tax1 llb404 2012-2013 prefinals notes

8/10/2019 Tax1 LLB404 2012-2013 Prefinals Notes

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TAX PREFINALSJEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, KRISTEL, RIZA, FRANK, PATRICIO, ANTHONY, KIM, BARBARA, KZ | 1

INDIVIDUAL INCOME TAXATION

Legend:Graynot part of coverageBlue syllabusBlacktranscript

A.

General Principles, Section 231.

A resident citizen is taxable on all income derived from sourceswithin and without the Philippines.

2.

A non-resident citizen is taxable on all income derived from sourceswithin the Philippines.

3. An overseas contract worker is taxable only on income fromsources within the Philippines.A seaman who is a citizen of the Philippines and who receivescompensation for services rendered abroad as a member of thecomplement of a vessel engaged exclusively in the internationaltrade shall be treated as an overseas contract worker

4.

A resident alien individual is taxable only on income derived fromsources within the Philippines

B.

Individual Taxpayers1.

Resident citizenAn individual whose residence is within the Philippines and who is

a citizen thereofa.

May be a pure compensation income earner under an employer-employee relationship

b.

May solely be engaged in trade/business/professionc.

May both be an employee and engaged intrade/business/profession

2.

Non-resident citizen, Section 22(E)a.

A citizen of the Philippines who establishes to the satisfactionof the Commissioner of the fact of his physical presence abroadwith a definite intention to reside therein.

b.

A citizen of the Philippines who leaves the Philippines duringthe taxable year to reside abroad, either as an immigrant or foremployment on a permanent basis.

c. A citizen of the Philippines who works and derives income fromabroad and whose employment thereat requires him to bephysically present abroad most of the time during the taxableyear.

d.

A citizen who has been previously considered as non-residentcitizen and who arrives in the Philippines at any time duringthe taxable year to reside permanently in the Phils.

3.

Resident alienAn individual whose residence is within the Philippines and who isnot a citizen thereof.When does an alien become a resident of the Philippines?Section 4 of Revenue Regulations No. 2: An alien actually presentin the Philippines who is not a mere transient or sojourner is aresident of the Philippines for income tax purposes. Whether he isa transient or not is determined by his intentions with regard to thelength and nature of his stay. A mere floating intention indefinite

as to time, to return to another country is not sufficient toconstitute him a transient. If he lives in the Philippines and has no

definite intention as to his stay, he is a resident. One who comesto the Philippines for a definite purpose, which in its nature may bepromptly accomplished, is a transient. But if his purpose is of suchnature that an extended stay may be necessary for itsaccomplishment, and to that end the alien makes his hometemporarily in the Philippines, he becomes a resident, though itmay be his intention at all times to return to his domicile abroadwhen the purpose for which he came has been consummated orabandoned.

4. Non-resident alien engaged in trade or business

An individual whose residence is not within the Philippines andwho is not a citizen thereof.He shall be deemed a non-resident alien engaged in trade orbusiness if the aggregate period of his stay in the Philippines ismore than 180 days during any calendar year.

5.

Non-resident alien not engaged in trade or businessAn individual whose residence is not within the Philippines andwho is not a citizen thereof.He shall be deemed a non-resident alien not engaged in trade orbusiness if the aggregate period of his stay in the Philippines doesnot exceed 180 days during any calendar year.

6.

Special employeesAn individual employed by a Regional Area Headquarter ofmultinational corporation, Regional Operating Headquarter of

multinational corporation, Offshore Banking Unit or PetroleumService Contractor

C.

Resident Citizens, Non-Resident Citizens and Resident Aliens1.

Rule on taxability of incomea. Resident citizens

5% - 32% tax on net income from sources within and sourceswithout

b. Non-resident citizens5% - 32% tax on net income from sources within

c.

Resident aliens5% - 32% tax on net income from sources within

2.

What constitute gross income?a. Compensation income

i.

Requisites for taxabilityii.

Doctrine of cash equivalentiii. Inclusions

(1)

Monetary Compensation(a)

Regular salary/wage(b) Separation pay/retirement benefits, not otherwise

exempt(c) Bonuses, 13th month pay and other benefits, not

otherwise exempt(d)

Directors fees(2) Non-monetary compensation

(a)

Fringe benefits subject to tax(i)

Definition: Any good, service or other benefitfurnished or granted in cash or in kind by anemployer to an individual employee(except

rank and file employee)


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(ii)

Special treatment of fringe benefits: Subject to32% final tax on the grossed-up monetaryvalue of the fringe benefits

(iii)Kinds of taxable fringe benefits Housing Expense account Vehicle of any kind Household personnel Interest on loan at less than market

rate(extent of the difference)

Membership fees, dues and other expensesborne by the employer in social and athleticclubs or other similar organizations

Expenses for foreign travel Holiday and vacation expenses Education assistance to the employee or his

dependents Life or health insurance and other non-life

insurance premiums or similar amounts inexcess of what the law allows

(b) Property(c)

Promissory note(d)

Stocks(e) Cancellation of indebtedness, in favor of services

rendered(f)

Premiums paid by the employer on the lifeinsurance policy of the employer

iv.

Exclusions(1)

13thmonth pay and other benefits and payments(2) Fringe benefits not subject to tax

(a)

Benefits granted to rank and file employees(b)

Contributions of the employer for the benefit of theemployee to retirement, insurance andhospitalization benefit plans

(c)

Fringe benefits which are authorized or exemptedunder special laws

(d) Employers convenience rule, as required by thenature of the trade, business or profession of theemployer

(e)

De minimis benefits, benefits relatively of smallamount, limited to facilities or privileges furnishedor offered by employer to his employees merely asa means of promoting health, goodwill,contentment or efficiency of the employees

b.

Gross income from trade, business or professionc. Rental income

i.

Lease of personal propertyii.

Lease of real propertyiii. Tax treatment of

(1)

Leasehold improvements by lessee(2)

VAT added to rental/paid by the lessee(3) Advance rental/long term lease

d.

Income from dealings in property

Types of properties:i. Ordinary assets

ii.

Capital assets, Section 39e.

Capital gains derived from the sale of real property classified ascapital assets, 6%Exceptions:i.

Sale of principal residence, requisitesii.

Sale to the government or any of its political subdivisions,agencies or GOCCs, options

f.

Capital gains derived from the sale of shares of stock in anydomestic corporationi. Listed and traded through the local stock exchange, of

1%ii.

Not listed/not traded through the local stock exchange, 5%and 10%

g.

Passive investment income, and its special ratesi. Interest income, 20% or 7.5%ii.

Royalty income, 20% or 10%iii.

Prizes and winnings, 20% or exemptiv. Dividend income

(1)

Cash dividend, 10%(2)

Stock dividend, exempt(3) Property dividend, 10%(4)

Liquidating dividend, 5% - 32%v.

Share of a partner in the net income after tax of a taxablepartnership, joint account, joint venture or concessions,

10%h.

Annuities, proceeds from life insurance or other types ofinsurance

i.

Pensions, retirement benefit, or separation payj.

Income from any source whatever I can put any type of income, which income is taxable and which

income is not taxable.i.

Forgiveness of indebtedness If it is given because there is service rendered, then it is

subject to income tax. If it is gratuitously given, then it issubject to donors tax.

ii.

Recovery of accounts previously written off If you have a receivable from the customer, and that

customer has been judicially declared as bankrupt, what willhappen to your receivable? It will be written off the books

now. It is no longer a collectible, worthless. Because of

that fact, you are allowed by law to deduct whatevercollectible as an expense. Now if you deduct it to theexpense, what will be the result? You diminish or lower yourincome tax liability to the government. That is the first eventthat took place.

When we talk about recovery, it means subsequent collection.If that amount which you have considered already asworthless and uncollectible, and you have deducted it as anexpense which lowered your income tax liability, such will becollected in the future, for example the said person judiciallydeclared as bankrupt won the lotto and is now willing to payyou, will that payment be taxable? Yes, to the extent it hasbenefitted the tax payer. What is the said extent that

benefitted the tax payer? To the extent that it reduced theincome tax liability of the tax payer.


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MAM TIUs 1stIllustration Sales, Cost or Capital. From your sales, you deduct any

cost you have spent = gross income. And you are allowedas a business to deduct expenses. And youre allowed todeduct collectibles that are already worthless and nettaxable income. This is where you apply your 5 to 32%rate. This will result to your tax due

If in 2005, you have sales of 10,000 and you have capitalof 5,000 so your gross income is 5,000. Your ordinaryand normal expenses is actually 3,000. But during this

year, your customer who owes you 2,000 was judiciallydeclared bankrupt. So you claimed this as your ordinaryand normal expense, this is not something you claimevery year. How much is your net taxable income? 5,000plus the said deductions (in short, subtract them), so youhave zero.

Did the government benefit? No. In 2012, same amount. No improvement in the

business same type of expense. You have a nettaxable income of 2,000. Your debtor suddenlypresented himself and gave you the 2,000 aspayment. Will it be a taxable income in 2012? YES.The reason why it is taxable in 2012 is that you were

benefitted in 2005, resulting to zero taxes. Therecovery of previously written off debts is taxableonly to he extent that it has benefitted the tax payer.

2005 2012

Assets 10,000 10,000

Costs/Ret. Capital 5,000 5,000

Gross Income 5,000 5,000

-Expenses:

Ordinary 3,000 3,000

Bad Debts 2,000

Net taxable income -0- 2,000

x 5% 32% x 5% 32% 2,000

Tax Due -0- 4,000

MAM TIUs Edited Illustration (when it will not benefit the taxpayer) Lets go back to 2005. If your ordinary expense is 5,000

and you have 2,000 as bad debts, it still results to zerotax. In 2012 you recovered, will it be taxable? No. even ifyou have not deducted the bad debts, you will still havezero tax.

2005 2012

Assets 10,000 10,000



-Expenses:


Bad Debts -0- -0-


x 5% 32% x 5% 32% 2,000

Tax Due -0- 3,000

MAM TIUs Illustration of Partial Lets go back again to 2005, you have ordinary expenses

of 10,000. If you had no bad debts to deduct, you haveto pay 1,000 (taxable. But since you have 2,000 to

deduct, you pay zero. If you recover the 2,000 in 2012,will it be taxable as a recovery? Yes. To the extent of1,000 only (extent that you benefitted)

2005 2012

Assets 10,000 10,000



-Expenses:


Bad Debts 2,000 -0-


x 5% 32% x 5%

32%

1,000

Tax Due -0- 2,000

Why would a recovery of account previously written offbe subject to defect? subject to income tax? Because he benefitted and it was deducted in the

previous year. If the writing off of accounts receivable benefitted the

taxpayer on the year of write off, it will be taxable ifsubsequently recovered but the amount subject to taxwill only be the extend of how much the taxpayer wasbenefitted.

If he was benefitted in full for the amount, then fullamount will be subject to income tax BUT if it benefittedbecause the taxpayer has zero income liability despite

the absence of that written off account then anysubsequent recovery will not be taxable and the thirdrepresentation we have was if it partially benefitted, ifthe taxpayer wherein half of it or portion of it lower thetax liability then to that extent it will be subjected to taxfrom the time it is recovered.

iii.

Receipt of tax refunds or credit How about tax refunds? What happens when you are

refunded by the government of taxes youve previouslypaid? It means that you have paid more than what is required

to pay.And when you are refunded you are restituted withmoney of the tax credit certificate.


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Will that be receipt of money of the tax creditcertificate during that year received be subject toincome tax? Yes.

Why would it be taxable if its only a return of the paymentyou have excessively paid or wrongfully paid? Lets say yourliable for the government with 1 million, you paid 2 million.Then you realized that you overpaid two years later you wererefunded of the one million overpayment. Will that receipt of1 million be subjected to income tax?

This would still require the application of the tax benefitrule to the extent that the taxpayer has been previouslybenefitted by the payment of tax, subsequent recoverywill be taxable.

After gross income, a taxpayer who is engaged in tradebusiness or professional whether individual or corporate isallowed and says which expenses includes in the taxexpenses. So if you have expenses of three million and youpaid real property tax of two million that brings down youtaxable income to 0. If you realized later on that the taxestate or real property tax has been excessive and it shouldonly be 1 million you refund to the and the subsequent refundof one million will be subjected whether a refund will betaxable in the year of receipt the answer will be based on tax

benefit rule Has for payment of the tax in the previous years

deducted from gross income and benefitted thetaxpayer. In this case, has the taxpayer beenbenefitted? Yes So therefore the 1 million is fully taxable because the two

million composed of 1 million real property tax and 1million overpayment actually reduced to zero. But if theexpenses was already at 4 million and he deducted taxesof million wherein 1 million is correct and the other onemillion is excessive payment subsequent recovery of thisone will not be taxable because 1 million payment heredid not have the company position whether it wascorrectly one million to zero or two-million to zero.

And if it was only 3.5 million and 2 million was deductedin taxes.

Will the subsequent refund of the 1 million by thegovernment be taxable? I believe only to the extent of 5,000. Why because without the deduction of taxes you would

have taxable income of 1.5 million minus the 1 millioncorrect taxes still taxable income of 500,000 but becauseyou have overpaid 1 million of taxes and half of thatoverpayment helped the company in reducing the incometo zero level only have benefitted the company therefore

If what you have overpaid are income taxes, will thesubsequent refund of the overpaid income taxes betaxable?

You have to determine what type of tax has beenoverpaid. If the type of tax is not a deductible expense

such as income tax (you cannot deduct income tax incomputing income tax) (other non-deductible taxes:donors tax, estate tax, VAT), subsequent refunds cannever be subject to tax because it has never beendeducted from your gross income.

Refunds of deductible taxes such as real property tax,community tax, will have to be examined under the taxbenefit rule (taxable if it has benefitted the taxpayer in thetaxable year it has been paid) in order to determine whethersuch refunds are taxable.

iv.

Income from any source whatever

D. Non-Resident Aliens Two classes:

1. Non Resident Alien Not Engaged in Trade or Business and Must not have stayedin the Philippines for more than 180 days

(continuous or aggregate), regardless of activity undertaken. (180or less)

2.

Non Resident Aliens Engaged in Trade or Business. Must have stayed in the Philippines continuously or for an

aggregate period of more than 180 days, regardless of activityundertaken. (181 and above)

Example: Mr. X, a tourist, has stayed in the Philippines for 7 monthswithout earning any income except that he won a raffle prize in SM. He

will be treated as a NRA Engaged in Trade or Business, even if he didnothing, because he has stayed in the Philippines for more than 180days. The determining factor is the number of days stayed, not theactivity undertaken by the alien. The winnings in the raffle draw will then be subjected to the

withholding tax on prizes and winnings at 20% because SM iswithin the Jurisdiction of the Philippines and can be compelled towithhold.

IF he stayed only for 180 days, then FWT on his winnings will be25% (because Mr X is a NRA Not Engaged in Trade or Business).Its up to SM to determine the status of Mr X.

1.

Engaged in trade or businessa.

Rule on taxability of income5% - 32% tax on net income from sources within Taxed at 5%-32% of his NET income within the Philippines (NET

income because he is allowed certain deductions). NRAs Engaged in Trade or Business are required to file their

Income Tax Returns at the end of the year, because they need tocollate deductions from their gross income.

b. What constitutes gross income?See previous discussion under CSubject to the same tax rates as a citizen and a resident alien,except for:i.

Cash dividends, 20%ii. Property dividends, 20%iii.

Share of a partner in the net income after tax of a taxablepartnership, joint account, joint venture or concessions,20%

What constitutes gross income?

i.

Cash dividends, 20%ii. Prperty dividends, 20%


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iii. Partners share, 20%

NRAs Engaged in Trade or Business have generally the same taxrates we previously discussed for Citizens and Resident Aliens,except for DIVIDENDS.

Non Resident and Resident Citizens are taxed at 10% finalwithholding tax for cash or property dividends that they receiveand 10% on the partners distributed share in a taxablepartnership. The same dividends received by a NRA Engaged inTrade or Business, however, will be subjected to a higher rate of20% (whether cash, property, or partners share. Stock dividends,

however, remain to be not taxable)2.

Not engaged in trade or businessa. Rule on taxability of income

25% tax on gross income from sources within NRAs Not Engaged in Trade or Business are taxed at 25% of gross

income from sources within the Philippines. Gross = not alloweddeductions

If a non-resident alien not engaged in trade or business was ableto sell personal belongings, clothes, jewelry. Let us say, a non-resident alien who has stayed in the Philippines for less than 180days, he some pieces of jewelry for his own use but decided to sellit for a higher price.

Will the entire selling price be subject to the 25% percenttax rate?

No, what is subject to 25% income tax is the gross income-selling price minus capital/cost. In our previous discussions, we said that an individual, from a

resident citizen to a non-resident alien engaged in trade orbusiness is taxed at 5-32% on their net income which meansgross income less expenses. In the case of NRA-NETB, they aretaxed at their gross income without the benefits of expensedeductions. Gross income does not equate to selling price unlessof course, what he (NRA-NETB) is engaged in the rendering ofservice because in rendering of service, you do not have tangiblecost to deduct from your gross income. Gross income simplymeans that the individual is not allowed to deduct expenses. So inour example, if you sold the jewelry for 2M (which you bought for1M), the gross income is 1M. If you belong to the classification ofindividuals who are taxed at their net income, then you will be

allowed to make deductions such as the commission you gave tothe person who looked for a buyer, etc.

Would a NRA-NETB be required to file an ITR at the end ofthe year? No. The nature of the 25% tax is a final tax. So, anyone who

pays an NRA-NETB is obligated to automatically withhold 25%and remit it to the government. So whatever an NRA-NETBreceives is net of the 25%, it is only 75% having subjected totax with finality. Hence, the individual is not required to filean ITR at the end of the year.

The reason why he is subjected to final tax is because he is notactually within our taxing jurisdiction, he is a transient.

b. All items of gross incomeSubject to 25% final tax, except for (which shall be the same

as citizens & resident aliens):i. Gain on sale of shares of stock in any domestic corporation

ii.

Gain on sale of real property classified as capital assetlocated in the Philippines

What if the NRA-NETB earns income through royalties anddividends, what is the taxability of such income? Section 25 (b) NIRC

Nonresident Alien Individual Not Engaged in Tradeor Business Within the Philippines.- There shall belevied, collected and paid for each taxable year upon theentire income received from all sources within thePhilippines by every non-resident alien individual bot

engaged in trade or business within the Philippines asinterest, cash and/or property dividends, rents salaries,wages, premiums, annuities, compensation,remuneration, emoluments, or other fixed ordeterminable annual or periodic or casual gains, profits,and income, and capital gains, a tax equal to 25% ofsuch income. Capital gains realized by a non-residentalien individual not engaged in trade or business in thePhilippines from the sale of shares of stock on andomestic corporation and real property shall be subject tothe income tax prescribed under subsection (c) and (d) ofSection 24.

So except:i. Gain on sale of shares of stock in any domestic

corporation (5% on first 100K, 10% on succeeding, STT)ii.

Gain on sale of real property classified as capital assetlocated in the Philippines (6% of Gross Selling Price)

Now you may ask if a non-resident alien may own real propertiesin the Philippines. Yes. They can own condominium units as wellas own parcels of land by right of succession.

E.

Special Employees Who are special employees?

Special employees are those employees employed in specialcorporations and special corporations are the following:(1)

Regional Area Headquarters (RAHQ) of multinational corporations,defined in Sec. 22

(2) Regional Operating Headquarters (ROHQ) of MultinationalCorporations, defined in Sec. 22

(3)

Offshore banking units(4) Petroleum service contractors

1.

Nationality and position Are special employees alien employees or Filipino employees?

The general rule is only alien employees occupying managerialand technical positions can be special employees. Only in caseswhere no alien individual can fill up that requirement would aFilipino individual be allowed to become a special employeesubject to the preferential, special tax rate of only 15%.

So, would you agree with me if I say that all employees of aRegional Area Headquarter of a Multinational Corporations issubject to 15% tax on their compensation income? No, only managerial and highly technical positions and these

positions should belong to the top management.

Who are qualified (in relation to Filipinos)? (Revenue Memorandum Circular No. 41 2009)


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Filipinos employed by ROHQs or RHQs in a managerial or technicalposition shall have the option to be taxed at either 15% of theirgross income or at the regular income tax rate on taxablecompensation income.

2.

Taxability of income15% preferential tax Filipinos exercising the option to be taxed at 15% preferential rate for

occupying the same managerial or technical position as that of an alienemployed in an ROHQ or RHQ must meet all the followingrequirements:

a.

Position and Function Test- The employee must occupy amanagerial or technical position and must actually beexercising such managerial or technical functions pertaining tosaid position;

b. Compensation Threshold Test- the employee must havereceived, or is due to receive under a contract of employment agross annual taxable compensation of at least 975,000.00.

c. Exclusivity Test-The Filipino managerial or technical employeemust be exclusively working for the RHQ or ROHQ as a regularemployee and not just a consultant or contractual personnel.Exclusivity means having just one employer at a time.

The Filipinos is not required to be both managerial AND highlytechnical. It can be managerial OR highly technical. That person mustoccupy top management still so technical support, not a special

employee. Insofar as the Filipino special employees are concerned, there ratesactually is not exclusive 15%, they have the option to be taxed at15%. So the default really is Filipino employees employed by theseheadquarters are subject to 5-32% and under the circular they willhave their option to be taxed similarly as alien employees at 15% ifthey have satisfied the three test:1.) Position and function test if they occupy managerial or highly

technical position, not only by designation but rather, the actualfunction itself.

2.) Exclusivity test he must be employed by that headquarter orany of the four special corporations as an employee not as aconsultant, and not concurrently be an employee of anothercompany. Otherwise the Filipino will be taxed at 5-32%.

3.)

Compensation threshold test that only Filipino employees thatwill have an annual compensation income of at least 975,000php(exclusive of retirement pay, separation pay etc.) will enjoy the15% (much better than the 5-32%, because 975k is alreadysubject to 32%, 15% is lower)-but if anytime during the year you fall below 975,000 php, fromthat point forward you will be subjected to the 5-32%.

This only applies to Filipino special employees. Alien employeesalways 15%

3.

Source of incomeSalaries, honorarium, wages, emoluments, remunerations andother similar income So the tax rate of alien employees, Filipino employees would be

15% on what type of income? Iincome from employment which are salaries, wages,

honorariums, per diems, which are related to such employment.

All other income outside that employment will no longer enjoy the15%.

F. Individual Taxpayers Exempt from Income Tax1.

Minimum wage income earners There is no one statutory minimum wage for the entire Philippines, it

depends per region. Ex. Cebu city and Cebu province have differentstatutory minimum wage.

If you have an employee in your company here in Cebu who isreceiving 305php per day and he subsequently assigned to

another branch of your company in some parts of the provincewhere the minimum wage is only 295php which is 10 pesolesser than the statutory minimum wage here in Cebu city, willhe be subject to tax? Will you be obligated to withhold taxfrom the employee? YES. Where an employee is assigned to an area where he is

receiving a salary of more than the statutory minimum wage inthat area where he is assigned he will already be subject to tax,the employer is already required to withhold tax. becausestatutory minimum wage is determined in the area where he iscurrently employed or assigned, in that case even if there is nochange, no increase in his income still, the area determineswhether he is earning the minimum wage or not.

But the income prior to the assignment or transfer is still exempt

because that time he was still considered a minimum wage incomeearner. If the other way around happens, the employee is earning 305php

here in Cebu city and later assigned to Manila where the minimumwage is more than 305, there is no question that the employee isexempt from income tax. But there is a labor issue that you wouldhave to increase the wage of the employee to comply with theminimum wage in Manila.

If you give your employee 306 pesos a day (Cebu City Satutoryminimum wage 305php) is he subject to income tax? YES, even if it is a mere peso difference. Because he is already

beyond the minimum wage. Other incomes by the minimum wage earner received from you as

their employer, will it be exempt still? YES, any overtime pay, holidaypay, night shift differential, hazard pay, or those what we call premium

payments are exempt from tax and is still part of their minimum wage. Thankfully there has already been a revision, because prior to RA 9504

any overtime pay received by the minimum wage earner alreadywithdraws him from the category of minimum wage, which is unfair.

Other incomes such as commissions and bonuses beyond the 30,000exempt bonus will already revoke the minimum wage income earnerfrom the category.

If you are a minimum wage income earner earning 305 pesosper day, no other source of income from your employer but youexercise your profession separately. So you have a professionalincome plus your minimum wage from your employer, will younow be subject to tax? This is what you have to remember, the law provides under sec.

24 that resident citizens, non-resident citizens, and resident aliens

are taxed in their income on all their taxable income apart frompassive incomes, and capital gains from 5-32% except if it falls


7/33TAX PREFINALSJEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, KRISTEL, RIZA, FRANK, PATRICIO, ANTHONY, KIM, BARBARA, KZ | 7

under the minimum wage. Now in that case although he is earningminimum wage income, he is earning additional income. He willhave to declare his minimum wage income as part of hisprofessional income at the end of the year (collate as the 5-32%tax relates to all income earned). But because insofar as theemployer is concerned, he is only giving out minimum wage, theemployer cannot withhold, the employee remains exempt from taxinsofar as his relationship with his employer is concerned becausethe employer cannot withhold tax on an income beyond itscontrol. The professional income is no longer within the control of

the employer. But on the part of the employee he have toocombine his income at the end of the year including that receivedfrom the minimum wage of employment which will result inincreasing or elevating the tax bracket prescribed by law.

Another example, Employee earns 305 from employer A, and another305 pesos from employer B. Should he be withheld of taxes from his employers or by

any of his employers? No, he remains exempt, as he is still receiving the minimum

wage as far as the employer is concerned. Because theemployer has no control over the other income earned by theemployee from another employer.

Is he liable for income tax? No, the total of his income is more than the statutory

minimum wage The employer is bound with his contract with the employee. It isnow with the employee to combine his 2 incomes from the 2different jobs at the end of the year and pay the taxes upon filingfor income tax.

Remember: The exemption from tax by a minimum wage earner applies only

to income earned from employment. Income derived from theexercise of trade, business or profession regardless if below theminimum wage is still subject to tax unless that income (fromtrade, business or profession) will never exceed your personal andadditional exemption.

TP is not required to report his income if aside from his minimum wageincome, what he earns is a passive income taxed with finality Example:

If an EE earns minimum wage + 1M as interest income froman inheritance:

ER cannot withhold income tax since his wage f rom employment is stillminimum wage. And EE is not required to file an ITR at the end of theyear since his other income (interest) is a passive income taxed withfinality or subject to FWT (this does not form part of the gross incomesubject to 5-32%) BUT if an EE earns minimum wage + 1m as an interest income

from 5/6: The interest income here is not a passive income. Interest income

to be passive must be from financial institutions. In this casewhich is already lending

a. Statutory minimum wage, definedb.

Minimum wage earner, defined

c.

Income also subject to tax exemption:i. Holiday pay

ii.

Overtime payiii.

Night shift differential payiv.

Hazard pay2. Senior citizens

Who are senior citizens? Those aged 60 years old and above. But not all senior citizens are

exempt from tax, must meet the qualification.a.

Qualifications earning MINIMUM wage from EMPLOYMENT (the applicable

minimum wage in the area) OR

earning not more than 60K income annually (from whateversource)

SO that if Senior citizen earns 70k annually as minimum wagefrom employment with XYZ corporation, he is still exempt fromincome tax since it is still belongs in the minimum wage category.Minimum wage depends on the rate applicable on the area.

b.

Exemption exempted also to the:

VAT, 20% discount on other purchases , 5% electric andwater bills

3. Exemptions granted under international agreements There are plenty of exemptions granted under tax treaties. Example is

when an individual comes to the country as a trainee so long as doesnot earn income for more than this amount of dollars, etc exempt from

income tax. (No detailed discussion)

G. Kinds of Deductions1.

Basic personal exemption each individual allowed basic personal exemption of 50k; in case of

married individuals where only one of the spouses is deriving grossincome, only such spouse shall be allowed personal exemption

a.

Php50,000 for every individual, except non-resident aliens notengaged in trade/business regardless of civil status, married or not

b.

Php50,000 for non-resident aliens engaged in trade/businesssubject to rule of reciprocity reciprocity means that the foreign country where the NRA etb

is a citizen grants exemptions to Filipinos not residing there butdoing trade or business therein. The amount granted should not

exceed the amount of personal exemptions allowed under ourlaws

c.

Change of Statusi.

Death of taxpayer during the taxable year

Kind ofExemption

RC NRC RA NRAetb NRAnetb

PersonalExemption(50k)

Yes Yes Yes Based onreciprocity:allowed ifcountry ofdomicile of alienallows the samepersonalexemption to

Filipinos notresident on that

No



country

*If US allowsexemption of 2kUSD(84PHP) toFilipinos

In the Phils that alien fromthe US only

allowed up to50K*If US allowsexemption toFilipinos 1KUSD (42K PHP)

In the Phils that alien onlyallowed 42K PHP

WE allowpersonalexemption of

50K or w/c everis lowergrantedby the otherstate

AdditionalExemption(25K PHP foreveryqualifieddependentnot exceeding4dependents)

Yes Yes Yes No

Reciprocity Ruleapply only to thePERSONALexemption.Since notexpecteddependents arein the Philippines

No

2.

Additional exemptiona.

Php25,000 for qualified dependents of individuals, except non-resident aliens

b. Maximum allowed, four(4) qualified dependentsc.

Who is a qualified dependent? The legitimate, illegitimate orlegally adopted child/ren. So to illustrate, if Mr. X has an Illegitame son that lives with the

mother, he is fully supporting the child, not more than 21 years ofage, not married and not gainfully employed, can Mr. X claim theadditional exemption?

Dependent means legitimate, illegitmate or legally adopted child,living with the tax payer, chiefly dependent upon him for support,not more than 21 years of age or even beyond so long as he isincapable of self-support because of mental or physical defect, not

married and not gainfully employed, all of these requistes must be

met so that the tax payer may be allowed to claim the additionalexemption of P25,000.

Living with the tax payer, temporary absence is allowed, some areyou are not living with your parents, chiefly dependent forsupport, that is why if Mr. X and Mrs. B has two children, onesupports the other, this one supports the other child, even if allthe requisites are met, no one, not one of them can claim thededuction because, Mr. X is supporting a child living with themother and the mother is supporting a child living with the father.Not all the requisites are met, not allowed to claim, but that is

only for discussion purposes in real life it is not necessary to tell. Then can you claim additional exemption for taking of a

senior citizen? If you are a benefactor of a living citizen,meaning you are the one with whom the senior citizen isliving, chiefly dependent on you for support, of course notthe 21 years of age, 60 years of age, at least no gainfulemployment, can you deduct P25,000? No. For P25,000 to apply, it only applies to a qualified

dependent. A qualified dependent under RA 9504 refers onlyto legitimate, illegitmate or legally adopted child. So even ifyou are taking care of a senior citizen, it is no longerbeneficial for tax purposes, before it was because it ischanging your status from single to head of the family,increasing your personal exemption. But with the personal

exemption fixed at P50,000, regardless of one's status, andadditional exemption refers only to children. Now, who by default should claim the additional

exemption? Student: The husband Why do you think it's the husband?

Probably because (?)the wife(?)it is more beneficial todeduct such exemption from the higher income earner.

So additional exemption can be deducted by the husbandunless? Assuming they are both earning income, unless the husband

waives his right to claim even so he has to file necessarydocuments, inform his employer, the employer of his wife andmore importantly the BIR.

If your wife has given on december 31, 2011, in filing your tax return

for 2011, can you claim additional exemption in full?

Yes. (Student answer in audible)d.

Qualifications of a dependente. Change of Status

i.

Additional dependent during the taxable year If your wife has given on december 31, 2011, in filing

your tax return for 2011, can you claim additionalexemption in full? Yes. (Student answer in audible)

You know the concept of giving additional exemption ofP25,000 for each child is for that amount not taxable is to inanswer for the needs of having such chid, but your child wasborn on the last day of the taxable year, can you still claim

the exemption on 2011 or can you begin only to claimsuch exemption that next year?



Attorney's comment: Jibberishly inaudible.ii.

Death of dependent during the taxable year If Mr. X losses his child on January 1, 2012, can he still

claim additional exemption for 2012? Yes because, according to the law on change of status, it

is provided that it is should interpreted in favor of thetaxpayer, any change in the status, if it is the death ofthe taxpayer, or any other change, even if it is in thebeginning of the year is considered during the entireyear, he is allowed for that exemption. If a child is born

even on the last day of the year it's as if for the entireyear, he has that exemption. If a child gets marriedduring the year, he will still be considered, for one lasttime, as an exemption, so long as he is no yet over 21years of age.

iii.

Gainful employment of the dependent during the taxableyear So any change in the status, gainful employment, birthday

(21), death, birth, marriage of the dependent, any change ofstatus will always be interpreted in favor of the taxpayerclaiming the exemption. Anyway it will not be any loss to thegovernment because there is always a limit in time. Diba sadependent is only up to 21 years of age even if can claim itduring the year, it will still end on 21.

iv.

Dependent became 21 years of age during the taxable year A child more than 21 years of age, can the parents still

claim for additional exemption? So even if more than 21 years of age, if he is

incapacitated, mentally of physically, you will still beconsidered as a dependent. But if he is married, morethan 21 years of age, having gainful employement, he isno longer a dependent.

f. Premiums on health and hospitalization insurance What are other exemptions granted to individuals?

Student: inaudible Let me ask you, would an individual taxpayer, resident

citizen, be allowed to claim personal exemption regardlessof the type of income that he earned? Otherwise stated,can a resident citizen claim personal exemption in all cases,

without regard whether he is earning purely compensationincome, income from business, or a mix of both? Yes. The personal and additional exemptions, including

premiums on health insurance, is available to all individuals,regardless of the type of income the individual is earning.

What is limited only is the claiming of itemized deductions andoptional standard deductions, which is only available totaxpayers who are engaged in trade, business or professionalbecause itemized business connotes business expenses.

If you are an individual engaged in the exercise ofprofessional even if you are not an employee, you mayclaim only personal or additional or premiums on healthand hospitalization insurance or itemized or optionalstandard deduction.

But if you are purely an employee without any businesstrade or profession, you may only claim personal exemption,

additional exemption if you have a child and premiums andhospitalization insurance. Just don't forget that itemized andoptional will only apply if there is trade, business or profession.Not only that, the premiums on and hospitalization insurance.

What are the requirements for an individual to claimbusiness expense or deduction?1. Premium payments made more than P2,400 per annum or

more than P200 per month can only be deducted under theamount of P2,400.

2. The salary of the family must not be more than P250,000 a

year. If you are single, that is the salary combined by thefather and mother and the taxpayer. If you are married, thesalary combined that of the husband and the wife. Verydifficult to claim if your income is more than P250,0000.

3. The spouse claiming the deduction is the one who will claimthe exemption on premiums on health and hospitalizationinsurance.

Limitations:i.

Must not be more than Php2,4000 a year (i.e., Php200 amonth)

ii. The family must have an income of not more thanPhp250,000 a year

iii.

The claimant must be the spouse claiming the additionalexemption

g.

Itemized business expensesi.

The ordinary, necessary and reasonable expenses incurredin relation to trade, business or profession, as enumeratedin Section 34 of the Tax Code

ii.

Default claim of expensesTo be discussed extensively in Corporate Income Taxation

h.

Optional standard deductionsi.

A standard deduction available to individuals andcorporations, except non-residents, in an amount notexceeding forty percent (40%) of the gross income, in lieuof the itemized business expenses.

ii.

When elected, irrevocable for the taxable yeariii.

When elected by the general professional partnership, theindividual partners shall use optional standard deduction inits individual income tax returns

What is the difference between itemized deductions andoptional standard? The difference between itemized(?) is when you deduct each

and every expenses whether related to trade, business orprofession. It is supported by official receipts and invoices. Itis the default type of expense without any invitation that youwould wish the optional standard deduction, automatically itis expected that you itemize your expenses. Any amount toall types of taxpayers who are taxed on their net income. Forthe 5 individuals that we have mentioned until NRA-ETB aretaxed at 5%-32% net income, they are allowed to claim theitemized expenses.

What may be Optional Standard deduction may be in lieu of theItemized deducitons if you cannot support your expenses with

official receipts, invoices, and other records. It is an arbitraryamount 40% with any question as to what type of expenses these



are - 40% of your gross income. Once chosen in the first quarterremains irrevocable during the entire year. Who are allowed toclaim optional standard deductions? Both individuals andcorporations except the non-residents. For the 5 individuals wehave stated there, though we said 4 can claim itemized deductionsbut for optional only 3 can claim except non-resident alien. Sothe 2 last items under non-resident engaged in trade and notengaged in trade are not allowed to claim optional standarddeductions.

H. Entitlement to Deductions

1.

Pure compensation income earner under an employer-employeerelationshipa. Basic personal exemptionb.

Additional exemption/sc. Premiums on health and hospitalization insurance

2.

Solely engaged in trade/business/professiona.

Basic personal exemptionb. Additional exemption/sc.

Premiums on health and hospitalization insuranced.

Business expensesi. Itemized deductionsii.

Optional standard deductions3.

Mixed income earnera. Basic personal exemptionb.

Additional exemption/sc.

Premiums on health and hospitalization insuranced. Business expenses

i.

Itemized deductionsii.

Optional standard deductions

I.

Estates and Trusts Estate is a mass of properties left by the deceased person Trust is right to property whether real/personal held by one person-trustee

for the benefit of another person-beneficiary

... Apartment units subject to rent, etc. Any income that it

generates will be subject to income tax treated just like anindividual tax payer. So estate taxation is different because

estate taxation under the Tax Code is a tax on the estate leftby the decedent. It is not a tax on the income.

Why do you think estate taxation would not apply tothe entire estate just the income that it generates? It's because estate tax which is a transfer tax because of

the privilege of receiving property upon death is only a taxon the gross value of the estate at the time of death. So itdoes not consider any income or properties generated bythat estate after death. So there is a reckoning point - atthe time of death estate taxes will be computed or the

value is the value at the time of death. So any increases ordecreases will not affect estate taxation. That is why if itearns income, it will be subjected to income tax.

What is the tax rate on estate income taxes and trustincome taxes? Because they are treated similarly individual taxpayers, it

will be the same 5%-32% tax rate based on the NETINCOME. It is subject to deductions. They aredeductions allowed including exemptions.

ESTATE INCOME TAXATION What type of settlement will be subject to estate

income taxation? It's when the estate is under administration and

judicial settlement. If the estate is underextrajudicial settlement, no estate income tax is duerather any income earned by the estate will betaxable in the hands of the estate or it may be antaxable unregistered partnership.

Let us assume that this were (?). (ILLUSTRATION) If Mr.X dies today which is Sept. 15. In 2012, there will be 2taxpayers. There will be Mr. X during his lifetime, anyincome, he will have to file separately, of course, nothimself but his executor or administrator would file anIncome Tax Return for his income during his lifetime. Andafter his death, another Income Tax Return will be filedby the estate of Mr. X. And this will continue Dec. 31,2013, another estate income tax return will be filed untilthe estate is judicially settled, distributed to the heirs.So in 2012, there are 2 taxpayers subject to the same

tax rate of 5%-32% based on the amount of incomegenerated.

Will Mr. X, as an individual, have to claim thebasic personal exemption? Yes, P50,000 as an individual. Will be allowed

to claim the additional exemption for each

qualified dependent that he has - qualifieddependent only refers to a legitimate,

Mr. X5%-32%

File -ITR

BPE=50KAE=25K (4) Estate

5%-32%

BPE=20KAE=0

ITREstate

Jan. 12012

Sept. 15 Dec. 31 Dec. 312013

ESTATE

Administrator/Executor

heirs

Estate

Estate Tax-

Transfer tax

INCOME

INCOME

TRUST

Grantor/trustor

TRUST

INCOME

INCOME

Fiduciary/trustee

beneficiary



illegitimate or legally adopted child excludingbrothers and sisters, excluding parents,excluding senior citizens. So, he can claimassuming he has qualified dependents notexceeding 4.

How about the estate? In filing the estate taxreturn, will it be allowed to take a personalexemption? Yes or No. Yes

Of how much will you be allowed to claim a

basic personal exemption? P20,000.

Additional exemption for each qualifieddependent? An estate does not have a child.

The reason why it is P20,000 basic personalexemption is because when the Tax Code of 1997,R.A. 8424 was enacted, Sec. 62 provide for theexemption available to estates and trusts which isP20,000, included into the exemption granted tosingle individuals. When R.A. 9504 was enacted in2005, if you notice the heading, it amended certainsections without including Sec. 62 of the Tax Code.And the P50,000 exemption refers to only individualtaxpayers. Estate is treated as an individual taxpayerbut not an individual. So in cases of exemption, weconstrue strictly against the taxpayer. So withoutany law amending particularly Sec. 62 of R.A. 8424,then you can say that it should only be P20,000personal exemption. Admittedly, it cannot beallowed any additional exemption to a child.

So what would comprise the income or grossincome of an estate? We said the income of an estate should be during the

year. Let us assume that for the remainder of 2012when Mr. X died, his estate earned an income ofP100M from rent or rent income.

How much would be the taxable income less theexpenses? It is just like a business when you are renting

personal properties less the basic personalexemption of P20,000. But if there are distributions

to the heirs during the year, say for example, thereare 5 heirs and the income of P100M, 50 or half of itwas distributed to the 5 heirs, P10M each, will theP100M be taxable, let us say there are no expensesto make the example simple. No expenses. Youonly deduct the basic personal exemption.

Will the entire gross income be taxable or wouldonly be the P50M less the basic personal exemptionduring the year? You have read through the outline until the end, it

provides there deductions are allowed to the extentof any distributions of the income made during theyear. But it does not mean that the income willescape income taxation. The income that has been

distributed to the heirs will be taxable in the handsof the heirs. So what will be taxable to the estate is

ESTATE

Administrator/Executor

Income

ESTATE

Income

2012

20135 heirs 100M 100M 100M Entirely deductible,

cannot deductdistribution from2012 income

Distributed 10 M toeach heir

50M Assuming noexpenses

-> *if distributed toheirs 2012 incomein 2013, nottaxable, subject

already to tax

50M 20K 20K

Yes taxableestate



only that which is left, the P50M less the P20,000basic personal exemption and the P50,000distributed during the same year will be taxableseparately in each to every year, not less thepersonal exemption that they can claim - theadditional exemption.

The income that has been distributed to the heirs willbe taxable. What is only taxable to the estate is thatwhat is left, 50M less 20k basic personal exemption.If the 50M will be distributed during the same year,

will be taxable separately 10M each to every heir, ofcourse less the personal exemption that they canclaim.

So what if no distribution is made? The entire gross income less expenses will be

taxable in the hands of the estate. If in the followingyear, 2013, that will be distributed in the hands ofthe heirs.

Will it be taxable in the hands of the heirs? In 2012, no distribution was made, assuming no

expenses but we can claim 20k personalexemption. Will the entire 100m be taxable less the20k? Yes, taxable and the taxpayer is the estate. If in

2013, the estate earned another 100m and noexpenses but deduct 20k. Distribution were madecoming from the 2012 income, 50m was distributed.Is the distribution 50m deductible to income earnedin 2013? No, because it did not reduce the income in2013 and it is a different set of income.

Will the distribution of 50m coming from the 2012income be taxable in the hands of the heirs?(Distributed in 2013) No, because it has already been subjected to tax in

2012. It's taxable in the hands of heirs if thedistribution is from the current income. Diba theentire 100m was already tax. You have to look at iton a yearly basis.

What is prohibited, no distribution of the estate will be

made until and unless the estate taxes w ill be paid. If theestate will not be paid of estate taxes, this will not bedistributed to the heirs. What we are talking right now isthe distribution of the income.

One the judicial settlement is terminated at one point,then we no longer have an estate to look into. We haveto look into whether the heirs have partitioned theincome. If there is no partition made, there is a co-ownership made. As a general rule, co-ownership is nottaxable if the purpose is only for the common enjoymentor preservation of the property, but once there issubstantial investments and improvements, then it willbe a partnership and taxable as a corporation.

What if it was not judicially settled?

If a parcel of land left, not judicially settled andearning income but distributed to the heirs

every time. The distribution will be taxable inthe hands of the heirs. We are not looking it asan estate left nor an unregistered partnership.The distributed income will be subject to 5-32%.We will not have any estate income tax return.At the time of death, there will only be oneincome tax return and that will only be of thedecedent for his income during his lifetime.

TRUST Only receive it at the time of emancipation or age of

majority. It's not really that popular here in thePhilippines. Trust when earns income is generally taxable similar to

an income generated by an estate, except for that whichis provided in number 2 of the outline. When the trust isformed in favor of the employees which is really apension, stock, bonus or profit sharing plan for thebenefit of some or all of the employees. It shall beexempt from tax.

1.

ApplicationIncome tax shall apply to the income of estates or of any kind ofproperty held in trust.a.

Income accumulated in trust for the benefit of unborn orunascertained person/s with contingent interests and incomeaccumulated or held for future distribution under the terms ofthe will or trust

b. Income which is to be distributed currently by the fiduciary tothe beneficiaries, and income collected by a guardian or aninfant which is to be held or distributed as the court may direct.

c. Income received by estates of deceased persons during theperiod of administration or settlement of the estate

d.

Income which, in the discretion of the fiduciary, may be eitherdistributed to the beneficiaries or accumulated

2.

ExceptionEmployees trust which forms part of a pension, stock, bonus orprofit-sharing plan of an employer for the benefit of some or all ofhis employees shall be exempt from income tax:a. If contributions are made to the trust by such employer, or

employees, or both, for the purpose of distributing to such

employees the earnings and the principal of the fundaccumulated by the trust in accordance with such plan; and

b.

If under the trust instrument, it is impossible, at any time priorto the satisfaction of all liabilities with respect to employeesunder the trust, for any part of the corpus or income to be usedfor or diverted to purposes other than for the exclusive benefitsof the employees.

That includes retirement funds if it is really addressed in favor ofwhom - the employees. So when the corporation creates a trust infavor of its employees for retirement or pension for the future, there isone juridical person who will hold the trust in favor of the employees,it may be a bank, that what we call trust-passing or it may be aninsurance company and that trust is entirely a separate juridical entityfrom the corporation. So any outflow of money from the corporation

to that trust will only be considered as a permanent outflow. It will


13/33


not redound to the benefit of the company. For the trust income to beexempt, there are 2 requirements:1.

The contribution are made either to the employer or employees orboth and its purpose of distributing such earning to the employeeand

2.

It is not to be diverted for purposes of other than for the exclusivebenefit of the employees

If the requirements are not met, then the income from such trusteven if for the employees will be taxable.

But if the company creates a retirement fund that is not managed by a

trust, then, it is not a separate entity. It still forms part of the assetsof the company. Any income will be taxable.However, any amount actually distributed to any employee ordistributee shall be taxable to him in the year in which sodistributed to the extent that it exceeds the amount contributed bysuch employee or distribute. So there are 3 parties: the grantor-trustor, the trustee and the

beneficiary. We are talking of the income that is taxable in the hands of whom -

the trustor, trustee or beneficiary? If the trust that has been created is a revocable, meaning

revocable in favor of the grantor anytime, then it is taxable in thehands of the grantor. It will not be considered as a separate trustbecause it is revocable. What we are considering here, (?) is thetype that is a irrevocable trust, taxable in the hands of thetrustee-fiduciary. But when there are distributions of the trustincome for the beneficiary during the year, it will be treatedsimilarly as the distributions we have discussed early on. So ifpart, talking of a irrevocable trust, if part of the income isdistributed to the beneficiaries during the year, if such income wasearned during the year, it will be allowed as a deduction only thenet that has been left or the remaining amount that has been leftwith the trust is taxable and what was distributed is taxable in thehands of the beneficiary. If it is not distributed, the entire incomeis taxable in the hands of the trustee. If it is subsequent year, thedistributions coming from the income of a subsequent year, it willno longer be taxable in the hands of the beneficiary because it hasalready been taxed in the hands of the trustee.

3.

Determination of tax

a.

Consolidation of income of two or more trusts There 2 (?) created by the same grantor in favor of the same

beneficiary. Usually what happens is that the trustee will file aseparate ITR but for tax purposes, since the grantor is the sameand the beneficiary is the same, it will be consolidated forpurposes of disallowing the excess of additional exemption paid.There will only be one basic personal exemption allowed. Such asa trust, you may also pay the P20,000 personal exemption. Theincome of trust will be computed at the consolidated.

b.

Taxable incomei.

Income tax shall be based on the taxable income of theestate and trust

ii.

Personal exemption shall be allowed

c.

Additional deductions allowed

i.

The amount of the income of the estate or trust for thetaxable year which is to be distributed currently by thefiduciary to the beneficiaries

ii. The amount of the income collected by a guardian of aninfant which is to be held or distributed as the court maydirect.

iii. The amount of the income of the estate or trust for itstaxable year, which is properly paid or credited during suchyear to the legatee, heir or beneficiary.

The amount so allowed as a deduction shall be included in

computing the taxable income of the heirs, beneficiaries orlegatees, whether distributed or not.


14/33


CORPORATE INCOME TAXATION

A.

General Principles, Section 231. A domestic corporation is taxable on all income derived from

sources within and without the Philippines Domestic corp taxable on sources of income within and without

2. A foreign corporation whether engaged or not in trade or businessin the Philippines, is taxable only on income derived from sourceswithin the Philippines Foreign corp whether doing business in the Philippines or not taxable

on sources of income withinB.

Definition of Terms1. Corporation includes partnership no matter how created or

organized, joint account companies, insurance companies andother associations, except:a.

General professional partnership A partnership to exercise a common profession. So when you form

a partnership to practice law, you cannot invite other professionalssuch as engineers or doctors to join your partnership. If you doso, it will not be called a general professional partnership andtherefore, it will be taxable as a partnership already.

Although general professional partnerships are exempt fromcorporate taxation, they are required to file an income tax returnand have their financial statements certified by an independentauditor for the purpose of monitoring whether the individualpartners of such partnership are declaring their income properly.The income of the partnership will be the expected income of theindividual partners. So if there is a declaration of P100M incomeand there are two partners, then each partner have to declare theP50M as part of their gross income subject to the 5-32% tax rate.

b.

Joint venture for the purpose of undertaking constructionprojects Does it have to be with the government?

No. Joint ventures undertaking construction projects may bewith any private persons, juridical or natural

When there is a joint venture between two corporations toundertake a construction project, will the income from theactivities of that joint venture be taxable at all? It would depend on how they would divide the income from

the joint venture and any income that is received by eachparty will be taxable to that party alone or separately.

When there are two corporations who wish to develop the entiresouth reclamation project or the entire mountain of this area orany development subdivisions, and they decide to distribute theincome 50-50, then that 50 will be taxable to one joint venturerand the other 50 to the other joint venturer.

NOTE: Joint ventures not for construction projects are alwaystaxable as a corporation.

But of course, if the joint venture is already taxable as acorporation because it is not for construction projects, that incomethat is taxable to the joint venture will no longer form part to theseparate income of the two corporations.

c.

Joint consortium for the purpose of engaging in petroleum,

geothermal and other energy operations pursuant to aconsortium agreement with the government

And the joint consortium for the petroleum, coal, and otherenergy operations, it has strictly to be a contract with thegovernment otherwise if it is a private undertaking, then bothparties under the joint consortium is taxable as a corporation.

2.

Partnership an association of 2 or more persons where they maycontribute money, property or industry to a common fund with theintention of dividing the profits among themselves.Tests that will determine whether a partnership exists or not:a.

There must be a contribution to a common fundb. There must be an intention to divide the profits among

themselves There are 2 types of partnership

1) taxable2)

non-taxable If 2 or more person creates a partnership without registering or the

non-compliance of the requirement will not benefit any association orpartnership they are subjected to the 30% corporate taxation

3. Professional partnership partnerships formed by persons for thesole purpose of exercising their common profession, no part of theincome of which is derived from engaging in any trade or business.

4. Co-ownership one formed and organized not for profit but for thecommon enjoyment of the property or for the preservation of theproperty.Lease of properties under common managementWhere there is a series of transaction whose purpose is not limitedto the conservation of the common fund or even acquiredproperties, a taxable partnership is formed. The character ofhabituality peculiar to business transactions engaged in for thepurpose of gain is present. (Evangelista vs. Collector, 102 Phil 140) GR: not taxable if the co-onwed property is for the common

enjoyment. XPN: if the property co-ownership so long as it is not to generate

profit. Donor giving as a gift an undivided property to several donees without

the latter diving the property Deceased that would give an estate to several heirs Note: NCC provision that co-ownership only last for 10/20 yrs.

5. Joint Venture created when 2 corporations, while registered andoperating separately, are place under 1 sole management which

operated the business affairs of said companies as though theyconstituted a single entity thereby obtaining substantial economyand profits in the operation.

6.

Joint Account created when 2 persons form or create a commonfund and such persons engage in a business for profit. This mayresult in a taxable unregistered association or partnership.

7. Joint Stock Companies the midway between a corporation and apartnership, a hybrid personality, somewhat a corporationbecause this is managed by a Board of Directors and such personsmay transfer their share/s without the consent of others, andsomewhat a partnership because it is an association, and personsor members of the same contribute fund, money to a common fund.

C.

Corporate Taxpayers

1.

Domestic CorporationsA corporation formed or organized under Philippine laws.


15/33


Situation: If a corporation composed of all American stockholder andregistered as a corporation in the Philippines it is considered as a DC,but not a Philippine corporation (a because is not composed of allFilipino).

If ABC Corporation is owned 100% by an American Citizen, registeredor organized in the Philippines, it is considered a Domestic Corporationand is taxable for income within and without.

ABC Corporation, however, cannot be considered a PhilippineCorporation.

Domestic Corporation: Organized under Philippine Laws, without

regard to the owners Philippine Corporation: 60% (or more) owned by Filipino Citizens

(Grandfather rule), without regard to where it is organized. General Rule: GOCCs will be treated as a Domestic Corporation and

will be taxed as such.2.

Resident Foreign CorporationsA corporation formed, organized, authorized or existing under thelaws of any foreign country, and engaged in trade or businesswithin the Philippines.Engaged in trade or business implies continuity of commercialtransactions or dealings continuity of business or continuity ofintention to conduct continuous business. Corporation organized in any foreign country but is engaged in trade

or business in the Philippines. Engaged in trade or business meanscontinuity of commercial dealings and transactions for the purpose ofengaging in a profitable activity.

Examples: When it has a permanent physical establishment in thePhilippines, or when it appoints an agent domiciled in the Philippines,or even when the agent is not domiciled in the Philippines but hasstayed in the country for more than 180 days or more. (Can now beconsidered as engaged in trade or business in the Philippines)

The only requirement for residency (as a strict rule), is registrationand licensing with the SEC. It can either be considered as a ForeignCorporation Philippine Branch, or it can be a Regional AreaHeadquarters (RAHQ) of a multination Corporation. It does not mean,however, that those unregistered Foreign Corporations will be freefrom taxation.

3. Non-Resident Foreign CorporationsA corporation formed, organized, authorized or existing under the

laws of any foreign country. A Corporation organized under the laws of any foreign corporation, not

habitually engaged in trade or business in the Philippines but mayenter into isolated transactions.

Example: Extending a loan payable in monthly intervals for 2 years.The loan was a single isolated transaction, and even though paymentswill be made over a period of time, it cannot be considered as havingregularly engaged in trade or business in the Philippines.

D. Domestic Corporations1.

Rule on taxability of incomea.

General Rule: 30% regular corporate income tax on netincome from sources within and sources without GR: Taxable at 30% on their NET income coming from sources

within and without. NET income, because they are allowed certaindeductions.

Domestic Corporations have the option to be taxed at 15% ontheir GROSS income. Lower rate, but no deductions allowed.

Formula: Gross sales-return of capital= gross income Gross income- itemized expenses or optional standard

deduction= net income

So the general rule is that corporations are going to be taxedbased on their net income. If the corporation is reporting 0income, naturally, that corporation will not opt to be taxed 15 percent income tax on gross (optional Gross Income Tax). Why wouldyou volunteer paying 15 per cent on your gross income? But thetax code provides an alternative rate and it is not an option. Evenif the corporation reports 0 income or its regular 30% income taxis lower than that amount then the alternative tax will have to bepaid and that alternative rate is called Minimum Corporate IncomeTax (MCIT).

Exception:i.

2% minimum corporate income tax (MCIT)Revenue Regulations No. 09-98, as amended by 12-07

MCIT= 2% x gross income as of the end of the taxable year What are the conditions for corporate income tax to

apply?1.

Whenever corporation incurs a net loss or negativetaxable income

2. Whenever the amount of 2% minimum corporate incometax is greater than the 30% normal income tax due fromsuch corporation

Will the MCIT apply to corporations who are exempt as yet

because they are granted tax holidays? Will proprietaryeducational institutions with a tax rate of 10 percent beincluded in the MCIT? With regards to corporations granted tax holidays,

because they are not subject to the normal income tax of30%, then there will be no 2% MCIT to speak of. So thisboils down to the conclusion that corporations who arenot subject to the 30% normal income tax shall not beliable to the 2%MCIT.

Now about the school. The school has gross income from educational activities of

50M. Its gross income from non-educational activities is 60Mfor a total of 110M. It is subject to what rate? It will be subject to the NCIT of 30% because the gross

income from non-educational activities is more than50%. So as we said, proprietary educational institutions

Gross SalesLess: Cost on Return of Capital

15% Gross Income 2% MCIT 1.

Net Loss

Less: Itemized Expenses/OSD 2.

30% NCIT < 2% MCIT30% Net Income 30% NCIT

Gross SalesLess: Cost on Return of Capital

15% Gross IncomeLess: Itemized Expenses/OSD

30% Net Income -0-


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are subject to 10% tax so long as income from non-educational activities does not exceed more than 50% ofits total gross income. In this case, since it is alreadytaxed NCIT, then it will now be subject to the 2%MCIT.

Would all corporations incorporated in 2012 be subject to the

2%MCIT? When: beginning on the 4th taxable year immediately

following the taxable year in which such corporationcommenced its business operations.

In his first year registration is 2012, beginning the yearfollowing its registration so we count the 4 years starting from

2013 as the law says MCIT shall be imposed beginning the 4

th

taxable year immediately following the year when thecorporation commenced its business operation.

MCIT vs. NCIT (normal corporate income tax) First 4 years, no MCIT. So even if the corporation would

be reporting for losses during the first 4 years the 30%NCIT tax will apply even if the 30% tax is lower than the2% MCIT.

Is date of BIR registration the same as starting commercialoperation? When the law provides that it is beginning the 4thtaxable

year immediately following the year when such coveragecommences business operations in order to make iteasier the BIR considers the reckoning point as the yearwhen it has registered with the BIR, it is not the actualyear of commercial operations.

SEC Nov. 15, 2011BIR Dec. 1, 2011SCO Jan. 2, 2012(Start of commercialoperations)

The year when the corporation was registered was 2011, the4th taxable year following the year of operations would be2015. So this is when MCIT will be compared as against the30% NCIT to see if whether or not the corporation would betaxed with MCIT or NCIT.

(1) Imposition of MCIT(a)

Gross income, defined

MCIT is 2% based on the gross income, what do youmean by gross income?

Gross sales less cost of goods sold or the return ofcapital further reduced by the discounts given, thereturns made by your customers or the allowancesthat you have provided, and that would be the basisof your MCIT of 2%.

What about the income that have already been subjectedto final withholding tax? Should it form part of your grossincome? No, because final withholding tax has already been

subjected to tax with finality and does not form part

of the gross income subject to the 5-32% tax.(b)

Cost of goods sold, defined What do cost of goods sold means?

Business expenses directly incurred to producethe merchandise if you are engaged in themanufacturing and all other expenses that areincurred to bring the merchandise to the sellinglocation which includes the freight cost,insurance and other packaging cost.

(c)

Cost of goods manufactured and sold, defined(d) Cost of services, defined

And cost of services would be? Would include the services of employees but not

all employees, only employees directly renderingthe service such as if it is a banking institution,the salaries of the tellers, guards.

How about interest expense? It is our interest income as deposited, it is a

direct cost from the bank, and also includes thecost of facilities that are directly used inproviding service.

(2)

Carry forward of excess MCITAny excess of the MCIT over the regular tax shall becarried forward and credited against the regular tax forthe 3 immediately succeeding taxable years

5thyear 6thyear 7thyear 8thyearSale 10M 10M 10M 10MLess: Cost 5M 5M 5M 5M

Gross income 5M 5M 5M 5M

Less: Expenses 4.8M 4.7M 4.8M 4.6MNet income 200K 300K 200K 400KNCIT (30% of Net income) 60K 90K 60K 120K

MCIT (2% of Gross income) 100K 100K 100K 100KPay to the government 100K 100K 100K 120KACTUAL payment to govt 100K 100K 100K 30K

Excess MCIT (MCIT NCIT) 40K 10K 40K 0Carry forward to Next Year 40K 50K 90K 0

Your actual tax liability is only 30% (referring to theNCIT). The MCIT is there to help the government in itstax collection. The reason why MCIT has been imposedbeginning 1998 is to get those companies who are alwaysreporting at a loss or a very low income to pay taxes.

In the case of year 5, the lower tax of 60,000 is your true

tax liability. But because MCIT as compared is higher,then you have to pay the higher tax.

CYSept. 15, 2012 2012

No MCITNo MCIT

1 20132 20143 2015 No MCIT

4 2016 MCIT2017

GI GIEduc Non-Educ50M + 60M = 110M *Subj. to 30%, GI Non

Educ exceeds 50% of GI


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What happens to the difference between the MCIT andthe NCIT? Any payment that is in excess of your normal income

tax of 30% is considered as an advance tax paymentto the government.

It will be treated as an asset of the corporation andoffset-able in the future.

It can be carried over for the next 3 succeedingconsecutive years after the year you paid MCIT inexcess of NCIT.

It can be credited and offset against the NCIT. It cannot be offset against a Minimum Income Tax

Corporate liability (MCIT) Year 5:

Pay the government = 100,000. (MCIT; it beinghigher than the NCIT)

Excess/advance payment = MCIT NCIT= 100,000 60,000 = 40,000. (difference between MCIT andNCIT)

Carry forward the excess = 40,000 Carry forward the 40,000 to the next 3 years which

is year 6, 7, and 8. Year 6:

Pay the government = 100,000 (MCIT) Excess during the year = 10,000

Carry forward to the next year = 50,000. Derivedfrom 40,000 from last year + 10,000 from this year.50,000 offset-able against any normal income taxliability in year 7.

Reason why you are not able to offset 40,000against the 100,000 tax liability: excess MCIT canonly be offset against the Normal Income Tax liability(NCIT).

Year 7: Pay the government = 100,000 (MCIT) Excess is 40,000 Carry-forward to the next year = 90,000; valid until

the 8th year. This is the last year wherein you canconsider the unused 40,000 as part of the asset.

If the 40,000 cannot be utilized in year 8, then it willnot form part of the carry-forward of year 9. Why?The 40,000 from year 5 can only be credited to thesucceeding 3 years. Year 6, year7, and year 8. Ifnot used in year 8: 0 na ang 40,000.

Year 8: You had good operations. Instead of an expense of

4.8M, you only have 4.6M in expenses. 400,000 innet income.

NCIT is 120,000; as against 100,000 MCIT. The higher amount is the NCIT. So you pay the

NCIT. Actual payment to the government? 30,000. Instead

of paying 120,000 NCIT, you are only required to

pay 30,000. The 120,000 less the 90,000 from theexcesses for the last 3 years.

Do you still have any excess during the year? Doyou still carry any excess MCIT to the succeedingyear? No more. Because you fully consumed the90,000.

In effect: Your total payment for the 4 years is 330,000

(100+100+100+30). Your NCIT liability is a total of 60+90+60+120 =

330,000. This is your tax liability, but you paid itdifferently.

You paid for the first 3 years in advance because theMCIT was higher, but eventually it catches up duringthe year when crediting is still allowed. Its simplyan advance tax payment.

BUT if something is forfeited, f its 4.8M of net taxableincome of year 8. Still MCIT is higher then you have topay the MCIT. How much can be recovered in year 9?You cannot anymore carry forward the 40k in year 5 toyear 9 then you can only carry forward the 10k of year 6and the 40k of year 7 and the 10k if year 8. Which is thetotal of 60k. If in year 9 your net income is 400k that willnormally form a tax liability of 120k which is higher thanthe MCIT for that year which is 100k. How much will youpay in year 9? 120k (the carry forward)60k.Then thereis no more carry forward because of the deduction andbecause there is no excess.

It would appear that your total payment for the 5 years is460k while your liability is 400k. You should have onlypaid 420k if MCIT was not provided by law. Thedifference is that you pay the excess of 40k if youallowed the 40k in the 5th year to be forfeited. Losscomes only when you forfeit an MCIT during the year orallow it to expire. .

(3)

Relief from the MCITThe Secretary of Finance may suspend the impositionof the MCIT on any corporation which suffers losses onaccount of [i] prolonged labor dispute; [ii] forcemajeure; and [iii] legitimate business reverses Assuming that your business is already on its 5 th

year operation and already covered by MCIT, inwhat instances can you ask for the suspension ofpayment of the MCIT? Ask for relief from the Secretary of Finance on the

bases that the corporation is suffering from lossesdue to:1. Force majeure, or2.

Prolonged labor dispute (strike for more than 6months)

3. Legitimate business reverses(4)

Applicability of the MCIT where a corporation isgoverned both under the regular tax system and aspecial income tax system

(5)

Corporations exempt from the MCIT

What corporations are not covered by MCIT?


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and all others present, then probably the 15% gross income taxmaybe allowed corporations that are domestic and residentforeign corporations. A further requirement is necessary, which isthat the ratio of cost of sales to gross sales/receipts from allsources does not exceed 55%. The condition is that the cost ofsales should not exceed 55% of the total gross sales. The reasonwhy such ratio is necessary is that if no limit is provided then thegross income maybe presented at a very low amount. If this is90% of gross sales, then the amount that will be presented, thegross margin, is only 10% of the gross rate which will result to a

very low tax collection by the government. So if gross sales is55%, the gross margin will be 45%. This is the lowest grossmargin that will be subjected to the 15% gross income tax inorder to avoid abuse in recognizing figures as part of cost of sales.Once, chosen it becomes irrevocable for 3 consecutive years, onthe assumption that during those years the corporation is qualifiedunder the gross income tax scheme, meaning your cost of saleswould not exceed 55% of your gross sales. If you exceed suchrate, you go back to the 30% net income taxation.

c.

Exempt corporationsi. General professional partnershipsii.

Government educational institutionsiii.

Non-stock, non-profit educational institutionsiv. Joint venture, for purpose of undertaking construction

projectsv.

Joint consortium, for purpose of engaging in petroleum,geothermal and other energy operations pursuant to aconsortium agreement under service contract with thegovt

vi. Regional area headquartersvii.

Labor, agricultural or horticultural organization notorganized principally for profit

viii.Mutual savings bank not having capital stock representedby shares and cooperative bank without capital stockorganized and operated for mutual purposes and withoutprofit

ix.

A beneficiary society, order or association, operating forthe exclusive benefits of the members

x.

Non-stock corporation or association organized and

operated exclusively for religious, charitable, scientific,athletic or cultural purposes, or for the rehabilitation ofveterans, no part of its income or asset shall belong to orinure to the benefit of any member, organizer, officer orany specific person

xi.

Business league, chamber of commerce, or board of trade,not organized for profit, and no part of the net income ofwhich inures to the benefit of any private stockholder orindividual

xii. Civic league or organization not organized for profit butoperated exclusively for the promotion of social welfare

xiii.

Farmers associations or like associations, organized andoperated as a sales agent, for the purpose of marketing theproducts of its members, and turning back to them the

proceeds of sales, less the necessary selling expenses onthe basis of the quantity of produce finished by them

xiv.

Farmers cooperative or other mutual typhoon or fireinsurance, mutual ditch or irrigation company, or likeorganization of a purely local character, the in

tax1 llb404 2012-2013 prefinals notes

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