income and withholding taxes-2013

8/12/2019 Income and Withholding Taxes-2013

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INCOME AND WITHHOLDING

TAXES

Atty. Vic C. Mamalateo

August 2-4, 2013Univ of San Jose Recoletos, Cebu City


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INCOME TAX (TITLE II, NIRC) Sec. 22 (Definitions), Chapter I to Sec. 83, Chapter

VIII (Withholding Tax on Wages)


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BASICTAX PRINCIPLES

General principles arising from lifeblood theory:

Taxation is the rule; exemption, the exception.

Exemptions are construed strictly against the taxpayer. In

case of doubt, you tax income or disallow deductions andtax credits.

Taxes are imposed by law (e.g., NIRC), while financial

accounting are based on generally accepted accounting

standards. In case of conflict between tax rules and

accounting rules, the former shall prevail.


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OVERVIEW

1. Cash/Property Received

Is it a return of capital or capital, or income, gain

or profit?

2. Capital or Return of Capital

Is it acquired gratuitously or for a valuable

consideration?

Gratuitous Transfer: May be subject to estate tax(Chapter I, Title III) or donors tax (Chapter II, Title III)

For Valuable Consideration: May be subject to income

tax (Title II)


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OVERVIEW

3. If income, gain or profit

Exempt from income tax:

Constitution, tax treaty, NIRC, or special law

Exclusion from gross income [Sec. 32(B), NIRC] Sec. 30, NIRC: Exemption corporations

Sec. 22, NIRC: GPP or JV

4. If taxable, what income tax system applies?

Schedular tax system (subject to FWT) Global tax system

Mixed schedular and global tax systems


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OVERVIEW

5. Who is the taxpayer?

Individual (or estate or trust)

Citizen or alien

Corporation (or partnership) Domestic or foreign

6. Where is the source of income?

Within the Philippines

Without the Philippines 7. Methods of reporting income

Cash, accrual, installment, POC, and crop year


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OVERVIEW

7. Nature of income?

Compensation income

Business or professional income

Capital gain Passive investment income

Other income

Type of asset and gain? Capital asset

Ordinary asset


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INCOME TAX

INCOME TAX Tax on all yearly profits arising from property, professions, trades or

offices, or as a tax on a persons income, emoluments, profits and thelike (Fisher v. Trinidad).

Income tax is a direct tax on taxable actual or presumed income (gross

or net) of a taxpayer received, accrued or realized during the taxableyear.

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

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

taxes.] There are 2 types of withholding taxes, namely: (1) final withholding

tax; and (2) creditable withholding tax, including expandedwithholding tax.


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FEATURES OF INCOME TAX

It is a direct tax.

It is a progressive tax, since the tax base increases asthe tax rate increases. It is founded on the ability topay of taxpayer.

Phil adopted the most comprehensive system inimposing income tax.

Phil follows the semi-global or semi-schedularincome tax system.

It is of American origin. Decisions of U.S. taxauthorities have peculiar and persuasive effects forthe Phil.


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CRITERIA IN IMPOSING INCOME TAX

Citizenship principle

For Filipino citizens and domestic corporations,

who are entitled to Philippine government

protection wherever they are situated.

Residence principle

For alien individuals and foreign corporations

Source principle

For alien individuals and foreign corporations


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INCOME TAX SYSTEMS

GLOBAL TAX SYSTEM Compensation 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

Compensation income subject to FWT

Capital gains subject to FWT

Passive investment income subject to FWT

Other income subject to FWT

The Philippines adopted the semi-global or semi-schedular tax system.Either the global or schedular system, or both systems, may apply onincome of a taxpayer.

You apply the schedular tax system only when the income, gain or profit issubject to FWT.


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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 incomeon bank deposits) represents FULL payment of income taxdue on suchincome of the recipient.

Income payee (or recipient of income) does notreport income subjectedto FWT in his income tax return, although income is reflected in hisaudited financial statements for the year. However, he is notallowed toclaim any tax credit on income subjected to FWT.

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

No Certificate of Tax Withheld (BIR Form 2307) is attached to the incometax return of recipient of income because he does not claim any tax creditin his tax return.


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TYPES OF INCOME TAX

1. Graduated income tax on individuals;

2. Normal corporate income tax on corporations (RCIT);

3. Minimum corporate income tax on corporations (MCIT);

4. Special income tax on certain corporations (e.g., private educational

institutions; foreign currency deposit units; international carriers)

5. Capital gains tax on sale or exchange of unlisted shares of stock of a

domestic corporation classified as a capital asset;

6. Capital gains tax on sale or exchange of real property located in the

Philippines classified as a capital asset;

7. Final withholding tax on certain passive investment incomes;

8. Final withholding tax on income payments made to non-residents

(individual or corporation); 9. Fringe benefit tax (FBT);

10. Branch profit remittance tax (BPRT); and

11. Tax on improperly accumulated earnings (IAET).


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FORMULA

GLOBAL SYSTEM

Gross sales

Less: Cost of sales

Gross income

Less: Deductions PAE (for ind.)

Net taxable income

Multiplied by applicablerate (graduated or flat)

Income tax due

Less: Creditable WT

Balance

SCHEDULAR SYSTEM Gross selling price or fair

market value, whichever ishigher times applicable taxrate = Tax due (real

property) Gross selling price less costor adjusted basis = Capitalgain times applicable taxrate = Tax due (shares ofdom corp)

Gross income timesapplicable rate = Tax due(passive inv income; incomepaid to non-residentperson)


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KINDS OF TAXPAYERS

INDIVIDUAL, including estate and trust CITIZEN

Resident (RC)Taxable on worldwide income Non-residentimmigrant, 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, including partnership DOMESTIC(DC)Taxable on worldwide income FOREIGN

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

TEST FOR TAX PURPOSES: Law of incorporation

RULE: All taxpayers are taxed only on income from sources within thePhil, except RC and DC.


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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)


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PARTNERSHIPS

EXEMPT

General professional partnership (GPP)

Joint venture undertaking construction activity or energy-relatedactivities with operating contract with the government

TAXABLE

Partnerships, no matter how created or organized

RULES:

If taxable, partnership is taxed like a corporation.

If taxable partnership derives net income during the year, the entirenet income is deemed received by the partners in the year it wasearned by the partnership.

If GPP adopts itemized deductions during the year, partners must useitemized deductions during the same year.


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RESIDENT FOREIGN CORPS

TAXABLE: RCIT & BPRT Ordinary branch of a foreign corporation in the Phil: 30%x net income from

sources within the Phil

PEZA- & SBMA-registered branch of foreign corporation is exempt from15% BPRT

Regional operating headquarters (ROHQ): 10%x net income from sources

within the Phil Offshore 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 international carriers by air or water: 2.5%x GPB

Foreign contractor or sub-contractor engaged in petroleum operations in thePhil: 8%x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil Representative office

Regional headquarters (RHQ)


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JOINT VENTURE

Lease of properties 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 fifteen years and derived rentalstherefrom. They appointed their brother to manage their properties and to collect andreceive rents.

The court ruled that a taxable partnership was formed. There were series of transactionswhere petitioners purchased twenty-four lots, showing that the purpose was not limited to

the conservation of the common fund or even the properties acquired by them. Thecharacter of habituality peculiar to business transactions engaged in for the purpose of gainwas present. The properties were leased out to tenants for several years. Moreover, theterm corporation includes organizations that are not necessarily partnerships in thetechnical sense of the term as well as partnerships, no matter how created or organized. Thisqualifying expression clearly indicates that a joint venture need not be undertaken in any ofthe standard forms, or in conformity with the usual requirements of the law on partnerships,in order that one could be deemed constituted for purposes of the tax on corporations

(Evangelista vs. Collector, 102 Phil. 140). When a father and son purchased a lot and building, entrusted the administration of the

building to an administrator and divided equally the net income, there is a taxablepartnership (Reyes vs. Commissioner, 24 SCRA 198).


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JOINT VENTURE

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

corporations, whose role was limited to its principal function of allocatingand distributing the risks arising from the original insurance among thesignatories to the treaty or the members of the pool on their ability toabsorb the risks ceded as well as the performance of incidental functions,such as records, maintenance, collection and custody of funds, and whichdid not insure or assure any risk in its own name, was treated as apartnership or association subject to tax as a corporation.

Article 1767 of the Civil Code recognizes the creation of a contract ofpartnership when two or more persons bind themselves to contribute,money, property, or industry to a common fund, with the intention of

dividing the profits among themselves. Its requisites are mutualcontribution to a common stock, and a joint interest in the profits (AFISCOInsurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25, 1999).


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JOINT VENTURE

Agreement to manage and operate mine denominated as Power of Attorney

Philex Mining Corporation entered into an agreement denominated as Power ofAttorney with Baguio Gold Mining Corporation to manage and operate the lattersmining claim. In managing the project, Philex made advances of cash andproperty. The mine suffered continuing losses resuling in Philexs withdrawal asmanager and cessation of mine operations.

A Compromise with Dation in Payment was executed by the parties, whereBaguio Gold admitted its liabilities to Philex and agreed to pay the same.

Philex wrote off in the books the remaining outstanding indebtedness of BaguioGold by charging a portion of the amount to allowances and reserves that were setup in 1981 and a portion to the 1982 operations. The amount allocated to 1982was deducted from the 1982 gross income as loss on settlement of receivables.

The BIR disallowed the deduction for bad debt and assessed Philex deficiency

taxes because the advances are Philexs investment in a partnership with BaguioGold for the exploitation and development of the mine.


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JOINT VENTURE

The totality of the circumstances and the stipulations in the partiesagreement indubitably lead to the conclusion that a partnership wasformed between the parties.

First, it does not appear that Baguio Gold was unconditionally obligated toreturn the advances made by Philex under the agreement.

Second, the Tax Court correctly observed that it was unlikely for a businesscorporation to lend hundreds of millions to another corporation withneither security nor collateral or a specific deed evidencing the terms andconditions of such loans. The parties also did not provide for a specificmaturity date for the advances to become due and demandable, and themanner of payment was unclear.

Third, the strongest indication that Philex was a partner is the fact that it

would receive 50% of the net profits as compensation under theagreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187, Apr. 16, 2008).


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SOURCES OF INCOME

InterestInterest from sources within Phil and interest on bonds and obligationsof residents, corporate or otherwise

DividendFrom domestic corporation and from foreign corporation, unless lessthan 50% of gross income of foreign corporation for 3 years prior to declaration ofdividends was derived from sources within the Phil, in which case, apply only ratioof Phil-source income to gross income from all sources

ServicesPlace where services are performed, except in case of international aircarrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings.Revenues from trips originating from the Phil are considered as income fromsources within the Philippines, while revenues from inbound trips are treated asincome from sources outside the Philippines.

Rentals and royaltiesLocation or use of property or property right in Phil

Sale of real propertyLocated in the Philippines

Sale of personal propertyLocated in the Philippines Gain from sale of shares of stocks of a domestic corporationis ALWAYS treated as

income from sources within the Philippines.

Other intangible propertyMobilia sequuntur personam (e.g., gain from sale ofshares of stocks of a foreign corporation)


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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

consisting of all direct

costs and expenses

Gross income

Timex 2%

MCIT


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INCOME

INCOME means cash or its equivalent coming to a person within aspecified period, whether as payment for services, interest or profit frominvestment. It covers gain derived from capital, from labor, or from bothcombined, including gain from sale or conversion of capital assets.

Return of capital is exempt from income tax. Capital, labor, or property isthe tree; income is the fruit. Capital is the fund, income is the flow offund.

To be taxable, there must be income, gain or profit; gain is received,accrued or realized during the year; and it is not exempt from income tax

under the Constitution, treaty or law. Mere increase in the value of property does not constitute taxable income. It

is not yet realized during the year.

Transfer of appreciated property to the employee for services rendered istaxable income.


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TEST IN DETERMINING INCOME

Realization test There must be separation 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 benefit test Stock option given to the employee

Income from whatever source All income not expressly exempted from income,

irrespective of voluntary or involuntary action of taxpayerin producing income


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NATURE OF INCOME

COMPENSATION INCOME Existence of employer-employee relationship

No deduction from gross compensation income allowed

BUSINESS AND/OR PROFESSIONAL INCOME NO employer-employee relationship

CAPITAL GAIN Real property in the Phil and shares of stock of domestic corporation

Other sources of capital gain

PASSIVE INVESTMENT INCOME Interest, dividend, and royalty income

OTHER INCOME Prizes and winnings

All other income, gain or profit not covered by the above classes


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COMPENSATION INCOME

Compensation income falling within the meaning of statutoryminimum wage(SMW) under R.A. 9504, effective July 6, 2008, asimplemented by Revenue Regulations No. 10-2008 dated July 8,2008, shall be exempt from income tax and withholding tax.

Holiday pay, overtime pay, night shift differential pay, and hazard

pay earned by Minimum Wage Earner (MWE) shall likewise becovered by the above exemption, provided that an employee whoreceives/earns additional compensation such as commissions,honoraria, fringe benefits, benefits in excess of the allowablestatutory amount of P30,000, taxable allowances and other taxableincome other than the SMW, holiday pay, overtime pay, hazard pay

and night shift differential pay shall not enjoy the privilege of beinga MWE and, therefore, his/her entire earnings are not exempt fromincome tax and withholding tax.


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COMMISSION INCOME

Commissions paid for marketing services rendered abroad for a Philippinecompany is considered foreign-source income. The source of the incomeis the property, activity or service that produced the income. Place whereservices are rendered determine taxation.

The fact that recipient of commission income is President and majoritystockholder of the Philippine company does not alter the source of

income. There are only two ways by which the President and othermembers of the Board can be granted compensation apart fromreasonableper diems: (1) when there is a provision in the by-laws fixingtheir compensation; and (2) when the stockholders agree to give it tothem. If none of these conditions are present, commission income cannotbe automatically attributed to petitioners position in the company(Juliane Baier-Nickel vs. CIR, GR No. 156305, Feb. 17, 2003)

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


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ONSHORE AND OFFSHORE INCOME

Construction and installation works were subcontracted anddone in the Philippines by a Phil corporation; hence, income isfrom sources within the Philippines.

However, some pieces of equipment and supplies for NDC

project and ammonia storage tanks and refrigeration unitswere completely designed and engineered in Japan. Allservices for the design, fabrication, engineering andmanufacture of materials and equipment under Japanese Yenportion 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).


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GROSS PHIL BILLINGS

INTERNATIONAL AIR CARRIER On outbound trip: Flight from Phil to foreign destination, income

is treated as from Philippine sources; hence, subject to 2.5% onGPB.

Continuous and uninterrupted flight

If transhipment of passenger in another country on another foreignairline takes place: GPB tax applies only on aliquot portion ofrevenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil, income istreated as from foreign sources; hence, exempt from Phil incometax

INTERNATIONAL SHIPPING LINE From Phil to final foreign destination: entire income is taxable,

even if transhipment of cargoes took place in another country

From foreign country to Phil: exempt


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RMC 40-2013, May 2, 2013

RA 10378 (grants income tax exemptions to internationalcarriers based on reciprocity) passed into law on March 7,2013, published in Manila Bulletin and Phil Star on March13, 2013, and took effect on March 29, 2013.

International carrier doing business in the Phil shall pay2.5% on its GPB, provided that international carriers mayavail of preferential rate or exemption from tax imposed ongross revenue derived from the carriage of persons andtheir excess baggage on the basis of applicable tax treaty orinternational agreement to which the Phil is a signatory or

on the basis of reciprocity such that the intl carrier, whosehome country grants income tax exemption to Phil carriers,shall likewise be exempt from income tax.


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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 domestic

corporation 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 profit from sale of

capital asset; hence, despite the loss from sale, seller has to pay

the 6% CGT.


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

Apply the 6% capital gains tax, if the seller is a resident citizen, analien individual (resident or non-resident), or a domesticcorporation.

If the seller is a foreign corporation (resident or non-resident), theasset in the Phil is a capital asset, but the gain from sale is subjectto the global tax system of taxation.

If the real property is located abroad, the gain from sale is exemptfrom Phil income tax, unless the seller is a resident citizen or adomestic corporation.

If the seller is a resident citizen and capital asset is the principalresidence of the seller, the sale may be exempt from the 6% CGT,provided that the conditions provided for in the law are compliedwith by the seller.

SALE OF REAL PROPERTY


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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 transaction is subject to the expanded withholding tax,

such tax to be withheld by the buyer of the property and

remitted to BIR. The withholding tax is creditable against

the income tax of the seller.

The 6% capital gains tax on the transaction is notapplicable thereon.


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SALE OF SHARES OF DOMESTIC

CORPORATION

Seller is a dealer in securities Dealer in securities is a person regularly engaged in the buy and sale

of securities for his own account. He sells property and looks at profits

from sale of shares or securities. A stockbroker is a middleman

between the seller and buyer of stocks or securities. He is a seller ofservices 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 taxation.

Transaction involving listed shares traded in local stock exchange iscovered by Sec 127(A), NIRC (stock transaction tax), but exempt from

income tax.


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SHARES OF DOMESTIC CORPORATION

Seller is an investor who is not a dealer in securities

If shares are listed and traded in a local stock exchange,

apply of 1% stock transaction 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 first P100,000 net capital gain; and

10% on any amount in excess of P100,000


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SHARES OF DOMESTIC CORPORATION

CGT return is filed within 30 days from date of sale. Every

sale must be covered by a separate CGT return and the tax

paid upon filing of the return.

All transactions during the year are consolidated and the

annual return shall be filed not later than April 15 of thefollowing 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 ofdomestic corporation during the year less total capital

losses during the same year.


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RR 6-2013, Apr 11, 2013

SEC 7 of RR 6-2008is amended as follows: Sec. 7 covers sale or exchange of shares (of domestic

corporation) not traded thru a local stock exchange

FMVFair market value of shares of stock sold shall be thevalue at the time of sale. In determining value of the shares,

the Adjusted Net Asset Method shall be used, whereby allassets and liabilities are adjusted to fair market values. The netof adjusted asset minus the liability values is the indicated valueof the equity. For purposes of this section, the appraised valueof real property at the time of sale shall be the higher of (1)FMV as determined by CIR; or (2) FMV as shown in the schedule

of values fixed by Provincial/City Assessor; or (3) FMV asdetermined by independent Appraiser.

RR shall take effect immediately.


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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 entire gain or

loss is taxable or deductible.


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INTEREST INCOME

TYPES OF INTEREST INCOME Subject to FWT: Interest income on bank deposits, deposit

substitutes, trust and other similar arrangements 20% FWTpeso deposit with bank

7.5% FWTforeign currency deposit with OBU/FCDU

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

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

form of trust funds, deposit substitutes, IMA and other investmentsprescribed by BSP

Taxable income: Preferential tax ratePre-termination of long-term deposit by individual :

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

Regular tax rateAll other cases; subject to 20% CWT.


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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

final withholding tax does not exempt OBU/FCDU ononshore interest income (ING Bank v CIR, 2005).

The withholding agent-borrower may also be

assessed deficiency withholding tax as penalty for

failure to withhold (RCBC v. CIR, CTA Case 2004).


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DIVIDEND INCOME

REQUISITES FOR DIVIDEND DECLARATION Presence of positive retained earnings

No prohibition to declare dividend in loan agreement

Declaration of dividend by Board of Directors

TYPES OF DIVIDENDS Taxable

Cash dividend

Property dividend

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

stockholders, or there is subsequent cancellation or redemption of sharesdeclared as stock dividend, which is essentially equivalent to cash dividend)

NOTE: Liquidating dividend represents distribution of corporate assets tostockholders. Gain from surrender of shares are treated as ordinary income.


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DIVIDEND INCOME

Intra-corporate dividend: Exempt from tax Corporation paying dividend: Domestic corporation

Recipient of dividend: Another domestic corporation or residentforeign corporation

Dividend paid to non-resident foreign corporation

Corporation paying dividend: Domestic corporation

Recipient of dividend

Foreign head office makes direct investment in Phil company: 15% FWTon gross dividend income

Phil branch of foreign corporation makes investment in Phil company:

Exempt from income tax

Tax-sparing provision

If country of residence of the foreign corporation does not impose incometax on dividend paid by a domestic corporation, impose 15% FWT only


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DIVIDEND INCOME

While there is transfer of the shares of stock/securities to the Borrower pursuantto the Securities Borrowing and Lending (SBL) Agreement, the Lender retainscertain rights accruing to the shares of stock/securities lent, such as the right toreceive cash, stock dividends or interest which the Borrower is obliged tomanufacture or reimburse to the Lender during the borrowing period. These cash,stock dividends or interest which the Borrower is required to manufacture orreimburse to the Lender are otherwise referred to as "Manufactured Dividends or

Benefits". The Lender may likewise retain voting rights over the loaned shares ofstock/securities while in the possession of the Borrower, if mutually agreed uponby the parties.

Receipt of the Manufactured Dividends or Benefits shall not be a taxable incomeof the Lender since it just represents dividends/other benefits that the lenderwould 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

deductible expense. On the other hand, the receipt of cash dividend from theissuing company by the Borrower or Buyer shall be subject to the provisions ofexisting laws (e.g., final withholding tax of 10% on gross dividend paid to a citizen).


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OTHER INCOME

Income from any source whatever The words income from any source whatever discloses a legislative

policy to include all income not expressly exempted from the class oftaxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner vs.BOAC). The words income from any source whatever is broad enough tocover gains contemplated here. These words disclose a legislative policy

to include all income not expressly exempted within the class of taxableincome under our laws, irrespective of the voluntary or involuntary actionof the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug. 31,1955).

Any economic benefit to the employee whatever may have been themode by which it is effected is taxable. Thus, in stock options, thedifference between the fair market value of the shares at the time theoption is exercised and the option price constitutes additionalcompensation income to the employee (Commissioner vs. Smith, 324 U.S. 177).


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EXCLUSIONS

Life insurance proceeds Amount received by insured as return of premium

Gifts, bequests and devises

Compensation for injuries or sickness

Income exempt under treaty

Retirement benefits, pensions, gratuities R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)

Interest income of employee trust fund or accredited retirement plan is exemptfrom FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)

Amount received as a consequence of separation because of death, sicknessor other physical disability or for any cause beyond the control of employee

Miscellaneous items Income of foreign government Income of government or its political subdivisions from any public utility or

exercise of governmental function


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INCOME OF RETIREMENT FUND

COA alleged that DBP is actual owner of the trust fund and its income because: DBP made the contribution 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 profit fromthe Fund and they maintained separate books for that purpose. The principal andincome will not revert to DBP, even if trust is subsequently modified or terminated.

SC ruled that the beneficiaries of the Fund are the DBP officials and employeeswho will retire. It is not always necessary that the beneficiaries should be namedor even be in existence at the time the trust is created in his favor, provided theyare sufficiently certain or identifiable.

The Salary Loan Program did not terminate the trust to the Funds trustee. That

the DBP Board of Directors confirms the approval of the SLP by the Funds trusteesdoes not make the fund property of DBP (DBP v. COA, 2004).


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EXCLUSIONS

Miscellaneous items

Prizes and awards

In recognition of religious, charitable, artistic, literary

achievement, etc. (He did not enter contest and is not required to

render substantial future services) Granted to athletes in local and international sports competitions,

sanctioned by their national sports associations

13thmonth pay and other benefits (up to P30,000)

Gains from sale of long-term(5 years and 1 day)bonds,debentures and other certificates of indebtedness

Gains from redemption of shares in mutual fund


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GAIN v. INTEREST

Gains cannot include interest, since it clearly refers to gains from the sale ofbonds, debentures and other certificates of indebtedness. Whereas the termgains includes interest in its general sense, this rule cannot be applied toSection 32(B)(7)(g) of the Tax Code in the specific sense. Section 32(A) of the TaxCode defines gross income and it is clear that there is a distinction betweengains derived from dealings in property and interests. Gains realized from thesale or exchange or retirement of bonds, debentures and other certificate of

indebtedness would fall under the category of gains derived from dealings inproperty. On the other hand, interests would include interest from bonds,debentures and other certificate of indebtedness. Only citizens, resident aliensand non-resident aliens engaged in trade or business are exempt from income taxon interest from long-term deposit or investment. On the other hand, domesticand resident foreign corporations are subject to a 20% final tax on such interest. IfCongress intended to exempt interest from bonds, debentures and other

certificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, it wouldhave done so in clear and specific terms (Nippon Life Insurance Company vs.Commissioner, CTA Case No. 6142, Feb 4, 2002). After all, exemptions are construedstrictly against the taxpayer and liberally in favor of the government.


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DE MINIMISBENEFITS

EXEMPT DE MINIMISBENEFITS, REGARDLESS OF RECIPIENT (RANK ANDFILE, OR MANAGERIAL OR SUPERVISORY)

a. Monetized unused vacation leave credits of private employees notexceeding ten (10) days during the year and the monetized value of leavecredits paid to government officials 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

amounting to not more than P1,500.00;

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

e. Actual yearly medical benefits not exceeding P10,000.00 perannum;

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


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DE MINIMISBENEFITS

g. Employees achievement awards (e.g., for length of service or safetyachievement, which must be in the form of a tangible personal property otherthan cash or gift certificate, with an annual monetary value not exceedingP10,000.00 received by the employee under an established written plan whichdoes not discriminate in favor of highly paid employees;

h. Gifts given during Christmas and major anniversary celebrations notexceeding P5,000.00 per employee per annum;

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

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

The amount of de minimis benefits conforming to the ceiling hereinprescribed shall not be considered in determining the P30,000.00 ceiling of

other benefits provided under Sec. 32(b)(7)(e) of the Tax Code. However, ifthe employer pays more than the ceiling prescribed by these regulations, theexcess shall be taxable to the employee receiving the benefits only if suchexcess is beyond the P30,000.00 ceiling. Any amount given by the employer asbenefits to its employees, whether classified as de minimisbenefits or fringebenefits, shall constitute as deductible expense upon such employer.

CO O O O


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INCOME FROM PROPERTY OF EXEMPT

ASSOCIATION

The phrase any of their activities conducted for profit does not qualify theword properties.-- The phrase any of their activities conducted for profit does notqualify the word properties. This makes income from the property of the organizationtaxable, regardless of how that income is usedwhether for profit or for lofty non-profitpurposes. Thus, the income derived from rentals of real property owned by the Young MensChristian Association of the Philippines, Inc. (YMCA), established as a welfare, education andcharitable non-profit corporation, is subject to income tax. The rental income cannot beexempted on the solitary but unconvincing ground that said income is not collected for profit

but is merely incidental to its operation. The law does not make a distinction. Where the lawdoes not distinguish, neither should we distinguish. Because taxes are the lifeblood of thenation, the Court has always applied the doctrine of strict interpretation in construing taxexemptions. YMCA is exempt from the payment of property taxes only but not income taxesbecause it is not an educational institution devoting its income solely for educationalpurposes. The term educational institution has acquired a well-known technical meaning.Under the Education Act of 1982, such term refers to schools. The school system issynonymous with formal education which refers to the hierarchically structured and

chronologically graded learnings organized and provided by the formal school system and forwhich certification is required in order for the learner to progress through the grades ormove to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No.124043, Oct. 14, 1998).


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INCOME FROM ACTIVITY FOR PROFIT OF NON-

STOCK HOSPITAL

To be exempt from income tax, Sec 30(e), NIRC requires that a charitableinstitution be organized and operated exclusively for charitable

purposes. Due to huge amount received from paying patients, hospital is

not operated exclusively for charitable purposes.

The last paragraph of Sec 30, NIRC provides that if a tax-exempt charitable

institution conducts any activity for profit, regardless of the dispositionmade of such income, such activity is not tax exempt (even as its not-for-

profit activities 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 stating that St Lukes Hospital is

exempt from income tax, no surcharge and interest shall be imposed on

the deficiency tax(CIR v. St Lukes Med Center, Sept 2012).


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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 attributable to the develop-

ment, management, operation 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. Operating expenses

of an illegal or questionable business are deductible, but

expenses of an inherently illegal nature, such as bribery and

protection 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.


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DEDUCTIONS

An expense is ordinary when it connotes a payment, which is normal inrelation to the business of the taxpayer and the surroundingcircumstances.

An expense is necessary where the expenditure is appropriate or helpfulin the development of taxpayers business or that the same is proper forthe purpose of realizing a profit or minimizing a loss.

P9.4 M paid in 1985 for advertising a product was staggering incurred tocreate or maintain some form of goodwill for the taxpayers trade orbusiness or for the industry or profession of which the taxpayer is amember.

Goodwill generally denotes the benefit arising from connection and

reputation, and efforts to establish reputation are akin to acquisition ofcapital assets. Therefore, expenses related thereto are not businessexpenses but capital expenditures (CIR vs. General Foods Phi., GR No. 143672, Apr.24, 2003).


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DEDUCTIONS

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

bonus as compensation. This depends upon many factors, one of thembeing the amount and quality of the services performed with relation tothe business.

Other tests suggested are payment must be made in good faith, the

character of the taxpayers business, the volume and amount of its netearnings, its locality, the type and extent of the services rendered, thesalary policy of the corporation, the size of the particular business, theemployees qualifications and contributions to the business venture, andgeneral economic conditions.

However, in determining whether the particular salary or compensation

payment is reasonable, the situation must be considered as a whole.Ordinarily, no single factor is decisive(C.M. Hoskins & Co., Inc. vs. Commissioner, L-24059,Nov. 28, 1969; Pacific Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gifts, are gratitude and are not deductible.


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DEDUCTIONS

Legal and accountants fees for prior years were not billed incorresponding years (1984-1985). It was paid by taxpayer in succeedingyear (1986) when it was billed by the lawyer and accountant. Taxpayersuses accrual method of accounting.

Accrual of income and expense is permitted when the all events test hasbeen met. This test requires (1) fixing a right to income or liability to pay,

and (2) the availability of reasonably accurate determination of suchincome or liability. It does not, however, demand that the amount ofincome or liability be known absolutely; it only requires that a taxpayerhas at its disposal the information necessary to compute the amount withreasonable accuracy, which implies something less than an exact orcompletely accurate amount.

Moreover, deduction takes the nature of tax exemption; it must beconstrued strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporation,G.R. No. 172231, Feb. 12, 2007).


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DEDUCTIONS

Entertainment, amusement and recreation expenses are subject tolimitation

% of net sales for sellers of goods

1% of net sales for sellers of services

Club dues for membership in social or athletic clubs to promote businessof corporation paid by the corporation are deductible from gross income.

However, they will be treated as fringe benefits subject to FBT on the part

of the employer. FBT paid by employer is deductible as business expense

of the corporation.

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.


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DEDUCTIONS

Directors Fees

If not officer or employee of corporation, report it as other income

subject to 10% EWT.

If director is also an officer of the corporation, apply CWT on

compensation income upon the directors fees, together with salaries.

Commission Income

If there is no employer-employee relationship between broker and

payor of income, treat it as business income subject to 10/15% EWT.

If there is employer-employee relationship, commission income is

treated as part of CWT on compensation income.


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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 deductible

under the Tax Code shall be allowed as a deductionfrom the payorsgross income only if it is shown that

the income tax required to be withheld has been paidto the Bureau in acc with Secs. 57 and 58 of the Code.

No deduction will also be allowed notwithstandingpayments of withholding tax at the time of the audit

investigation or reinvestigation/reconsideration incases where no withholding of tax was made in accwith Secs 57 and 58 of the Code.


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DEDUCTIONS

INTEREST EXPENSE 1. There must be a valid and existing indebtedness;

2. The indebtedness (unconditional obligation to pay) must be that of the taxpayer;

3. The interest must be legally due and stipulated in writing;

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 Section 34(B)(2)(b), in relation to Section 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 finance petroleum operations);

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 deduction for interest expense shall be reduced by forty-two percent (42%) of the interest

income subjected to final tax beginning November 1, 2005 under R.A. 9337, and

that effective January 1, 2009, the percentage shall be thirty-three percent (33%)

[Sec. 34(B)(1), NIRC].


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DEDUCTIONS

Deficiency or delinquency interest Deficiency or delinquency interest on unpaid taxes is not

deductible as tax, but taxpayer is allowed to deduct thesame as interest.

Interest expense on capital expenditures At the option of the taxpayer, interest expense on capital

expenditure incurred to acquire property used in trade,business or exercise of profession may be deducted in fullin the year incurred, or may be treated as capitalexpenditure subject to amortization. However, taxpayercannot claim interest expense both as deduction and partof cost of asset.


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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 connection with the

taxpayers trade, business or profession; and

4. Taxes are not specifically excluded by law from being deducted from the taxpayers gross income.


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DEDUCTIONS

The word taxes means taxes proper and no deductionshould be allowed for amounts representing interest,surcharge or penalties. Interest on taxes is not deductible astaxes, but as an item of interest.

Fines and penalties for violations of law are not deductible astaxes.

Only the person upon whom taxes are imposed may claimthem as deduction, except: (1) Taxes upon an individual uponhis interest as shareholder of corporation which are paid by

corporation without reimbursement; and (2) Corporate bondsor other obligations containing a tax-free covenant clause, thecorporation paying the tax or any part of it for someone else(Sec. 80, RR 2).


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DEDUCTIONS

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

connection with trade, business or exercise of profession is deductible.Examples: professional tax, documentary stamp tax, other percentagetax, 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 consumption tax under B.P. 36.

6. VAT

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


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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 off within the taxable year; 3. The loss is evidenced by a closed and completed transaction (fixed by

identifiable events or when insurance recovery was definitely established); 4. The loss is not claimed as a deduction 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 transaction entered into for profit 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-five days from date of occurrence of the loss.


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DEDUCTIONS

Bad Debt Theory Loss from theft or embezzlement occurring in the year and discovered

in another year is deductible in the year in which sustained. However,where the taxpayer had no means of determining the actual date ofembezzlement, a loss was sustained in the year of discovery.

The rule is now modified by the bad debt theory, which holds thatsince embezzlement creates a debtor-creditor relationship, a loss isdeductible as bad debt in the year the right of recovery becomesworthless.

NOLCO

Net operating loss of one year may be carried over and deducted fromgross income for the next succeeding 3 years, provided that nosubstantial change in the ownership of the business or enterprise (notless than 75%) takes place.


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DEDUCTIONS

BAD DEBTS

1. There must be an existing indebtedness due to the taxpayer

which must be valid and legally demandable;

2. The same must be connected with the taxpayer's trade, business

or practice of profession; 3. The same must not be sustained in a transaction entered into

between related parties enumerated under Sec. 36(B) of the Tax

Code of 1997;

4. The same must be actually charged off the books of accounts of

the taxpayer as of the end of the taxable year; and

5. The same must be actually ascertained to be worthless and

uncollectible as of the end of the taxable year.


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DEDUCTIONS

In the case of banks, the BSP thru the Monetary Board shallascertain the worthlessness and uncollectibility of the bad

debts and approve in writing the writing off of bad debts from

the books, without prejudice to the CIRs determi-nation of

the worthless and uncollectibility of debts. In no case shall a receivable from an insurance or surety

company be written off from taxpayers books and claimed as

bad debt deduction, unless such company has been declared

closed due to insolvency or for any similar reason by theInsurance Commission.


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DEDUCTIONS

TAX BENEFIT RULE The taxpayer is obliged to declare as taxable income any

subsequent recovery of bad debts in the year they werecollected to the extent of the tax benefit enjoyed by the

taxpayer when the bad debts were written off and claimedas deduction from gross income.

It also applies to taxes previously deducted from grossincome but which were subsequently refunded or creditedby the BIR. He has to report income to the extent of the

tax benefit derived in the year of deduction.


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DEDUCTIONS

DEPRECIATION

1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or

business, or out of its not being used temporarily during the year; 3. It must be charged off during the taxable year from the taxpayers

books of accounts; 4. Depreciation shall be computed on the basis of historical cost or

adjusted basis. While financial accounting allows computation basedon appraised value, recovery of investment for tax purposes shall belimited to historical cost.

Depreciation for the year = Cost less salvage value divided by theestimated useful life (number of years) of the assetBook value of the asset = Cost or adjusted basis less accumulated

depreciation.


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DEDUCTIONS

CHARITABLE CONTRIBUTIONS

1. The charitable contribution must actually be paid or made to thePhilippine government or any political subdivision thereof exclusively forpublic purposes, or any of the accredited domestic corporation orassociation specified in the Tax Code;

2. It must be made within the taxable year; 3. It must not exceed 10% (individual) or 5% (corporation) of the

taxpayers taxable income before charitable contributions (whetherdeductible in full or subject to limitation);

4. It must be evidenced by adequate receipts or records; and

5. The amount of charitable contribution of property other than moneyshall be based on the acquisition cost of said property (Sec. 34(H), NIRC).The limitation is imposed to prevent abuse of donating paintings andother valuable properties and claiming excessive deductions therefrom.


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DEDUCTIONS

D. Optional Standard Deduction

Privilege is available only to citizens or resident aliens as wellcorporations subject to the regular corporate income tax;thus, non-resident aliens and non-resident foreign

corporations are not entitled to claim the optional standarddeduction.

Standard deduction is optional; i.e., unless taxpayer signifiesin his/its return his/its intention to elect this deduction, he/itis considered as having availed of the itemized deductions;

Such election when made by the qualified taxpayer isirrevocable for the year in which made; however, he canchange to itemized deductions in succeeding year(s);


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DEDUCTIONS

Amount of standard deduction is limited to 40% of taxpayers grosssales or receipts (in the case of an individual) or gross income (in thecase of a corporation). If the individual is on the accrual basis ofaccounting for his income and deductions, OSD shall be based on thegross sales during the year. If he employs the cash basis of accounting,OSD shall be based on his gross receipts during the year. It should benoted that cost of sales or cost of services shall not be allowed to bededucted from gross sales or receipts.

A general professional partnership (GPP) may claim either the itemizeddeductions or in lieu thereof, the OSD allowed to corporations inclaiming the deductions in an amount not exceeding 40% of its grossincome. The net income determined by either the itemized deductionor OSD from the GPPs gross income is the distributable net incomefrom which the share of each share is to be ascertained.

Proof of actual expenses is not required; hence, he is not also requiredto keep books of accounts and records with respect to his deductionsduring the year.


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DEDUCTIONS

NON-DEDUCTIBLE ITEMS

1. Personal, living or family expenses;

2. Any amount paid out for new buildings or for permanent improvements, orbetterments made to increase the value of any property or estate. This Subsectionshall not apply to intangible drilling and development costs incurred in petroleumoperations, which are deductible under Subsection (G)(1) of Section 34 of thisCode.

3. Any amount expended in restoring property or in making good the exhaustionthereof for which an allowance is or has been made; or

4. Premiums paid on any life insurance policy covering the life of any officer oremployee, or of any person financially interested in any trade or business carriedon by the taxpayer, individual or corporate, when the taxpayer is directly or

indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property between related parties


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PERSONAL EXEMPTIONS

RA 8424: Jan 1, 1998 Single and estate or trust

P20,000

Head of familyP25,000

MarriedP32,000

For each child, not toexceed 4P8,000

RA 9504: July 6, 2009 Individual, whether single,

HOF, or marriedP50,000

For each child, not toexceed 4P25,000

Law exempts income ofminimum wage earners andincreases OSD from 10% to40% of gross sales orreceipts, for individuals, and

of gross income, forcorporations.


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TAX BASES AND RATES

COMPENSATION INCOME

FRINGE BENEFITS

Gross compensation incomeless PAE times graduatedrates

Gross compensation incomeof employees of RHQ,ROHQ, OBU/FCDU, andpetroleum contractorstimes 15%

Grossed-up monetary value

of fringe benefits timesapplicable rate (32%) = FBT


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TAX BASES AND RATES

BUSINESS AND/ORPROFESSIONAL INCOME

Corporations (see formulaopposite here)

Individuals:

There is no MCIT.

Deduct applicable PAE.

Apply graduated rates of5% to 32%

Pay IT on two equalinstallments, providedamount is more thanP2,000.

Gross sales Less: Cost of sales or services

Gross income

Multiplied by: 2%

MCIT

Gross income

Less: Deductions

Net income

Multiplied by: 35%

RCIT

Less: CWT

Balance


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TAX BASES AND RATES

CAPITAL ASSETS A. REAL PROPERTY IN THE PHILIPPINES

B. SHARES OF STOCKS OF DOMESTICCORPORATION

C. OTHER CAPITAL ASSETS

Consideration or FMV, whichever is highertimes 6% = CGT.

Sale of principal residence is exempt fromCGT, provided conditions are satisfied

Listed and traded in local stock exchange:GSP times of 1% = Stock transaction tax

Listed but traded over the counter orunlisted shares: Gross selling price lesscost or adjusted basis = Capital gain or losstimes 5%/10% = CGT

Include in global tax system, but long-termcapital gain or loss shall be taxable ordeductible only at 50% thereof.

AX AS S AN A S


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TAX BASES AND RATES

PASSIVE INCOME A. Interest

B. Dividend

20% FWT (peso deposit) anddeposit substitute

7.5% FWT (foreign exchangedeposit)

Long-term deposits (5 years ofmore) of individuals: exempt

Others: Global system

10% FWTCitizen

20% FWTResident alienengaged in trade

25% FWTNRANE 0% -- DC & RFC

35%, unless tax sparing provi-sionapplies -- NRFC

TAX BASES AND RATES


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TAX BASES AND RATES

C. Royalty

D. Rental income

10% FWTbooks, literary worksand musical compositions(citizen)

20% FWTgeneral rate (NRAE,DC & RFC)

25% FWTNRANE

35% FWTNRFC

NRFC 25% x gross income: NR cinema

film owner, lessor or distributor

4.25% x gross income: NR owner

or lessor of vessels 7.5% x gross income: NR lessor

of aircraft, machineries andother equipment

BRANCH PROFIT REMITTANCE TAX


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BRANCH PROFIT REMITTANCE TAX

Branch profit of the Phil. branch used as additional capitalinvestment of the foreign head office in the Philippine branch,pursuant to the requirements of the Bangko Sentral ngPilipinas, is considered as profit constructively remittedabroad.

Branch profit remittance tax (BPRT) applies not only when theprofit is actually remitted but also when such profit isconstructively remitted to the head office abroad (ING Bank, ManilaBranch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

BPRT does not apply on profits remitted by an enterpriseregistered with PEZA or SBMA and other freeport zones.

Tax base of BPRT is the amount of profit earmarked forremittance to its head office abroad.

NATURE OF ASSET


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NATURE OF ASSET

ORDINARY ASSET

CAPITAL ASSET (Sec 38A)

Inventory if on hand at end oftaxable year

Stock in trade held primarily forsale or for lease in the course oftrade or business

Asset used in trade or business,subject to depreciation

Real property used in trade orbusiness

All other assets, whether or notused in trade or business, otherthan the above assets

ORDINARY CAPITAL ASSETS


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ORDINARY v. CAPITAL ASSETS

Who is seller of asset?

Person is habitually engaged in real estate business

Presumption or proof when habitually engaged in real

estate business

6-transaction 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



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

who resident or non-resident but engaged in trade in the Phil, sale is

exempt from 6% CGT, provided other conditions are present.

Otherwise, sale is taxable.

Tax base, tax rate, and gain or loss from sale

CA located in the Phil6% CGT; CA located abroadGlobal 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 corporation; it is subject to EWT provisions.



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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 insufficient consideration

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

EXCHANGE OF PROPERTY


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EXCHANGE OF PROPERTY

GENERAL RULE

The entire gain or loss shall be recognized.

EXCEPTIONS:

No gain or loss shall be recognized at the time of

the transaction on tax-free exchanges of propertyunder Sec 40(2), NIRC:

a. Merger or consolidation

b. Exchange of property for shares of stocks, as aresult of which, he together with four others gainscontrol of the corporation

ACCOUNTING METHODS


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ACCOUNTING METHODS

Cash method Accrual method

All events test; amounts received in advance are not treated asrevenue of the period in which received but as revenue of futureperiods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar24, 1997).

Installment sales Sale on the installment plan

Initial payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan Initial payments exceed 25% of GSP

Percentage of completion (for long-term constructionproject)

Crop year method

FILING OF TAX RETURN


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SUBSTITUTED FILING OF ITR: No individual income tax returnfor the year will be filed by the employee concerned, and theemployer is the one that files the return for him Applies only to individuals

With only one (1) employer

Who correctly withholds the income tax on compensation income paidto the employee and remits the same to the BIR

Substituted filing of return does not apply when theconditions above are not met, such as when the individual has(a) two or more employers, (b) mixed incomes, correct WTwas not deducted from compensation income, etc.

BIR Form 2316 is filed by employer with BIR not later than Feb28 of the following year; original copy thereof is given toemployee concerned on Jan 30 of following year.



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Individual deriving mixed income, or purely business/professional income, or other income must file his quarterlyincome tax returns (BIR Form 1700 Q) and annual income taxreturn (BIR Form 1700 ) as follows:

Period Due Date for Filing Return

Q1 Return April 15 of same year

Q2 Return August 15 of same year

Q3 Return November 15 of same year

Annual Return April 15 of the following year



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A domestic corporation and resident foreign corporation shall filequarterly corporate income tax return (BIR Form 1702 Q) and annualcorporate income tax return (BIR Form 1702 as follows:

Q1 Return May 31 of same year

Q2 Return August 31 of same year

Q3 Return November 30 of same year

Annual Return April 15 of the following year (if on calendaryear), or 15th day of the fourth month followingthe close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except thosereceiving purely compensation income) and corporations shall be made on thecumulative basis; i.e., gross income and deductions are consolidated and theincome tax liability is computed on the consolidated net income, and the incometaxes paid for the preceding quarter(s) are credited against the consolidatedincome tax due.

WITHHOLDING TAX


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WITHHOLDING TAX

An income payment is subject to the expanded withholdingtax,if the following conditions concur:

a. An expense is paid or payable by the taxpayer, which isincome to the recipient thereof subject to income tax;

b. The income is fixed or determinable at the time of

payment; c. The income is one of the income payments listed in the

regulations that is subject to withholding tax, unless thecorporation is designated as Top 20,000 Corporation;

d. The income recipient is a resident of the Philippines liable

to income tax; and e. The payor-withholding agent is also a resident of the

Philippines.

WITHHOLDING TAX


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WITHHOLDING TAX

EXEMPT FROM EWT 1. National government and its instrumentalities, including provincial, city or

municipal governments and barangays, except government-owned orcontrolled corporations;

2. Persons enjoying exemption from payment of income taxes pursuant to theprovisions of any law, general or special, such as but not limited to thefollowing:

a. Sales of real property by a corporation which is registered with and certifiedby HLURB or HUDCC as engaged in socialized housing project where the sellingprice of the house and lot or only the lot does not exceed P180,000 in MetroManila and other highly urbanized areas and P150,000 in other areas;

b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemptionfrom income tax under E.O. 226, R.A. 7916, and R.A. 7227;

c. Corporations which are exempt from income tax under Section 30 of the TaxCode, such as GSIS, SSS, PHIC, and PCSO;

d. General professional partnerships; and e. Joint ventures or consortium formed for the purpose of undertaking

construction projects or engaging in petroleum, coal, geothermal and otherenergy operations

f. International carriers (by air or water) subject to 2.5% Gross Phil Billings

WITHHOLDING TAX


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WITHHOLDING TAX

1. Professional fees for services rendered by individuals, incl. real estate servicepractitioners; and professional entertainers and athletes, and directors:

If gross income for current year exceeds P720,000 - 10% If gross income for current year does not P720,000 - 15%

2. If recipient of professional fees, talent fees, etc. is a juridical person:

If gross income for current year exceeds P720,000 - 10% If gross income for current year does not P720,000 - 15%

3. Rental income Real properties - 5% Personal properties of P10,000 per payment; P10,000 shall not apply when accumulated rental to same lessor exceeds or is reasonably expected to exceed

P10,000 within a year - 5% Poles, satellites and transmission facilities - 5% Billboards - 5%

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4. Gross payments to resident individuals and corporate cine- matographic film owners, lessors, or distributors - 5%

5. Gross payments to contractors - 2%

6. Income distribution to beneficiaries - 15%

7. Income payments to certain brokers and agents - 10%

8. Income payments to partners of general professional

partnerships:

If gross income for current year exceedsP720,000 - 15%

If otherwise - 10%

9. Professional fees paid to medical practitioners

If gross income for current year exceedsP720,000 - 15%

If otherwise - 10%

10. Gross additional payments to government personnel from

importers, shipping and airline companies, or their

agents - 15%

11. One-half of gross amounts paid by any credit card

company in the Philippines - 1%

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WITHHOLDING TAX

12. Income payments made by any Top 20,000 Corp Supplier of goods - 1% Supplier of services - 2% 13. Income payments made by government to its local/resident supplier of goods and services other than those covered by other rates of withholding taxes Supplier of goods - 1% Supplier of services - 2%

14. Commissions of independent and exclusive distributors, and marketing agents of companies - 10% 15. Tolling fees paid to refineries - 5% 16. Payments made by pre-need companies to funeral parlor - 1% 17. Payments made to embalmers - 1% 18. Income payments made to suppliers of agricultural products - 1% 19. Income payments on purchases of minerals, mineral products and quarry resources - 10% 20. MERALCO refund to customers With active contracts - 25% With terminated contracts - 32%


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REFUND


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REFUND

Requisites of claim for refund are: Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes were withheld were included in the return of

the recipient; and Fact of withholding is established by a copy of statement (BIR Form

1743.1) duly issued by payor (withholding agent) to payee, showingamount paid and amount of tax withheld (RR 6-85).

CTA found above requisites were satisfied. Findings of facts of CTA are entitledto great weight and will not be disturbed on appeal, unless it is shown that thelower court committed gross error in the appreciation of facts.

Failure of respondent to indicate its option in its annual ITR to avail itself ofeither tax refund or tax credit is not fatal to its claim for refund. Sec. 76, NIRC offers two options: refund or tax credit. The options are

alternative and the choice of one precludes the other. However, in PhilamAsset Mgt v. CIR, this Court ruled that failure to indicate a choice will notbar a valid request for refund, should this option be chosen by thetaxpayer later on. The requirement is only for the purpose of easing taxadministration, particularly the self-assessment and collection aspects.

REFUND


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REFUND

Failure of respondent to present in evidence the 1998 ITR is not fatal to itsclaim for refund.

CTA denied claim for 1997 tax credit of PERF because it failed tosubmit its 1998 ITR.

PERF attached its 1998 ITR to its motion for reconsideration. The ITR ispart of the records of the case and clearly showed that income taxes

were not claimed as tax credit in 1998. Technicalities should not be used to defeat substantive rights,

especially those that have been held as a matter of right.

The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence ismisplaced. This provision should be taken in the light of RA 1125;proceedings therein shall not be governed strictly by technical rules of

evidence. No one shall unjustly enrich oneself at the expense of another. This

applies not only to individuals but to the State as well. In the field oftaxation where the State exacts strict compliance upon its citizens, theState must likewise deal with taxpayers with fairness and honesty. Theharsh power of taxation must be tempered with evenhandedness (CIRv. PERF Realty Corp., GR 163345, July 4, 2008).

REFUND


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REFUND

Tax refunds or credits are not founded principally onlegislative grace but on the legal principle which underlies allquasi-contracts, abhorring a persons unjust enrichment at theexpense of another. The dynamic of erroneous payment of taxfits to a tee the prototypic quasi-contract, which covers not

only mistake in fact but also mistake in law. The government is not exempt from the application of solutio

indebiti. Indeed, the taxpayer expects fair dealing from thegovernment, and the latter has the duty to refund withoutany unreasonable delay what it has erroneously collected (CIR v.Fortune Tobacco Corp, GR 167274, July 21, 2008).


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END OF PRESENTATION

Atty. Vic C. Mamalateo

Mobile: 0918-9037436

Email: [email protected] [email protected]
mailto:[email protected]:[email protected]