed

/B,000 per

dependent

4xemption statutes are not retroactive. #ensacola v CI%&

8iscounts for senior citiens is now treated as tax deductions, as per %' D/B. This

sucs for the taxpa!er because he doesn)t get the Fpeso for pesoG benefit which hewould have gotten if it were considered a tax credit as before. #$.4. oldings Corp v CI%

CT'&

*enior Citiens are

o %esident citiens

o 't least H0 !ears old

The! are not exempt from income taxes unless the! are considered

minimum wage earners. #%' DDDA, which also too out the previousH0,000 re@uirement&

Change of status9ec +8. )C* C6an-e of 9tatus.6 If the taxpa!er marries or should have additional dependent#s& as defined above

during the taxable !ear, the taxpa!er ma! claim the corresponding additional exemption, as the case ma! be, infull for such !ear.

If the taxpa!er dies during the taxable !ear, his estate ma! still claim the personal and additionalexemptions for himself and his dependent#s& as if he died at the close of such !ear.

If the spouse or an! of the dependents dies or if an! of such dependents marries, becomes twent!6one#/1& !ears old or becomes gainfull! emplo!ed during the taxable !ear, the taxpa!er ma! still claim the same

exemptions as if the spouse or an! of the dependents died, or as if such dependents married, became twent!6one#/1& !ears old or became gainfull! emplo!ed at the close of such !ear.

ersonal exemption allowable to nonresident alien individuals9ec. +8 )D* Personal Exemption Alloa3le to 0onresident Alien Individual. 6 ' nonresident alien individualengaged in trade, business or in the exercise of a profession in the hilippines shall be entitled to a personalexemption in the amount e@ual to the exemptions allowed in the income tax law in the countr! of which he is asub


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Personal Exemptions alloa3le to

nonresident alien individuals

If engaged in trade, business or in the exercise of

a profession

4ntitled to a personal exemption in the

amount e@ual to the exemptionsallowed in the income tax law of his

countr! for ilipinos, but it shouldn)texceed the amount fixed here forexemptions

If not engaged in trade, business or in the exercise

of a profession

>one, because *ec /B #7& states that

he will be taxed upon his entireincome.

8e "eon states that nonresident aliens are not entitled to additional e*emptions for

dependents. #. 12B, undamentals of Taxation /00D&

Optional *tandard 8eduction9ec. + )* &ptional 9tandard Deduction.6 In lieu of the deductions allowed under the preceding *ubsections,an individual sub


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receipts shall be determined in accordance with the said acceptable method ofaccounting.

4xample:

o *uppose a retailer of goods, an individual, whose accounting method is under the

accrual basis has a gross sales of 1m with a cost of sales amounting to E00.

the computation of the O*8 shall be determined as follows:5ross *ales 1,000,000

5ess! 6o7S 888888888888887asis of the O*8 1,000,000

* 3S( Rate 1ma*2 .A0

O*8 'mount A00,000

If the taxpa!er opts to use the O*8 in lieu of the itemied deductions allowed

under *ec 2A of the Tax Code, his net taxable income shall be as follows:5ross *ales 1,000,000

5ess! 6o7S 8888888888885ross *ales-5ross Inome1,000,000

5ess! 3S( 1ma*2 A00,000>et Income H00,000

remium pa!ments on health and-or hospitaliation insurance9ec. + )(* Premium Payments on Health andor Hospitali!ation Insurance of an Individual Taxpayer.8The amount of premiums not to exceed Two thousand four hundred pesos #/,A00& per famil! or Two hundredpesos #/00& a month paid during the taxable !ear for health and-or hospitaliation insurance taen b! the

taxpa!er for himself, including his famil!, shall be allowed as a deduction from his gross income: +rovided, Thatsaid famil! has a gross income of not more than Two hundred fift! thousand pesos #/B0,000& for the taxable!ear: +rovided, finally, That in the case of married taxpa!ers, onl! the spouse claiming the additional exemption fordependents shall be entitled to this deduction.

The taxpa!er is allowed a deduction of /,A00-famil! or /00-month for health and-or

hospitaliation insurance premiums, provided:o *aid famil!)s gross income is not more than /B0,000 for the taxable !ear.

If married, onl! the spouse claiming the additional exemption for dependents can avail

of this.

4xclusions and deductions #discussion from 8e "eon)s boo, see also *ec H16HA of %% /&

4xclusions are incomes that are exempt from the tax. The! are not to be included in the

tax return unless information regarding it is specificall! called for.

o 4xamples:

"ife insurance proceeds paid to beneficiaries upon the death of the

insured.

Qalue of the propert! ac@uired b! inheritance or donation, because it is

sub


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5ains from the sale or retirement of bonds or other certificates of

indebtedness with a maturit! of more than B !ears.

8eductions are items or amounts which the law allows to be deducted under certain

conditions from the gross income of a taxpa!er in order to arrive at the taxable income.

7oth reduce actual gross income although exclusions are not included in the income tax

return.

*ome general principals governing deductions include:o The taxpa!er seeing a deduction must point to some specific provision of the

statute authoriing the deduction; and

o e must be able to prove that he is entitled to the deduction authoried or

allowed.

The! are allowed onl! where there is a clear provision in the statute for the

deduction claimed.

Taxable gross income is affected b! exclusions because the latter are omitted from the

former and are not reported on the income tax return but is not affected b! deductionsbecause the! are subtracted after gross income is determined and are reported on the

return.

Rinds of deductions:

1. 8eductions from compensation income./. 8eductions from business-professional income.

2. 8eductions from corporate income.A. *pecial deductions

B. 8eductions allowed b! special laws.

Tax on non6resident aliens>on6resident aliens engaged in business in the hilippines9EC. 28. Tax on "onresident Alien Individual. 8)A* "onresident Alien En#a#ed in trade or $usiness %ithin the Philippines.8

#1& "n 7eneral. 6 ' nonresident alien individual engaged in trade or business in the hilippines shall be sub


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1 Three #2& !ears to less than four #A& !ears 6 1/L; and1 "ess than three #2& !ears 6 /0L.

#2& 6apital 7ains. 6 Capital gains realied from sale, barter or exchange of shares of stoc in domestic corporationsnot traded through the local stoc exchange, and real properties shall be sub Business or Exercisin- a Profession

"inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem exempt

/. %o!alt! from boos, literar! wors, musical compositions 10L

2. %o!alt! other than above /0L

A. Interest on an! current ban deposit, !ield or other monetar! benefits

from deposit substitute, trust fund similar arrangement

/0L

B. rie exceeding 10,000 /0LH. Other winnings, except hil Charit! *weepstaes "otto /0L

. 8ividend from a domestic corp, or from a on6resident aliens not engaged in business in the hilippines9ec. 28 )B* "onresident Alien Individual "ot En#a#ed in Trade or $usiness %ithin the Philippines. 8There shall be levied, collected and paid for each taxable !ear upon the entire income received from all sourceswithin the hilippines b! ever! nonresident alien individual not engaged in trade or business within the hilippinesas interest, cash and-or propert! dividends, rents, salaries, wages, premiums, annuities, compensation,remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income,and capital gains, a tax e@ual to twent!6five percent #/BL& of such income. Capital gains realied b! a nonresidentalien individual not engaged in trade or business in the hilippines from the sale of shares of stoc in an! domesticcorporation and real propert! shall be sub


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*ection /A.

>onresident aliens not engaged in business are taxed /BL of their entire income within

the hilippines.

That means the! have no deductions

Their capital gains are the same with nonresident aliens engaged in business #see table

above&

*pecial aliens9ec. 28 )C* Alien Individual Employed &y 'e#ional or Area Head(uarters and 'e#ional )peratin#Head(uarters of *ultinational +ompanies. 6 There shall be levied, collected and paid for each taxable !earupon the gross income received b! ever! alien individual emplo!ed b! regional or area head@uarters and regionaloperating head@uarters established in the hilippines b! multinational companies as salaries, wages, annuities,compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or areahead@uarters and regional operating head@uarters, a tax e@ual to fifteen percent #1BL& of such gross income:+rovided, however, That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing the same position

as those of aliens emplo!ed b! these multinational companies. or purposes of this Chapter, the term Nmultinationalcompan!N means a foreign firm or entit! engaged in international trade with affiliates or subsidiaries or branchoffices in the 'sia6acific %egion and other foreign marets.

#8& Alien "ndividual 9mployed %y 3ffshore Baning :nits. 6 There shall be levied, collected and paid for eachtaxable !ear upon the gross income received b! ever! alien individual emplo!ed b! offshore baning unitsestablished in the hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments,such as honoraria and allowances, from such off6shore baning units, a tax e@ual to fifteen percent #1BL& of suchgross income: +rovided, however,That the same tax treatment shall appl! to ilipinos emplo!ed and occup!ing thesame positions as those of aliens emplo!ed b! these offshore baning units.

#4&Alien "ndividual 9mployed %y +etroleum Service 6ontractor and Su%contractor. 6 'n 'lien individual who is a

permanent resident of a foreign countr! but who is emplo!ed and assigned in the hilippines b! a foreign servicecontractor or b! a foreign service subcontractor engaged in petroleum operations in the hilippines shall be liable toa tax of fifteen percent #1BL& of the salaries, wages, annuities, compensation, remuneration and otheremoluments, such as honoraria and allowances, received from such contractor or subcontractor: +rovided,however,That the same tax treatment shall appl! to a ilipino emplo!ed and occup!ing the same position as analien emplo!ed b! petroleum service contractor and subcontractor.

'n! income earned from all other sources within the hilippines b! the alien emplo!ees referred to under*ubsections #C&, #8& and #4& hereof shall be sub


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1. Is this income If not, then it)s not reall! a income tax problem./. 9ho)s the taxpa!er 'nd what)s the source %efer to *ec /2

2. 9hat)s the specific rate *ee sec /A6/B

or example, what is the tax rate of on income derived from dividends from foreigncorporations for 1. Citiens /. %esident aliens and 2. >onresident aliens engaged in trade or

business

1. Citiensa. =es, it)s income.

b. The source is outside the hilippines. 're the! liable for sources from outsidethe hilippines =es Citiens are taxed worldwide

c. 9hat)s the specific tax rate mmJ since it)s not in an! of the charts, butthe! still have to be taxed, then the income the! derive from dividends from

foreign corporations will be considered in computing the tax rate based on thetax calendar of *ec /A#a&

/. %esident aliens

a. =es, it)s income.b. The source is outside the hilippines. 're the! liable for sources from outside

the hilippines >o The! aren)t taxed worldwide.2. >onresident aliens engaged in trade or business

a. =es, m! dear, it)s income.

b. The source is outside the hilippines. 're the! liable for source from outsidethe hilippines >o The! aren)t taxed worldwide either.

D. Definitions*ection //, Tax Code

8efinition of corporations9ec 22 )B*The term ?corporation? shall include partnerships, no matter how created or organied,


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The moment inheritance shares are used as part of the common assets to be used in

maing profits, it is considered part of the taxable income of an unregistered

partnership. #Ona v CI%&

%e@uisites of a MQ:

1. Contribution b! each part!/. rofits are shared among the parties

2. There is ; and#A& ' 0.D percent #0.DL& ratio of the Consolidated ublic *ector inancial osition #C*& to 5>.

The option to be taxed based on gross income shall be available onl! to firms whose ratio of cost of salesto gross sales or receipts from all sources does not exceed fift!6five percent #BBL&.

The election of the gross income tax option b! the corporation shall be irrevocable for three #2&consecutive taxable !ears during which the corporation is @ualified under the scheme.

or purposes of this *ection, the term Ngross incomeN derived from business shall be e@uivalent to grosssales less sales returns, discounts and allowances and cost of goods sold. ?Cost of goods sold? shall include allbusiness expenses directl! incurred to produce the merchandise to bring them to their present location and use.

or a trading or merchandising concern, ?cost of goods? sold shall include the invoice cost of the goodssold, plus import duties, freight in transporting the goods to the place where the goods are actuall! sold, includinginsurance while the goods are in transit.

or a manufacturing concern, ?cost of goods manufactured and sold? shall include all costs of productionof finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurancepremiums and other costs incurred to bring the raw materials to the factor! or warehouse.

In the case of taxpa!ers engaged in the sale of service, Ngross incomeN means gross receipts less salesreturns, allowances and discounts.

Tax rate of 8omestic Corporations 20L of taxable income from all sources within

and outside the hilippines, or/L of gross income if $CIT applies, or1BL of gross income if the following conditions

are met:1. tax effort ratio of /0L of 5>


1E


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/. ratio of A0L of income tax collection to

total tax revenues

2. Q'T tax effort of AL of 5>; andA. .DL ratio of the Consolidated ublic *ector

inancial osition #C*& to 5> #this lastone has !et to be implemented&

Option to be taxed based on gross income shall be available onl! to firms whose ratio ofcost of sales to gross sales or receipts from all sources does not exceed BBL

4lection of the gross income tax option b! the corporation shall be irrevocable for

2 consecutive taxable !ears

8omestic corporations are subormal tax

$inimum corporate income tax #$CIT&

5ross income tax #5IT&

Improperl! accumulated earnings tax #I'4T&

Gross Income Computation

5ross *ales"ess: *ales %eturns

8iscounts

'llowances

Co5* #all business expenses directl! incurred to produce the merchandise and bringthem to their present location or use&

Total 5ross Income

CoG9 for a Tradin- or (erc6andise Concern

Invoice cost of goods sold

Import duties

reight in transporting the goods to the place where the goods are actuall! sold

Insurance while the goods are in transit

CoG9 for a (anufacturin- Concern

'll costs of production of finished goods such as raw materials, direct labor manufacturing

overhead

reight cost

Insurance premiums

Other costs incurred to bring the raw materials to the factor! or warehouse

Gross Income Computation for a 9ervice Concern

5ross *ales

"ess: *ales %eturns

8iscounts 'llowances

Cost of *ervices #all direct costs expenses necessaril! incurred to provide theservices re@uired b! the customers clients including:

*alaries emplo!ee benefits of personnel, consultants specialists

directl! rendering the service

Cost of facilities directl! utilied in providing the service such as

depreciation or rental of e@uipment use cost of supplies

If it)s a ban, interest expense is included


1D


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Total 5ross income of a service concern

". Proprietar# Educational Institutions and $ospitals#7& roprietar! 4ducational Institutions and ospitals. 6 roprietar! educational institutions and hospitals which arenonprofit shall pa! a tax of ten percent #10L& on their taxable income except those covered b! *ubsection #8&hereof: rovided, that if the gross income from unrelated trade, business or other activit! exceeds fift! percent#B0L& of the total gross income derived b! such educational institutions or hospitals from all sources, the tax

prescribed in *ubsection #'& hereof shall be imposed on the entire taxable income. or purposes of this *ubsection,the term Nunrelated trade, business or other activit!N means an! trade, business or other activit!, the conduct ofwhich is not substantiall! related to the exercise or performance b! such educational institution or hospital of itsprimar! purpose or function. ' ?roprietar! educational institution? is an! private school maintained andadministered b! private individuals or groups with an issued permit to operate from the 8epartment of 4ducation,Culture and *ports #84C*&, or the Commission on igher 4ducation #C48&, or the Technical 4ducation and *ills8evelopment 'uthorit! #T4*8'&, as the case ma! be, in accordance with existing laws and regulations.

roprietar! educational institution is:

o 'n! private school maintained administered b! private individuals or groups

o 9ith an issued permit to operate from the 84C* or C48 or T4*8'

Tax rate of proprietar! educationalinstitutions and hospitals

10L on their taxable income #except for passiveincome&, or

20L on their entire taxable income if the grossincome from unrelated trade, business or other

activit! exceeds B0L of the total gross income ofthe institution

Knrelated trade, business or other activit! means

o 'n! trade, business or other activit!

o The conduct of which is not su%stantially related to the exercise or performance

b! such its institution of its primar! purpose or function.

or non6stoc, non6profit educational institutions, all revenues use actuall!, directl! and

exclusivel! for educational purposes are exempt.

o Their exemption refers onl! to revenues derived from assets used actuall!,

directl! and exclusivel! for educational purposes.

o

Income from cafeterias, canteens boostores are also exempt if the! areowned operated b! the educational institution and are located within the school

premises.

o owever, the! shall be sub


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o Their ban deposits and foreign currenc! deposits are exempt from withholding

taxes but the! must show proof that such income is used to fund proposed

pro


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Code, whichever is higher, of such lands and-or buildings.

Tax ate on Passive Income of Domestic Corporations "inal Tax

1. Interest under the expanded foreign currenc! deposit s!stem .BL

/. %o!alt! of all t!pes within the hilippines

o %o!alt! from abroad 4nters the taxable income 20L tax rate

/0L

2. Interest on an! current ban deposit, !ield or other monetar! benefits

from deposit substitute, trust fund similar arrangement

/0L

A. 8ividend from domestic corporations #inter6corporate dividend& exempt

Tax ate on Capital Gains )same as individuals*

2. On sale of shares of stoc of a domestic corporation 034

listed and 034 traded thru a local stoc exchange held as

a capital asset,

o Capital gains not over 100,000

o Capital gains in excess of 100,000

BL of the net capital gains

10L of the net capital gains

/. On sale of real propert! in the hilippines held as a capital

asset HL of the gross sellingprice, or the current maretvalue at the time of sale,

whichever is higher

Tax ate of BA0/9 on Income Derived under t6e Expanded "CD

9#stem

"inal Tax

1. Income derived b! a depositor! 7'>R from foreign currenc!transactions with non6residents, O7Ks, etc

exempt

/. Interest income from foreign currenc! loans granted b! a ban toresidents other than O7Ks

10L

Income of non6residents #individuals or corporations& from transactions with depositor!

ban under the expanded C8 s!stem are exempt.

9hat are deposit substitutes#=& The term ?deposit substitutes? shall mean an alternative from of obtaining funds from the public #the termNpublicN means borrowing from twent! #/0& or more individual or corporate lenders at an! one time& other thandeposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account,for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or theneeds of their agent or dealer. These instruments ma! include, but need not be limited to banersN acceptances,promissor! notes, repurchase agreements, including reverse repurchase agreements entered into b! and betweenthe 7ango *entral ng ilipinas #7*& and an! authoried agent ban, certificates of assignment or participationand similar instruments with recourse: rovided, however, That debt instruments issued for interban call loans

with maturit! of not more than five #B& da!s to cover deficienc! in reserves against deposit liabilities, includingthose between or among bans and @uasi6bans, shall not be considered as deposit substitute debt instruments.

' deposit substitute is a means of borrowing mone! from the public #/0 or more

individual or corporate lenders& other than b! wa! of deposit with bans through theissuance of debt instruments.

*ale of shares

Tax ate on Income from 9ale> Barter> Exc6an-e or

ot6er Disposition of 96ares of 9toc? ) @2''!*

If shares of stoc are listed and traded through the local

stoc exchange

P of 1L #or .00BL& of the

gross selling price or grossvalue in mone! of the


//


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shares of stoc

If shares not tradedthrough the local stoc exchange




C8K

Income of non6residents #individuals or corporations& from transactions with depositor!ban under the expanded C8 s!stem are exempt.

Intercorporate dividends

8ividends received b! a domestic corporation from another domestic corporation shall

not be sub Exc6an-es> or Transfers or eal

Properties Classified as Capital Assets ) !%!**ale of real propert! in the hilippines HL of the gross selling

price, or the currentmaret value at the time

of sale, whichever ishigher

If sale was made to the government or to 5OCCs 4ither HL of the grossselling price-current

maret value or underthe normal income tax

rate, taxpa!er)s option

Credita3le 5it66oldin- Tax on 9ales> Exc6an-es orTransfers of eal Properties classified as &rdinar# Assets

) !%!*

1. If the seller is ha%itually engaged in the real estate business

o *elling price is less than B00,000

o *elling price is B00,000 to /m

o *elling price is above /m

1.BL

2LBL of gross selling

price-current maret


/. If the seller is not habituall! engaged in the real estatebusiness

.BL of gross sellingprice-current maret

value, whichever is

higher2. If the seller is exempt from creditable withholding tax as per%% /6DE

Exempt

If the mortgagor exercises his right of redemption within 1 !ear, no capital gains tax.

In case of non6redemption, the capital gains will be due based on the bid price of the

highest bidder. #%% A6DD&

I. (inimum Corporate Income Tax )(CIT*9ec 27 )E* *inimum +orporate Income Tax on Domestic +orporations .


/2


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#1& "mposition of 4a*.6 ' minimum corporate income tax of two percent #/L0 of the gross income as of the end ofthe taxable !ear, as defined herein, is hereb! imposed on a corporation taxable under this Title, beginning on thefourth taxable !ear immediatel! following the !ear in which such corporation commenced its business operations,when the minimum income tax is greater than the tax computed under *ubsection #'& of this *ection for thetaxable !ear.#/& 6arry -orward of 9*cess Minimum 4a*. 6 'n! excess of the minimum corporate income tax over the normal

income tax as computed under *ubsection #'& of this *ection shall be carried forward and credited against thenormal income tax for the three #2& immediatel! succeeding taxable !ears.#2& Relief from the Minimum 6orporate "ncome 4a* :nder 6ertain 6onditions. 6 The *ecretar! of inance is hereb!authoried to suspend the imposition of the minimum corporate income tax on an! corporation which suffers losseson account of prolonged labor dispute, or because of force ma


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o %esident foreign corporations engaged in business as international carriers #see

below for more discussion&

o %esident foreign corporations engaged in business as offshore baning units

o %esident foreign corporations engaged in business as regional operating

head@uarterso irms that are taxed under a special income tax regime #lie those under 4S' or

other economic ones&

,. Income Tax on esident "orei-n Corporations9ec 2!)A* Tax on 'esident orei#n +orporations.

#1& "n 7eneral. 6 4xcept as otherwise provided in this Code, a corporation organied, authoried, or existing underthe laws of an! foreign countr!, engaged in trade or business within the hilippines, shall be sub


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Tax ate on Capital Gains

1. On sale of shares of stoc of a domestic corporation

034 listed and 034 traded thru a local stoc exchange

held as a capital asset,



BL of the net capital gains

10L of the net capital gains/. On sale of real propert! in the hilippines 0o provision for capital

gains for sale of realty.Atty. Montero says that you

apply it to the normalcorporate ta* of >?@

International Carrier*ec /E #'& "nternational 6arrier. 6 'n international carrier doing business in the hilippines shall pa! a tax of two and one6half percent #/ 1-/L& on its /7ross +hilippine Billings/as defined hereunder:#a&"nternational Air 6arrier. 8 /7ross +hilippine Billings/ refers to the amount of gross revenue derived from

carriage of persons, excess baggage, cargo and mail originating from the hilippines in a continuous anduninterrupted flight, irrespective of the place of sale or issue and the place of pa!ment of the ticet or passage

document: +rovided, That ticets revalidated, exchanged and-or indorsed to another international airline form partof the 5ross hilippine 7illings if the passenger boards a plane in a port or point in the hilippines: +rovided,further, That for a flight which originates from the hilippines, but transshipment of passenger taes place at an!port outside the hilippines on another airline, onl! the ali@uot portion of the cost of the ticet corresponding to theleg flown from the hilippines to the point of transshipment shall form part of 5ross hilippine 7illings.#b&"nternational Shipping. 6 /7ross +hilippine Billings/means gross revenue whether for passenger, cargo or mail

originating from the hilippines up to final destination, regardless of the place of sale or pa!ments of the passageor freight documents.

Tax rate for international carriers is /.BL of 5ross hilippine 7illings

5ross hilippine 7illings refers to

o 5ross revenue derived from carriage of persons, excess baggage, cargo and mail

o 3riginating from the +hilippines in a continuous and uninterrupted flight

o

"rrespective of the place of sale or issue and the place of pa!ment of the ticet orpassage document

In CI% v 7O'C, 7ritish Overseas 'irwa!s did not have an! landing rights here nor did

the! have license to operate here. The! also did not carr! passengers or cargo to orfrom the hilippines. The! did, however, have a general sales agent which sold 7O'C

ticets. The! were taxed for the sale of the ticets #because of the situs of taxationprinciple&, even if the service to be rendered was outside the hilippines. The! weren)t

liable for carrier)s tax though.

o 8oing business has no specific criterion. 's long as there was a continuit! of

conduct and intention to establish a continuous business and not one of atemporar! character, then !ou are doing business in the hilippines. #%emember

!our corp&

'n offline airline which has a branch-agent in the hilippines and sells passage

documents to cover offline flights of its principal or other airlines is >OT considered

engaged in business as an international air carrier in the countr! and is >OT sub


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flights to and from the hilippines but nonetheless earn income from other activities inthe countr! will be taxed at the rate of 2/L #now 20L& of such income. #*outh 'frican

'irwa!s, eb 1H, /010&

9hat is included in computing the 57

o 5ross revenue from passage of persons #actual amount as reflected in the tax

coupon part of the plane ticet&

o 4xcess baggageo Cargo and mail originating from the hilippines in a continuous and uninterrupted

flight

To compute the 57: #monthl! average net fare of all the tax coupons of plane ticets

per point of final destination, per class of passage, per classification of passenger&

$K"TI"I48 b! the #total number of passengers flown for the month as declared in theflight manifest&

In case of passengers) flights from an! point in the hilippines and bac, that portion of

revenue pertaining to the return trip to the hilippines is >OT included as part of the57. # 182''2*

Offshore 7aning Knits

#A& 3ffshore Baning :nits. 6 The provisions of an! law to the contrar! notwithstanding, income derived b! offshorebaning units authoried b! the 7ango *entral ng ilipinas #7*& to transact business with offshore baning units,

including an! interest income derived from foreign currenc! loans granted to residents, shall be sub


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resident foreign corporation from C8 withholding tax

7ranch rofit %emittance Tax#B& 4a* on Branch +rofits Remittances. 6 'n! profit remitted b! a branch to its head office shall be sub


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o 5eneral admin and planning

o 7usiness planning and coordination;

o *ourcing and procurement of raw materials and components;

o Corporate finance advisor! services;

o $areting control and sales promotion;

o Training and personnel management;

o "ogistic services;

o %esearch and development services and product development;

o Technical support and maintenance;

o 8ata processing and communications; and

o 7usiness development.

The! are taxed 10L on taxable income.

/. Income Tax on 0onresident "orei-n Corporations

In general#7& Tax on >onresident oreign Corporation. 6

#1& "n 7eneral. 6 4xcept as otherwise provided in this Code, a foreign corporation not engaged in trade or businessin the hilippines shall pa! a tax e@ual to thirt!6five percent #2BL& of the gross income received during eachtaxable !ear from all sources within the hilippines, such as interests, dividends, rents, ro!alties, salaries,premiums #except reinsurance premiums&, annuities, emoluments or other fixed or determinable annual, periodicor casual gains, profits and income, and capital gains, except capital gains subon6resident foreign corporations are subon6resident cinematographic filmowner, lessor, or distributor

/BL 5ross income from the hil

>on6resident lessor of aircraft,

machiner! and other e@uipment

.BL 5ross rentals, charges and

other fees from hil sources

roprietar! educational institution 10L Taxable income from all


/D


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and non6profit hospital sources

%esident international carrier /.BL 5ross hilippine billings

%egional operating head@uarters ofmultinational corporation

10L hilippine Taxable income

There)s no $CIT for special corporations

Tax rate on certain incomes of non6resident foreign corporations#B& 4a* on 6ertain "ncomes Received %y a 0onresident -oreign 6orporation. 8#a& "nterest on -oreign 5oans. 6 ' final withholding tax at the rate of twent! percent #/0L& is hereb! imposed onthe amount of interest on foreign loans contracted on or after 'ugust 1, 1DEH;#b& "ntercorporate (ividends.6 ' final withholding tax at the rate of fifteen percent #1BL& is hereb! imposed onthe amount of cash and-or propert! dividends received from a domestic corporation, which shall be collected andpaid as provided in *ection B #'& of this Code, sub>C2#c& 9*change. 8 ' final tax at the rates prescribed below is hereb! imposed upon the net capital gains realied

during the taxable !ear from the sale, barter, exchange or other disposition of shares of stoc in a domestic

corporation, except shares sold, or disposed of through the stoc exchange:>ot over 100,000JJJJ..JJJJJJ..........BL On an! amount in excess of 100,000JJJJ 10L

Tax ate on Passive Income of "orei-n 0onesidentCorporations

"inal Tax

1. Interest on foreign loans0on8resident lends to a domestic corporation

/0L

/. 8ividend from domestic corporations #inter6corporate dividend&

4his is su%Dect to the condition that the country in which the non8

resident foreign corporation is domiciled allows a credit againstthe ta* due from the non8resident foreign corp ta*es deemed to

have %een paid in the +hilippines equivalent to EF@. "f they dont,the dividends will %e ta*ed at >?@.

1BL

Tax ate on Capital Gains )same as forei-n resident

corporations*

2. On sale of shares of stoc of a domestic corporation

034 listed and 034 traded thru a local stoc exchangeheld as a capital asset,




/. On sale of real propert! in the hilippines 0o provision for capitalgains for sale of realty.

Atty. Montero says that youapply it to the normal

corporate ta* of >?@

On inter6corporate dividends #CI% v rocter and 5amble hilippine $anufacturing, 1DD1&

The ordinar! 2BL #now 20L& tax rate applicable to dividend remittances to non6

resident corporate stocholders of a hilippine corporation, goes down to 1BL if thecountr! of domicile of the foreign stocholder corporation Fshall allowG such foreign

corporation a tax credit for Ftaxes deemed paid in the hilippinesG, applicable againstthe tax pa!able to the domiciliar! countr! b! the foreign stocholder corporation.


20


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In CI% v 5 #$C& #1DD1&, rocter and 5amble hilippines declared dividends to its

parent compan!, 56K*'. It deducted 2BL withholding tax, but now claimed for a

refund, stating that the reduced 1BL dividend tax rate should appl!.o The *C said that the reduced 1BL dividend tax rate is applicable if the K*'

Fshall allowG to 56K*' a tax credit for Ftaxes deemed paid in thehilippinesG applicable against the K* taxes of 56K*'.

o The >I%C specifies that such tax credit for Ftaxes deemed paid in thehilippinesG must, as a minimum, reach an amount e@uivalent to /0L #now

1BL& which represents the difference between the regular 2BL #now >?@&dividend tax rate and the preferred 1BL dividend tax rate. It is important to

note that *ec. /A#b&1 #now Sec. GH 1B2 1F2 1%2 of the >I%C does not re@uirethat the K* must give a Fdeemed paidG tax credit for the dividend tax #/0L

points& waived b! the hilippines in maing applicable the preferred dividendtax rate of 1BL.

o In other words, our >I%C does not re@uire that the K* tax law deem the

parent6corporation to have paid the /0L points of dividend tax waived b! the

hilippines. The >I%C onl! re@uires that the K* Fshall allowG 56K*' aFdeemed paidG tax credit in an amount e@uivalent to the /0L points waived

b! the hilippines. CI% v 9ander hilippines had the same facts as CI% v 5$C. 7ut in 9ander, the

countr! at issue was *witerland and it did not even impose an! income tax on thedividends received b! *wiss corporations from foreign corporations.

o T4 *C said that the condition of Ftaxes deemed paidG was alread! complied

with since no income tax was imposed on the dividends in the first place.

In both cases, the taxpa!ers were entitled to a refund.

Income covered b! tax treaties

In negotiating tax treaties, the underl!ing rationale for reducing the tax rate is that the

hilippines will give up a part of the tax in the expectation that the tax given up for this

particular investment is not taxed b! the other countr!. There would be some incentives

on the part of the foreigners to invest in the hilippines because the rates of tax arelowered and at the same time, the! are credited against the domestic tax abroad afigure higher than what was collected in the hilippines.

o Thus, if the rates of tax are lowered here, there should be a concomitant

commitment on the part of the state of residence #of the foreign corp& to grant

some form of tax relief, whether this be in the form of a tax credit or exemption.Otherwise, the tax which would have been collected here will simpl! be collected

b! another state, defeating the ob


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because it allowed a 10L rate on ro!alties. owever, the 5erman!6% treat! alsoallowed for /0L matching credit for ro!alties. The K*6% tax treat! did >OT have

this /0L matching credit. *o the *C said that since the %6K* Tax Treat! doesnot give a matching tax credit of /0 percent for the taxes paid to the hilippines

on ro!alties as allowed under the %6 5erman! Tax Treat!, *C Mohnson cannot bedeemed entitled to the 10 percent rate granted under the latter treat! for the

reason that there is no pa!ment of taxes on ro!alties under similarcircumstances.&

7ased on %$C AH6/00/ #affirmed b! 5olden 'rches v CI%, CT' Case HEH/, /00&, the

10L rate of withholding tax on ro!alties remitted to residents of the K* ma! now be

availed of because of the %6China tax treat! which has the basicall! the sameprovisions of the %6K* tax treat!. *o, the $> of the %6K* tax treat! can refer to the

%6China tax treat! #as compared to the %65erman! treat! which were essentiall! notthe same&.1

. Improperl# Accumulated Earnin-s Tax )IAET**4C. /D. Imposition of Improperl! 'ccumulated 4arnings Tax. 6#'& In 5eneral. 6 In addition to other taxes imposed b! this Title, there is hereb! imposed for each taxable !ear onthe improperl! accumulated taxable income of each corporation described in *ubsection 7 hereof, an improperl!

accumulated earnings tax e@ual to ten percent #10L& of the improperl! accumulated taxable income.

#7& Tax on Corporations *ub


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#/& Income excluded from gross income;#2& Income subon6taxable C%4'*48 7=:Income exempt from tax

Income excluded from gross incomeIncome sub


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The amount of net operating loss carr! over #>O"CO&848KCT48 7=:

8ividends actuall! or constructivel! paidIncome tax paid for the taxable !ear

Amount reserved for reasona%le needs of the %usinessemanating from the covered years ta*a%le income 1from

%e!es, p. 1&4UK'"*:

Improperl! accumulated taxable income 10L #I'4T&

9hat !ou have to pa!

F%easonable needsG means the immediate needs of the business. If the corporation can

not prove this, then it is not an immediate need. In order to determine whether profits

are accumulated for the reasonable needs of the business as to avoid the surtax uponshareholders, the controlling intention of the taxpa!er is that which is manifested at the

time of accumulation, not subse@uentl! declared intentions which are merel! the productof afterthought. #$anila 9ine $erchants v CI%&

o This is the immediac! test in 2'1.

%easonable needs means the immediate needs of the business including

reasonabl! anticipated needs. The burden of proof is with the corporation.

The touchstone of liabilit! is the purpose behind the accumulation of the income and not

the conse@uences of the accumulation. *o, if the failure to pa! dividends were for thepurpose of using the undistributed earnings and profits for the reasonable needs of the

business, that purpose would not fall within the interdiction of the statute. #CI% vTuason&

The tax on improper accumulation of surplus is essentiall! a penalt! tax designed to

compel corporations to distribute earnings so that the said earnings b! shareholders,

could, in turn, be taxed. 9hen corporations do not declare dividends, income taxes arenot paid on the undeclared dividends received b! the shareholders. #C!anamid v CT'&

9hat are considered reasonable

a. 'llowance for the increase of accumulated earnings up to 100L of the paid6up capital

b. 4arnings reserved for building, plant, or e@uipment ac@uisitions as approved

b! the 7oard of 8irectors #expansion, improvement, and repairs&c. 4arnings reserved for compliance with an! loan or obligation established

under a legitimate business agreement #debt retirement&d. In case of subsidiaries of foreign corporations in the hilippines, all

undistributed earnings intended or reserved for investments in the hilippinese. 4arnings re@uired b! law to be retained # 2'1*

f. 'nticipated losses or reverses in business #%e!es, p. 0&

(. Taxexempt Corporations*4C. 20. 4xemptions from Tax on Corporations. 6 The following organiations shall not be taxed under this Title inrespect to income received b! them as such:#'& "abor, agricultural or horticultural organiation not organied principall! for profit;#7& $utual savings ban not having a capital stoc represented b! shares, and cooperative ban without capitalstoc organied and operated for mutual purposes and without profit;#C& ' beneficiar! societ!, order or association, operating fort he exclusive benefit of the members such as a

fraternal organiation operating under the lodge s!stem, or mutual aid association or a nonstoc corporationorganied b! emplo!ees providing for the pa!ment of life, sicness, accident, or other benefits exclusivel! to themembers of such societ!, order, or association, or nonstoc corporation or their dependents;#8& Cemeter! compan! owned and operated exclusivel! for the benefit of its members;


2A


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#4& >onstoc corporation or association organied and operated exclusivel! for religious, charitable, scientific,athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong toor inures to the benefit of an! member, organier, officer or an! specific person;#& 7usiness league chamber of commerce, or board of trade, not organied for profit and no part of the netincome of which inures to the benefit of an! private stoc6holder, or individual;#5& Civic league or organiation not organied for profit but operated exclusivel! for the promotion of social

welfare;#& ' nonstoc and nonprofit educational institution;#I& 5overnment educational institution;#M& armersN or other mutual t!phoon or fire insurance compan!, mutual ditch or irrigation compan!, mutual orcooperative telephone compan!, or lie organiation of a purel! local character, the income of which consists solel!of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and

#R& armersN, fruit growersN, or lie association organied and operated as a sales agent for the purpose ofmareting the products of its members and turning bac to them the proceeds of sales, less the necessar! sellingexpenses on the basis of the @uantit! of produce finished b! them;>otwithstanding the provisions in the preceding paragraphs, the income of whatever ind and character of theforegoing organiations from an! of their properties, real or personal, or from an! of their activities conducted forprofit regardless of the disposition made of such income, shall be sub


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or newl! registered firms 3 full! exempt from income taxes

4xtension of tax exemption for more than 1 !ear:

If the proOT entitled to additional deduction for incremental laborexpense

This incentive cannot be extended be!ond 2 !ears

o 'dditional deduction for labor expense

or the first B !ears from registration, a registered enterprise is allowed anadditional deduction of B0L of the wages corresponding to the incrementin the number of 8I%4CT labor for silled and unsilled labors if the

pro


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>o taxes #local national& shall be imposed on businesses operating

within the 4COSO>4s

In lieu of taxes, BL of the gross income shall be remitted to the national

government

o 'pplicable national taxes

'll income derived b! persons and all services establishments in the

4COSO>4 are subote: %' DA00 has restored tax privileges to Clar 'ir 7ase, Camp Mohn a!, oro

oint and $orong *pecial 4co Sone

In Mohn a! v "im, the *C said that Camp Mohn a! was not afforded tax

privilegs. 7ut %' DA00 has restored it.

*ome stuff from the Mewelr! Industr! 8evelopment 'ct of 1DDE #A !8'2& and %% 16DD

o Uualified ational 4lectrification 'dministration, relative tothe generation and distribution of electricit! as well as their importation of machineries and e@uipment, includingspare parts, which shall be directl! used in the generation and distribution of electricit!;

#t& 5ross receipts from lending activities b! credit or multi6purpose cooperatives dul! registered with theCooperative 8evelopment 'uthorit! whose lending operation is limited to their members;

#u& *ales b! non6agricultural, non6 electric and non6credit cooperatives dul! registered with the Cooperative8evelopment 'uthorit!: rovided, That the share capital contribution of each member does not exceed ifteenthousand pesos #1B,000& and regardless of the aggregate capital and net surplus ratabl! distributed among themembers;


2


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7ut the other part! not exempt has to pa! the 8*T

'nnual registration fee of B00 under *ec /2H #7&

o If it deals with members and outsiders, see footnote.A

o >ote: 'll income of the cooperative not related to its main-principal business-es

shall be subOT exempt from

final taxes on deposits, interest income and capital gains tax,

8*T if dealing with nonmembers and cooperative exceeding 10m,

Q'T billed on certain purchasesB

o The exemption of the cooperatives does not extend to their individual members.

Thus, members of cooperatives are liable to pa! all the necessar! internalrevenue taxes under the >ational Internal %evenue Code, including the tax on

earnings derived from their capital contribution. rovided, however, that interests received b! members of a cooperative

with accumulated reserves and undivided net savings greater than Ten

$illion esos #10,000,000.00&, after the lapse of the ten6!ear exemption,

shall no longer be taxable in the hands of such members. *ome stuff from the 7aranga! $icro 7usiness 4nterprises #7$74s& #A %17! and Dept

&rder 17'*o 7$74sHare exempt from income tax.

A or cooperatives with accumulated reserves and undivided net savings of not more than Ten $illion esos#10,000,000.00&a. 4xemption from all national internal revenue taxes for which the! aredirectl! liable, asenumerated under *ec. 2.1 of these %egulations.

II. or cooperatives with accumulated reserves and undivided net savings of more than Ten $illion esos#10,000,000.00& Wa. 4xemption from income tax for a period of ten #10& !ears from the dateof registration with the C8', provided,that at least twent!6five percent#/BL& of the net income of the cooperative is returned to the membersin the formof interest and-or patronage refund.or cooperatives whose exemptions were removed b! 4xecutive Order >o. D2, the ten6!ear period shall be

reconed from $arch 10, 1DE #meaning, tax exemption is valid onl! until $arch 10, 1DD&.'fter the lapse of the above ten6!ear period, the! shall be sub


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7ut not from final taxes on deposits, interest income, capital gains tax,

ro!alties, etc

*ome stuff from the Tourism 'ct of /00D #A %8%+ and its I&

o Income tax holida!

>ew enterprises in 5reenfield and 7rownfield Tourism Sones 3 H !ears

from start of business operations

4xisting enterprises in 7rownfield Tourism Sones 3 H !ears from time ofcompletion of expansion or upgrade

The income tax holida! can be extended but note more than H !ears

provided the facilities are upgraded to at least B0L of the original

investment *pecial >O"CO rule: carried over for the next H consecutive !ears from

!ear of loss, provided loss has not been previousl! offset as a deduction

o 5ross income taxation: BL gross income tax, in lieu of all national internal

revenue taxes and local taxes, impost, assessments, fees and licenses

0. Taxa3le Income9EC. +1. Taxa&le Income Defined. The term taxable income means the pertinent items of gross income

specified in this Code, less the deductions and-or personal and additional exemptions, if an!, authoried for sucht!pes of income b! this Code or other special laws.

5ross Income"ess: deductions

"ess: ersonal exemptionsTaxable income

&. Gross Income*4C. 2/. 5ross Income. 6

#'& 5eneral 8efinition. 6 4xcept when otherwise provided in this Title, gross income means all income derived fromwhatever source, including #but not limited to& the following items:#1& Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages,commissions, and similar items;

#/& 5ross income derived from the conduct of trade or business or the exercise of a profession;#2& 5ains derived from dealings in propert!;

#A& Interests;#B& %ents;#H& %o!alties;#& 8ividends;#E& 'nnuities;#D& ries and winnings;#10& ensions; and#11& artnerNs distributive share from the net income of the general professional partnership.

5ross income means '"" I>CO$4 derived from 9'T4Q4% *OK%C4. This includes, but

is not limited to, the enumeration in the codal.

In answering problems, the first thing !ou should as is FIs this gross incomeG, and

then !ou as Fis this excludibleG #that)s the thought process to follow&

Compensation

Compensation for services in whatever form paid, including, but not limited to:

o fees,

o salaries,

but exclusive of the land on which the particular business entit!Ns office, plant and e@uipment aresituated, shall not be more than Three $illion esos #2,000,000.00& The 'bove definition shall besubo. E/ED


2D


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o wages,

o commissions,

o and similar items.

Compensation earners are not allowed to deduct an! other deductions from their salar!

o but the! ma! have deductions applied to income earned from other sources.

igh6raning executive was given an apartment where he would host parties for the

clients of his compan!. e would also travel abroad with his wife to go on meetings. 'rethese rental allowances and travel allowances part of the gross income

o >O.

o Convenience of the emplo!er rule: >o part of these redounded to the executive)s

personal benefit, nor were such amounts retained b! him. These bills were paiddirectl! b! the emplo!er6corporation. These expenses are CO$'>= 44>*4*,

not income b! emplo!ees which are sub8I%4CT"= b! the same

interests, the CI% is authoried to distribute, apportion or allocate gross income ordeductions between or among such orgs, trades or businesses, if the CI% determines

that such is necessar! in order to prevent tax evasion. #9ec 8'> 0IC*

o This is called Ftransfer pricingG or Fimputed interestG

o The standard to determine the fairness of related part! transactions is the arm)s

length standard.

It means that there should be no intimac! between the two.

It means that the corporation should deal with the related corporation in

the same manner it would with an uncontrolled taxpa!er.

?ersonal 4@uit! and %etirement 'ccount #4%'&? refers to the voluntar! retirement accountestablished b! and for the exclusive use and benefit of the Contributor for the purpose of beinginvested solel! in 4%' investment products in the hilippines. The Contributor shall retain theownership, whether legal or beneficial, of funds placed therein, including all earnings of such funds.


A0


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o If a member of a group of controlled entities maes a loan or advances directl! or

indirectl! to another member of such group and does >OT charge an! interest or

charges interest not e@ual to an arm)s length, the CI% ma! mae appropriateallocations to reflect arm)s length interest rate. #meaning the CI% can come in

and impose an interest on the transaction&o The arm)s length interest rate shall be:

The same rate of interest which would have been charged at the time theindebtedness arose in an independent transaction between unrelated

parties under similar circumstances, or The 7an %eference rate b! the 7* #(& @+%%*

%ents

%ents are included in the gross income

7ut what about improvements b! lessees #9ection %> 2*

o 9hen a lessee erects a building or maes improvements per agreement with the

lessor, the lessor ma! report the income therefrom upon either of the follow, at

his option:

't the time when such building or improvements are completed, the fair

maret value of such building or improvement The lessor ma! spread over the life of the lease the estimated depreciated

value of such building or improvement at the termination of the lease andreport the income for each of the ade@uate part.

o If the lease is terminated, and it is not through purchase b! the lessor, so that

the lessor comes into possession of the propert! prior to the time originall! fixed,

the lessor is considered to receive additional income for that !ear #if the value ofthe building exceeds the amount alread! reported as income&

>o appreciation value due to causes other than premature termination of

the lease shall be included.

o If the building is destro!ed before the expiration of the lease, the lessor is

entitled to deduct as loss for the !ear when such destruction occurred the

amount previousl! reported as income, less an! salvage value to the extent thatsuch loss was not compensated b! insurance.

o Obligations of lessor to third parties are assumed and paid b! the lessee. #&

o 9hat about advanced rentals

%o!alties

%o!alties are an! pa!ment of an! ind received as consideration for the use of or right to

use:

1. 'n! patent, trademar, design or model

/. *ecret formula or process2. Industrial, commercial or scientific e@uipment

A. Information concerning industrial, commercial or scientific experience.

8ividends 8ividends are an! distribution whether in cash or in other propert! in the ordinar!

course of business even if extraordinar! in amount, made b!:

o ' domestic or resident foreign corporation

o '


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o 'n insurance compan!

To the shareholders or members out of its earnings or profits.

Tidbits:

o 9hen the corporation receives dividends which are tax6fee #lie intercorporate

dividends&, it becomes taxable as dividends when it distributes the same to itsshareholders.

o 9hen the dividend is paid b! a domestic corporation to a non6resident foreigncorporation, it is taxable in full. #*ec /E #Bb& of >I%C&

5eneral rule: Cash and propert! dividends are taxable. *toc dividends are not taxable.

ropert! dividends #or securities other than its own stoc& #9ection 281> 2*

o These are considered income in the amount of the full maret value as when

received b! the stocholder.

o The! are taxed 10L. #or /0L if >%'47&

o If it was paid in stoc of another corporation, it is not considered a stoc

dividend.

o The valuation is the maret value at the time the dividend becomes pa!able. #or

shares of stoc of another corporation given as dividends, it is the maret valuewhen the shares of stoc are received&

*toc dividendso The! are not taxable.

4C4T when the stoc dividend causes change in the corporate identit!

or a change in the nature of the shares issued whereb! the proportional

interest of the stocholders after the distribution is essentiall! differentfrom his former interest. )9ection 282> 2*

' stoc dividend constitutes income if it gives the shareholder an

interest different from that which his former stoc represented.

9hen a stocholder receives a stoc dividend which is taxable

income, the measure of income is the fair maret value of theshares of stoc received.

*ale of stoc received as dividends #9ection 28+> 2*

o Once the recipient sells the stoc dividend, he ma! realie gain or loss. This gainor loss is treated as arising form the sale or exchange of a capital asset.

o Computation of gain or loss #t

293183315 mickey ingles ateneo taxation 1

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