INCOME AND WITHHOLDING TAXES

A"y. Vic C. Mamalateo July 13-17, 2015

ATENEO COLLEGE OF LAW, Maka5

TITLE II: INCOME TAX Chap I DeniBons Chap II General principles Chap III Tax on individuals Chap IV Tax on corpora5ons Chap V ComputaBon of taxable income Chap VI ComputaBon of gross income Chap VII Allowable deducBons Chap VIII AccounBng periods and methods of accounBng Chap IX Returns and payment of tax Chap X Estates and trusts Chap XI Other income tax requirements Chap XII Quarterly corporate income tax Chap XIII Withholding tax on wages

BASIC TAX PRINCIPLES General principles arising from lifeblood theory:

TaxaBon is the rule; exempBon, the excepBon. ExempBon from taxaBon may refer to the transacBon or to the

person. ExempBons are construed strictly against the taxpayer. In case of

doubt, you tax income or disallow deducBons and tax credits. Taxes are imposed by law (e.g., NIRC), while nancial accounBng are

based on generally accepted accounBng principles or standards adopted by BOA/SEC. In case of conict between (a) tax accoun5ng rules (provided in the Tax Code) and (b) nancial accoun5ng rules (in PFRS/PAS), the former shall prevail in determining the tax liabili5es of a person.

Only one (1) type of income tax under Title II, NIRC on the taxable income of a person shall be imposed!

Business transac5ons are classied either as (a) sale of goods or proper5es, or (b) sale of service! Principal document in support of sale is sales invoice, for sale of goods, or ocial receipts, for sale of service.

OVERVIEW 1. Cash/Property Received Is it a (a) return of capital (or capital), or (b) income, gain or prot?

2(A). Capital or Return of Capital Is it acquired (1) gratuitously or (2) for a valuable consideraBon? Gratuitous Transfer: Transferor may be subject to estate tax (Chapter I, Title III) or donors tax (Chapter II, Title III)

For Valuable Considera5on: Transferor-seller may be subject to income tax (Title II). Buyer is not subject to income tax, although the parBes may agree that the income tax of the seller be assumed by the buyer thereof.

OVERVIEW 2(B). If income, gain or prot 1. Exempt from income tax:

ConsBtuBon, tax treaty, NIRC, or special law Exclusion from gross income [Sec. 32(B), NIRC] Sec. 30, NIRC: Exempt corporaBons and associaBons Sec. 22, NIRC: GPP or JV (construcBon or energy-related projects)

2. If taxable, what income tax system applies? Schedular tax system (subject to FWT) Global tax system (subject to CWT or no WT) Mixed schedular and global tax systems

OVERVIEW 3. Who is the taxpayer? Individual (or estate or trust)

CiBzen or alien CorporaBon (including partnership or joint venture)

DomesBc or foreign 4. Where is the source of income? Within the Philippines Without the Philippines

5. Methods of repor5ng income Cash, accrual, installment plan, percentage of compleBon, and crop year

OVERVIEW

6. Nature of income? CompensaBon income Business or professional income Capital gain Passive investment income Other income

7. Type of asset and gain? Capital asset Ordinary asset

INCOME TAX IMPORTANT PROVISIONS: Secs. 23 (General principles), 24-28 (individual & corporaBon), 32 (gross income & exclusions), 39-40 (capital gain/loss and determinaBon of gain), 42 (source rules), and 60-63 (tax on estates and trusts), NIRC

Secs. 22(b) [corporaBon & other deniBons], 30 (exempt corporaBon or associaBon), 31 (taxable income), 34-36 (deducBons & non-deducBble items), 44-45 (accounBng periods), and 48-49 (methods of accounBng), and 50 (allocaBon of income of related parBes), NIRC

INCOME TAX INCOME TAX

Tax on all yearly prots arising from property, professions, trades or oces, or as a tax on a persons income, emoluments, prots and the like (Fisher v. Trinidad).

Income tax is a tax on (a) actual or presumed income, gain or prot (gross or net) of a seller of property or service, (b) received, accrued or realized during the taxable year, and (c ) there is no law that exempts (i) such income, gain or prot, or (ii) the person who derives such income, from income tax.

WITHHOLDING TAX It is not an internal revenue tax but a mode of collecBng income tax in

advance on income of the recipient of income thru the payor of income. [NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.]

The duty to le and pay income tax is dierent from the duty to withhold and remit income tax. Exemp5on from income tax does not exempt said taxpayer from the duty to withhold income tax on the recipient of income! However, NO INCOME TAX, NO WITHHOLDING TAX!

There are 2 types of withholding taxes, namely: (1) nal withholding tax; and (2) creditable withholding tax, including expanded withholding tax.

REQUISITE #1 INCOME TAX THERE IS INCOME, GAIN OR PROFIT OF SELLER

Person subject to income tax is the seller or transferor of property or service; buyer is not subject to income tax, except as a withholding agent of government, or where income tax on the seller is assumed by the buyer;

Income, gain or prot should be actual, unless presumed by law; 6% CGT is due on sale of real property, classied as a capital asset, located

in the Philippines, and the seller is NOT a foreign corporaBon, and is computed on the gross selling price or fair market value, whichever is higher. Law makes a conclusive presump5on here; hence, even if seller incurs a loss, he is sBll liable to pay the 6% CGT.

If seller is a foreign corporaBon, ordinary rules shall apply. Income, gain or prot could be gross income or net income; gross

selling price may consist of (a) return of capital and (b) income, gain or prot; return of capital is not subject to income tax.

Income, gain or prot may be in cash or its equivalent (value of property or service).

REQUISITE #2 INCOME TAX RECEIVED, ACCRUED OR REALIZED/RECOGNIZED DURING THE YEAR

Receipt of income could be actual or construcBve (i.e., credited to the account of or set aside for a taxpayer, which may be drawn by him at any Bme and not subject to any condiBon or limitaBon, although not actually reduced to possession); 20% FWT on interest income on bank deposits of commercial banks with

other banks is construc5vely received; hence, subject to percentage tax. Accrued income means income is earned but not received during the year;

Receipt of liability by a person using the accrual method is not subject to income tax.

Income is realized means there is a separaBon from capital of something of exchangeable value; it generally arises from sale or other disposiBon of property, especially when there is a closed and completed transacBon. To be taxable, the sale need not be consummated!

Income is recognized means the enBre income is not subject to income tax; the law imposes tax only on the recognized porBon of the income (e.g., long-term other capital gain).

Method of accoun5ng income (cash, accrual or other method) adopted by income payee determines the period of reporBng such income.

REQUISITE #3 INCOME TAX THERE IS NO LAW THAT EXEMPTS THE INCOME OR THE PERSON THAT

RECEIVES SUCH INCOME The law may exempt the income, gain or prot

Intra-corporate dividend The law may exempt the person that receives the income, gain or prot Interest income on long-term bank deposits of individuals

The law granBng tax exempBon could be the ConsBtuBon, tax treaty or statute ExecuBve Order cannot extend the tax exempBon to persons not expressly granted under the law.

ExempBon may be full or parBal (e.g., preferenBal tax rate); permanent or for a limited period (e.g., ITH); for all taxes (direct and indirect) or for specied tax only.

FEATURES OF INCOME TAX

It is a direct tax. It is a progressive tax, since the tax base increases as the tax rate increases. It is founded on the ability to pay of taxpayer.

Phil adopted the most comprehensive system in imposing income tax (based on ciBzenship, residence, or source of income).

Phil follows the semi-global or semi-schedular income tax system (i.e., global, schedular, or mixed global and schedular tax system).

It is of American origin. Decisions of U.S. tax authoriBes have peculiar and persuasive eects for the Philippines.

CRITERIA IN IMPOSING INCOME TAX

Ci5zenship principle For Filipino ciBzens and domesBc corporaBons, who are enBtled to Philippine government protecBon wherever they are situated.

Residence principle For alien individuals and foreign corporaBons

Source principle For alien individuals and foreign corporaBons

INCOME TAX SYSTEMS GLOBAL TAX SYSTEM

CompensaBon income not subject to FWT Business and/or professional income Capital gains not subject to FWT Passive investment income not subject to FWT Other income not subject to FWT

SCHEDULAR TAX SYSTEM CompensaBon income subject to FWT Capital gains subject to FWT Passive investment income subject to FWT Other income subject to FWT

SEMI-GLOBAL OR SEMI-SCHEDULAR TAX SYSTEM The Philippines adopted the semi-global or semi-schedular tax system.

Either the global or schedular system, or both systems, may apply on income of a taxpayer, depending on the nature of such income.

PURELY GLOBAL TAX SYSTEM 1. The taxable income (regardless of nature) is not subject to FWT; it may

be subject to CWT or no WT applies. In other words, if income, gain or prot is subject to income tax and no FWT tax applies thereon, use GLOBAL TAX SYSTEM in compuBng income tax.

2. All taxable incomes above are declared in tax return for the year. COST OF SALES (represenBng return of capital) or cost of services is DEDUCTED FROM GROSS SALES to arrive at GROSS INCOME.

3. All allowable deducBons (except on compensaBon income) and personal/addiBonal exempBons, if individual is qualied, are deducted therefrom to arrive at NET TAXABLE INCOME.

4. Tax rates depend on WHO is the taxpayer -- graduated rates (5%-32%) for individuals, and xed rate (30%) for corporaBons, unless the law imposes a dierent tax rate.

5. CWT taxes withheld by the buyer (thru 1706 return led with BIR) and usually evidenced by BIR Form 2307 (CerBcate of Tax Withheld) are creditable against the income tax due for the period of the seller.

PURELY SCHEDULAR TAX SYSTEM 1. Income of seller is subject to income tax under Title II, NIRC; 2. Income is listed in Sec 57(A), NIRC among those subject to FWT, to be

withheld by the Phil resident-payor of income and remijed to BIR within the prescribed period. You apply the schedular tax system only when the taxable income, gain or

prot is subject to FWT. 3. FWT return (1601F, 1602, or 1603) is led by payor of income-buyer of

goods or service. However, capital gains tax return for sale of real property subject to 6% CGT (1606) is to be led by the seller/transferor, not by the buyer.

4. Payee-recipient of income may be resident or non-resident person. He does not report or declare such income subjected to FWT in his tax return (1701 or 1702), although current regulaBons require that such income be reected in the supplemental informaBon in the tax returns to be led. RA 1405 (Bank Secrecy Law) prohibits the disclosure or inquiry into the bank

deposits by the government.

SEMI-GLOBAL OR SEMI-SCHEDULAR TAX SYSTEM

1. Incomes are subject to income tax, but one or more types of income is subject under the global tax system (e.g., compensaBon income and business/professional income), while other types of incomes are subject under the schedular tax system (e.g., interest income on bank deposits and dividend income).

2. It does not apply to mixed incomes of taxpayer, where both of the incomes are subject to the (a) purely global tax system (e.g., compensaBon income and professional/business income), or (b) purely schedular tax system (e.g., interest income on bank deposits and dividend income from domesBc corporaBon).

FORMULA

GLOBAL SYSTEM (CWT/No WT)

Gross sales/revenue Less: Cost of sales/service Gross income Less: DeducBons PAE (for individual) Net taxable income MulBplied by applicable

rate (graduated or at) Income tax due Less: Creditable WT Balance

SCHEDULAR SYSTEM (FWT) Type #1. Gross selling price

or fair market value, whichever is higher Bmes applicable tax rate = Tax due (real property)

Type #2. Gross selling price less cost or adjusted basis = Capital gain Bmes applicable tax rate = Tax due (shares of domesBc corp)

Type #3. Gross income Bmes applicable rate = Tax due (passive inv income; income paid to resident or non-resident person)

FINAL WITHHOLDING TAX Income payment is listed in Sec 57(A), NIRC, as subject to FWT. FWT withheld by the payor of income (e.g., 20% FWT on interest income

on bank deposits) represents FULL payment of income tax due on such income of the recipient.

Income payee (or recipient of income) does not report income subjected to FWT in his income tax return, although income is reected in his audited nancial statements for the year. However, he is not allowed to claim any tax credit on income subjected to FWT.

Withholding agent (payor of income) les the withholding tax return, which includes the FWT deducted from the income of payee, and pays the tax to the BIR. There is no CerBcate of Tax Withheld issued to income payee.

No CerBcate of Tax Withheld (BIR Form 2307) is asached to the income tax return of recipient of income because he does not claim any tax credit in his tax return.

FWT: SEC 57(A), NIRC Income tax is imposed or prescribed by:

Sec. 24(B)(1) Interests, royalBes, prizes & other winnings Sec. 24(B)(2) Cash and/or property dividends Sec. 24(C) CGs from sale of shares not traded in PSE Sec. 24(D)(1) CGs from sale of real property located in the Phil Sec. 25(A)(2) Cash and/or property dividends from DC; interests, royalBes,

prizes and other winnings Sec. 25(A)(3) CGs from sale of shares not traded in PSE and real property Sec. 25(B) NRA not engaged in trade or business in the Phil Sec. 25(C) Alien employed by RHQ and ROHQ Sec. 25(D) Alien employed by OBU Sec. 25(E) Alien employed by petroleum service contractor and sub-

contractor FWT is required to be withheld and remijed by buyer-payor of income,

except in the case of CGG on real property which if paid by the seller-payee of income.

CREDITABLE WITHHOLDING TAX Income payment is (a) compensa5on income subject to WT on

Wages under Chapter XIII (WT on wages), or (b1) one listed in the regula5on, in the case of ordinary withholding agent, or (b2) even though unlisted, in the case of Top 20,000 CorporaBon or Top 5,000 Individual, that is subject to expanded withholding tax (EWT) under Sec 57(B) [EWT], NIRC; hence, if income or person is exempt from income tax, NO WT is required.

Taxable income is reported in the tax return of taxpayer, together with other incomes subject to income tax under the global tax system.

Income tax is generally computed on the net taxable income of taxpayer.

EWT is creditable against the income tax due, provided that it is evidenced by BIR Form 2307 (Cert of Creditable WT), or other relevant legal documents (e.g., JV/check).

NO WITHHOLDING TAX APPLICABLE

Income is subject to income tax under the global tax system, but no withholding tax (whether CWT or FWT) applies thereon.

Income is reported by the taxpayer (recipient of income) in his/its tax return, together with other incomes subject to income tax under the global tax system.

EnBre income tax due per return is paid at the Bme of ling of tax return, except in the case of self-employed individuals with more than P2,000 income tax due for the year, provided that at least 50% thereof is paid upon ling on or before April 15 (Sec. 56, NIRC).

TYPES OF INCOME TAX 1. Graduated income tax on individuals (Secs 24-25); 2. Regular corporate income tax on corporaBons (RCIT) [Sec 27(A)-28(A)]; 3. Minimum corporate income tax on corporaBons (MCIT) [Sec 27(E)-Sec(E2)]; 4. Special income tax on certain corporaBons (e.g., private educaBonal insBtuBons [Sec 27(B)]; foreign currency deposit units [Sec 27(D3)]; internaBonal carriers [Sec 28(A3)]; OBU (Sec 28(D4)]; ROHQ (Sec 28(D6); FCDU (Sec 27(D3) &28(D7b)]; 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domesBc corporaBon classied as a capital asset; 6. Capital gains tax on sale or exchange of real property located in the Philippines classied as a capital asset; 7. Final withholding tax on certain passive investment incomes (e.g., interest, dividend, and royalty); 8. Final withholding tax on income payments made to non-residents (individual or corporaBon); 9. Fringe benet tax (FBT) [Sec 33]; 10. Branch prot remisance tax (BPRT) [Sec 28(D5)]; and 11. Tax on improperly accumulated earnings (IAET) [Sec 29, NIRC].

KINDS OF TAXPAYERS INDIVIDUAL, including estate and trust

CITIZEN (RC) Resident (RC) Taxable on worldwide income Non-resident immigrant, permanent worker, OFW (seamen)

ALIEN Resident Non-resident

Engaged in trade or business (more than 180 days in the Phil) Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION (DC), including partnership DOMESTIC (DC) Taxable on worldwide income FOREIGN

Resident (e.g., Phil branch of foreign corporaBon) Non-resident

TEST FOR TAX PURPOSES: Law of incorporaBon, NOT ownership RULE: All taxpayers are taxed only on income from sources within the

Phil, except RC and DC.

INCOME TAX ON INDIVIDUAL COMPENSATION INCOME Gross compensaBon income Less: Personal (P50T) and

addi5onal exemp5ons (P25T) Tax base MulBplied by graduated rates of

income tax (5%-32%) Ordinary income tax Less: Creditable withholding tax

(CWT) Balance due for payment upon

ling of return

BUSINESS/PROFESSIONAL INCOME Gross sales/professional fees Less: Cost of sales/service Gross income Less: Deduc5ons Personal and addiBonal

exempBons Net taxable income MulBplied by grad tax rates Income tax due Less: CWT Balance due (if amount of income

tax due is over P2,000, he may pay in 2 equal installments on April 15 and July 15) [Sec 56(A2), NIRC]

RA 9504, June 17, 2008

1. COMPENSATION INCOME EARNER Statutory Minimum Wage (SMW) rate xed by the Regional

TriparBte Wage and ProducBvity Board, as dened by BLES of DOLE (Sec. 22(GG), NIRC)

Minimum Wage Earner (MWE) worker in the private sector paid the statutory minimum wage, or to an employee in the government sector with compensaBon income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned (Sec. 22 (HH), NIRC)

Minimum wage earners shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overBme pay, night shix dierenBal pay and hazard pay received by such MWE shall likewise be exempt from income tax (Sec. 24(A)(2), NIRC)

RR 10-2008, July 8, 2008

An employee who receives/earns addiBonal compensaBon such as commissions, honoraria, fringe benets, benets in excess of the allowable statutory amount of P30,000 (increased to P82,000 beginning 2015 under RA 10653), taxable allowances and other taxable income other than the SMW, holiday pay, overBme pay, hazard pay and night shix dierenBal pay, shall not enjoy the privilege of being a MWE and, therefore, his/her enBre earnings are not exempt from income tax and, consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business or pracBce of profession, except income subject to nal tax, in addiBon to compensaBon income, are not exempted from income tax on their enBre income earned during the year.

This rule notwithstanding, the SMW, holiday pay, overBme pay, night shix dierenBal pay, and hazard pay shall sBll be exempt from withholding tax.

RMC 91-2010, Dec 2, 20100

If in Dec 2010, the MWE was promoted, her salary for the month of December will be subject to income tax if it exceeds her personal and addiBonal exempBons (Q10).

If an MWE with a salary of P382/day assigned in NCR was re-assigned in Laguna with the same salary in May 2010, his salary in Laguna will be subject to withholding tax because his daily wage is above the prevailing minimum wage in Laguna region (Q14-15).

RESIDENT CITIZENS EMPLOYED BY ADB & INTL ORGANIZATIONS

A. ADB IN THE PHIL Sec 45(b), Art XII of the Agreement between ADB and RP: Only ocers and sta of ADB who are not Phil naBonals shall be exempt from Phil income tax (because exempBon is subject to the power of the Govt to tax its na5onals.

B. FOREIGN EMBASSIES IN THE PHIL Resident ciBzens are taxed on worldwide income.

C. OTHER INTL ORGANIZATIONS IN THE PHIL Resident ciBzens are taxed on worldwide income.

TAXES ON LABOR DISPUTE AWARDS

RMC 39-2012, Aug 3, 2012 Backwages, allowances and benets awarded in a labor

dispute consBtute remuneraBon for services that would have been performed by the employee in the year when actually received, or during the period of his dismissal from the service which was subsequently ruled to be illegal.

The employee should report as income and pay the corresponding income taxes by allocaBng or spreading his backwages, allowances and benets thru the years from his separaBon up to the nal decision of the court awarding the backwages.

The backwages, allowances and benets are subject to withholding tax on wages.

TAXES ON LABOR DISPUTE AWARDS

However, when the judgment awarded in a labor dispute is enforced thru garnishment of debts or having in possession or control of such credits (e.g., banks or other nancial insBtuBons) would normally release and pay the enBre garnished amount to the employee. As a result, employers who are mandated to withhold taxes on wages cannot withhold the appropriate tax due thereon.

In order to ensure the collecBon of the appropriate withholding tax on wages, garnishees of a judgment award in a labor dispute are consBtuted as withholding agents with the duty to withhold tax on wages equivalent to ve percent (5%) of the porBon of the judgment award, represenBng the taxable backwages, allowances and benets.

DE MINIMIS BENEFITS RR 10-2008, July 8, 2008 FaciliBes and privileges of relaBvely small value. Ordinarily, faciliBes and privileges (such as entertainment, medical services, or so-called courtesy discounts on purchases), otherwise known as de minimis benets, furnished or oered by an employer to his employees, are not considered as compensaBon subject to income tax and consequently, to withholding tax, if such faciliBes or privileges are of relaBvely small value and are oered or furnished by the employer merely as means of promoBng the health, goodwill, contentment, or eciency of his employees.

DE MINIMIS BENEFITS RR 5-2011, Mar 16, 2011 MoneBzed unused vacaBon leave credits of private employees not

exceeding 10 days MoneBzed value of vacaBon and sick leave credits paid to

government employees Medical cash allowance to dependents of employees, not

exceeding P750 per employee per semester or P125 per month Rice subsidy of P1,500 or one sack of 50 kg rice per month

amounBng to not more than P1,500 Uniform and clothing allowance not exceeding P4,000 per annum Actual medicine assistance (e.g., medical allowance to cover

medical and healthcare needs, annual medical/execuBve check-up, maternity assistance, and rouBne consultaBons, not exceeding P10,000 per annum

DE MINIMIS BENEFITS Laundry allowance not exceeding P300 per month Employees achievement awards (e.g., for length of service or safety

achievement, which must be in the form of tangible personal property other than cash or gix cerBcate, with an annual monetary value not exceeding P10,000 received by employee under an established wrisen plan which does not discriminate in favor of highly paid employees

Gixs given during Xmas and major anniversary celebraBons not exceeding P5,000 per employee per annum

Daily meal allowance for overBme work and night/graveyard shix not exceeding 25% of basic minimum wage on a per region basis

Benets received by an employee under a CBA or produc5vity incen5ve scheme, provided it does not exceed P10,000 for the year (RR 1-2015)

All other benets not included above shall not be considered as de minimis benets; hence, subject to income tax and withholding tax.

FILIPINO CITIZENS

A. RESIDENT CITIZENS 2. Self-employed (i.e., he is engaged in trade or business in the Philippines or he exercises his profession) Allow deducBons from gross income (itemized or OSD) on taxable income not subject to FWT

Use purely global tax system; i.e., compute income tax based on net taxable income (gross sales less cost of sales less deducBons and personal and addiBonal exempBons) Bmes graduated rates = IT due

Taxable income from sources within and without the Philippines are subject to income tax.

NON-RESIDENT CITIZEN

A. IMMIGRANT Qualies as non-resident ciBzen from the date of departure from the Philippines.

B. PERMANENT EMPLOYEE Qualies as non-resident ciBzen from the date of departure from the Philippines.

C. OVERSEAS CONTRACT WORKER Qualies as non-resident ciBzen, if his aggregate period of stay outside the Philippines during the year exceed 183 days.

DOMESTIC CORPORATION 1. Taxable incomes of DC on worldwide net income,

not subject to FWT, are taxed at 30%, unless a lower rate is imposed under the law (i.e., educaBonal insBtuBon or hospital)

2. Income of branches within the Philippines as well as those outside the Philippines must be reported in the tax return of the head oce in the Philippines

3. Some DCs are granted ITH (e.g., BOI law or PEZA law) for limited period or granted preferenBal tax rate for unlimited period, in lieu of all naBonal and local taxes (e.g., PEZA law, BCDA law), permanent exempBon under certain condiBons (e.g., CDA law).

1997 TAX CODE PROVISION SEC. 27: INCOME TAX ON DOMESTIC CORPS (A) In general Income tax of 30% on taxable income (i.e.,

gross income less allowable deducBons) derived during each year from all sources within and without the Phil by every corporaBon.

(B) Proprietary EducaSonal InsStuSons and Hospitals. Proprietary educaBonal insBtuBons and hospitals which are non-prot shall pay a tax of 10% on their taxable income, except those covered by Subsec D hereof: Provided, That if the gross income from unrelated trade, business or other acBvity exceeds 50% of the total gross income derived by such educaBonal insBtuBons or hospital from all sources, the 30% tax shall be imposed on the enBre taxable income.

1997 TAX CODE PROVISION Unrelated trade, business or other ac5vity means

any trade, business or other acBvity, the conduct of which is not substanBally related to the exercise or performance by such educaBonal insBtuBon or hospital of its primary purpose or funcBon.

Proprietary educa5onal ins5tu5on is any private school maintained and administered by private individuals or groups with an issued permit to operate from the DECS, or CHED, or the TESDA, as the case may be, in accordance with exisBng laws and regulaBons.

1997 TAX CODE PROVISION SEC. 30: EXEMPTION FROM TAX ON CORPS (E) Non-stock corporaBon or associaBon orga-nized and operated exclusively for religious, charitable, scienBc, athleBc, or cultural purposes, or for the rehabilitaBon of veterans, no part of its net income or asset shall belong to or inure to the benet of any member, organizer, ocer or any specic person;

(H) A non-stock and non-prot educaBonal insBtuBon;

(I) Government educaBonal insBtuBon

1997 TAX CODE PROVISION

Notwithstanding the provisions in the preced-ing paragraphs, the income of whatever kind and character of the foregoing organizaBons from any of their properBes, real or personal, or from any of their acBviBes conducted for prot, regardless of the disposiSon made of such income, shall be subject to tax imposed under this Code.

Jesus Sacred Heart College v. Collector

The fact that a college is administered to assure that it will not incur a decit should not subject it to income tax. Every responsible organizaBon must be so run as to, at least insure its existence, by operaBng within the limits of its own resources, specially its regular income. It should strive, whenever possible, to have a surplus.

In other words, the making of a prot does not destroy the tax exempBon of charitable, benevolent or educaBonal insBtuBons.

CONSTITUTIONAL PROVISION ART XIV: EDUCATION Sec 1. The State shall protect and promote the right of

all ciBzens to quality educaBon at all levels and shall take appropriate steps to make such educaBon accessible to all.

Sec. 4(3). All revenues and assets of non-stock, non-prot educaBonal insBtuBons used actually, directly, and exclusively for educaBonal purposes shall be exempt from taxes and duBes. Upon the dissoluBon or cessaBon of the corporate existence of such insBtuBons, their assets shall be disposed of in the manner provided by law.

CONSTITUTIONAL PROVISION

Actually is opposed to seemingly, pretendedly, or feignedly, as actually engaged in farming means truly in fact;

Directly means in a direct way without anything intervening; not by secondary, but by direct means;

Exclusively means apart from all others; without admission of others to parBcipaBon; in a manner to exclude (NPC v. CBAA, G.R. 171470, Jan 30, 2009).

CONSTITUTIONAL PROVISION

Proprietary educaBonal insBtuBons, including those cooperaBvely owned, may likewise be enBtled to such exempBons subject to the limitaBons provided by law, including restricBons on dividends and provisions for reinvestment.

Sec. 4(4). Subject to condiBons prescribed by law, all grants, endowments, donaBons, or contribu-Bons used actually, directly, and exclusively for educaBonal purposes shall be exempt from tax.

CONSTITUTIONAL PROVISION ART. VI: LEGISLATIVE DEPARTMENT Sec. 28(3). Charitable insBtuBons, churches and parsonages or convents

appurtenant thereto, mosques, non-prot cemeteries, and all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educaBonal purposes shall be exempt from taxaBon. What is exempted from real property tax is not the insBtuBon itself but the

lands, building and improvements of these insBtuBons. It is the use of property, not ownership that is the test of exempBon (Abra Valley College Inc v. Aquino, G.R. 39086, June 15, 1988).

If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxaBon. It is not the use of the income from property that determines whether such property is used for tax-exempt purposes (Lung Center of the Phil v. QC, GR 144104, June 29, 2000).

Sec. 234, LGC. ExempSons from real property. Charitable insBtuBons, churches, parsonages or convents appurtenant thereto, mosques, nonprot or religious cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educaBonal purposes.

RMO 20-2013, July 22, 2013 APPLICATIONS FOR TAX EXEMPTION AND REVALIDATION

CorporaBons and associaBons under Sec 30, NIRC, including those that have been issued tax exempBon rulings/cerBcates prior to June 30, 2012, shall le their applicaBons with the RDO where they are registered.

GENERAL DOCUMENTARY REQUIREMENTS Original copy of applicaBon leser, ciBng parBcular paragraph of Sec

30, NIRC as basis; CerBed true copy of latest ArBcles of IncorporaBon and By-laws

issued by SEC; Original copy of cerBcaBon under oath by an ocer of the

corporaBon or associaBon as to (i) previous amendments in arBcles and by-laws; (ii) manner of acBviBes; and (iii) sources and disposiBon of income. If there is no amendment, this fact shall be stated therein.

CerBed true copy of BIR CerBcate of RegistraBon;

RMO 20-2013, July 22, 2013 Original copy of cerBcate under oath by the Treasurer of the

corp/asso as to amount of income, compensaBon, salaries or any emoluments paid by the corporaBon or associaBon to its trustees, ocers and other execuBve ocers. A corporaBon sole need not submit this cerBcaBon.

Original copy of the cerBcate issued by the RDO where the corp/asso is registered that the corp/asso is not the subject of any pending invesBgaBon, on-going audit, pending tax assessment, administraBve protest, claim for refund or issuance of TCC, collecBon proceedings, or a judicial appeal; or if there be any, the original copy of the cerBcate issued by the RDO on the status thereof;

CerBed true copies of the ITRs or annual informaBon returns and nancial statements of the corp/asso for the last 3 years;

RMO 20-2013, July 22, 2013 Original copy of statement under oath by an execuBve ocer of the corp/asso as to its modus operandi which shall include (i) a full descripBon of the past, present and proposed acBviBes of the corp/asso; (ii) narraBve descripBon of anBcipated receipts and contemplated expenditures; and (iii) detailed descripBon of all revenues which it seeks to be exempted from income tax.

All other revenues not included in the statement/ applicaBon shall be subject to income tax.

RMO 20-2013, July 22, 2013 ADDL REQUIREMENTS FOR EDUC INST

CerBed true copy of government recogniBon/permit/accreditaBon to operate issued by CHED, DepEd, or TESDA;

If govt recogniBon/permit/accreditaBon to operate was issued more than 5 years prior to the applicaBon, an original copy of a current CerBcate of OperaBon/Good Standing, or other equivalent document, issued by appropriate govt agency shall be submised as proof of the non-stock, non-prot educ inst is currently operaBng as such; and

Original copy of Cert of UBlizaBon of annual revenues and assets by the Treasurer or his equivalent, which shall provide (i) amount in cash or in kind paid or uBlized to accomplish one or more purposes for which the educ inst was created or organized; amount paid to acquire an asset or invested in acBvity related to educ purposes; amount set aside for a specic purpose, which must be supported by a Board ResoluBon.

ST PAUL COLLEGE-MAKATI vs CIR St Paul College-MakaB challenged the consBtuBonality of RMO before the

MakaB RTC and requested for the issuance of injuncBon. It anchored its peBBon on the provisions of the ConsBtuBon.

According to the court, the RMO violates the ConsBtuBon. The said exempBon is in recogniBon of the fact that in the educaBonal system, the public and private insBtuBons have complementary roles. The court observed that prior to the issuance of the RMO, non-stock, non-prot educaBonal insBtuBons did not need to secure a TER in order to enjoy tax exempBon. With the RMO, however, such insBtuBons who fail to secure the TER will be deemed non-compliant subject to tax and penalBes. Thus, the RMO eecBvely divests them of their tax-exempt status under the ConsBtuBon. The court declared that the RMO is unconsBtuBonal as it imposes a prerequisite to the enjoyment by non-stock, non-prot educaBonal insBtuBons of the privilege granted by the ConsBtuBon, which the Congress cannot diminish by mere legislaBon. The Commissioner is all the more powerless to do the same, considering that she only possesses quasi-legislaBve funcBons.

EXEMPT GOCCs

EXEMPT GOCC (Sec 27, NIRC): SSS GSIS PHILHEALTH PCSO Local Water Districts (RA 10026); RMC 28-2010, March 22, 2010

PAGCOR was deleted from Sec 27 in R.A. 9337 (Nov 1, 2005)

PARTNERSHIPS

EXEMPT General professional partnership (GPP) Joint venture undertaking construcBon acBvity or energy-related acBviBes with operaBng contract with the government

TAXABLE Partnerships, no maser how created or organized

RULES: If taxable, partnership is taxed like a corporaBon. If taxable partnership derives net income during the year, the enBre

net income is deemed received by the partners in the year it was earned by the partnership.

If GPP adopts itemized deducBons during the year, partners must use itemized deducBons during the same year.

RESIDENT FOREIGN CORPS TAXABLE: RCIT & BPRT

Ordinary branch of a foreign corporaBon in the Phil: 30% x net income from sources within the Phil PEZA- & SBMA-registered branch of foreign corporaBon is exempt from

15% BPRT Regional operaBng headquarters (ROHQ): 10% x net income from sources

within the Phil Oshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING

Bank Manila v. CIR]: 10% x gross interest income on forex loan to residents Foreign internaBonal carriers by air or water: 2.5% x GPB Foreign contractor or sub-contractor engaged in petroleum operaBons in the

Phil: 8% x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil RepresentaBve oce Regional headquarters (RHQ)

REV REGS NO. 10-2012, June 1, 2012

JOINT VENTURE, NOT TAXABLE AS CORPORATION JV or consorBum is formed for the purpose of undertaking

construcBon projects; It involves joining or pooling of resources by licensed local

contractors; i.e., licensed as a general contractor by the Phil Contractors AccreditaBon Board (PCAB) of the DTI;

Local contractors are engaged in construcBon business; and JV itself is likewise licensed as such by PCAB.

If any requirement above is absent, JV or consorBum is a taxable corporaBon.

Tax-exempt JV shall not include those who are mere suppliers of goods, services or capital to a construcBon project.

JOINT VENTURE Lease of proper5es under common management Three sisters borrowed money from their father and bought twenty-four (24) pieces of real

property that they leased to various tenants for over xeen years and derived rentals therefrom. They appointed their brother to manage their properBes and to collect and receive rents.

The court ruled that a taxable partnership was formed. There were series of transacBons where peBBoners purchased twenty-four lots, showing that the purpose was not limited to the conservaBon of the common fund or even the properBes acquired by them. The character of habituality peculiar to business transacBons engaged in for the purpose of gain was present. The properBes were leased out to tenants for several years. Moreover, the term corporaBon includes organizaBons that are not necessarily partnerships in the technical sense of the term as well as partnerships, no maser how created or organized. This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed consBtuted for purposes of the tax on corporaBons (Evangelista vs. Collector, 102 Phil. 140).

When a father and son purchased a lot and building, entrusted the administraBon of the building to an administrator and divided equally the net income, there is a taxable partnership (Reyes vs. Commissioner, 24 SCRA 198).

JOINT VENTURE

Insurance pool or clearing house An insurance pool or clearing house, composed of 41 non-life insurance

corporaBons, whose role was limited to its principal funcBon of allocaBng and distribuBng the risks arising from the original insurance among the signatories to the treaty or the members of the pool on their ability to absorb the risks ceded as well as the performance of incidental funcBons, such as records, maintenance, collecBon and custody of funds, and which did not insure or assure any risk in its own name, was treated as a partnership or associaBon subject to tax as a corporaBon.

ArBcle 1767 of the Civil Code recognizes the creaBon of a contract of partnership when two or more persons bind themselves to contribute, money, property, or industry to a common fund, with the intenBon of dividing the prots among themselves. Its requisites are mutual contribuBon to a common stock, and a joint interest in the prots (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).

JOINT VENTURE Agreement to manage and operate mine denominated as Power of Ajorney Philex Mining CorporaBon entered into an agreement denominated as Power of

Asorney with Baguio Gold Mining CorporaBon to manage and operate the lasers mining claim. In managing the project, Philex made advances of cash and property. The mine suered conBnuing losses resuling in Philexs withdrawal as manager and cessaBon of mine operaBons.

A Compromise with DaBon in Payment was executed by the parBes, where Baguio Gold admised its liabiliBes to Philex and agreed to pay the same.

Philex wrote o in the books the remaining outstanding indebtedness of Baguio Gold by charging a porBon of the amount to allowances and reserves that were set up in 1981 and a porBon to the 1982 operaBons. The amount allocated to 1982 was deducted from the 1982 gross income as loss on seslement of receivables.

The BIR disallowed the deducBon for bad debt and assessed Philex deciency taxes because the advances are Philexs investment in a partnership with Baguio Gold for the exploitaBon and development of the mine.

JOINT VENTURE The totality of the circumstances and the sBpulaBons in the parBes

agreement indubitably lead to the conclusion that a partnership was formed between the parBes.

First, it does not appear that Baguio Gold was uncondiBonally obligated to return the advances made by Philex under the agreement.

Second, the Tax Court correctly observed that it was unlikely for a business corporaBon to lend hundreds of millions to another corporaBon with neither security nor collateral or a specic deed evidencing the terms and condiBons of such loans. The parBes also did not provide for a specic maturity date for the advances to become due and demandable, and the manner of payment was unclear.

Third, the strongest indicaBon that Philex was a partner is the fact that it would receive 50% of the net prots as compensaBon under the agreement (Philex Mining Corporaaon vs. Commissioner, G.R. No. 148187, Apr. 16, 2008).

SOURCES OF INCOME Interest Interest from sources within Phil and interest on bonds and obligaBons

of residents, corporate or otherwise Dividend From domesBc corporaBon and from foreign corporaBon, unless less

than 50% of gross income of foreign corporaBon for 3 years prior to declaraBon of dividends was derived from sources within the Phil, in which case, apply only raBo of Phil-source income to gross income from all sources

Services Place where services are performed, except in case of internaBonal air carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings. Revenues from outbound trips (originaBng from the Phil) are considered as income from sources within the Philippines, while revenues from inbound trips are treated as income from sources outside the Philippines.

Rentals and royal5es LocaBon or use of property or property right in Phil Sale of real property Located in the Philippines Sale of personal property Located in the Philippines Gain from sale of shares of stocks of a domes5c corpora5on is ALWAYS treated as

income from sources within the Philippines. Other intangible property Mobilia sequuntur personam (e.g., gain from sale of

shares of stocks of a foreign corporaBon)

MINIMUM CORP INCOME TAX

SALE OF GOODS Gross Sales Less: Cost of Sales: Beg. Inventory

+ Purchases Total available for sale - Ending inventory Cost of Sales

Gross income Times 2% MCIT

SALE OF SERVICES Gross Revenue Less: Cost of Service consisBng of all direct costs and expenses

Gross income Times 2% MCIT

INCOME

INCOME means cash or its equivalent coming to a person within a specied period, whether as payment for services, interest or prot from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of capital assets.

Return of capital is exempt from income tax. Capital, labor, or property is the tree; income is the fruit. Capital is the fund, income is the ow of fund. Subsidy of foreign corporaBon to Phil representaBve oce is not income. Reimbursement of advances made is not income, but receipts/invoices must

be issued by provider of goods or services in the name of the principal. To be taxable, there must be income, gain or prot; gain is received,

accrued or realized during the year; and such income or the person who derives such income is not exempt from income tax under the Cons5tu5on, treaty or law. Mere increase in the value of property does not consBtute taxable income. It

is not yet realized during the year. Transfer of appreciated property to the employee for services rendered is

taxable income. MCIT on domesBc corporaBons is consBtuBonal, as it is a tax on gross income.

TEST IN DETERMINING INCOME

Realiza5on test There must be separaBon from capital of something of exchangeable value (e.g., sale of asset)

Claim of right doctrine CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M, instead of $1,000)

Economic benet test Stock opBon given to the employee

Income from whatever source All income not expressly exempted from income, irrespecBve of voluntary or involuntary acBon of taxpayer in producing income

NATURE OF INCOME

COMPENSATION INCOME Existence of employer-employee relaBonship No deducBon from gross compensaBon income allowed

BUSINESS AND/OR PROFESSIONAL INCOME NO employer-employee relaBonship

CAPITAL GAIN Real property in the Phil and shares of stock of domesBc corporaBon Other sources of capital gain

PASSIVE INVESTMENT INCOME Interest, dividend, and royalty income

OTHER INCOME Prizes and winnings All other income, gain or prot not covered by the above classes

COMPENSATION INCOME

CompensaBon income falling within the meaning of statutory minimum wage(SMW) under R.A. 9504, eecBve July 6, 2008, as implemented by Revenue RegulaBons No. 10-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax.

Holiday pay, overBme pay, night shix dierenBal pay, and hazard pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the above exempBon, provided that an employee who receives/earns addiBonal compensaBon such as commissions, honoraria, fringe benets, benets in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overBme pay, hazard pay and night shix dierenBal pay shall not enjoy the privilege of being a MWE and, therefore, his/her enBre earnings are not exempt from income tax and withholding tax.

RMC 58-2014, July 22, 2014

RMC 58-2014 publishes the full text of Supreme Court

ResoluBon dated June 25, 2014 on the withholding of tax from the special allowance for the judiciary as well as the withholding of corresponding taxes on the following: Monthly SAJ of incumbent jusBces, judges and judiciary ocials with the equivalent rank of a CA jusBce or RTC judge;

Monthly special allowance in an amount equivalent to the SAJ being received by judiciary ocials not included in item #1; and

AddiBonal allowances from the surplus of the SAJ Fund that may be authorized to be given to judiciary ocials and employees who are not direct beneciaries under RA 9227.

COMMISSION INCOME Commissions paid for markeBng services rendered abroad for a Philippine

company is considered foreign-source income. The source of the income is the property, acBvity or service that produced the income. Place where services are rendered determine taxaBon.

The fact that recipient of commission income is President and majority stockholder of the Philippine company does not alter the source of income. There are only two ways by which the President and other members of the Board can be granted compensaBon apart from reasonable per diems: (1) when there is a provision in the by-laws xing their compensaBon; and (2) when the stockholders agree to give it to them. If none of these condiBons are present, commission income cannot be automaBcally asributed to peBBoners posiBon in the company (Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instrucBons as to sizes, designs and fabrics to be used in nished products and sample sales orders relayed to clients abroad are not enough to show services were performed abroad. Said documents must show that instrucBons or orders ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel, GR No. 153793, Aug 29, 2006).

ONSHORE AND OFFSHORE INCOME

ConstrucBon and installaBon works were subcontracted and done in the Philippines by a Phil corporaBon; hence, income is from sources within the Philippines.

However, some pieces of equipment and supplies for NDC project and ammonia storage tanks and refrigeraBon units were completely designed and engineered in Japan. All services for the design, fabricaBon, engineering and manufacture of materials and equipment under Japanese Yen porBon were made and completed in Japan; hence, exempt from Phil income tax.

Service income from turn-key contract on a project in the Phil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).

NATURE OF ASSET

ORDINARY ASSET

CAPITAL ASSET (Sec 38A)

Inventory if on hand at end of taxable year

Stock in trade held primarily for sale or for lease in the course of trade or business

Asset used in trade or business, subject to depreciaBon

Real property used in trade or business

All other assets, whether or not used in trade or business, other than the above assets

ORDINARY v. CAPITAL ASSETS

Who is seller of asset? Person is habitually engaged in real estate business

PresumpBon or proof when habitually engaged in real estate business 6-transacBon rule

Person is not habitually engaged in real estate business Nature of asset sold? If it forms part of stock primarily for sale or it is being used in trade or business, ordinary asset

Otherwise, capital asset

ORDINARY v. CAPITAL ASSETS

Type of capital asset sold? If CA is used as principal residence of seller who is a ciBzen or alien

who resident or non-resident but engaged in trade in the Phil, sale is exempt from 6% CGT, provided other condiBons are present.

Otherwise, sale is taxable.

Tax base, tax rate, and gain or loss from sale CA located in the Phil 6% CGT; CA located abroad Global tax

system. Basis is FMV or GSP, whichever is higher. Seller pays the 6% CGT, but buyer does not withhold the FWT.

In OA, tax base is net income and rate of tax depends on whether seller is individual or corporaBon; it is subject to EWT provisions.

ORDINARY v. CAPITAL ASSETS

Cost or adjusted basis upon subsequent sale This is not material, if asset sold is capital asset, because tax base is GSP/FMV, whichever is higher.

This is important, if asset sold is ordinary asset, because tax base is net income.

Donors tax on sale for insucient considera5on If CA, no donors tax due. If OA, there is donors tax due per Sec 100, NIRC.

Filing of tax return If CA, within 30 days from date of sale If OA, within 45/60 days from close of quarter

COST OR ADJUSTED BASIS COMPUTATION OF GAIN OR LOSS

Amount realized less basis or adjusted basis = gain or loss Amount realized is the sum of money received plus the fair

market value of property (other than money) received BASIS OF PROPERTY

Cost, if acquired by purchase FMV at date of acquisiBon, if property was acquired by

inheritance Basis shall be the same as if it would be in the hands of the

donor or last preceding owner by whom it was not acquired by gix, if property was acquired by donaBon

Basis is the amount paid by the transferee for the property, if acquired for less than adequate consideraBon (Sec. 40, NIRC).

EXCHANGE OF PROPERTY GENERAL RULE The enBre gain or loss shall be recognized.

EXCEPTIONS: No gain or loss shall be recognized at the Bme of the transacBon on tax-free exchanges of property under Sec 40(2), NIRC:

a. Merger or consolidaBon b. Exchange of property for shares of stocks, as a result of which, he together with four others gains control of the corporaBon

GROSS PHIL BILLINGS INTERNATIONAL AIR CARRIER

On outbound trip: Flight from Phil to foreign desBnaBon, income is treated as from Philippine sources; hence, subject to 2.5% on GPB. ConBnuous and uninterrupted ight If transhipment of passenger in another country on another foreign

airline takes place: GPB tax applies only on aliquot porBon of revenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil, income is treated as from foreign sources; hence, exempt from Phil income tax

INTERNATIONAL SHIPPING LINE From Phil to nal foreign desBnaBon: enBre income is taxable, even if transhipment of cargoes took place in another country

From foreign country to Phil: exempt

RMC 40-2013, May 2, 2013 RA 10378 (grants income tax exempBons to internaBonal

carriers based on reciprocity) passed into law on March 7, 2013, published in Manila BulleBn and Phil Star on March 13, 2013, and took eect on March 29, 2013.

InternaBonal carrier doing business in the Phil shall pay 2.5% on its GPB, provided that internaBonal carriers may avail of preferenBal rate or exempBon from tax imposed on gross revenue derived from the carriage of persons and their excess baggage on the basis of applicable tax treaty or internaBonal agreement to which the Phil is a signatory or on the basis of reciprocity such that the intl carrier, whose home country grants income tax exempBon to Phil carriers, shall likewise be exempt from income tax.

CAPITAL GAINS

3 TYPES OF CAPITAL GAINS Capital gain from sale of real property located in the Phil Capital gain from sale of shares of stocks of a domesBc corporaBon

Other types of capital gains Sale of real property located in the Phil Seller is not engaged in real estate business

The law presumes that the seller realizes a prot from sale of capital asset; hence, despite the loss from sale, seller has to pay the 6% CGT.

The tax base is gross selling price or fair market value, whichever is higher

Apply the 6% capital gains tax, if the seller is a resident ciBzen, an alien individual (resident or non-resident), or a domesBc corporaBon.

If the seller is a foreign corporaBon (resident or non-resident), the asset in the Phil is a capital asset, but the gain from sale is subject to the global tax system of taxaBon.

If the real property is located abroad, the gain from sale is exempt from Phil income tax, unless the seller is a resident ciBzen or a domesBc corporaBon.

If the seller is a resident ciBzen and capital asset is the principal residence of the seller, the sale may be exempt from the 6% CGT, provided that the condiBons provided for in the law are complied with by the seller.

SALE OF REAL PROPERTY

SALE OF REAL PROPERTY Seller is a person engaged in real estate business Real property is an ordinary asset; hence, any gain (selling price less cost or adjusted basis) from sale is taxed under the global tax system.

The transacBon is subject to the expanded withholding tax, such tax to be withheld by the buyer of the property and remised to BIR. The withholding tax is creditable against the income tax of the seller.

The 6% capital gains tax on the transacBon is not applicable thereon.

SALE OF SHARES OF DOMESTIC CORPORATION

Seller is a dealer in securi5es Dealer in securiBes is a person regularly engaged in the buy and sale of

securiBes for his own account. He sells property and looks at prots from sale of shares or securiBes. A stockbroker is a middleman between the seller and buyer of stocks or securiBes. He is a seller of services and his income is commission.

Shares are ordinary assets of seller; selling price less cost or adjusted basis equals gain; gain from sale is subject to global tax system of income taxaBon.

TransacBon involving listed shares traded in local stock exchange is covered by Sec 127(A), NIRC (stock transacBon tax), but exempt from income tax.

SHARES OF DOMESTIC CORPORATION

Seller is an investor who is not a dealer in securi5es If shares are listed and traded in a local stock exchange, apply of 1% stock transacBon tax on gross selling price or gross value in money. Sale is exempt from income tax.

If shares are listed but not traded in a local stock exchange (or over-the-counter), or the shares are unlisted, the net capital gain (selling price less cost or adjusted basis), if any, is subject to the capital gains tax computed as follows: 5% on rst P100,000 net capital gain; and 10% on any amount in excess of P100,000

SHARES OF DOMESTIC CORPORATION

CGT return is led within 30 days from date of sale. Every sale must be covered by a separate CGT return and the tax paid upon ling of the return.

All transacBons during the year are consolidated and the annual return shall be led not later than April 15 of the following year, but only one P100,000 is subject to 5% and the balance of net capital gain for the year is subject to 10%.

Net capital gain = Total capital gains from sales of shares of domesBc corporaBon during the year less total capital losses during the same year.

RR 6-2013, Apr 11, 2013 SEC 7 of RR 6-2008 is amended as follows:

Sec. 7 covers sale or exchange of shares (of domesBc corporaBon) not traded thru a local stock exchange

FMV Fair market value of shares of stock sold shall be the value at the Bme of sale. In determining value of the shares, the Adjusted Net Asset Method shall be used, whereby all assets and liabiliBes are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. For purposes of this secBon, the appraised value of real property at the Bme of sale shall be the higher of (1) FMV as determined by CIR; or (2) FMV as shown in the schedule of values xed by Provincial/City Assessor; or (3) FMV as determined by independent Appraiser.

RR shall take eect immediately.

OTHER CAPITAL ASSETS

INDIVIDUAL If capital asset is long-term (holding period is over 12 months), only 50% of gain is subject to income tax, using the global tax system.

If gain is short-term, 100% of gain is subject to income tax under the global tax system.

CORPORATION Regardless of holding period, the enBre gain or loss is taxable or deducBble.

INTEREST INCOME TYPES OF INTEREST INCOME

Subject to FWT: Interest income on bank deposits, deposit subsBtutes, trust and other similar arrangements 20% FWT peso deposit with bank 7.5% FWT foreign currency deposit with OBU/FCDU

NOT subject to FWT but subject to global tax system: All other interest income or nancing income not covered above

Exempt income: Long-term deposit or investment (5 years or more) by individuals in the

form of trust funds, deposit subsBtutes, IMA and other investments prescribed by BSP

Taxable income: PreferenBal tax rate Pre-terminaBon of long-term deposit by individual :

20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and interest on foreign loan (20%)

Regular tax rate All other cases; subject to 20% CWT.

TAX ON OBU/FCDU

Final tax on interest income from loans to resident borrower is a direct liability of FCDU

Failure of local borrower to withhold and remit the nal withholding tax does not exempt OBU/FCDU on onshore interest income (ING Bank v CIR, 2005).

The withholding agent-borrower may also be assessed deciency withholding tax as penalty for failure to withhold (RCBC v. CIR, CTA Case 2004).

DIVIDEND INCOME REQUISITES FOR DIVIDEND DECLARATION

Presence of posiBve retained earnings No prohibiBon to declare dividend in loan agreement DeclaraBon of dividend by Board of Directors

TYPES OF DIVIDENDS Taxable

Cash dividend Property dividend

Exempt Stock dividend (except when there is change in proporBonate interest among

stockholders, or there is subsequent cancellaBon or redempBon of shares declared as stock dividend, which is essenBally equivalent to cash dividend)

NOTE: LiquidaBng dividend represents distribuBon of corporate assets to stockholders. Gain from surrender of shares are treated as ordinary income.

DIVIDEND INCOME Intra-corporate dividend: Exempt from tax

CorporaBon paying dividend: DomesBc corporaBon Recipient of dividend: Another domesBc corporaBon or resident

foreign corporaBon Dividend paid to non-resident foreign corpora5on

CorporaBon paying dividend: DomesBc corporaBon Recipient of dividend

Foreign head oce makes direct investment in Phil company: 15% FWT on gross dividend income

Phil branch of foreign corporaBon makes investment in Phil company: Exempt from income tax

Tax-sparing provision If country of residence of the foreign corporaBon does not impose income

tax on dividend paid by a domesBc corporaBon, impose 15% FWT only

DIVIDEND INCOME While there is transfer of the shares of stock/securiBes to the Borrower pursuant

to the SecuriBes Borrowing and Lending (SBL) Agreement, the Lender retains certain rights accruing to the shares of stock/securiBes lent, such as the right to receive cash, stock dividends or interest which the Borrower is obliged to manufacture or reimburse to the Lender during the borrowing period. These cash, stock dividends or interest which the Borrower is required to manufacture or reimburse to the Lender are otherwise referred to as "Manufactured Dividends or Benets". The Lender may likewise retain voBng rights over the loaned shares of stock/securiBes while in the possession of the Borrower, if mutually agreed upon by the parBes.

Receipt of the Manufactured Dividends or Benets shall not be a taxable income of the Lender since it just represents dividends/other benets that the lender would have received had the share not been loaned pursuant to SBL agreement. However, the payment of such amount by the Borrower shall not be a tax deducBble expense. On the other hand, the receipt of cash dividend from the issuing company by the Borrower or Buyer shall be subject to the provisions of exisBng laws (e.g., nal withholding tax of 10% on gross dividend paid to a ciBzen).

OTHER INCOME Income from any source whatever The words income from any source whatever discloses a legislaBve

policy to include all income not expressly exempted from the class of taxable income under our laws (Madrigal vs. Raerty, supra; Commissioner vs. BOAC). The words income from any source whatever is broad enough to cover gains contemplated here. These words disclose a legislaBve policy to include all income not expressly exempted within the class of taxable income under our laws, irrespecBve of the voluntary or involuntary acBon of the taxpayer in producing the gains (Guaerrez vs. Collector, CTA Case 65, Aug. 31, 1955).

Any economic benet to the employee whatever may have been the mode by which it is eected is taxable. Thus, in stock opBons, the dierence between the fair market value of the shares at the Bme the opBon is exercised and the opBon price consBtutes addiBonal compensaBon income to the employee (Commissioner vs. Smith, 324 U.S. 177).

EXCLUSIONS Life insurance proceeds Amount received by insured as return of premium Gixs, bequests and devises CompensaBon for injuries or sickness Income exempt under treaty ReBrement benets, pensions, gratuiBes

R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs) Interest income of employee trust fund or accredited reBrement plan is exempt

from FWT (CIR v. GCL Rearement Plan, 207 SCRA 487) Amount received as a consequence of separaBon because of death, sickness

or other physical disability or for any cause beyond the control of employee Miscellaneous items

Income of foreign government Income of government or its poliBcal subdivisions from any public uBlity or

exercise of governmental funcBon

EXCLUSIONS

Miscellaneous items Prizes and awards

In recogniBon of religious, charitable, arBsBc, literary achievement, etc. (He did not enter contest and is not required to render substanBal future services)

Granted to athletes in local and internaBonal sports compeBBons, sancBoned by their naBonal sports associaBons

13th month pay and other benets (up to P30,000) Gains from sale of long-term (5 years and 1 day) bonds, debentures and other cerBcates of indebtedness

Gains from redempBon of shares in mutual fund

INCOME OF RETIREMENT FUND COA alleged that DBP is actual owner of the trust fund and its income because:

DBP made the contribuBon to the Fund Trustees of the Fund are merely administrators DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and prot from the Fund and they maintained separate books for that purpose. The principal and income will not revert to DBP, even if trust is subsequently modied or terminated.

SC ruled that the beneciaries of the Fund are the DBP ocials and employees who will reBre. It is not always necessary that the beneciaries should be named or even be in existence at the Bme the trust is created in his favor, provided they are suciently certain or idenBable.

The Salary Loan Program did not terminate the trust to the Funds trustee. That the DBP Board of Directors conrms the approval of the SLP by the Funds trustees does not make the fund property of DBP (DBP v. COA, 2004).

RMC 39-2014, May 12, 2014

RMC 39-2014 claries the tax treatment of payouts by

employee pension plans Sec 60(A), NIRC subjects income of any kind of property held in trust to income tax.

Sec 60(B), NIRC exempts from income tax an employees trust which forms part of a pension, stock bonus or prot-sharing plan of an employer for the benet of some or all of the employees. However, any amount actually distributed to employee to the extent it exceeds the amount contributed by such employee shall be subject to income tax.

Payments of reBrement benets under Sec 32(B)(6)(a), NIRC are exempt from income tax.

RMC 39-2014, May 12, 2014

Non-contributory pension plan If employees who do not contribute to the provident fund receive dividends from en employee pension fund, the same is subject to income tax.

If employee resigns from an employer, and he receives benets from the provident fund maintained by it that does not qualify as tax-exempt, the enBre amount received by him is subject to income tax.

Contributory pension plan Dividend distributed to employees is subject to income tax in the year so distributed.

Benets received by a resigning employee is exempt only to the extent of his contribuBon to the pension fund.

DE MINIMIS BENEFITS EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND

FILE, OR MANAGERIAL OR SUPERVISORY) a. MoneBzed unused vacaBon leave credits of private employees not

exceeding ten (10) days during the year and the moneBzed value of leave credits paid to government ocials and employees;

b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month;

c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month amounBng to not more than P1,500.00;

d. Uniforms and clothing allowance not exceeding P4,000.00 per annum;

e. Actual yearly medical benets not exceeding P10,000.00 per annum;

f. Laundry allowance not exceeding P300.00 per month;

DE MINIMIS BENEFITS g. Employees achievement awards (e.g., for length of service or safety

achievement, which must be in the form of a tangible personal property other than cash or gix cerBcate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established wrisen plan which does not discriminate in favor of highly paid employees;

h. Gixs given during Christmas and major anniversary celebraBons not exceeding P5,000.00 per employee per annum;

i. Flowers, fruits, books, or similar items given to employees under special circumstances (e.g., on account of illness, marriage, birth of a baby, etc.); and

j. Daily meal allowance for overBme work not exceeding twenty-ve percent (25%) of the basic minimum wage.

The amount of de minimis benets conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of other benets provided under Sec. 32(b)(7)(e) of the Tax Code. However, if the employer pays more than the ceiling prescribed by these regulaBons, the excess shall be taxable to the employee receiving the benets only if such excess is beyond the P30,000.00 ceiling. Any amount given by the employer as benets to its employees, whether classied as de minimis benets or fringe benets, shall consBtute as deducBble expense upon such employer.

INCOME FROM PROPERTY OF EXEMPT ASSOCIATION

The phrase any of their acSviSes conducted for prot does not qualify the word properSes.-- The phrase any of their acBviBes conducted for prot does not qualify the word properBes. This makes income from the property of the organizaBon taxable, regardless of how that income is used whether for prot or for loxy non-prot purposes. Thus, the income derived from rentals of real property owned by the Young Mens ChrisBan AssociaBon of the Philippines, Inc. (YMCA), established as a welfare, educaBon and charitable non-prot corporaBon, is subject to income tax. The rental income cannot be exempted on the solitary but unconvincing ground that said income is not collected for prot but is merely incidental to its operaBon. The law does not make a disBncBon. Where the law does not disBnguish, neither should we disBnguish. Because taxes are the lifeblood of the naBon, the Court has always applied the doctrine of strict interpretaBon in construing tax exempBons. YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educaBonal insBtuBon devoBng its income solely for educaBonal purposes. The term educaBonal insBtuBon has acquired a well-known technical meaning. Under the EducaBon Act of 1982, such term refers to schools. The school system is synonymous with formal educaBon which refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which cerBcaBon is required in order for the learner to progress through the grades or move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).

INCOME FROM ACTIVITY FOR PROFIT OF NON-STOCK HOSPITAL

To be exempt from income tax, Sec 30(e), NIRC requires that a charitable insBtuBon be organized and operated exclusively for charitable purposes. Due to huge amount received from paying paBents, hospital is not operated exclusively for charitable purposes.

The last paragraph of Sec 30, NIRC provides that if a tax-exempt charitable insBtuBon conducts any acBvity for prot, regardless of the disposiBon made of such income, such acBvity is not tax exempt (even as its not-for-prot acBviBes remain exempt from income tax). Such taxable net income is taxed at 10% pursuant to Sec. 27(B), NIRC.

However, in view of the BIR ruling in 1990 staBng that St Lukes Hospital is exempt from income tax, no surcharge and interest shall be imposed on the deciency tax (CIR v. St Lukes Med Center, Sept 2012).

RMC 51-2014, June 11, 2014

RMC 51-2014 claries the inurement prohibi5on

under Sec 30, NIRC Sec 30 enumerates the non-stock, non-prot corporaBons or associaBons exempt from income tax on income received by them as such.

Non-stock means no part of its income is distributable as dividends to its members, trustees, or ocers and that any prot obtained as an incident to its operaBons shall, whenever necessary or proper, be used for the furtherance of the purpose(s) for which the corporaBon was organized.

Non-prot means that no income or asset accrues to or benets any member or specic person, with all the net income or asset devoted to the insBtuBons purposes and all its acBviBes conducted not for prot.

RMC 51-2014, June 11, 2014

To qualify as a tax-exempt enBty, its earnings or assets shall not inure to the benet of any of its trustees, organizers, ocers, members or specic person. The following are considered inurements of such nature: Payment of compensaBon, salaries or honorarium to its trustees or organizers;

Payment of exorbitant or unreasonable compensaBon to its employees;

Provision of welfare aid and nancial assistance to its members. An organizaBon is not exempt if its principal acBvity is to receive and manage funds associated with savings or investment programs, including pension or reBrement programs. This does not cover a society, order, associaBon or non-stock corporaBon under Sec 30, NIRC providing for payment of life, sickness, accident and other benets exclusively for its members or their dependents.

RMC 51-2014, June 11, 2014

DonaBon to any person or enBty (except donaBons made to other enBBes formed for the purpose(s) similar to its own);

Purchase of goods or services for amounts in excess of FMV of such goods or services from an enBty in which one or more of its trustees, ocers or duciaries has an interest; and

When upon dissoluBon and saBsfacBon of all liabiliBes, its remaining assets are distributed to its trustees, organizers, ocers or members. Its assets must be dedicated to its exempt purpose(s). Its consBtuBve document must expressly provide that in the event of dissoluBon, its assets shall be distributed to one or more enBBes formed for the purposes similar to its own or to the Phil government for public purpose.

CIR v. Insular Life Assurance Co. Ltd,

G.R. 197192, June 4, 2014 The 1997 Tax Code does not require registraBon with

the CDA. No tax provision requires a mutual life insurance company to register with that agency in order to enjoy exempBon from both the percentage tax and DST.

Although RMC 48-91 requires the submission of the Cert of RegistraBon with the CDA before issuance of the tax exempBon cerBcate, that provision cannot prevail over the clear absence of an equivalent requirement under the Tax Code.

The provisions of the CooperaBve Code of the Phil do not apply to mutual life insurance companies.

CIR v. Insular Life Assurance Co. Ltd,

G.R. 197192, June 4, 2014 Graaa argumena that registraBon is mandatory, it cannot

deprive respondent of its tax exempBon privilege merely because it failed to register.

The Insurance Code does not require registraBon of mutual life insurance companies with the CDA.

While administraBve agencies like the BIR may issue regulaBons to implement statutes, they are without authority to limit the scope of the statutes to less than what it provides, or to extend or expand the statute beyond its terms, or in any other way modify explicit provisions of the law. Indeed, a judicial body or an administraBve agency for that maser cannot amend an Act of Congress. In case of discrepancy between the basic law and an interpretaBve or administraBve ruling the basic law prevails.

DEDUCTIONS KINDS OF DEDUCTIONS

Itemized DeducBons OpBonal Standard DeducBons Special DeducBons

ITEMIZED DEDUCTIONS Business expenses, incl. research and development Interests Taxes Losses Bad debts DepreciaBon DepleBon Charitable contribuBons ContribuBons to pension trust Health or hospitalizaBon premium

DEDUCTIONS

BUSINESS EXPENSES 1. The expense must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. In carrying on or which are directly asributable to the develop- ment, management, operaBon and/or conduct of the trade, business or exercise of profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals. OperaBng expenses of an illegal or quesBonable business are deducBble, but expenses of an inherently illegal nature, such as bribery and protecBon payments, are not. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR.

DEDUCTIONS An expense is ordinary when it connotes a payment, which is normal in

relaBon to the business of the taxpayer and the surrounding circumstances.

An expense is necessary where the expenditure is appropriate or helpful in the development of taxpayers business or that the same is proper for the purpose of realizing a prot or minimizing a loss.

P9.4 M paid in 1985 for adverBsing a product was staggering incurred to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member.

Goodwill generally denotes the benet arising from connecBon and reputaBon, and eorts to establish reputaBon are akin to acquisiBon of capital assets. Therefore, expenses related thereto are not business expenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr. 24, 2003).

DEDUCTIONS TEST OF REASONABLENESS OF BONUS There is no xed test for determining the reasonableness of a given

bonus as compensa5on. This depends upon many factors, one of them being the amount and quality of the services performed with relaBon to the business.

Other tests suggested are payment must be made in good faith, the character of the taxpayers business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporaBon, the size of the parBcular business, the employees qualicaBons and contribuBons to the business venture, and general economic condiBons.

However, in determining whether the parBcular salary or compensaBon payment is reasonable, the situaBon must be considered as a whole. Ordinarily, no single factor is decisive (C.M. Hoskins & Co., Inc. vs. Commissioner, L-24059, Nov. 28, 1969; Pacic Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gixs, are graBtude and are not deducBble.

DEDUCTIONS Legal and accountants fees for prior years were not billed in

corresponding years (1984-1985). It was paid by taxpayer in succeeding year (1986) when it was billed by the lawyer and accountant. Taxpayers uses accrual method of accounBng.

Accrual of income and expense is permised when the all events test has been met. This test requires (1) xing a right to income or liability to pay, and (2) the availability of reasonably accurate determinaBon of such income or liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the informaBon necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount.

Moreover, deducBon takes the nature of tax exempBon; it must be construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporaaon, G.R. No. 172231, Feb. 12, 2007).

DEDUCTIONS Entertainment, amusement and recreaBon expenses are subject to

limitaBon % of net sales for sellers of goods 1% of net sales for sellers of services

Club dues for membership in social or athleBc clubs to promote business of corporaBon paid by the corporaBon are deducBble from gross income. However, they will be treated as fringe benets subject to FBT on the part of the employer. FBT paid by employer is deducBble as business expense of the corporaBon.

Rental expenses include leasehold acquired for business purposes and cost of improvements introduced by lessee to be allocated over the term of the lease. Realty taxes paid by lessee for business property is part of rental expenses.

DEDUCTIONS Directors Fees

If not ocer or employee of corporaBon, report it as other income subject to 10% EWT.

If director is also an ocer of the corporaBon, apply CWT on compensaBon income upon the directors fees, together with salaries.

Commission Income If there is no employer-employee relaBonship between broker and

payor of income, treat it as business income subject to 10/15% EWT. If there is employer-employee relaBonship, commission income is

treated as part of CWT on compensaBon income.

RR 12-2013, July 12, 2013

Sec. 2.58.5, RR 2-98, as amended by RR 12-2013: Any income payment which is otherwise deducBble under the Tax Code shall be allowed as a deducBon from the payors gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in acc with Secs. 57 and 58 of the Code.

No deducBon will also be allowed notwithstanding payments of withholding tax at the Bme of the audit invesBgaBon or reinvesBgaBon/reconsideraBon in cases where no withholding of tax was made in acc with Secs 57 and 58 of the Code.

RMC 63-2013, Sept 26, 2013

RR 12-2013 (No WT, no deducBon from gross income) shall apply to audit invesBgaBon for the taxable year 2013.

DEDUCTIONS INTEREST EXPENSE 1. There must be a valid and exisBng indebtedness; 2. The indebtedness (uncondiBonal obligaBon to pay) must be that of the taxpayer; 3. The interest must be legally due and sBpulated in wriBng; 4. The interest expense must be paid or incurred during the taxable year; 5. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; 6. The interest payment arrangement must not be between related taxpayers as mandated in SecBon 34(B)(2)(b), in relaBon to SecBon 36(B), of the Tax Code; 7. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income (e.g., interest on indebtedness to nance petroleum operaBons); and 8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayers otherwise allowable deducBon for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to nal tax beginning November 1, 2005 under R.A. 9337, and that eecBve January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC].

DEDUCTIONS

Deciency or delinquency interest Deciency or delinquency interest on unpaid taxes is not deducBble as tax, but taxpayer is allowed to deduct the same as interest.

Interest expense on capital expenditures At the opBon of the taxpayer, interest expense on capital expenditure incurred to acquire property used in trade, business or exercise of profession may be deducted in full in the year incurred, or may be treated as capital expenditure subject to amorBzaBon. However, taxpayer cannot claim interest expense both as deducBon and part of cost of asset.

DEDUCTIONS

TAXES

1. Payments must be for taxes; 2. Taxes are imposed by law upon the taxpayer; 3. Taxes must be paid or accrued during the taxable year in connecBon with the taxpayers trade, business or profession; and 4. Taxes are not specically excluded by law from being deducted from the taxpayers gross income.

DEDUCTIONS

The word taxes means taxes proper and no deducBon should be allowed for amounts represenBng interest, surcharge or penalBes. Interest on taxes is not deducBble as taxes, but as an item of interest.

Fines and penalBes for violaBons of law are not deducBble as taxes.

Only the person upon whom taxes are imposed may claim them as deducBon, except: (1) Taxes upon an individual upon his interest as shareholder of corporaBon which are paid by corporaBon without reimbursement; and (2) Corporate bonds or other obligaBons containing a tax-free covenant clause, the corporaBon paying the tax or any part of it for someone else (Sec. 80, RR 2).

DEDUCTIONS

DEDUCTIBLE TAXES All taxes, naBonal and local, paid or accrued during the year in

connecBon with trade, business or exercise of profession is deducBble. Examples: professional tax, documentary stamp tax, other percentage tax, excise tax, real property tax, etc.

NON-DEDUCTIBLE TAXES 1. Philippine income tax 2. Foreign income tax 3. Estate and donors taxes 4. Special assessments on real property 5. Electric energy consumpBon tax under B.P. 36. 6. VAT

Foreign income tax paid may be credited against the Phil income tax due, subject to limitaBon (e.g., Federal income tax of M Pacquiao).

DEDUCTIONS LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79)

1. The loss must be that of the taxpayer; 2. The loss is actually sustained and charged o within the taxable year; 3. The loss is evidenced by a closed and completed transacBon (xed by

idenBable events or when insurance recovery was denitely established); 4. The loss is not claimed as a deducBon for estate tax purposes; 5. The loss is not compensated for by insurance or otherwise; 6. In the case of an individual, the loss must be connected with his trade, business or profession, or incurred in any transacBon entered into for prot though not connected with his trade, business or profession; and 7. In the case of casualty loss, it has been reported to the BIR within forty-ve days from date of occurrence of the loss.

DEDUCTIONS Bad Debt Theory

Loss from thex or embezzlemen