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INCOME TAX REVIEWER

I. Definition Of Income Tax Income tax is referre d to as A tax on all yearly profits arising fr. property, professions, trades or offices, or A tax on a persons income, emoluments, profits & the like. It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. A. Nature of Income ax Income tax is generally regarded as an excise tax. It is not le!ied upon persons, property, funds or profits but upon the "I#$ of a person to recei!e income or profits. %. &urpose of Income tax' (iscal)Non* fiscal +. to pro!ide large amounts of re!enue, +. to offset regressi!e sales & consumption taxes, -. o mitigate the e!ils arising fr. the ine.ualities in the distribution of income & wealth w)c are considered deterrents to social progress, by a progressi!e scheme of taxation. Income tax is regarded as the best measure of a persons ability to pay. /. %rief $istorical %ackground of &hil. Income ax 1. United States Revenue Act of 191 3 0xtended to the &hils. w)c was then a territorial possession of the 12 administered & enforced by internal re!enue officers of the &hil. #o!ernment -. Revenue Act of 191 6 , ar Revenue Act of 191 ! amended "e!enue Act of +3+4 3. Act "o. #$3 3 enacted by the &hil. legislature under authority conferred by +3+5 Act %. &A "o. %66 ' "ationa( Inte rna( Revenue &ode of 193 9 ) re!ised, amended & codified into a single tax code all the internal re!enue laws embodied in the +343 NI"/ & amendatory laws & decrees was amended se!eral times *. +D 11*$ ' "IR& of 19! ! ) 6A 7aw 80.9. 43, +3:5; ' first attempt to restructure tax system, tax administration 8(AI70<; 2NI 2 8+33-; ' another attempt at restructuring <. 2ources of Income ax 7aw' NI"/ as amended II. ,eanin- Of Income. Sources. /inds A. <efinition of income) differentiate fr. capital Sec. 36, Rev. Re-. # Income in the broad sense * all wealth w)c flows into the taxpayer other than as a mere return of capital, includes the forms of income specifically described as gains & profits, including gains deri!ed fr. the sale or other disposition of capital assets. #ross Income * income 8 in the broad sense; less income w)c is by statutory pro!ision or otherwise exempt fr. the tax imposed by law. Net Income * gross income less statutory deductions Income means * accession to wealth gain flow of wealth &on0i vs. &TA #13 S&RA $3 1acts2 &ets., (ilipino citizens & employees of &&#, were assigned to work abroad in +35= & +35+, during w)c they were paid 12 > as compensation. ?hen they filed their I " in +35= & +35+, they computed the tax due by applying the >*& con!ersion based on the floating rate ordained under %I" "uling No. 5=* =-5. In +354 howe!er, they filed amended I "s for @5= & @5+ using the par !alue of the peso as prescribed in "A A -BC. hey thus claim tax refunds or tax credits, w)c was denied by / A. It is to be noted that &ets. did not remit any portion of their income into the &hils. during their stints abroad. Issue2 ?9N income of &ets. were still taxable in the absence of remittances or acceptance of their salaries into the country 3e(d2 Des the foreign earnings are taxable. Income may be defined as an amount of money coming to a person or corporation w)in a specified time, whether as payment for ser!ices, interest or profit fr. in!estment. he > earnings of &ets. are the fruit of their labors in the foreign subsidiaries of &&#. It was a definite amount of money w)c came to them w)in a specified period of time of - years as payment for their ser!ices. 2ec. -+ of the NI"/ states that a tax shall be imposed upon taxable net income recei!ed during each taxable year fr. all sources by e!ery indi!idual, whether a citizen of the &hils. residing therein or abroad. &IR vs. 4OA& 1%9 S&RA 39* 1acts2 %ritish 9!erseas Airways /orp. is a +==E %ritish* owned corp. organized & existing under the laws of the 1F. It had no landing rights in the &hil. & had no /&/N . Although it did not carry passengers &)or cargo to or fr. the &hil., it maintained a general sales agent , ?arner %arnes & /o. 7td. & later Gantas Airways w)c was responsible for selling %9A/ tickets co!ering passengers & cargoes. /I" assessed deficiency taxes w)c was protested by %9A/.

consolidated & codified into a single tax code all the internal re!enue laws embodied in the NI"/ & amendatory laws & decrees

6. +D 199% '"IR& of 19$ 6 )

income tax law of the &hils. today

enacted to simplify & restructure certain pro!isions of the NI"/

INCOME TAX REVIEWER


Issue2 ?9N the re!enue deri!ed by %9A/ fr. sales of tickets in the &hil. for air transportation, while ha!ing no landing rights here, constitute income fr. &hil. sources & accordingly taxable 3e(d2 Income means H cash recei!ed or its e.ui!alent I. It is the amount of money coming to a person w)in a specific time. It is distinct fr. capital, for while the latter is a fund, income is a flow. As used in our laws, income is a flow of wealth. he source of an income is the property, acti!ity or ser!ice that produced the income. (or the source of income to be considered as coming fr. the &hil., it is sufficient that income is deri!ed fr. acti!ity w)in the &hils. In %9A/s case, the sale of tickets in the &hils. is the acti!ity that produces the income. he tickets exchanged hands here & payments were made in &hil currency. hus, the flow of wealth should share the burden of supporting the go!ernment. ,adri-a( vs. Raffer t5 3$ +6i( %1% 1acts2 In Jadrigals I ", he declared his total net income to be & -3B . 2ubse.uently, he submitted a claim that said amount was the income of the conKugal partnership existing between himself & his wife, & that in computing & assessing the additional income tax pro!ided by act of /ongress, the income declared should be di!ided into two e.ual parts. Issue2 ?9N additional income tax should be assessed by di!iding income into two e.ual parts, bec. of the conKugal partnership existing between the Jadrigal spouses 3e(d2 N9. A wife may make a separate return of her own income only when she has a separate estate managed by herself as her own separate property & recei!es an income of more than & 4 . he essential difference between capital & income is that capital is a fund of property existing at an instant time, income is a flow of ser!ices rendered by that capital by the payment of money fr. it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. /apital is wealth, income is ser!ice of wealth. 1is6er vs. Trinidad %3 +6i( 9!3 1acts2 he &hilippine American <rug /o. was a duly organized corp. existing under &hil. laws. (isher was a stockholder of said corporation w) a share of stock di!idends worth & -L,:== in +3+3. $e was made to pay under protest w) the /I". Issue2 ?9N the stock di!idends are income & thus taxable 3e(d2 N9. 2tock di!idends are not income. An income is the return in money fr. ones business, labor or capital in!ested. 9nly when a cash di!idend is gi!en or such that di!idend normally payable in money, & when so paid, then only does the stockholder realize a profit or gain, w)c becomes his separate property, & thus deri!e an income fr. the capital that he in!ested. 1ntil that is done, the increased assets belong to the corporation & not to the indi!idual stockholders. he stockholder who recei!es a stock di!idend has recei!ed nothing but a representation of his increased interest in the capital of the corporation. %. 2ources of Income +. /apital)labor)exchange of capital 7uer52 ?hat produces incomeM Ans0er2 &ommissione r vs. 4OA&, su8ra 3e(d2 he source of income is the property, acti!ity or ser!ice that produced the income. (or the source of income to be considered as coming fr. the &hil., it is sufficient that the income is deri!ed fr. acti!ity w)in the &hil. In the case of %9A/, the sale of tickets in the &hil. is the acti!ity that produces the income. he tickets exchanged hands here & payments for fares were also made in &hil. currency. he site of the source of income is the &hil. & the flow of wealth proceeded fr., & occurred w)in &hil. territory, enKoying the protection accorded by the &hil. go!ernment. hus, said flow of wealth should share the burden of supporting the go!ernment. -. Income deri!ed fr. whate!er source S9&. 3#. :ross Income . 8A; #eneral <efinition. * 0xcept when otherwise pro!ided in this itle, gross income means all income deri!ed from whate!er source, x x x he words used in the law disclose a legislati!e policy to include all income not expressly exempted w)in the class of taxable income under our laws, irrespecti!e of the !oluntary or in!oluntary action of the taxpayer in producing the gains, & whether deri!ed fr. legal or illegal sources. Income tax is source blind.

7ueries2 ?hy is income tax source blindM Are the ff. items incomeM +. found treasure -. puniti!e damages)damages for breach of promise or alienation of affection 4. worthless bad debts subse.uently collected L. tax refund C. non* cash benefits B. income fr. illegal sources 5. psychological benefits of work :. gi!e* away prizes)scholarships)fellowships /. Finds) /lassification of Income or #ain 'not in ,a;a m ;s S+IT out(ine <ut I t6in= s6e >ust omitt e d it <ec. s6e 8roceede d to (ette r D. Ella ) +. &assi!e Income refers to those items of gross income earned by the taxpayer w)o his acti!e)direct participation in the earning process. 0x. di!idends, royalties, prizes & winnings Sec. ##'?), RA $%#% he term @ordina r5 income@ includes any gain from the sale or exchange of property which is not a capital asset or property described in 2ection 438A;8+;. Any gain from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary incomeN shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in 2ection 438A;8+;. he term @ordinar5 (oss@ includes any loss from the sale or exchange of property which is not a

INCOME TAX REVIEWER


capital asset. Any loss from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary lossN shall be treated as loss from the sale or exchange of property which is not a capital asset. -. /apital #ain)9rdinary #ain :AI" * transaction resulting in increases of wealth capable of pecuniary estimation &A+ITAA :AI" is the gain deri!ed fr. the sale or exchange of capital assets. ORDI"ARB :AI" is gain deri!ed fr. the sale or exchange of an asset w)c is not capital. 8see 2-=8z; supra; S9&. 39. Capital Gains and Losses. 8A; <efinitions. * As used in this itle * 8+; /apital Assets. * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. 8-; Net /apital #ain. * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. 84; Net /apital 7oss. * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. 8%; &ercentage aken into Account. * In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income' 8+;9ne hundred percent 8+==E; if the capital asset has been held for not more than twel!e 8+-; months, and 8-;(ifty percent 8C=E; if the capital asset has been held for more than twel!e 8+-; months, 8/; 7imitation on /apital 7osses. * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 8<; Net /apital 7oss /arry* o!er. * If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss 8in an amount not in excess of the net income for such year; shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twel!e 8+-; months. 80; "etirement of %onds, 0tc. * (or purposes of this itle, amounts recei!ed by the holder upon the retirement of bonds, debentures, notes or certificates or other e!idences of indebtedness issued by any corporation 8including those issued by a go!ernment or political subdi!ision thereof; with interest coupons or in registered form, shall be considered as amounts recei!ed in exchange therefor. 8(; #ains or losses from 2hort 2ales, 0tc. * (or purposes of this itle * 8+; #ains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets, and 8-; #ains or losses attributable to the failure to exercise pri!ileges or options to buy or sell property shall be considered as capital gains or losses. Sec. 6 'e), "IR& Authori ty of the Commissioner to prescribe real proper ty values . he /ommissioner is hereby authorized to di!ide the &hilippines into different zones or areas & shall, upon consultation w) competent appraisers both fr. pri!ate & public sectors, determine the fair market !alue of real properties located in each zone or area. (or purposes of computing any internal re!enue tax, the !alue of the property shall be w)ce!er is higher of' +. he fair market !alue as determined by the /ommissioner, or -. he fair market !alue as shown in the schedule of !alues of the &ro!l. or /ity Assessors. Sec. 1##, Rev. Re-. # Losses fr. sales or exchanges of property . No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,* +. %etween members of a family 8whole or half siblings, spouse, ancestors & lineal descendants;, -. %etween an indi!idual & a corporation more than C=E in !alue of the outstanding stock of w)c is owned, directly or indirectly by or for such indi!idual except in the case of distributions in li.uidation, 4. %etween two corporations more than C=E in !alue of the outstanding stock of each of w)c is owned, directly or indirectly, by or for the same indi!idual, if either one of the corps. w) respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, except in the cases of distributions in li.uidation, L. %etween a grantor & a fiduciary of any trust, C. %etween the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w) respect to each trust, or B. %etween a fiduciary of a trust & a beneficiary of such trust.

INCOME TAX REVIEWER


Sec. 131, Rev. Re-. # Losses fr. wash sales of stock or securities a; A taxpayer cannot deduct any loss claimed to ha!e been sustained fr. the sale of stock or securities, if, w)in a period beginning thirty days before the date of such sale or disposition & ending thirty days after such date he has ac.uired, or has entered into a contract to ac.uire, substantially identical stock or securities. $owe!er, this prohibition does not apply in the case of a dealer in stock or securities if the sale or other disposition of stock or securities is made in the ordinary course of business of such dealer OOO Sec. 13#, Rev. Re-. # efinition of capital assets . he law pro!ides that the term capital assets shall be held to mean property held by the taxpayer 8?9N connected w) his trade or business; . . . Same as Sec. 33, NIRC. he term capital asset includes all classes of property not specifically excluded by 24= 8a;. he exclusion fr. the term Hcapital assetsI by property used in the trade or business of the taxpayer of a character w)c is subKect to the allowance for depreciation in 24= 8f; NI"/ * is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange 8&; it has no application to gains or losses arising fr. the sale of real property used in the trade or business to the extent that such gain or loss is allocable to the land, as distinguished fr. depreciable impro!ements upon the land. o such gain or loss allocable to the land, the limitations of 4L8b; & 8c; apply 8 such limitation may be inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to customers in the ordinary course of his trade or business, not bec. the land is subKect to the allowance for depreciation pro!ided in 4= 8f; NI"/;, will not be subKect to the percentage pro!isions of 4L8b; & losses fr. such transactions will not be subKect to the limitations on losses pro!ided in 4= 8c;. Tua?on vs. Ain-ad *$ S&RA 1!C 1acts2 In +3L:, pet. inherited - parcels of land, w)c he subdi!ided into -3 lots & leased -:. In +3C=, he sold the lots on an installment basis to their occupants. 7ot -3 was subse.uently subdi!ided & pa!ed, & were also sold on a += yr. annual amortization basis. $e reported his income fr. the sale of the lots as long* term capital gain. In +3C5, he treated his income fr. the sale of the small lots as capital gains & included only +)- as taxable income. $e deducted the real estate dealers tax he paid in +3C5 due to the rentals fr. his -: lots & other properties. %I" charged him w) deficiency income, considering the sale as ordinary gains & not capital. Issue2 ?9N properties inherited by should be regarded as capital assets petitioner periodically deri!ed a substantial income, & for w)c he had to pay the real estate dealers tax, w)c he used to deduct fr. his gross income. 1nder the circumstances, pets sale of the lots forming part of his rental business cannot be characterized as other than sales of non* capital, or ordinary assets. 8remember exceptions in 244;. &a(asan? vs. &om. 1%% S&RA 6%% 1acts2 &etitioner inherited fr. her father an agricultural land in "izal. In order to li.uidate her inheritance, she had the land sur!eyed, introduced impro!ements thereon & sold the lots at a profit. In their Koint I ", they disclosed a profit of & 4+,=B= fr. the sale of the subdi!ided lots, & reported C=E thereof as taxable capital gains. "e!enue examiner adKudged pets. as engaged in business as real estate dealers, re.uired them to pay real estate dealers tax & assessed a deficiency income tax on profits deri!ed fr. the sale based on the rates for ordinary income. Issue2 ?9N pets. are real estate dealers liable for real estate dealers tax ?9N gains realized fr. the sale of the lots are taxable as ordinary income 3e(d2 D02 in both . he acti!ities of pet. are no different fr. those in!ariably employed by one engaged in the business of selling real estate. here was extensi!e de!elopment such that pets. did not sell the land in the condition in w)c they ac.uired it. A considerable amount was expended to co!er the cost of the impro!ements. It has been held that a property ceases to be a capital asset if the amount expended to impro!e it is double its original cost, as in the /A%, for the extensi!e impro!ements indicates that the seller held the property primarily for sale to its customers in the ordinary course of business. And since they are engaged in the business of real estate, it follows that the property sold falls w)in the exception in the definition of capital assets in 244, NI"/. :on?a(es vs. &TA 1% S&RA !9 1acts2 0xpropriation proceedings were conducted on property owned by petitioners, w)c they inherited fr. their mother. 1pon the amounts recei!ed fr. the go!ernment, the pets. were ascertained to ha!e made a capital gain of & -+4,4-:.:- & each of them to ha!e recei!ed the amount of & :3 as share in the interest. &etitioners were each credited the amount of & :B as payment of their income tax. 2ubse.uently, pets. asked for a refund of the amount of & -L saying that the & :3 they recei!ed as share in the interest would ha!e been computed as capital gain & not ordinary gain. Issue2 ?9N & :3 recei!ed as interest on the !alue of the land expropriated is taxable as ordinary income 3e(d2 D02. he ac.uisition by the go!t. of pri!ate prop. through the exercise of eminent domain is embraced w)in the meaning of the term Hsale I or Hdisposition of propertyI & the definition of gross income in 2 -3. he transfer of property through condemnation proceedings is a sale or exchange & the profit fr. the txn constitutes capital gain. $owe!er, for income tax purposes, interest does not form part of the price paid by the go!t. & thus not part of capital gain. Interest is the compensation for the delay in the return of such capital.

3e(d2 N9. ?hen pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlati!e right to recei!e & enKoy the fruits of the business & the property w)c the decedent had established. Also, pet. owned other properties w)c he rented out, fr. w)c he

INCOME TAX REVIEWER


<. axable Income +. "e.uisites for taxability +. here must be gain. here must be in fact income. A txn whereby nothing of exchangeable !alue comes to or is recei!ed by the taxpayer does not gi!e rise to taxable income. -. he gain must be realized or recei!ed. he increase in !alue, i.e., the gain, can be taxed only when a disposition of the property has occurred, w)c is of such nature as to constitute a realization of such gain fr. the original capital in!ested in the property. he realization of income may take the form of actual receipt of cash or property or constructi!e receipt of the income. 4. he gain must not be excluded by law fr. taxation. Incomes that are exempt fr. the tax by law are not considered in determining gross income. <eductions, in contrast, are subtracted fr. gross income to arri!e at taxable net income. -. "ecognition) tax purposes 7ueries2 "ealization of income for w) the appro!ed method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, & money or property is recei!ed on a Kudgment therefor in a later year, income is realized in $A D0A", assuming that the money or property would ha!e been income in the earliest year if then recei!ed. his is true of a reco!ery for patent infringement. %ad debts or accounts charged off subse.uent to Jarch +, +3+4, bec. of the fact that they were determined to be worthless, w)c are subse.uently reco!ered, whether or not by suit, constitute income for $A D0A" IN ?$I/$ "0/960"0<, regardless of the date when amounts were charged off. Sec. *#, Rev. Re-. "o. # "ncome construc tively received. Income w)c is credited to the account of, or set apart for a taxpayer & w)c is drawn upon him at any time is subKect to tax for the D0A" <1"IN# ?$I/$ 29 /"0<I 0< 9" 20 A&A" , although not actually reduced to possession. o constitute receipt in such a case, the income must be credited to the taxpayer w)o any substantial limitation or restriction as to the * time or manner of payment or condition upon w)c payment is to be made. A %99F 0N "D, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be un.ualifiedly subKect to the demand of the taxpayer. ?hen a corporation contingently credits 0es w) bonus stock, %1 the stock is not a!ailable to such 0es until some future date, the mere crediting on the books of the corporation does N9 constitute receipt. Sec. *3, Rev. Re-. "o. # 9xam8(es of construc tive recei8t 8+; Interest /oupons. ?hen interest coupons * ha!e matured & are payable, but ha!e not been cashed, such interest payment, though not collected when due & payable, * is ne!ertheless a!ailable for the taxpayer & should therefore be included in his gross income for the D0A" <1"IN# ?$I/$ 21/$ /91&9N2 JA 1"0<. his is true if the coupons are exchanged for other property instead of e!entually being cashed. <efaulted coupons are income for the year in w)c paid. 8-; 2hare of profits. he distributi!e share of the profits of a partner in a gen. partnership duly registered is regarded as recei!ed by him, although not distributed. 84; Interest on bank deposits. Interest credited on sa!ings bank deposits, e!en though the bank nominally has a rule, seldom or ne!er enforced, that it may re.uire so many days notice in ad!ance of cashing depositors checks, is IN/9J0 9 $0 <0&92I 9" ?$0N /"0<I 0<.

?hen is income realizedM

S9&. %3. :enera( Ru(e . * he taxable income shall be computed upon the basis of the taxpayerNs annual accounting period 8fiscal year or calendar year, as the case may be; in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the /ommissioner clearly reflects the income. If the taxpayerNs annual accounting period is other than a fiscal year, as defined in 2ection --8G;, or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an indi!idual, the taxable income shall be computed on the basis of the calendar year. S9&. %%. +eriod in 06ic6 Items of :ross Income Inc(uded . * he amount of all items of gross income shall be included in the gross income for the taxable year in which recei!ed by the taxpayer, unless, under methods of accounting permitted under 2ection L4, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. Sec. *1, Rev. Re-. "o. # !hen income is to be reporte d . #ains, profits, & income are to be included in the gross income for the taxable year in w)c they are recei!ed by the taxpayer, 1N7022 they are included when they accrue to him in accordance

INCOME TAX REVIEWER


8L; /redit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc., when such credit passes w)o restriction to the shareholder, has a taxable status as IN/9J0 (9" $0 D0A" 9( $0 /"0<I . ?here the amount of such accumulations has not become a!ailable to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is IN/9J0 (9" $0 D0A" 9( $0 JA 1"I D 9( $0 2$A"0. Aim8an vs. &om. 1! S&RA !C3 1acts2 7impan In!estment /o., a corp. engaged in leasing real properties, filed its I "s for +3CB & +3C5. After an in!estigation, the %I" found that pet. had underdeclared its rental incomes & had claimed excessi!e depreciation of its buildings. hus deficiency income taxes & surcharges were demanded against them. &et. argues that the rents in .uestion were not recei!ed in +3C5, but were turned o!er by the president to the company only in +3C3 & that the rates of depreciation applied by the %I" were unfair & inaccurate. Issue2 ?9N the assessment of deficiency taxes were accurate 3e(d2 he assessment was !alid. &et.s denial & explanation of the non* receipt of the remaining unreported income for +3C5 was not substantiated by the president nor by his +3C5 personal income tax return in order to establish that the rental income w)c he allegedly collected & recei!ed in +3C5 were reported therein. he w)drawal in +3C: of the deposits in court pertaining to the +3C5 rental income is no sufficient Kustification for the non* declaration of said income in +3C5, since the deposit was resorted to due to the refusal of pet, to accept the same, & was not the fault of its tenants. &et. is thus deemed to ha!e constructi!ely recei!ed such rentals in +3C5. Re8u<(ic vs. de (a Rama 1$ S&RA $61 1acts2 In +3C+, the estate of the late 0steban de la "ama filed its I " for the year +3C=. 7ater, %I" claims that the estate had recei!ed in +3C= cash di!idends fr. the <e 7a "ama 2teamship /o. Inc. w)c was not declared in the I ". %I" claims that the cash di!idends were applied in the deceaseds account w) the former & this constituted constructi!e receipt by the estate or heirs. Issue2 ?9N there was constructi!e payment thus constructi!e receipt by the estate & b. ests to determine realization income 'Au=<an, 88. %%- %6) 2e!erance test 2ubstantial alteration of interest test (low of wealth test c. Finds)/lassification of taxable income or gain +. /apital gain 8sale of capital asset; -. 9rdinary gain 4. %usiness income' 2er!ice concern) Janufacturing)Jerchandising L. Income fr. trade or practice of profession C. &assi!e income B. 9ther forms of gain' ex. found treasure 4. Income ax %ase) Jeaning) Finds of

a. Approaches in income recognition' Sc6edu(ar vs. -(o<a( a88roac6 Tan vs. de( Rosario 1acts2 hese are two consolidated special ci!il actions for prohibition challenging' +; the constitutionality of "A 5L3B, also known as the 2implified Net Income axation 2cheme 82NI 2;, amending certain pro!isions of the NI"/, -; the !alidity of 2ec.B, "e!. "eg. No. -*34 promulgated by the %I" pursuant to the said law. &etitioners are taxpayers claiming to be ad!ersely affected by the implementation of the law. In the + st case, the petitioners assert that the "A !iolates' +; Art. 6I, 2ec. -B8+; w)c states, H0!ery bill passed by the /ongress shall embrace only one subKect w)c shall be expressed in the title thereof.I, -; Art. 6I, 2ec. -:8+; w)c states, H he rule of taxation shall be uniform & e.uitable. he /ongress shall e!ol!e a progressi!e system of taxation. I, & 4; Art. III, 2ec.+, w)c states, HNo person shall be depri!ed of P property w)o due process of law, nor shall any person be denied the e.ual protection of the laws.I In the - nd case, the petitioners contend that the %I" exceeded its rule* making authority in implementing the "e!. "eg. 3e(d2 "A is constitutional, "e!. "eg. is !alid. Its title is sufficiently descripti!e of the subKect of the law. ?hat may be apparent fr. the amendatory law is the legislati!e intent to increasingly shift the income tax system towards the schedular approach in the income taxation of indi!idual taxpayers & to maintain the present global treatment on taxable corporations. his classification is neither arbitrary nor inappropriate. (urther, the due process clause may be correctly in!oked only when there is a clear contra!ention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is e!ident in the /A%. b. %ases of income tax i. #ross income) receipts) meaning in taxation) in financial accounting

3e(d2 here was no constructi!e receipt of the di!idends. Income tax is assessed on income that has been recei!ed. In this case, income was not recei!ed due to failure to deli!er, either actually or constructi!ely. he debts to w)c they were applied were not pro!en to ha!e existed. he first debt was not pro!en to exist & the second debt was due fr. $iKos de I. de la "ama, an entity separate & distinct fr. the principal owner thereof. /onstructi!e deli!ery occurs only when it is shown that the debts to w)c the di!idends were applied actually existed, were legally demandable & chargeable to the deceased. a. ?hen is income realizedM "ealization of income for tax purposes

INCOME TAX REVIEWER


ii. Net income) net taxable income) in taxation) in accounting iii. &resumed gain) income Sec. #% # $ Capital Gains from %ale of &eal 'roper ty . 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or agencies or to go!ernment* owned or controlled corporations shall be determined either under 2ection -L 8A; or under this 2ubsection, at the option of the taxpayer. 8-; 0xception. * he pro!isions of paragraph 8+; of this 2ubsection to the contrary notwithstanding, capital gains presumed to ha!e been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in ac.uiring or constructing a new principal residence within eighteen 8+:; calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this 2ubsection' &ro!ided, hat the historical cost or adKusted basis of the real property sold or disposed shall be carried o!er to the new principal residence built or ac.uired' &ro!ided, further, hat the /ommissioner shall ha!e been duly notified by the taxpayer within thirty 84=; days from the date of sale or disposition through a prescribed return of his intention to a!ail of the tax exemption herein mentioned' +rovided , still further, hat the said tax exemption can only be a!ailed of once e!ery ten 8+=; years' +rovided , finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to ha!e been realized from the sale or disposition shall be subKect to capital gains tax. (or this purpose, the gross selling price or fair market !alue at the time of sale, whiche!er is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph 8+; of this 2ubsection shall be imposed thereon. c. Income tax rates S9&. #%. "ncome (ax &ates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein, 8b; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual citizen of the &hilippines who is residing outside of the &hilippines including o!erseas contract workers referred to in 2ubsection8/; of 2ection -4 hereof, and 8c; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8b;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual alien who is a resident of the &hilippines. he tax shall be computed in accordance with and at the rates established in the following schedule' Not o!er &+=,===PPPPPPPPPPPPP CE 9!er &+=,=== but not o!er &4=,===PPPP &C== Q+=E of the excess o!er &+=,=== 9!er &4=,=== but not o!er &5=,===PPP &-,C== Q+ CE of the excess o!er &4=,=== 9!er &5=,=== but not o!er &+L=,===PP &:,C== Q- =E of the excess o!er &5=,=== 9!er &+L=,=== but not o!er &-C=,===P &--,C== Q - CE of the excess o!er &+L=,=== 9!er &-C=,=== but not o!er &C==,===P &C=,=== Q 4 =E of the excess o!er &-C=,=== 9!er &C==,=== PPPPP.PPPPPP &+-C,=== Q 4 L E of the excess o!er &C==,=== in +33:. &ro!ided, hat effecti!e Ranuary +, +333, the top marginal rate shall be thirty* three percent 844E; and effecti!e Ranuary +, -===, the said rate shall be thirty* two percent 84-E;. (or married indi!iduals, the husband and wife, subKect to the pro!ision of 2ection C+ 8<; hereof, shall compute separately their indi!idual income tax based on their respecti!e total taxable income' &ro!ided, hat if any income cannot be definitely attributed to or identified as income exclusi!ely earned or realized by either of the spouses, the same shall be di!ided e.ually between the spouses for the purpose of determining their respecti!e taxable income. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income'

INCOME TAX REVIEWER


&ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E 8-; /ash and)or &roperty <i!idends * A final tax at the following rates shall be imposed upon the cash and)or property di!idends actually or constructi!ely recei!ed by an indi!idual from a domestic corporation or from a Koint stock company, insurance or mutual fund companies and regional operating head.uarters of multinational companies, or on the share of an indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or on the share of an indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture or consortium taxable as a corporation of which he is a member or co* !enturer' 2ix percent 8BE; beginning Ranuary +, +33:, 0ight percent 8:E; beginning Ranuary +, +333, en percent 8+=E beginning Ranuary +, -===. estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or agencies or to go!ernment* owned or controlled corporations shall be determined either under 2ection -L 8A; or under this 2ubsection, at the option of the taxpayer. 84; 0xception. * he pro!isions of paragraph 8+; of this 2ubsection to the contrary notwithstanding, capital gains presumed to ha!e been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in ac.uiring or constructing a new principal residence within eighteen 8+:; calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this 2ubsection' &ro!ided, hat the historical cost or adKusted basis of the real property sold or disposed shall be carried o!er to the new principal residence built or ac.uired' &ro!ided, further, hat the /ommissioner shall ha!e been duly notified by the taxpayer within thirty 84=; days from the date of sale or disposition through a prescribed return of his intention to a!ail of the tax exemption herein mentioned' &ro!ided, still further, hat the said tax exemption can only be a!ailed of once e!ery ten 8+=; years' &ro!ided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to ha!e been realized from the sale or disposition shall be subKect to capital gains tax. (or this purpose, the gross selling price or fair market !alue at the time of sale, whiche!er is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph 8+; of this 2ubsection shall be imposed thereon. S9&. #*. (ax on )onreside nt Alien "ndividual. 8A; Nonresident Alien 0ngaged in trade or %usiness ?ithin the &hilippines. * 8+; In #eneral. * A nonresident alien indi!idual engaged in trade or business in the &hilippines shall be subKect to an income tax in the same manner as an indi!idual citizen and a resident alien indi!idual, on taxable income recei!ed from all sources within the &hilippines. A nonresident alien indi!idual who shall come to the &hilippines and stay therein for an aggregate period of more than one hundred eighty 8+:=; days during any calendar year shall be deemed a Nnonresident alien doing business in the &hilippinesN. 2ection -- 8#; of this /ode notwithstanding. 8-; /ash and)or &roperty <i!idends from a <omestic /orporation or Roint 2tock /ompany, or Insurance or Jutual (und /ompany or "egional 9perating $ead.uarter or Jultinational /ompany, or 2hare in the <istributable Net Income of a &artnership 80xcept a #eneral &rofessional &artnership;, Roint Account, Roint 6enture axable as a /orporation or Association., Interests, "oyalties, &rizes, and 9ther ?innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a

&ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including

INCOME TAX REVIEWER


nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co*!enturer, interests, royalties 8in any form;, and prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8%;8+; of 2ection -L; and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, shall be subKect to an income tax of twenty percent 8-=E; on the total amount thereof' &ro!ided, howe!er, that royalties on books as well as other literary works, and royalties on musical compositions shall be subKect to a final tax of ten percent 8+=E; on the total amount thereof' &ro!ided, further, hat cinematographic films and similar works shall be subKect to the tax pro!ided under 2ection -: of this /ode' &ro!ided, furthermore, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, that should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, and 7ess than three 84; years * -=E. 84; /apital #ains. * /apital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subKect to the tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8%; Nonresident Alien Indi!idual Not 0ngaged in rade or %usiness ?ithin the &hilippines. * here shall be le!ied, collected and paid for each taxable year upon the entire income recei!ed from all sources within the &hilippines by e!ery nonresident alien indi!idual not engaged in trade or business within the &hilippines as interest, cash and)or property di!idends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax e.ual to twenty* fi!e percent 8-CE; of such income. /apital gains realized by a nonresident alien indi!idual not engaged in trade or business in the &hilippines from the sale of shares of stock in any domestic corporation and real property shall be subKect to the income tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8/; Alien Indi!idual 0mployed by "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by regional or area head.uarters and regional operating head.uarters established in the &hilippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area head.uarters and regional operating head.uarters, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same position as those of aliens employed by these multinational companies. (or purposes of this /hapter, the term Nmultinational companyN means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia* &acific "egion and other foreign markets. 8<; Alien Indi!idual 0mployed by 9ffshore %anking 1nits. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by offshore banking units established in the &hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off* shore banking units, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. 80; Alien Indi!idual 0mployed by &etroleum 2er!ice /ontractor and 2ubcontractor. * An Alien indi!idual who is a permanent resident of a foreign country but who is employed and assigned in the &hilippines by a foreign ser!ice contractor or by a foreign ser!ice subcontractor engaged in petroleum operations in the &hilippines shall be liable to a tax of fifteen percent 8+CE; of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, recei!ed from such contractor or subcontractor' &ro!ided, howe!er, hat the same tax treatment shall apply to a (ilipino employed and occupying the same position as an alien employed by petroleum ser!ice contractor and subcontractor. Any income earned from all other sources within the &hilippines by the alien employees referred to under 2ubsections 8/;, 8<; and 80; hereof shall be subKect to the pertinent income tax, as the case may be, imposed under this /ode. S9&. #6. (ax Liability of *e mbe rs of General 'rofessional 'artne rships. - A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership.

INCOME TAX REVIEWER


&3A+T9R ID - TAE O" &OR+ORATIO"S S9&. #!. &ates of "ncome tax on omes tic Corpora tions. 8A; In #eneral. * 0xcept as otherwise pro!ided in this /ode, an income tax of thirty* fi!e percent 84CE; is hereby imposed upon the taxable income deri!ed during each taxable year from all sources within and without the &hilippines by e!ery corporation, as defined in 2ection --8%; of this /ode and taxable under this itle as a corporation, organized in, or existing under the laws of the &hilippines' &ro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, further, hat the &resident, upon the recommendation of the 2ecretary of (inance, may effecti!e Ranuary +, -===, allow corporations the option to be taxed at fifteen percent 8+CE; of gross income as defined herein, after the following conditions ha!e been satisfied' 8+; A tax effort ratio of twenty percent 8-=E; of #ross National &roduct 8#N&;, 8-; A ratio of forty percent 8L=E; of income tax collection to total tax re!enues, 84; A 6A tax effort of four percent 8LE; of #N&, and 8L; A =.3 percent 8=.3E; ratio of the /onsolidated &ublic 2ector (inancial &osition 8/&2(&; to #N&. he option to be taxed based on gross income shall be a!ailable only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty* fi!e percent 8CCE;. he election of the gross income tax option by the corporation shall be irre!ocable for three 84; consecuti!e taxable years during which the corporation is .ualified under the scheme. (or purposes of this 2ection, the term Ngross incomeN deri!ed from business shall be e.ui!alent to gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goodsN sold shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit. (or a manufacturing concern, Ncost of goods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances and discounts. 8%; &roprietary 0ducational Institutions and $ospitals. * &roprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent 8+=E; on their taxable income except those co!ered by 2ubsection 8<; hereof' &ro!ided, that if the gross income from unrelated trade, business or other acti!ity exceeds fifty percent 8C=E; of the total gross income deri!ed by such educational institutions or hospitals from all sources, the tax prescribed in 2ubsection 8A; hereof shall be imposed on the entire taxable income. (or purposes of this 2ubsection, the term Nunrelated trade, business or other acti!ityN means any trade, business or other acti!ity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A N&roprietary educational institutionN is any pri!ate school maintained and administered by pri!ate indi!iduals or groups with an issued permit to operate from the <epartment of 0ducation, /ulture and 2ports 8<0/2;, or the /ommission on $igher 0ducation 8/$0<;, or the echnical 0ducation and 2kills <e!elopment Authority 8 02<A;, as the case may be, in accordance with existing laws and regulations. 8/; #o!ernment* owned or /ontrolled* /orporations, Agencies or Instrumentalities. * he pro!isions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the #o!ernment, except the #o!ernment 2er!ice Insurance 2ystem 8#2I2;, the 2ocial 2ecurity 2ystem 8222;, the &hilippine $ealth Insurance /orporation 8&$I/;, the &hilippine /harity 2weepstakes 9ffice 8&/29; and the &hilippine Amusement and #aming /orporation 8&A#/9";, shall pay such rate of tax upon their taxable income as are imposed by this 2ection upon corporations or associations engaged in s similar business, industry, or acti!ity. 8<; "ates of ax on /ertain &assi!e Incomes. * 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8-; Capital Gains from the %ale of %hares of %tock )ot (raded in the %tock Exchange . * A final tax at the rates prescribed below shall be

10

INCOME TAX REVIEWER


imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP. CE Amount in excess of &+==,===PPPPP.. +=E 84; (ax on "ncome erived under the Expande d +oreign Currency eposit %yste m . * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8L; Intercorporate <i!idends. * <i!idends recei!ed by a domestic corporation from another domestic corporation shall not be subKect to tax. 8C; /apital #ains "ealized from the 2ale, 0xchange or <isposition of 7ands and)or %uildings. * A final tax of six percent 8BE; is hereby imposed on the gain presumed to ha!e been realized on the sale, exchange or disposition of lands and)or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, of such lands and)or buildings. 80; Jinimum /orporate Income ax on <omestic /orporations. * 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimu m ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimu m /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. S9&. #$. &ates of "ncome (ax on +oreign Corpora tions. 8A; ax on "esident (oreign /orporations. T 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subKect to an income tax e.ui!alent to thirty* fi!e percent 84CE; of the taxable income deri!ed in the preceding taxable year from all sources within the &hilippines' pro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates

11

INCOME TAX REVIEWER


within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, howe!er, hat a resident foreign corporation shall be granted the option to be taxed at fifteen percent 8+CE; on gross income under the same conditions, as pro!ided in 2ection -5 8A;. 8-; Jinimum /orporate Income ax on "esident (oreign /orporations. * A minimu m corporate income tax of two percent 8-E; of gross income, as prescribed under 2ection -5 80; of this /ode, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph 8+; of this 2ubsection. 84; International /arrier. * An international carrier doing business in the &hilippines shall pay a tax of two and one* half percent 8- +)-E; on its N#ross &hilippine %illingsN as defined hereunder' 8a; International Air /arrier. * N#ross &hilippine %illingsN refers to the amount of gross re!enue deri!ed from carriage of persons, excess baggage, cargo and mail originating from the &hilippines in a continuous and uninterrupted flight, irrespecti!e of the place of sale or issue and the place of payment of the ticket or passage document' &ro!ided, hat tickets re!alidated, exchanged and)or indorsed to another international airline form part of the #ross &hilippine %illings if the passenger boards a plane in a port or point in the &hilippines' &ro!ided, further, hat for a flight which originates from the &hilippines, but transshipment of passenger takes place at any port outside the &hilippines on another airline, only the ali.uot portion of the cost of the ticket corresponding to the leg flown from the &hilippines to the point of transshipment shall form part of #ross &hilippine %illings. 8b; International 2hipping. * N#ross &hilippine %illingsN means gross re!enue whether for passenger, cargo or mail originating from the &hilippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 8L; 9ffshore %anking 1nits. * he pro!isions of any law to the contrary notwithstanding, income deri!ed by offshore banking units authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with offshore banking units, including any interest income deri!ed from foreign currency loans granted to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with said offshore banking units shall be exempt from income tax. 8C; ax on %ranch &rofits "emittances. * Any profit remitted by a branch to its head office shall be subKect to a tax of fifteen 8+CE; which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof 8except those acti!ities which are registered with the &hilippine 0conomic Uone Authority;. he tax shall be collected and paid in the same manner as pro!ided in 2ections C5 and C: of this /ode' pro!ided, that interests, di!idends, rents, royalties, including remuneration for technical ser!ices, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains recei!ed by a foreign corporation during each taxable year from all sources within the &hilippines shall not be treated as branch profits unless the same are effecti!ely connected with the conduct of its trade or business in the &hilippines. 8B; "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. 8a; "egional or area head.uarters as defined in 2ection --8<<; shall not be subKect to income tax. 8b; "egional operating head.uarters as defined in 2ection --800; shall pay a tax of ten percent 8+=E; of their taxable income. 85; ax on /ertain Incomes "ecei!ed by a "esident (oreign /orporation. * 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8b; Income <eri!ed under the 0xpanded (oreign /urrency <eposit 2ystem. * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8c; /apital #ains from 2ale of 2hares of 2tock Not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP CE 9n any amount in excess of &+==,===PP. +=E 8d; Intercorporate <i!idends. * <i!idends recei!ed by a resident foreign corporation from a domestic corporation liable to tax under this /ode shall not be subKect to tax under this itle. 8%; ax on Nonresident (oreign /orporation. * 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a foreign corporation not engaged in trade or business in the &hilippines shall pay a tax e.ual to thirty* fi!e percent 84CE; of the gross income recei!ed during each taxable year from all sources within the &hilippines, such as interests, di!idends, rents, royalties, salaries,

12

INCOME TAX REVIEWER


premiums 8except reinsurance premiums;, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subKect to tax under subparagraphs 8/; and 8d;' &ro!ided, hat effecti!e +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and, effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. 8-; Nonresident /inematographic (ilm 9wner, 7essor or <istributor. * A cinematographic film owner, lessor, or distributor shall pay a tax of twenty* fi!e percent 8-CE; of its gross income from all sources within the &hilippines. 84; Nonresident 9wner or 7essor of 6essels /hartered by &hilippine Nationals. * A nonresident owner or lessor of !essels shall be subKect to a tax of four and one* half percent 8L +)-E; of gross rentals, lease or charter fees from leases or charters to (ilipino citizens or corporations, as appro!ed by the Jaritime Industry Authority. 8L; Nonresident 9wner or 7essor of Aircraft, Jachineries and 9ther 0.uipment. * "entals, charters and other fees deri!ed by a nonresident lessor of aircraft, machineries and other e.uipment shall be subKect to a tax of se!en and one* half percent 85 +)-E; of gross rentals or fees. 8C; ax on /ertain Incomes "ecei!ed by a Nonresident (oreign /orporation. T 8a; Interest on (oreign 7oans. * A final withholding tax at the rate of twenty percent 8-=E; is hereby imposed on the amount of interest on foreign loans contracted on or after August +, +3:B, 8b; Intercorporate <i!idends. * A final withholding tax at the rate of fifteen percent 8+CE; is hereby imposed on the amount of cash and)or property di!idends recei!ed from a domestic corporation, which shall be collected and paid as pro!ided in 2ection C5 8A; of this /ode, subKect to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to ha!e been paid in the &hilippines e.ui!alent to twenty percent 8-=E; for +335, nineteen percent 8+3E; for +33:, eighteen percent 8+:E; for +333, and se!enteen percent 8+5E; thereafter, which represents the difference between the regular income tax of thirty* fi!e percent 84CE; in +335, thirty* four percent 84LE; in +33:, and thirty* three percent 844E; in +333, and thirty* two percent 84-E; thereafter on corporations and the fifteen percent 8+CE; tax on di!idends as pro!ided in this subparagraph, 8c; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange' Not o!er &+==,===PPPP..PPPPPPP CE 9n any amount in excess of &+==,===PPPP +=E S9&. #9. "mposition of Accumula t e d Earnings (ax. "mprope rly 8A; In #eneral. * In addition to other taxes imposed by this itle, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in 2ubsection % hereof, an improperly accumulated earnings tax e.ual to ten percent 8+=E; of the improperly accumulated taxable income. 8%; ax on /orporations 2ubKect to Improperly Accumulated 0arnings ax. * 8+; In #eneral. * he improperly accumulated earnings tax imposed in the preceding 2ection shall apply to e!ery corporation formed or a!ailed for the purpose of a!oiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being di!ided or distributed. 8-; 0xceptions. * he improperly accumulated earnings tax as pro!ided for under this 2ection shall not apply to' 8a; &ublicly* held corporations, 8b; %anks and other nonbank financial intermediaries, and 8c; Insurance companies. 8/; 0!idence of &urpose to A!oid Income ax. * 8+; &rima (acie 0!idence. * the fact that any corporation is a mere holding company or in!estment company shall be prima facie e!idence of a purpose to a!oid the tax upon its shareholders or members. 8-; 0!idence <eterminati!e of &urpose. * he fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinati!e of the purpose to a!oid the tax upon its shareholders or members unless the corporation, by the clear preponderance of e!idence, shall pro!e to the contrary. 8<; Improperly Accumulated axable Income. * (or purposes of this 2ection, the term Nimproperly accumulated taxable incomeN means taxable incomeN adKusted by' 8+; Income exempt from tax, 8-; Income excluded from gross income, 84; Income subKect to final tax, and 8L; he amount of net operating loss carry* o!er deducted, And reduced by the sum of' 8+; <i!idends actually or constructi!ely paid, and 8-; Income tax paid for the taxable year. &ro!ided, howe!er, hat for corporations using the calendar year basis, the accumulated earnings under tax shall not apply on improperly accumulated income as of <ecember 4+, +335. In the case of corporations adopting the fiscal year accounting period, the improperly accumulated income not subKect to this tax, shall be reckoned, as of the end of the month comprising the twel!e 8+-;* month period of fiscal year +335* +33:. &(assification of tax 8a5ers2 I"DIDI DUAA. &OR+ORATIO". 9STAT9 and TRUST S9&. 31. Taxa<(e Income Defined. - he term taxable income means the pertinent items of gross income specified in this /ode, less the

13

INCOME TAX REVIEWER


deductions and)or personal and additional exemptions, if any, authorized for such types of income by this /ode or other special laws. IN<I6I<1A7' citizens' resident 8N0 )?9"7<?I<0; non resident 8N0 ) ?I $IN; 9/? 8N0 )?I $IN; alien' resident 8N0 )?I $IN; non* resident engaged in trade or business 8N0 )?I $IN; non* resident not engaged in trade) business 8#"922) ?I $IN; /9"&9"A I9N2' domestic 8N0 )?9"7<?I<0; foreign resident doing business 8N0 )?I $IN; non* resident 8not doing business; #"922) ?I $IN 02 A 02 and "12 2 T treated as ind. & taxpayerNs annual accounting period 8fiscal year or calendar year, as the case may be; in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the /ommissioner clearly reflects the income. If the taxpayerNs annual accounting period is other than a fiscal year, as defined in 2ection --8G;, or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an indi!idual, the taxable income shall be computed on the basis of the calendar year. S9&. %%. +eriod in 06ic6 Items of :ross Income Inc(uded . * he amount of all items of gross income shall be included in the gross income for the taxable year in which recei!ed by the taxpayer, unless, under methods of accounting permitted under 2ection L4, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. S9&. %*. +eriod for 06ic6 Deductions and &redits Ta=en . * he deductions pro!ided for in this itle shall be taken for the taxable year in which Npaid or accruedN or Npaid or incurredN, dependent upon the method of accounting the basis of which the net income is computed, unless in order to clearly reflect the income, the deductions should be taken as of a different period. In the case of the death of a taxpayer, there shall be allowed as deductions for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period. S9&. %6. &6an-e of Accountin- +eriod . If a taxpayer, other than an indi!idual, changes his accounting period from fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to another, the net income shall, with the appro!al of the /ommissioner, be computed on the basis of such new accounting period, subKect to the pro!isions of 2ection L5. S9&. %!. 1ina( or Ad>ust me n t Returns for a +eriod of Aess t6an T0e(ve '1#) ,ont6s. 8A; "eturns for 2hort &eriod "esulting from /hange of Accounting &eriod. * If a taxpayer, other than an indi!idual, with the appro!al of the /ommissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adKustment return shall be made for the period between the close of the last fiscal year for which return was made and the following <ecember 4+. If the change is from calendar year to fiscal year, a separate final or adKustment return shall be made for the period between the close of the last calendar

tax rate on ordinary income) tax rate for capital gain regular tax rate) special tax rates final tax T creditable tax withholding tax flat rate) graduation of tax rates min marginal rate ) max marginal rate automatic increase of tax rates by +333 and -=== L. Accounting periods & methods of accounting for taxable income & deductible expenses a. /alendar year) fiscal year

Accounting period, he accounting period is the taxable year. It is a fixed period of time, consisting of +- months, upon the basis of w)c the taxable income is computed & the income tax imposed. Sec. ##. efinitions . F 8&; he term @taxa<(e 5ear@ means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this itle. N axable yearN includes, in the case of a return made for a fractional part of a year under the pro!isions of this itle or under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the commissioner, the period for which such return is made. 8G; he term @fisca( 5ear@ means an accounting period of twel!e 8+-; months ending on the last day of any month other than <ecember. 8"; he terms @8aid or incurre d@ and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle. &3A+T9R DIII - A&&OU"TI": +9RIODS A"D ,9T3ODS O1 A&&OU"TI": S9&. %3. :enera( Ru(e . * shall be computed upon he taxable income the basis of the

14

INCOME TAX REVIEWER


year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adKustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. 8%; Income &om8ute d on 4asis of S6ort +eriod . * ?here a separate final or adKustment return is made under 2ubsection 8A; on account of a change in the accounting period, and in all other cases where a separate final or adKustment return is re.uired or permitted by rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adKustment return is made. !hen is income to be report e d"ncome construc tively received Sec. *1, Rev. Re-. "o. # !hen income is to be reporte d . #ains, profits, & income are to be included in the gross income for the taxable year in w)c they are recei!ed by the taxpayer, 1N7022 they are included when they accrue to him in accordance w) the appro!ed method of accounting followed by him. If a person sues in one year on a pecuniary claim or for property, & money or property is recei!ed on a Kudgment therefor in a later year, income is realized in $A D0A", assuming that the money or property would ha!e been income in the earliest year if then recei!ed. his is true of a reco!ery for patent infringement. %ad debts or accounts charged off subse.uent to Jarch +, +3+4, bec. of the fact that they were determined to be worthless, w)c are subse.uently reco!ered, whether or not by suit, constitute income for $A D0A" IN ?$I/$ "0/960"0<, regardless of the date when amounts were charged off. Sec. *#, Rev. Re-. "o. # "ncome construc tively received. Income w)c is credited to the account of, or set apart for a taxpayer & w)c is drawn upon him at any time is subKect to tax for the D0A" <1"IN# ?$I/$ 29 /"0<I 0< 9" 20 A&A" , although not actually reduced to possession. o constitute receipt in such a case, the income must be credited to the taxpayer w)o any substantial limitation or restriction as to the * time or manner of payment or condition upon w)c payment is to be made. A %99F 0N "D, if made, should indicate an absolute transfer fr. one account to another. If the income is credited but is set apart, such income must be un.ualifiedly subKect to the demand of the taxpayer. ?hen a corporation contingently credits 0es w) bonus stock, %1 the stock is not a!ailable to such 0es until some future date, the mere crediting on the books of the corporation does N9 constitute receipt. Sec. *3, Rev. Re-. "o. # 9xam8(es of construc tive recei8t 8+; Interest /oupons. ?hen interest coupons * ha!e matured & are payable, but ha!e not been cashed, such interest payment, though not collected when due & payable, * is ne!ertheless a!ailable for the taxpayer & should therefore be included in his gross income for the D0A" <1"IN# ?$I/$ 21/$ /91&9N2 JA 1"0<. his is true if the coupons are exchanged for other property instead of e!entually being cashed. <efaulted coupons are income for the year in w)c paid. 8-; 2hare of profits. he distributi!e share of the profits of a partner in a gen. partnership duly registered is regarded as recei!ed by him, although not distributed. 84; Interest on bank deposits. Interest credited on sa!ings bank deposits, e!en though the bank nominally has a rule, seldom or ne!er enforced, that it may re.uire so many days notice in ad!ance of cashing depositors checks, is IN/9J0 9 $0 <0&92I 9" ?$0N /"0<I 0<. 8L; /redit to shareholders of building & loan. An amount credited to shareholders of a bldg. & loan assoc., when such credit passes w)o restriction to the shareholder, has a taxable status as IN/9J0 (9" $0 D0A" 9( $0 /"0<I . ?here the amount of such accumulations has not become a!ailable to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the shareholder is IN/9J0 (9" $0 D0A" 9( $0 JA 1"I D 9( $0 2$A"0. Revenue Re-u(a tion G # +rovisions Sec. 166. General &ule . T he method of accounting regularly employed by the taxpayer in keeping his books, if such method clearly reflects his income is to be followed w) respect to the time as of w)c items of gross income & deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting w)c clearly reflects his income, the computation shall be made in such manner as in the opinion of the /ommissioner of Internal "e!enue clearly reflects it. Sec. 16!. *ethods of accounting. T It is recognized that no uniform method of accounting can be prescribed for all taxpayers, & the law contemplates that each taxpayer shall adopt such forms & systems of accounting as are in his Kudgment best suited to his purpose. 0ach taxpayer is re.uired by law to make a return of his true income. $e must, therefore, maintain such accounting records as will enable him to do so. Any appro!ed standard method of accounting w)c reflects taxpayers income may be adopted. Among the essentials are the following' In all cases in w)c the production, purchase, or sale of merchandise of any kind is an income*

15

INCOME TAX REVIEWER


producing factor, in!entories of the merchandise on hand 8including finished goods, work in process, raw materials, & supplies; should be taken at the beginning & end of the year & used in computing the net income of the year in accordance w) sections +LL to +C+ of these regulations. 0xpenditures made during the year should be properly classified as between capital & income, that is to say, expenditures for items of plant, e.uipment, etc., w)c ha!e a useful life extending substantially beyond the year should be charged to a capital account & not to an expense account, & In any case in w)c the cost of capital assets is being reco!ered through deductions for wear & tear, depletion, or obsolescence, any expenditure 8other than ordinary repairs; made to restore the property or prolong its useful life should be added to the property account or charged against the appropriate reser!e & not to current expenses. Sec. 16$. Changes in accounting methods . T he true income, computed under the law, shall in all cases be entered in the return. If for any reason the basis of reporting income subKect to tax is changed, the taxpayer shall attach to his return a separate statement setting forth for the taxable year & for the preceding year the classes of items differently treated under the two systems, specifying in particular all amounts duplicated or entirely omitted as the result of such change A taxpayer who changes the method of accounting employed in keeping his book shall, before computing his income upon such new method for purposes of taxation, secure the consent of the /ommissioner of Internal "e!enue. (or the purposes of this section, a change in the method of accounting employed in keeping books means any change in the accounting treatment of items of income or deductions, such as a change fr. cash receipts & disbursements method to the accrual method, or !ice !ersa, a change in!ol!ing the basis of !aluation employed in the computation of in!entories, a change fr. the cash or accrual method to the long* term contract method, or !ice !ersa, a change in the long* term contract method fr. the percentage of completion basis to the complete contract basis, or !ice !ersa, or a change in!ol!ing the adoption of, or a change in the use of, any other specialized basis of computing net income such as the crop basis. Application for permission to change the method of accounting employed & the basis upon w)c the return is made shall be filed w)in 3= days after the beginning of the taxable year to be co!ered by the return. he application shall be accompanied by a statement specifying all amounts w)c would be duplicated or entirely omitted as a result of the proposed change. &ermission to change the method of accounting will not be granted unless the taxpayer & the /ommissioner of Internal "e!enue agree to the terms & conditions under w)c the change will be effected. Sec. 169. Accounting period . T Income returns, whether for indi!iduals or corporations, associations, or partnerships, re.uired to be made & their income computed tax for are for each calendar year ending on <ecember 4+ st of e!ery year. $owe!er, corporations, associations, or partnerships may w) the appro!al of the /ommissioner of Internal "e!enue first secured, file their returns & compute their income on the basis of a fiscal year w)c means an accounting period of twel!e months ending on the last day of any month other than <ecember. %ut in no instance shall indi!idual taxpayers be authorized to establish a fiscal year as basis for filing their returns & computing their income. Sec. 1!C. !hen included in gross income. T 0xcept as otherwise pro!ided in section 43 in the case of the death of a taxpayer, gains, profits, & income are to be included in the gross income for the taxable year in w)c they are recei!ed by the taxpayer, unless they are included as of a different period in accordance w) the appro!ed method of accounting followed by him. If a taxpayer has died, there shall also be included in computing net income for the taxable period in w)c he died amounts accrued up to the date of his death if not otherwise properly includible VallowableW in respect of such period or a prior period, regardless of the fact that the decedent may ha!e kept his books & made his returns on the basis of cash receipts & disbursements. Sec. 1!1. .'aid or incurre d / 0 .paid or accrued/ . F he terms Hpaid or incurred I & Hpaid or accrued I will be construed according to the method of accounting upon the basis of w)c the net income is computed by the taxpayer. he deductions & credits must be taken for the taxable year in w)c Hpaid or accrued I or Hpaid or incurred I, unless in order clearly to reflect the income such deductions or credits should be taken as of a different period. If a taxpayer desires to claim a deduction or a credit as of a period other than the period in w)c it was Hpaid or accrued I or Hpaid or incurred I, he shall attach to his return a statement setting forth his re.uest for consideration of the case by the /ommissioner of Internal "e!enue together w) a complete statement of the facts upon w)c he relies. $owe!er, in his income tax return he shall take the deduction or credit only for the taxable period in w)c it was actually Hpaid or incurred I, or Hpaid or accrued I, as the case may be. 1pon the audit of the return, the /ommissioner of Internal re!enue will decide whether the case is w)in the exception pro!ided by the law, & the taxpayer will be ad!ised as to the period for w)c the deduction or credit is properly allowable. he pro!isions of paragraph 8a; of this section in general are not applicable w) respect to the taxable period during w)c the taxpayer dies. In such case, there shall also be allowed as deductions & credits for such taxable period amounts accrued & credits for such taxable period amounts accrued up to the date of his death if not otherwise allowable w) respect to such period or a prior period, regardless of the fact that the decedent was re.uired to keep his books & make his returns on the basis of cash receipts & disbursements. Sec. 1!#. Change of accounting period . T If a corporation, including a duly registered general co*partnership, desires to change its accounting period fr. fiscal year to calendar year or fr.

16

INCOME TAX REVIEWER


calendar year to fiscal year, or fr. one fiscal year to another, it shall at any time not less than thirty days prior to the date fixed in section LB8b; of the /ode for the filing of its return on the basis of its original accounting period submit a written application to the /ommissioner of Internal "e!enue designating the proposed date for the closing of its new taxable year, together w) a statement of the date on w)c the books of account were opened & closed each year for the past three year, the date on w)c the taxable year began & ended as shown on the returns filed for the past three years, & the reasons why the change in accounting period is desired. b. $ow is income recognized under the ff. situations' i. 7ong* term contracts S9&. %$. Accountin- for Aon-- term &ontrac ts . * Income from long* term contracts shall be reported for tax purposes in the manner as pro!ided in this 2ection. As used herein, the term Nlong* term contractsN means building, installation or construction contracts co!ering a period in excess of one 8+; year. &ersons whose gross income is deri!ed in whole or in part from such contracts shall report such income upon the basis of percentage of completion. he return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable year of the entire work performed under contract. here should be deducted from such gross income all expenditures made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the /ommissioner may permit or re.uire an amended return. ii. Installment sales S9&. %9. Insta((me n t 4asis. F 8A; 2ales of <ealers in &ersonal &roperty. * 1nder rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually recei!ed in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. 8%; 2ales of "ealty and /asual 2ales of &ersonality. * In the case 8+; of a casual sale or other casual disposition of personal property 8other than property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year;, for a price exceeding 9ne thousand pesos 8&+,===;, or 8-; of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty* fi!e percent 8-CE; of the selling price, the income may, under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, be returned on the basis and in the manner abo!e prescribed in this 2ection. As used in this 2ection, the term Ninitial paymentsN means the payments recei!ed in cash or property other than e!idences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. 8/; 2ales of "eal &roperty /onsidered as /apital Asset by Indi!iduals. * An indi!idual who sells or disposes of real property, considered as capital asset, and is otherwise .ualified to report the gain therefrom under 2ubsection 8%; may pay the capital gains tax in installments under rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8<; /hange from Accrual to Installment %asis. * If a taxpayer entitled to the benefits of 2ubsection 8A; elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subse.uent year, amounts actually recei!ed during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. S9&. *C. A((ocation of Income and Deductions . * In the case of two or more organizations, trades or businesses 8whether or not incorporated and whether or not organized in the &hilippines; owned or controlled directly or indirectly by the same interests, the /ommissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to pre!ent e!asion of taxes or clearly to reflect the income of any such organization, trade or business. iii. ermination of leasehold RR G #. Sec. %9. "mprov e m e n ts by lessees --?hen buildings are erected or impro!ements made by a lessee in pursuance of an agreement w) the lessor & such buildings or impro!ements are not subKect to remo!al by the lessee, the lessor may at his option report the income therefr. upon either of the following bases' 8a; he lessor may report as income at the time when such buildings or impro!ements are completed the fair market !alue of such buildings or impro!ements subKect to the lease. (completion basis) 8b; he lessor may spread o!er the life of the lease the estimated depreciated !alue of such buildings or impro!ements at the termination of the lease & report as income for each of the lease an ade.uate part thereof. 8 Pro-rated basis) If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the prop. prior to the time originally fixed for the termination of the lease, the lessor recei!es additional income for the year in w)c the lease is so terminated to the extent that the !alue of such buildings or impro!ements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or impro!ements. No appreciation in !alue due to causes other than the premature termination of the lease shall be included. /on!ersely, if the bldg. or impro!ements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as loss for the year

17

INCOME TAX REVIEWER


when such destruction takes place the amount pre!iously reported as income bec. of the erection of such buildings or impro!ements, less any sal!age !alue subKect to the lease to the extent that such loss was not compensated for by insurance. If the bldgs. or impro!ements destroyed were ac.uired prior to Jarch +, +=+4, the deduction shall be based on the cost or the !alue subKect to the lease to the extent that such loss was not compensated for by insurance. c. "ecording income & expense) Feeping of books i. ii. iii. i!. /omputing gross) net income Allocating income & expense Jatching principle) method) accrual) mixed Acctg. method reflects income w)c cash clearly thereon, the interest payments shall be included in gross income. 8-; Amount "ecei!ed by Insured as "eturn of &remium. * he amount recei!ed by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract. 84; #ifts, %e.uests, and <e!ises. X he !alue of property ac.uired by gift, be.uest, de!ise, or descent' &ro!ided, howe!er, hat income from such property, as well as gift, be.uest, de!ise or descent of income from any property, in cases of transfers of di!ided interest, shall be included in gross income. 8L; /ompensation for InKuries or 2ickness. * amounts recei!ed, through Accident or $ealth Insurance or under ?orkmenNs /ompensation Acts, as compensation for personal inKuries or sickness, plus the amounts of any damages recei!ed, whether by suit or agreement, on account of such inKuries or sickness. 8C; Income 0xempt under reaty. * Income of any kind, to the extent re.uired by any treaty obligation binding upon the #o!ernment of the &hilippines. 8B; "etirement %enefits, &ensions, #ratuities, etc.* 8a; "etirement benefits recei!ed under "epublic Act No. 5BL+ and those recei!ed by officials and employees of pri!ate firms, whether indi!idual or corporate, in accordance with a reasonable pri!ate benefit plan maintained by the employer' &ro!ided, hat the retiring official or employee has been in the ser!ice of the same employer for at least ten 8+=; years and is not less than fifty 8C=; years of age at the time of his retirement' &ro!ided, further, hat the benefits granted under this subparagraph shall be a!ailed of by an official or employee only once. (or purposes of this 2ubsection, the term Nreasonable pri!ate benefit planN means a pension, gratuity, stock bonus or profit* sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is pro!ided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be di!erted to, any purpose other than for the exclusi!e benefit of the said officials and employees. 8b; Any amount recei!ed by an official or employee or by his heirs from the employer as a conse.uence of separation of such official or employee from the ser!ice of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. 8c; he pro!isions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits recei!ed by resident or nonresident citizens of the &hilippines or aliens who come to reside permanently in the &hilippines from foreign go!ernment agencies and other institutions, pri!ate or public.

Sec. ## 'R), "IR&. he terms @8aid or incurred@ and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle. !. III. IT9,S 9E&AUSIO"S <ifferences bet. financial acctg. O1 :ROSS tax acctg.) A"D

I"&O,9

Sec. 31. (axable income efined . F he term Htaxable income I means the pertinent items of gross income specified in this /ode, less the deductions, and) or personal and additional exemptions if any, authorized by such types of income by this /ode or other special laws. Sec. 3#. Gross "ncome . F 'a) General definition . T #ross income means all income fr. whate!er source deri!ed, including 8but not limited to; the following items' +. /ompensation for ser!ices in whate!er form paid, including fees, salaries, wages, commissions, & similar items, -. #ross income deri!ed fr. the conduct of trade or business or the exercise of profession, 4. #ains deri!ed fr. dealings in property, L. Interests, C. "ents, B. "oyalties, 5. <i!idends, :. Annuities, 3. &rizes & winnings, +=. &ensions, & ++. &artners distributi!e share of the gross income of general professional partnership. '<) Exclusions fr. gross income . T he following items shall not be included in gross income & shall be exempt fr. taxation under this itle' +. 7ife insurance . T he proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest

18

INCOME TAX REVIEWER


8d; &ayments of benefits due or to become due to any person residing in the &hilippines under the laws of the 1nited 2tates administered by the 1nited 2tates 6eterans Administration. 8e; %enefits recei!ed from or enKoyed under the 2ocial 2ecurity 2ystem in accordance with the pro!isions of "epublic Act No. :-:-. 8f; %enefits recei!ed from the #2I2 under "epublic Act No. :-3+, including retirement gratuity recei!ed by go!ernment officials and employees. 85; Jiscellaneous Items. T 8a; Income <eri!ed by (oreign #o!ernment. * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. 8b; Income <eri!ed by the #o!ernment or its &olitical 2ubdi!isions. * Income deri!ed from any public utility or from the exercise of any essential go!ernmental function accruing to the #o!ernment of the &hilippines or to any political subdi!ision thereof. 8c; &rizes and Awards. * &rizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or ci!ic achie!ement but only if' 8i; he recipient was selected without any action on his part to enter the contest or proceeding, and 8ii; he recipient is not re.uired to render substantial future ser!ices as a condition to recei!ing the prize or award. 8d; &rizes and Awards in sports /ompetition. * All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the &hilippines or abroad and sanctioned by their national sports associations. 8e; +4 th Jonth &ay and 9ther %enefits. * #ross benefits recei!ed by officials and employees of public and pri!ate entities' &ro!ided, howe!er, hat the total exclusion under this subparagraph shall not exceed hirty thousand pesos 8&4=,===; which shall co!er' 8i; %enefits recei!ed by officials and employees of the national and local go!ernment pursuant to "epublic Act No. BB:B, 8ii; %enefits recei!ed by employees pursuant to &residential <ecree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, 8iii; %enefits recei!ed by officials and employees not co!ered by &residential decree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, and 8i!; 9ther benefits such as producti!ity incenti!es and /hristmas bonus' &ro!ided, further, hat the ceiling of hirty thousand pesos 8&4=,===; may be increased through rules and regulations issued by the 2ecretary of (inance, upon recommendation of the /ommissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. 8f; #2I2, 222, Jedicare and 9ther /ontributions. * #2I2, 222, Jedicare and &ag*ibig contributions, and union dues of indi!iduals. 8g; #ains from the 2ale of %onds, <ebentures or other /ertificate of Indebtedness. * #ains realized from the same or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than fi!e 8C; years. 8h; #ains from "edemption of 2hares in Jutual (und. * #ains realized by the in!estor upon redemption of shares of stock in a mutual fund company as defined in 2ection -- 8%%; of this /ode. A. Income fr. whate!er source deri!ed +. -. Income tax is source blind. reatment of special items' a. b. 'Sec. *C RR #) c. d. ax refunds 1ound treasure "eco!ery of accounts pre!iously written off (orgi!eness of indebtedness

4. Items of gross income A. /ompensation for ser!ices, including fees, commission & similar items +. axable compensation income &ursuant to an 0r*0e relationship Sec.3# 'A), "IR&. %ee above. Sec. #.! $ 1 'A) RR #- 9$ De Aeon2 /ompensation for personal ser!ices is usually made in money but it may also be paid for in kind, or both in money & kind If payment is made in cash, the full amount recei!ed is subKect to tax. If ser!ices are paid for w) something other than money, the (J6 of the thing taken in payment is the amount to be included as income. If the ser!ices were rendered at a stipulated price, in the absence of e!idence to the contrary, such price shall be presumed to be the (J6 of the compensation recei!ed. 0xamples of compensation in kind' +. /ompensation paid in company stocks is to be treated as if the company had sold the stock for its (J6 & paid the 00 in cash. -. ?here li!ing .uarters are furnished in addition to a cash salary, the rental !alue should be reported as income. 4. ?hen meals are gi!en an 00, the !alue thereof constitutes income subKect to tax. L. &romissory notes &)or other e!idences of indebtedness constitute income according to the amount of their (J6. a. (actors recognition' i. to consider in income

/on!enience of the employer rule

19

INCOME TAX REVIEWER


Sec. #.! $ 1'A- #, 6a) , RR #- 9$ ii. iii. (actor of restricted preference (orced sa!ings consumption ) forced 83; 0ducational assistance to the employee or his dependents, and 8+=; 7ife or health insurance and other non* life insurance premiums or similar amounts in excess of what the law allows. '&) 1rin-e 4enefits "ot Taxa<(e . * he following fringe benefits are not taxable under this 2ection' 8+; fringe benefits which are authorized and exempted from tax under special laws, 8-; /ontributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans, 84; %enefits gi!en to the rank and file employees, whether granted under a collecti!e bargaining agreement or not, and 8L; <e minimis benefits as defined in the rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, such rules and regulations as are necessary to carry out efficiently and fairly the pro!isions of this 2ection, taking into account the peculiar nature and special need of the trade, business or profession of the employer. Revenue Re-u(ation 3-9$ ii. iii. (ringe benefits not taxable' 2ec. 44 / abo!e. 2ee

b. reatment of the following compensation income' i. (ringe benefits to managerial & super!isory 0es 0O/71<0< (". /9J&0N2A I9N IN/9J0) taxed separately.

S9&. 33. S8ecia( Treat m e n t of 1rin-e 4enefit.'A) Im8osition of Tax . - A final tax of thirty* four percent 84LE; effecti!e Ranuary +, +33:, thirty* three percent 844E; effecti!e Ranuary +, +333, and thirty* two percent 84-E; effecti!e Ranuary +, -=== and thereafter, is hereby imposed on the grossed* up monetary !alue of fringe benefit furnished or granted to the employee 8except rank and file employees as defined herein; by the employer, whether an indi!idual or a corporation 8unless the fringe benefit is re.uired by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the con!enience or ad!antage of the employer;. he tax herein imposed is payable by the employer which tax shall be paid in the same manner as pro!ided for under 2ection C5 8A; of this /ode. he grossed* up monetary !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by sixty* six percent 8BBE; effecti!e Ranuary +, +33:, sixty* se!en percent 8B5E; effecti!e Ranuary +, +333, and sixty* eight percent 8B:E; effecti!e Ranuary +, -=== and thereafter' &ro!ided, howe!er, hat fringe benefit furnished to employees and taxable under 2ubsections 8%;, 8/;, 8<; and 80; of 2ection -C shall be taxed at the applicable rates imposed thereat' &ro!ided, further, hat the grossed *1p !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by the difference between one hundred percent 8+==E; and the applicable rates of income tax under 2ubsections 8%;, 8/;, 8<;, and 80; of 2ection -C. '4) 1rin-e 4enefit defined .* (or purposes of this 2ection, the term @frin-e <enefi t@ means any good, ser!ice or other benefit furnished or granted in cash or in kind by an employer to an indi!idual employee 8except rank and file employees as defined herein; such as, but not limited to, the following' 8+; $ousing, 8-; 0xpense account, 84; 6ehicle of any kind, 8L; $ousehold personnel, such as maid, dri!er and others, 8C; Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted, B; Jembership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations, 85; 0xpenses for foreign tra!el, 8:; $oliday and !acation expenses,

reatment of the ff. items for rank & file 0es'

Non* cash benefits' free use of facilities Jeals & lodging) li!ing .uarters Imputed rent) use of household durable transportation ) representation & li!ing allowance C. other fringe benefits ,eanin- of ran= H fi(e2 Sec. ## 'AA) , "IR& . he term @ran= and fi(e em8(o5e es@ shall mean all employees who are holding neither managerial nor super!isory position as defined under existing pro!isions of the 7abor /ode of the &hilippines, as amended. Sec. #.! $- 1 RR #- 9$ 9xem8t fr. Tax &o((ector vs. 3ende rson 1acts2 Arthur $enderson is the president of the American International 1nderwriters for the &hilippines w)c represents a group of American insurance companies engaged in the business of general insurance 8except life insurance;. $e recei!es a basic annual salary of &4=,=== & allowance for house rental & utilities 8light, water, telephone, etc.;. Although he & his wife are childless & are only two in the family, they li!ed in a large apartment pro!ided for by his employer. As company president, he & his wife had to entertain & put up houseguests for the company. he %I" now seeks to collect taxes on the allowances for rental & utilities expenses.

+. -. 4. L.

20

INCOME TAX REVIEWER


3e(d2 he exigencies of $endersons high executi!e position, not to mention social standing, demanded & compelled them to li!e in a more spacious & pretentious .uarters like the ones they had occupied. Although entertaining & putting up houseguests & guests of the 0" were not $endersons predominant occupation as president, he & his wife had to do so. hat is why his 0" 8corporation; had to grant him allowances for rental & utilities in addition to his annual basic salary in order to take care of those extra expenses for rental & utilities in excess of their personal needs. $ence, the fact that the taxpayers had to li!e or did not ha!e to li!e in the apartments chosen by the 0" is of no moment, for no part of the allowances in .uestion redounded to their personal benefit or was retained by them. heir bills for rental & utilities were paid directly by the 0" to the creditors. $enderson is entitle to a ratable !alue of the allowances, & only a reasonable amount they would ha!e spent for house rentals & utilities should be the amount subKect to tax, & the excess considered as expenses of the corporation. +irovano vs. &ommissioner 1acts2 &iro!ano was president & general manager of the <e la "ama 2teamship /ompany until the time of his death. he company had insured his life w) !arious insurance companies for a total sum of &+,===,===, w) itself as the beneficiary. After &iro!anos death, the company renounced its rights o!er the proceeds of the insurance policies in fa!or of &iro!anos children. he /I" collected a donees gift tax fr. the children. he latter contest the imposition on the ground that the act of the company was not moti!ated solely by its sense of gratitude but was made for compensation for &iro!anos ser!ices to the company. 3e(d2 A donation made out of gratitude for past ser!ices is subKect to the donees gift tax. Art. 5-B, N// pro!ides that Hwhen a person gi!es to another a thing on account of the latters merit or of the ser!ices rendered by him pro!ided they do not constitute a demandable debt, the con!eyances remain a gift or donation.I In the /A%, it was emphasized in the <irectors resolution that the company decided to gi!e the heirs the proceeds Hout of gratitude I. c. i. Income earner & the applicable tax rates "egular compensation income modified gross 8b; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual citizen of the &hilippines who is residing outside of the &hilippines including o!erseas contract workers referred to in 2ubsection8/; of 2ection -4 hereof, and 8c; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8b;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual alien who is a resident of the &hilippines. he tax shall be computed in accordance with and at the rates established in the following schedule'

Not o!er &+=,===PPPPPPPPPPPPP CE 9!er &+=,=== but not o!er &4=,===PPPP &C== Q+=E of the excess o!er &+=,=== 9!er &4=,=== but not o!er &5=,===PPP &-,C== Q+ CE of the excess o!er &4=,=== 9!er &5=,=== but not o!er &+L=,===PP..:,C== Q - = E of the excess o!er &5=,=== 9!er &+L=,=== but not o!er &-C=,===P &--,C== Q - CE of the excess o!er &+L=,=== 9!er &-C=,=== but not o!er &C==,===P &C=,=== Q 4 =E of the excess o!er &-C=,=== 9!er &C==,=== PPPPPPPPPPPP &+-C,=== Q 4 L E of the excess o!er &C==,=== in +33:. &ro!ided, hat effecti!e Ranuary +, +333, the top marginal rate shall be thirty* three percent 844E; and effecti!e Ranuary +, -===, the said rate shall be thirty* two percent 84-E;. (or married indi!iduals, the husband and wife, subKect to the pro!ision of 2ection C+ 8<; hereof, shall compute separately their indi!idual income tax based on their respecti!e total taxable income' &ro!ided, hat if any income cannot be definitely attributed to or identified as income exclusi!ely earned or realized by either of the spouses, the same shall be di!ided e.ually between the spouses for the purpose of determining their respecti!e taxable income. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half

9nly ind. taxpayers earn comp. income Applicable rates' /itizens, "es Alien & Non* "es. Alien engaged in trade or business' S9&. #%. Income Tax Rates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein,

21

INCOME TAX REVIEWER


percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E 8-; /ash and)or &roperty <i!idends * A final tax at the following rates shall be imposed upon the cash and)or property di!idends actually or constructi!ely recei!ed by an indi!idual from a domestic corporation or from a Koint stock company, insurance or mutual fund companies and regional operating head.uarters of multinational companies, or on the share of an indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or on the share of an indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture or consortium taxable as a corporation of which he is a member or co* !enturer' 2ix percent 8BE; beginning Ranuary +, +33:, 0ight percent 8:E; beginning Ranuary +, +333, en percent 8+=E beginning Ranuary +, -===. &ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or agencies or to go!ernment* owned or controlled corporations shall be determined either under 2ection -L 8A; or under this 2ubsection, at the option of the taxpayer. 8-; 0xception. * he pro!isions of paragraph 8+; of this 2ubsection to the contrary notwithstanding, capital gains presumed to ha!e been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in ac.uiring or constructing a new principal residence within eighteen 8+:; calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this 2ubsection' &ro!ided, hat the historical cost or adKusted basis of the real property sold or disposed shall be carried o!er to the new principal residence built or ac.uired' &ro!ided, further, hat the /ommissioner shall ha!e been duly notified by the taxpayer within thirty 84=; days from the date of sale or disposition through a prescribed return of his intention to a!ail of the tax exemption herein mentioned' &ro!ided, still further, hat the said tax exemption can only be a!ailed of once e!ery ten 8+=; years' &ro!ided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to ha!e been realized from the sale or disposition shall be subKect to capital gains tax. (or this purpose, the gross selling price or fair market !alue at the time of sale, whiche!er is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph 8+; of this 2ubsection shall be imposed thereon. CE * 4LE 8+33:; 44E 8+333; 4-E 8-===;) modified gross "on- residen t A(ien "9T4 #*I gross compensation income 8no deductions) exemption allowed; )ote ' special cases' alien employed by regional $G of multination, offshore banking units) petroleum ser!ice contractor +CE final tax i. (inal tax on fringe benefit 8N9N* "ANF and (I70; at the ff. rates'

4LE +33:, 44E +333, 4-E -=== based on the grossed up monetary !alue of fringe benefit. he (INA7 AO w)held & pd. by 0es at ff. rates' +. "es. /it & "es. Aliens T 4LE +33:, 44E +333, 4-E -===. -. Aliens employed by regional $G of a multinational corp. +CE 4. Non* res. alien N9 engaged in trade or business' -CE AO %A20' grossed up monetary !alue of fringe benefits

22

INCOME TAX REVIEWER


Note: he grossed up monetary !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by the tax rate. +(ease read2 Rev. Re-. 3- 9$ -. 0xclusions fr. gross income a. /ompensation for inKuries or sickness Sec. 3# '<,% ), "IR&. &om8ensa tion for in>uries or sic=ness . F Amounts recei!ed, through Accident or $ealth Insurance or under ?orkmens /ompensation Acts, as compensation for personal inKuries or sickness, plus the amounts of any damages recei!ed whether by suit or agreement on account of such inKuries or sickness. b. Income exempt under treaty Sec. 3# '<,* ), "IR&. Income exem8 t under trea t5 . T Income of any kind, to the extent re.uired by any treaty obligation binding upon the #o!ernment of the &hilippines. :arrison vs. &A 3e(d2 he exemption granted to the petitioners by the Jilitary %ases Agreement fr. payment of income tax is not absolute. %y the explicit terms of the J%A, it exists only as regards income deri!ed fr. their employment Hin the &hilippines in connection w) the construction, maintenance, operation or defense of the basesI, it does not exist in respect of other income, i.e. obtained or proceeding fr. &hilippine sources or sources other than 1.2. sources. 9b!iously, w) respect to the latter form of income, the petitioners & all other American nationals who are residents of the &hilippines are legally bound to pay the tax thereon. 4IR Ru(in-s2 C31- 91 '1e<. #*, 1991 ) 1acts2 he "efugee 2er!ices &hilippines, Inc. 8"2&;, through Rosefina Jendoza, re.uested for tax exemption fr. the %I" on the ground that it is a non* stock, non* profit organization implementing proKects for the 1nited Nations $igh /ommissioner for "efugees 81N$/";. 3e(d2 ax exemption denied. Art. +: of the /on!ention on the &ri!ileges & Immunities of the 1nited Nations is specific as to who are the employees or officials entitled to tax exemption. 9nly officials of the 1nited Nations & of the specialized agencies of the 1N whose names are included in the list of officials w)c shall fr. time to time be communicated & made known to the go!ernments of the member* nations are exempt fr. the payment of income tax. In this case, there is no showing that the "2& & its employees had been included in such list. he amounts that "2& recei!es fr. the 1N represent the consideration for the ser!ices it renders under a contract w) it. 2uch being the case, "2&s relationship w) 1N$/" is by !irtue of a contract, & not as conferred under the pro!isions of the 1N /harters. C%#- 91 ',arc6 13, 1991 ) 1acts2 he /onsuelo Uobel Alger (oundation 8/UA(;, a 1.2. corporation not engaged in business in the &hilippines, re.uested for confirmation of its opinion to the effect that the gross amount of interest deri!ed by it fr. its &hilippine currency bank deposits in the &hilippines is subKect to a +CE w)holding tax. 3e(d2 &ursuant to 2ec. -C8b;8+;, NI"/, foreign corporations not engaged in trade or business in the &hilippines shall pay a tax e.ual to 4CE of gross income recei!ed during each taxable year fr. all sources w)in the &hilippines such as interest, di!idends, rents, royalties, etc. $owe!er, Art. +-8-; of the "&*12 ax reaty pro!ides that Hinterest deri!ed by a resident of one of the contracting 2tates fr. sources w)in the other contracting 2tate shall not be taxed by the other contracting 2tate at a rate in excess of +CE of the gross amount of such interest.I 2uch being the case, the /UA(s interest income deri!ed fr. its &hilippine currency bank deposits is subKect to a +CE tax rate pursuant to Art. +-8-; of the "&*12 ax reaty. "ead at least one tax treaty. c. +4 th month pay & other benefits Sec. 3# '4, !, e). 12 th *onth 'ay and 3ther 4enefits. * #ross benefits recei!ed by officials and employees of public and pri!ate entities' &ro!ided, howe!er, hat the total exclusion under this subparagraph shall not exceed hirty thousand pesos 8&4=,===; which shall co!er' 8i; %enefits recei!ed by officials and employees of the national and local go!ernment pursuant to "epublic Act No. BB:B, 8ii; %enefits recei!ed by employees pursuant to &residential <ecree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, 8iii; %enefits recei!ed by officials and employees not co!ered by &residential decree No. :C+, as amended by Jemorandum 9rder No. -:, dated August +4, +3:B, and 8i!; 9ther benefits such as producti!ity incenti!es and /hristmas bonus' Pro ided, !"rt#er, hat the ceiling of hirty thousand pesos 8&4=,===; may be increased through rules and regulations issued by the 2ecretary of (inance, upon recommendation of the /ommissioner, after considering among others, the effect on the same of the inflation rate at the end of the taxable year. i. ii. Items to be included) 7imitation "e.uirements for exclusion benefits) 2eparation

%. &ensions) "etirement pay +. -. 0xclusions

axable items ' &ensions 4enefits5

Sec. 3# '4,6, 1- f). &etire me n t 'ensions5 Gratuities5 etc.-

8a; "etirement benefits recei!ed under "epublic Act No. 5BL+ and those recei!ed by officials and employees of pri!ate firms, whether indi!idual or corporate, in accordance with a reasonable pri!ate benefit plan maintained by the employer' &ro!ided, hat the retiring official or employee has been in the ser!ice of the same employer for at least ten 8+=; years and is not less than fifty 8C=; years of age at the time of his retirement' &ro!ided, further, hat the benefits granted under this subparagraph shall be a!ailed of by an

23

INCOME TAX REVIEWER


official or employee only once. (or purposes of this 2ubsection, the term Nreasonable pri!ate benefit planN means a pension, gratuity, stock bonus or profit* sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein its is pro!ided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be di!erted to, any purpose other than for the exclusi!e benefit of the said officials and employees. 8b; Any amount recei!ed by an official or employee or by his heirs from the employer as a conse.uence of separation of such official or employee from the ser!ice of the employer because of death sickness or other physical disability or for any cause beyond the control of the said official or employee. 8c; he pro!isions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits recei!ed by resident or nonresident citizens of the &hilippines or aliens who come to reside permanently in the &hilippines from foreign go!ernment agencies and other institutions, pri!ate or public. 8d; &ayments of benefits due or to become due to any person residing in the &hilippines under the laws of the 1nited 2tates administered by the 1nited 2tates 6eterans Administration. 8e; %enefits recei!ed from or enKoyed under the 2ocial 2ecurity 2ystem in accordance with the pro!isions of "epublic Act No. :-:-. 8f; %enefits recei!ed from the #2I2 under "epublic Act No. :-3+, including retirement gratuity recei!ed by go!ernment officials and employees. Sec. #.! $. 1 '4, 1- 1#) RR #- 9$ a. "etirement 5BL+ and benefits under "A benefits to the 00. #/7 made in!estments but +CE of that was w)held as final w)holding tax. Is #/7 entitled to refund. 3e(d2 "A L3+5 specifically pro!ides that retirement benefits recei!ed by officials & 0es of pri!ate firms are exempt from all taxes. In so far as 0es trusts are concerned, "A L3+5 should be read together w) 2ec C48b; w)c pro!ides that the tax imposed by this itle shall not apply to ees trusts w)c forms part of a pension, stock bonus, or income* sharing plan of an 0". for the benefit of the some or all of his 00s. 00s trust & benefit plans pro!ide eco. assistance to 00s upon occurrence of some contingency. he tax ad!antage was concei!ed in order to encourage the formation & establishment of such pri!ate plans for the benefit of 00s. 9m8(o5ees Trusts he tax imposed on estates & trusts does not apply to income of an 00s trust pro!ided the ff. conditions are satisfied' +. he 00s trust forms part of a

of the 0" 8/orp. or business partnership; for the benefit of some or all of its 00s -. /ontributions made to the trust by such 0", 00 or both for the purpose of distributing to such 00s the earnings & principal of the fund accumulated by the trust in accordance w) such plan, 4. 2uch contributions were made for the purpose of distributing the earnings & principal of the fund accumulated by the trust, & L. he trust instrument makes it impossible, at any time prior to the satisfaction of all liabilities w) respect to 00s under the trust, for part of the corpus or income to be 8w)in the taxable year or thereafter;

pension stock bonus or profit* sharing plan

"etirement benefits recei!ed by officials & 0es of p!t. firms fr. a reasonable plan. b. 2eparation pay) cause beyond 0es control 8.uestion of fact) must be determined on the basis of pre!ailing facts & circumstances; must not be asked for or INI IA 0< by the 0e was not of his own making c. 2imilar benefits foreign go!t. rec!d recei!ed fr.

used for or di!erted to the exclusi!e

purposes other than for benefit of the 00s Jia(cita case

1acts ' 9n Aug. -4, +33=, a resolution of the ct. en banc was issued regarding the amounts claimed by Atty. Uialcita on the occasion of his retirement. H he terminal lea!e pay of Atty. Uialcita recei!ed by !irtue of his compulsory retirement can ne!er be considered a part of his salary subKect to the payment of income tax but falls under the phrase Hother similar benefits recei!ed by retiring 0es & workers... & thus exempt fr. the payment of I . H he dispositi!e portion of the "es. pro!ides that Atty. U is to be refunded the amt. w)c was deducted fr. his terminal lea!e pay & the ct. declared that Hhenceforth, no w)holding tax shall be deducted by any office of this /ourt fr. the terminal lea!e pay benefits of all retirees similarly situated...I /I" filed reconsideration. a motion for clarification &)or

d. %enefits Admin

fr. 12 6eterans

e. %enefits fr. 222)#2I2 &ommissioner vs. &A 1acts2 #/7 "etirement &lan is an 00 trust maintained by the 0". &urpose of the plan is to pro!ide for retirement pensions, disability & death

3e(d2 erminal lea!e pay is exempt fr. I . ?)in the pur!iew of the NI"/ pro!isions, compulsory retirement may be considered as a Hcause beyond

24

INCOME TAX REVIEWER


the control of said official or 0e.I /onse.uently, the amt. he recei!ed by way of commutation of his accumulated lea!e credits fall w)in 2ec. -: 8b, 5b; NI"/. 9r it may likewise be !iewed as a Hretirement gratuity recei!ed by go!t officials & 0esI w)c is another exclusion fr. gross income under 2ec. -:8b,5f;. 1. 4IR Ru(in- G C1%- 91 H C#9- 91, C$*- 91, H C#C- 91 1nder 2ec. -:8b; 85; 8%; of the NI"/, any amt. recei!ed by an official or employee by his heirs fr. his employer as a conse.uence of separation of such official or 00 fr. the 0"s ser!ice due to death, sickness, or other physical disability or for any cause beyond the control of the said official or 0e is exempt fr. taxes regardless of age or length of ser!ice. he phrase Hfor any cause beyond the control of the said official or 0eI connotes in!oluntariness on the part of the official or 00. he separation fr. the ser!ice of the official or 00 must not be asked for or initiated by him. #. 4IR Ru(in- G C#1- 91 Amounts paid specifically either as ad!ance or reimbursements for transportation, representation & other bona fide ordinary & necessary expenses incurred or reasonably expected to be incurred by the employee in the performance of his duties are not compensation subKect to w)holding tax if the ff., conditions are satisfied' a. It is ordinary & necessary tra!eling & representation or entertainment expenses paid or incurred by the 0e in the pursuit of the trade or business of the 0" b. he 00 is re.uired to & does, make an accounting)li.uidation for such expense in accordance w) the specific re..s of substantiation for each category of expense. If the reimbursements or ad!ances exceed the actual expenses, the excess if not returned to the 0" constitutes taxable compensation. /. &A22I60 IN/9J0 +. Interest income 82ec. 4- A, L; a. i. axable interest income 2ources income of interest #eneral banking Act. A bank may either be a commercial bank, a thrift bank, a de!elopment bank, a rural bank or specialized go!ernment bank. 8D; he term @de8osit su<stitu t es@ shall mean an alternati!e from of obtaining funds from the public 8the term NpublicN means borrowing from twenty 8-=; or more indi!idual or corporate lenders at any one time; other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of recei!ables and other obligations, or financing their own needs or the needs of their agent or dealer. hese instruments may include, but need not be limited to bankersN acceptances, promissory notes, repurchase agreements, including re!erse repurchase agreements entered into by and between the %angko 2entral ng &ilipinas 8%2&; and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse' &ro!ided, howe!er, hat debt instruments issued for interbank call loans with maturity of not more than fi!e 8C; days to co!er deficiency in reser!es against deposit liabilities, including those between or among banks and .uasi* banks, shall not be considered as deposit substitute debt instruments. ex. promissory notes, repurchase agreements exception' <ebt instruments issued for interbank call loans w) maturity of not more than C days. iii. reatment of bonds issued at a premium) at a discount of

adKustment to int. income) recognition income upon retirement of bond. i!. b.

Interest on insurance proceeds 0xclusions

+. interest on bank deposit)deposit substitute) fr. trust fund & similar arrangement -. interest on lending)interest income fr. bonds 4. interest on uncollected salary L. Int. on foreign bonds) go!t. bonds C. in on *bills B. int. earned fr. deposit maintained under (/< system Rev. Re-. 1C- 9$2 operators interest income of pawnshop

Sec. 3# '<,! ) "IR&. *iscellaneous "tems. 6 8a; Income <eri!ed by (oreign #o!ernment. * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. &om. vs. ,itsu<is6i ,eta( 1acts ' Atlas /onsolidated borrowed fr. Jitsubishi Jetal the amount of >-= J. Atlas, in turn, undertook to sell Jitsubishi all the copper concentrates produced fr. said machine for a period of +C years. Jitsubishi then borrowed fr. the 0xport* Import %ank of Rapan. Atlas paid interest to Jitsubishi totaling &+4,3BB.53 for the years @5L to @5C. /I" imposed a +CE tax thereon. Jitsubishi is now applying for a tax credit on the ground that it was merely a financing institution owned, controlled & financed by the Rapanese #o!t.

ii.

Jeaning items'

of

the

ff.

Sec. ## 'D) "IR&. he term @<an=@ means e!ery banking institution, as defined in 2ection - of "A No. 445, as amended, otherwise known as the

25

INCOME TAX REVIEWER


3e(d ' he loan agreement is strictly between Jitsubishi as creditor & Atlas as seller of copper concentrates. he terms & the reciprocal nature of their obligations make it implausible that Jitsubishi was a mere agent of 0ximbank. he loan & sales contract bet. Jitsu & Atlas does not contain any direct or inferential reference to 0ximbank whatsoe!er. herefore, the interest income fr. the loans extended to Atlas by Jitsu is N9 excludable fr. gross income taxation, is not exempt fr. w)holding tax. cc. Applicable tax rate i. Interest on bank deposit substitute deposit) 8&029* percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E. Sec. #* 'A,#) Cash and7or 'roperty ividends from a omes tic Corpora tion or 8oint %tock Company5 or "nsurance or *utual +und Company or &egional 3pera ting 9ead:ua r t e r or *ultina tional Company 5 or %hare in the istribut a bl e )et "ncome of a 'artne rship #Except a General 'rofessional 'artne rship$5 8oint Account5 8oint ;enture (axable as a Corpora tion or Association.5 "nte res ts5 &oyalties5 'ri<es5 and 3ther !innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co* !enturer, interests, royalties 8in any form;, and prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8%;8+; of 2ection -L; and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, shall be subKect to an income tax of twenty percent 8-=E; on the total amount thereof' &ro!ided, howe!er, that royalties on books as well as other literary works, and royalties on musical compositions shall be subKect to a final tax of ten percent 8+=E; on the total amount thereof' &ro!ided, further, hat cinematographic films and similar works shall be subKect to the tax pro!ided under 2ection -: of this /ode' +rovided , furthermore, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' +rovided , finally, that should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment

(rom trust fund & similar arrangement deposit; T ?ithin

-=E 8(INA7 AO; w)held by payer* bank /itizen) resident alien -CE 8(INA7; Nonresident alien N0 % -=E 8(INA7; corp. ii. interest income fr. long term deposit or in!estment in the form of sa!ings, common ind. trust fund, deposit substitutes, in!estment management accounts & other in!estment e!idenced by certificates in such form prescribed by the %2& shall be exempt fr. tax imposed under this 2ubsection. Y <enomination &+=,=== issued by banks 9N7D

Sec. ## '11), "IR&. he term @(on-- term de8osit or investm e n t certificates@ shall refer to certificate of time deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments with a maturity period of not less than fi!e 8C; years, the form of which shall be prescribed by the %angko 2entral ng &ilipinas 8%2&; and issued by banks only 8not by nonbank financial intermediaries and finance companies; to indi!iduals in denominations of en thousand pesos 8&+=,===; and other denominations as may be prescribed by the %2&. Sec. #% '4,1). &ate of (ax on Certain 'assive "ncome. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half

26

INCOME TAX REVIEWER


certificate thereof' based on the remaining maturity 9perating lease)finance lease 7easehold Impro!ements

(our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, and 7ess than three 84; years * -=E.

"ote2 0xemption applies only to ind. &s except nonresident alien N0 %. hey are taxed at 4CE. (or corporate taxpayers, no exemption. &re*termination will subKect the interest to tax) tax rate based on the remaining maturity. iii. Interest earned by non* stock non* profit educational institutions

1inance De8t. Order 13!- $! 0duc. inst. means a non* stock, non* profit corporation association duly registered under &hil. law, & operated exclusi!ely for educational purposes, maintained & administered by pri!ate indi!idual or group offering formal education issued permit to operate by the <0/2. "e!enues deri!ed fr. & assets used in the operation of cafeterias)canteens, dormitories, bookstores are exempt fr. taxation pro!ided they are owned & operated by the educational institution as ancillary acti!ities & the same are located w)in the school premises. De8t. of 1inance Order 1%9- 9* Re2 9xem8tion of "on- stoc= "on- +rofit 9ducationa( 9ntities Amendin- 1inance de8ar t m e n t Order 13!- $! Non* stock, non* profit educational institutions are exempt fr. taxes on all their re!enues & assets used actually, directly & exclusi!ely for educational purposes. $owe!er, they shall be subKect to internal re!enue tax on such educational institution of its educational purposes or function. Interest income shall be exempt fr. taxation only when used directly, exclusi!ely for educational purposes. o substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the %oard resolution on the proposed proKect to be funded out of the money deposited in banks. i!. 9ther interest income

Rev. Re-u(a tion "o. 19- $6 Sec. #.C 1. 1 3pera ting lease5 defined . *** An Hoperating leaseI is a contract under w)c the asset is not wholly amortized during the primary period of the lease, & where the lessor <902 N9 rely solely on the rentals during the primary period for his profits, but looks for the reco!ery of the balance of his costs & for the rest of his profits fr. the sale or re*lease of the returned assets at the end of the primary lease period. Sec. #.C1. # +inance lease5 defined --- H(inance leaseI or Hfull payout leaseI is a contract in!ol!ing payment o!er an obligatory period 8also called primary or basic period; of specified rental amounts for the use of a lessors property, sufficient in total to amortize the capital outlay of the lessor & to pro!ide for the lessors borrowing costs & profits. he obligatory period refers to the primary or basic non* cancelable period of the lease w)c in no case shall be less than 54= days. he lessee, not the lessor, exercises the choice of the asset & is normally responsible for maintenance, insurance, & such other expenses pertinent to the use, preser!ation & operation of the asset. (inance leases may be extended, after the expiration of the primary period, by non* cancelable secondary or subse.uent periods w) the rentals significantly reduced. he residual !alue shall in no instance be less than fi!e per centum 8CE; of the lessors ac.uisition cost of the leased asset. Sec. %.C#. # Compelling persuasive factors . A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasi!e factors are present' 8A; he lessee is gi!en the option to purchase the asset at any time during the obligatory period of the lease, notw)standing that the option price is e.ui!alent to or higher than the current fair market !alue of the asset, 8%; he lessee ac.uires automatic ownership of the asset upon payment of the stated amount of HrentalsI w)c under the contract he is re.uired to make, 8/; &ortions of the periodic rental payments are credited to the purchase price of the asset, 8<; he receipts of payment indicate that the payments made were partial or full payments of the asset. Sec. %.C3. 3 Absence of compelling persuasive factors . In the absence of the abo!e compelling persuasi!e factors or contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase & sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present' 8a; &ortions of the periodic payments are made specifically applicable to an e.uity to be ac.uired by the lessee. 8b; he prop. may be ac.uired under a purchase option, at a price w)c is nominal in relation to the !alue of the prop. at the time when the option may be exercised, as determined at the time of entering into the original agreement, or w)c is a

interest fr. lending 8business; T regular tax rate interest income fr. bonds T final tax rate interest on uncollected salary T regular rate interest on foreign bonds T regular if taxable interest on go!ernment bonds T -=E final interest on *bills T -=E final int. earned fr. deposit maintained under (/< 8foreign currency; system T 5 Z E int. on foreign loan contracted by a nonresident foreign corp. on or after Aug. +, +3:B T -=E (inal tax.82ec. -: %, C*a; NI"/. -. "entals)7eases a. 7ease of tangible personal property

27

INCOME TAX REVIEWER


relati!ely small amount when compared w) the total payments w)c are re.uired to be made. b. c. i. ii. iii. 7ease of real property ax treatment of Ad!ance lease rental) long* term destroyed prior to the expiration of the lease, the lessor is entitled to deduct as loss for the year when such destruction takes place the amount pre!iously reported as income bec. of the erection of such buildings or impro!ements, less any sal!age !alue subKect to the lease to the extent that such loss was not compensated for by insurance. If the bldgs. or impro!ements destroyed were ac.uired prior to Jarch +, +=+4, the deduction shall be based on the cost or the !alue subKect to the lease to the extent that such loss was not compensated for by insurance. i!. 6A added to the rental) paid by the lessee

axes & other obligations assumed by the lessee 7easehold the lessee impro!ements by

?hen is rental income recognizedM Rev. Re-u(a tion "o. # Sec. !%. &entals --- ?here a leasehold is ac.uired for business purposes for a specified sum, the purchaser may take as a deduction in his return an ade.uate part of such sum each year, based on the number of years the lease has to run. axes paid by a tenant to or for a landlord for business property are A<<I I9NA7 "0N & constitute a deductible item to the tenant & AOA%70 IN/9J0 to the landlord, the amount of the tax being deductible by the latter. he cost borne by the lessee in erecting buildings or making permanent impro!ements on ground of w)c he is a lessee is held to be a capital in!estment & not deductible as a business expense. In order to return to such taxpayer his in!estment of capital, an annual deduction may be made fr. gross income of an amount e.ual to the cost of such impro!ements di!ided by the number of years remaining of the term of the lease, & such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life !alue of the buildings erected, or of the impro!ements made, this deduction shall take the form of an allowance for depreciation. Sec. %9. "mprove m e n ts by lessees --- ?hen buildings are erected or impro!ements made by a lessee in pursuance of an agreement w) the lessor & such buildings or impro!ements are not subKect to remo!al by the lessee, the lessor may at his option report the income therefr. upon either of the following bases' 8a; he lessor may report as income at the time when such buildings or impro!ements are completed the fair market !alue of such buildings or impro!ements subKect to the lease. (completion basis) 8b; he lessor may spread o!er the life of the lease the estimated depreciated !alue of such buildings or impro!ements at the termination of the lease & report as income for each of the lease an ade.uate part thereof. 8 Pro-rated basis) If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the prop. prior to the time originally fixed for the termination of the lease, the lessor recei!es additional income for the year in w)c the lease is so terminated to the extent that the !alue of such buildings or impro!ements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or impro!ements. No appreciation in !alue due to causes other than the premature termination of the lease shall be included. /on!ersely, if the bldg. or impro!ements are

Aim8an vs. &ommissione r 1acts ' he %I" disco!ered that 7impan In!estment /o. underdeclared its rental incomes for taxable years +3CB & +3C5. 7impan, howe!er, argued that it was not supposed to declare said rental income for @CB bec. the pre!ious owners of the leased bldg. still ha!e to collect part of the total rentals. It also claimed that only a part of the amount of &:+,B3=.== for @C5 was turned o!er to the company by their &resident, Isabelo 7im. Also, one of its tenants deposited in court his rentals amounting to &+=,:==.==. 3e(d ' 7impan, ha!ing admitted through its own witness that it had N9 declared more than +)- of the amt. found by the internal re!enue examiners as unreported rental income for @CB & more than +)4 of the amount ascertained by the examiners as unreported rental income for @C5 contrary to its original claim to the re!enue authorities. d. Applicable rate i. ii. Normal) regular rate 0xcept the ff. foreign corps. nonresident

Sec. #$, '4), "IR&. (ax on )onresiden t +oreign Corpora tion. 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a foreign corporation not engaged in trade or business in the &hilippines shall pay a tax e.ual to thirty* fi!e percent 84CE; of the gross income recei!ed during each taxable year from all sources within the &hilippines, such as interests, di!idends, rents, royalties, salaries, premiums 8except reinsurance premiums;, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subKect to tax under subparagraphs 8/; and 8d;' &ro!ided, hat effecti!e +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and, effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. 8-; Nonresident /inematographic (ilm 9wner, 7essor or <istributor. * A cinematographic film owner, lessor, or distributor shall pay a tax of twenty* fi!e percent 8-CE; of its gross income from all sources within the &hilippines. 84; Nonresident 9wner or 7essor of 6essels /hartered by &hilippine Nationals. * A nonresident owner or lessor of !essels shall be subKect to a tax of four and one* half percent 8L +)-E; of gross rentals, lease or charter fees from leases or charters to (ilipino citizens or corporations, as appro!ed by the Jaritime Industry Authority.

28

INCOME TAX REVIEWER


8L; Nonresident 9wner or 7essor of Aircraft, Jachineries and 9ther 0.uipment. * "entals, charters and other fees deri!ed by a nonresident lessor of aircraft, machineries and other e.uipment shall be subKect to a tax of se!en and one* half percent 85 +)-E; of gross rentals or fees. 8C; ax on /ertain Incomes "ecei!ed by a Nonresident (oreign /orporation. * 8a; Interest on (oreign 7oans. * A final withholding tax at the rate of twenty percent 8-=E; is hereby imposed on the amount of interest on foreign loans contracted on or after August +, +3:B, 8b; Intercorporate <i!idends. * A final withholding tax at the rate of fifteen percent 8+CE; is hereby imposed on the amount of cash and)or property di!idends recei!ed from a domestic corporation, which shall be collected and paid as pro!ided in 2ection C5 8A; of this /ode, subKect to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to ha!e been paid in the &hilippines e.ui!alent to twenty percent 8-=E; for +335, nineteen percent 8+3E; for +33:, eighteen percent 8+:E; for +333, and se!enteen percent 8+5E; thereafter, which represents the difference between the regular income tax of thirty* fi!e percent 84CE; in +335, thirty* four percent 84LE; in +33:, and thirty* three percent 844E; in +333, and thirty* two percent 84-E; thereafter on corporations and the fifteen percent 8+CE; tax on di!idends as pro!ided in this subparagraph, 8c; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange' Not o!er &+==,===PPPP..PPPPPPP CE 9n any amount in excess of &+==,===PPPP +=E. Nonresident cinematographic film owner 70229" or distributor -CE of gross income Nonres owner or lessor of !essels chartered by &hil. nationals L ZE of gross rentals Nonres owner) lessor of aircraft, machinery & other e.uipmt. 5 Z E gross rentals or fees. 4. "oyalties a. ?hat are royaltiesM b. $ow are royalties earnedM c. Applicable rates' Indi!idual taxpayers Sec. #% '4,1) "IR&. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E. Sec. #* 'A,#), "IR&. Cash and7or 'roperty ividends from a omestic Corpora tion or 8oint %tock Company5 or "nsurance or *utual +und Company or &egional 3pera ti ng 9ead:ua r t e r or *ultina tional Company5 or %hare in the istribut a bl e )et "ncome of a 'artne rship #Except a General 'rofessional 'artne rship$5 8oint Account5 8oint ;enture (axable as a Corpora tion or Association. 5 "nteres ts5 &oyalties5 'ri<es5 and 3ther !innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co* !enturer, interests, royalties 8in any form;, and prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8%;8+; of 2ection -L; and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, shall be subKect to an income tax of twenty percent 8-=E; on the total amount thereof' &ro!ided, howe!er, that royalties on books as well as other literary works, and royalties on musical compositions shall be subKect to a final tax of ten percent 8+=E; on the total amount thereof' &ro!ided, further, hat cinematographic films and similar works shall be subKect to the tax pro!ided under 2ection -: of this /ode' +rovided , furthermore, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or

29

INCOME TAX REVIEWER


indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' +rovided , finally, that should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, & 7ess than three 84; years * -=E. i. ii. all royalties -=E (INA7 tax except' royalties on books, as well as other literary works & musical composition T +=E (INA7 tax -CE * nonres alien N0 % (or domestic & resident foreign corp. !. for nonres foreign corp. 4LE * +33: 44E * +333 4-E * -===

L. <i!idends a. ?hat is di!idend incomeM i. ii. $ow is di!idend income earned Finds of di!idend income a. /ash di!idend b. 2tock di!idend) stock rights c. &roperty di!idends

d. 7i.uidating di!idends b. <isguised di!idend) payments e.ui!alent to di!idend distribution excessi!e di!idends compensation) rental in lieu of

iii. i!.

Sec. #! 'D,1). &ates of (ax on Certain 'assive "ncomes. 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. Sec. #$ '!,a ) (ax on Certain "ncomes &eceived by a &esident +oreign Corpora tion. 6 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. #CI 1I"AA tax

Sec. !3 '&), "IR&. Dividends Distri<ut e d are Deeme d ,ade from ,ost Recent(5 Accumu(a t e d +rofits. * Any distribution made to the shareholders or members of a corporation shall be deemed to ha!e been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which recei!ed. 'D) "et Income of a +artne rs6i8 Deeme d &onstructiv e(5 Received <5 +artne rs. * he taxable income declared by a partnership for a taxable year which is subKect to tax under 2ection -5 8A; of this /ode, after deducting the corporate income tax imposed therein, shall be deemed to ha!e been actually or constructi!ely recei!ed by the partners in the same taxable year and shall be taxed to them in their indi!idual capacity, whether actually distributed or not. Rev. Re-. #, Secs. #*C- #*3 he distinction between a stock di!idend w)c does not, & one w)c does , constitute income taxable to the shareholder is the distinction between a stock di!idend w)c works no change in the corporate entity, the same interest in the same corp. being represented after the distribution by more shares of precisely the same character, & a stock di!idend where there either has been a change of corporate identity or a change in the nature of the shares issued as di!idends whereby the proportional interest of the shareholders after the distribution is essentially different fr. his former interest. A stock di!idend constitutes income if it gi!es the shareholder an interest different fr. that w)c his former stock holdings represented. A stock di!idend does not constitute income if the new shares confer no different rights or interest than did the old * the new certificates Q the old representing the same proportionate interest in the net assets of the corp. as did the old. A true stock di!idend is not subKect to tax on its receipt in the hands of the recipient. Ne!ertheless, if a corporation after the distribution of a stock di!idend, proceeds to cancel or redeem its stock at such time & in such

30

INCOME TAX REVIEWER


manner as to make the distribution & cancellation or redemption essentially e.ui!alent to the distribution of a taxable di!idend, the amount recei!ed in redemption or cancellation of the stock shall be treated as a taxable di!idend. Re8u<(ic vs. De(a Rama 1acts ' he estate of the late 0steban de la "ama was the subKect of 2pecial &roceedings of the /(I of Iloilo. he exec* administrator, $er!as, filed on Jarch +-, +3C+ income tax returns of the estate corresponding to tax yr. +3C= declaring a net income of &--, 53B.C3. &4,3+3.== was assessed & paid as income tax. he %I" later claimed that it had found out that there had been recei!ed by the estate in +3C= fr. the <ela "ama 2teamship /o. cash di!idends amounting to &:B,:== & was not declared in the I ". he %I" then made an assessment as deficiency I !s. the estate &CB,=4-.C= 8454CC.== as deficiency & +:,B55.C= as C=E surcharge;. he /ollector of I" wrote a letter -)-3)CB to Jrs. 7ourdes de la "ama *9smena informing her of the assessment & asking payment thereof. 9n 4)+4)CB, the latters counsel contended that the assessment should be sent to 7eonor de la "ama who was appointed as administratrix of the estate. /I" sent the assessment to 7eonor asking for payment. he assessment not being paid, the <ep. /omm. of I" again sent a letter to 7ourdes & again it said that they should assess 7eonor. he </I" demanded 7eonor to pay the tax but still was not paid. hence, the "ep. filed w) /(I a complaint !s. the heirs of 0steban seeking to collect fr. each heir the proportionate share in the I liability of the estate. 3e(d2 ?here the di!idends were not recei!ed by the estate or the heirs, neither of them is liable for the payment of income tax therefor. here would be constructi!e receipt of the di!idends if the debts to w)c they were applied really exist. In /A%, no constructi!e receipt as the first debt was contested, & the second debt was due fr. H$iKos de la "amaI an entity separate & distinct fr. 0steban. &ommissioner vs. ,annin1acts ' JAN "A2/9 has authorized capital stock di!idend into -C,=== common shares, -L,5== owned by "eese, & the rest at +== shares owned by Janning, Jc<onald, & 2immons. &ursuant to a rust Agreement, after "eese died, the -L,5== shares were reac.uired by Jantrasco. /onse.uently, the same shares were distributed e.ually to J, J & 2 while payment to the estate of "eese fr. the companies profit was gradually made fr. +3C4* B4. 3e(d2 ?here corporate earnings are used to purchase outstanding stock treated as treasury stock as a technical but prohibited de!ice to a!oid effects of income taxation, distribution of said corporate earnings in the form of stock di!idends will subKect stockholders recei!ing them to income tax. ?hen the company parted w) a portion of their earnings Hto buyI the corporate holdings of "eese, they were in ultimate effect & result making a distribution of such earnings to J, J & 2. "ote ' <istribution of partners share in the net income of a taxable partnership is e.ui!alent to distribution of di!idends in a corp. c. 0xclusions i. Income exempt under a tax treaty ii. &assi!e income go!ernment of foreign

Sec. 3# '4, !, a), "IR&. "ncome erived by +oreign Governm e n t . * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. C. Annuities & proceeds fr. life insurance a. axable income)computation Art. #C#1 "&& . he aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once w) the burden of the income. Sec. 3# 'a,$ ) "IR&. Gross income. #a$ General definition . - #ross income means all income fr. whate!er source deri!ed, including 8 but not limited to ; the following items' 8:; Annuities b. 0xclusions i. &roceeds of 7ife insurance ?hat is insuranceM Is casualty insurance a life insurance contractM

Are proceeds of non* life or property insurance taxableM &re*need contractsM Sec. 3# '<,1 ) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 8+; 7ife Insurance . * he proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. Sec. 6# Rev. Re-. #. &roceeds of life insurance are excluded fr. gross income bec. they partake more of indemnity or compensation rather than gain to the recipient. In case of a transfer for a !aluable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein only the actual !alue of such consideration & the amount of the premiums & other sums subse.uently paid by the transferee shall be tax* exempt. ii. "eturn of premium paid ?hat is cash surrender !alueM /omputing income in annuity contracts Sec. 3# '<,# ) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 8-; Amount "ecei!ed by Insured as "eturn of &remium. * he amount recei!ed by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the

31

INCOME TAX REVIEWER


term mentioned in the contract or upon surrender of the contract. iii. /ompensation sickness for inKuries or maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E ii. &rizes and competition awards in sports

Sec. 3#. 4. 8 =$ Compensa tion for "n>uries or %ickness . * amounts recei!ed, through Accident or $ealth Insurance or under ?orkmenNs /ompensation Acts, as compensation for personal inKuries or sickness, plus the amounts of any damages recei!ed, whether by suit or agreement, on account of such inKuries or sickness. 2ec. B4 "" -. B. &rizes & winnings) Awards) "ewards a. axable items i. ii. iii. gambling winnings)contests)raffle prizes small town lottery winnings rewards under 2ec. -:- NI"/) informers reward +=E (INA7 w)holding tax

Sec. 3# '<, !d) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 85; ,isce((aneous items2 8d; +ri?es and A0ards in s8orts &om8e ti tion . * All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the &hilippines or abroad and sanctioned by their national sports associations. iii. &rizes & charitable) literary awards) scientific) religious) artistic)

Sec. 3# 'a, 9) "IR&. Gross income. #a$ General definition. * #ross income means all income fr. whate!er source deri!ed, including 8 but not limited to ; the following items' 83; &rizes & winnings b. 0xclusions) 0xemptions i. &hil. /harity lotto winnings 2weepstakes and

Sec. #%. '4 $ &ate of (ax on Certain 'assive "ncome. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining

ReKuisites for exc(usion Sec. 3# '<, !c) "IR& . Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 85; Jiscellaneous items' 8c; &rizes and Awards. * &rizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or ci!ic achie!ement but only if' 8i; he recipient was selected without any action on his part to enter the contest or proceeding, and 8ii; he recipient is not re.uired to render substantial future ser!ices as a condition to recei!ing the prize or award. 5. #ifts)%e.uests)<e!ises ax treatment of remunerati!e donation 0xtended) but income from such property taxable Sec. 3# '4, 3) "IR&. 4. #ifts, %e.uests, and <e!ises. X he !alue of property ac.uired by gift, be.uest, de!ise, or descent' &ro!ided, howe!er, hat income from such property, as well as gift, be.uest, de!ise or descent of income from any property, in cases of transfers of di!ided interest, shall be included in gross income. :. 9ther types of passi!e income a. (ound treasure T regular rate b. "efund of tax or reco!ery of bad debt pre!iously deducted T regular tax rate c. /. <amages #ains deri!ed from dealings in property

S9&. 39. &a8ita( :ains and Aosses. 8A; <efinitions. * As used in this itle * 8+; /apital Assets. * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to

32

INCOME TAX REVIEWER


customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. 8-; Net /apital #ain. * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. 84; Net /apital 7oss. * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. 8%; &ercentage aken into Account. * In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income' 8+;9ne hundred percent 8+==E; if the capital asset has been held for not more than twel!e 8+-; months, and 8-;(ifty percent 8C=E; if the capital asset has been held for more than twel!e 8+-; months, 8/; 7imitation on /apital 7osses. * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. 8<; Net /apital 7oss /arry* o!er. * If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such loss 8in an amount not in excess of the net income for such year; shall be treated in the succeeding taxable year as a loss from the sale or exchange of a capital asset held for not more than twel!e 8+-; months. 80; "etirement of %onds, 0tc. * (or purposes of this itle, amounts recei!ed by the holder upon the retirement of bonds, debentures, notes or certificates or other e!idences of indebtedness issued by any corporation 8including those issued by a go!ernment or political subdi!ision thereof; with interest coupons or in registered form, shall be considered as amounts recei!ed in exchange therefor. 8(; #ains or losses from 2hort 2ales, 0tc. * (or purposes of this itle * +. #ains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets, and -. #ains or losses attributable to the failure to exercise pri!ileges or options to buy or sell +. a. ypes of gain)kinds of property Finds)/lassification income or gain of taxable 8U; he term @ordinar5 income@ includes any gain from the sale or exchange of property which is not a capital asset or property described in 2ection 438A;8+;. Any gain from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary incomeN shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in 2ection 438A;8+;. he term Nordinary lossN includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary lossN shall be treated as loss from the sale or exchange of property which is not a capital asset. b. ?hat is N0 capital lossM capital gainM N0

'I can;t find Sec. 16 'e) in t6e &TRA and Sec. ## 'J) is repe ti tion? its coming back to me? repeti tion? the only thing " can see? 3biter *aster@$ Sec. 1##, Rev. Re-. # Losses fr. sales or exchanges of property . No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,* 5. %etween members of a family 8whole or half siblings, spouse, ancestors & lineal descendants;, :. %etween an indi!idual & a corporation more than C=E in !alue of the outstanding stock of w)c is owned, directly or indirectly by or for such indi!idual except in the case of distributions in li.uidation, 3. %etween two corporations more than C=E in !alue of the outstanding stock of each of w)c is owned, directly or indirectly, by or for the same indi!idual, if either one of the corps. w) respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, except in the cases of distributions in li.uidation, +=. %etween a grantor & a fiduciary of any trust, ++. %etween the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w) respect to each trust, or +-. %etween a fiduciary of a trust & a beneficiary of such trust. Sec. 13#, Rev. Re-. # efinition of capital assets . he law pro!ides that the term capital assets shall be held to mean property held by the taxpayer 8?9N connected w) his trade or business; . . . Same as Sec. 33, NIRC. he term capital asset includes all classes of property not specifically excluded by 24= 8a;. he exclusion fr. the term Hcapital assetsI by property used in the trade or business of the taxpayer of a character w)c is subKect to the allowance for depreciation in 24= 8f; NI"/ * is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange 8&; it has no application to gains or losses arising fr. the sale of real property used in the trade or business to the extent that such gain or loss is

?hat is capital gainM gain) incomeM

?hat is ordinary

33

INCOME TAX REVIEWER


allocable to the land, as distinguished fr. depreciable impro!ements upon the land. o such gain or loss allocable to the land, the limitations of 4L8b; & 8c; apply 8 such limitation may be inapplicable to a dealer in real estate, but, if so, it is bec. he holds the land primarily for sale to customers in the ordinary course of his trade or business, not bec. the land is subKect to the allowance for depreciation pro!ided in 4= 8f; NI"/;, will not be subKect to the percentage pro!isions of 4L8b; & losses fr. such transactions will not be subKect to the limitations on losses pro!ided in 4= 8c;. c. 2hort term asset) long term asset 'A) Definitions. * As used in this itle * '1) &a8ita( Assets . * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. '#) "et &a8ita( :ain . * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. '3) "et &a8ita( Aoss . * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. Tua?on vs. Ain-ad *$ S&RA 1!C 1acts2 In +3L:, pet. inherited - parcels of land, w)c he subdi!ided into -3 lots & leased -:. In +3C=, he sold the lots on an installment basis to their occupants. 7ot -3 was subse.uently subdi!ided & pa!ed, & were also sold on a += yr. annual amortization basis. $e reported his income fr. the sale of the lots as long* term capital gain. In +3C5, he treated his income fr. the sale of the small lots as capital gains & included only +)- as taxable income. $e deducted the real estate dealers tax he paid in +3C5 due to the rentals fr. his -: lots & other properties. %I" charged him w) deficiency income, considering the sale as ordinary gains & not capital. Issue2 ?9N properties inherited by should be regarded as capital assets petitioner inheritance, she had the land sur!eyed, introduced impro!ements thereon & sold the lots at a profit. In their Koint I ", they disclosed a profit of & 4+,=B= fr. the sale of the subdi!ided lots, & reported C=E thereof as taxable capital gains. "e!enue examiner adKudged pets. as engaged in business as real estate dealers, re.uired them to pay real estate dealers tax & assessed a deficiency income tax on profits deri!ed fr. the sale based on the rates for ordinary income. Issue2 ?9N pets. are real estate dealers liable for real estate dealers tax ?9N gains realized fr. the sale of the lots are taxable as ordinary income 3e(d2 D02 in both . he acti!ities of pet. are no different fr. those in!ariably employed by one engaged in the business of selling real estate. here was extensi!e de!elopment such that pets. did not sell the land in the condition in w)c they ac.uired it. A considerable amount was expended to co!er the cost of the impro!ements. It has been held that a property ceases to be a capital asset if the amount expended to impro!e it is double its original cost, as in the /A%, for the extensi!e impro!ements indicates that the seller held the property primarily for sale to its customers in the ordinary course of business. And since they are engaged in the business of real estate, it follows that the property sold falls w)in the exception in the definition of capital assets in 244, NI"/. Rodri-ue? vs. &o((ector 1acts ' he #o!t. paid &+,-4:,-=L.== to 0. "odriguez Inc. as payment for its land w)c was expropriated by the go!t. 9f the said amount, &B-C,4+C.3= were in the form of tax* exempt go!t. bonds. Nung bayaran na ng tax, 0. "odriguez Inc. did not include the sum of &B-C thou, belie!ing it to be exempt fr. taxation. 0rgo, the /I" assessed 0. "odriguez w) a deficiency income tax. 3e(d ' here can be no .uestion that 0. "odriguez is taxable on its income deri!ed fr. the sale of its prop. to the #o!t. he fact that a portion of the purchase price of the prop. was paid by the #o!t. in the form of tax exempt bonds does not operate to exempt said income fr. tax. he income fr. the sale of the land in .uestion & the bonds are different & distinct taxable items so that the exemption does not operate to exempt the other, unless the law expressly so pro!ides. he tax here is on the income deri!ed fr. the sale of 0. "odriguezs prop. to the #o!t. not the income deri!ed fr. the sale or exchange of the bonds. -. /omputation of gain)loss S9&. %C. eter mi n a ti on of Amount and &ecognition of Gain or Loss. 'A) &om8uta ti on of :ain or Aoss. * he gain from the sale or other disposition of property shall be the excess of the amount realized therefrom o!er the basis or adKusted basis for determining gain, and the loss shall be the excess of the basis or adKusted basis for determining loss o!er the amount realized. he amount realized from the sale or other disposition of property shall be the sum of money recei!ed plus the fair market !alue of the property 8other than money; recei!ed, '4) 4asis for Deter mi ni n- :ain or Aoss from Sa(e or Dis8osition of +ro8er t5 . - he basis of property shall be *

3e(d2 N9. ?hen pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlati!e right to recei!e & enKoy the fruits of the business & the property w)c the decedent had established. Also, pet. owned other properties w)c he rented out, fr. w)c he periodically deri!ed a substantial income, & for w)c he had to pay the real estate dealers tax, w)c he used to deduct fr. his gross income. 1nder the circumstances, pets sale of the lots forming part of his rental business cannot be characterized as other than sales of non* capital, or ordinary assets. 8remember exceptions in 244;. &a(asan? vs. &om. 1%% S&RA 6%% 1acts2 &etitioner inherited fr. her father an agricultural land in "izal. In order to li.uidate her

34

INCOME TAX REVIEWER


8+; he cost thereof in the case of property ac.uired on or after Jarch +, +3+4, if such property was ac.uired by purchase, or 8-; he fair market price or !alue as of the date of ac.uisition, if the same was ac.uired by inheritance, or 84; If the property was ac.uired by gift, the basis shall be the same as if it would be in the hands of the donor or the last preceding owner by whom it was not ac.uired by gift, except that if such basis is greater than the fair market !alue of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such fair market !alue, or 8L; If the property was ac.uired for less than an ade.uate consideration in money or moneyNs worth, the basis of such property is the amount paid by the transferee for the property, or 8C; he basis as defined in paragraph 8/;8C; of this 2ection, if the property was ac.uired in a transaction where gain or loss is not recognized under paragraph 8/;8-; of this 2ection. #C$ Exchange of 'roper ty . 8+; #eneral "ule. * 0xcept as herein pro!ided, upon the sale or exchange or property, the entire amount of the gain or loss, as the case may be, shall be recognized. 8-; 0xception. * No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation * 8a; A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation, or 8b; A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation, or 8c; A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation. No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four 8L; persons, gains control of said corporation' &ro!ided, hat stocks issued for ser!ices shall not be considered as issued in return for property. 84; 0xchange Not 2olely in Find. * 8a; If, in connection with an exchange described in the abo!e exceptions, an indi!idual, a shareholder, a security holder or a corporation recei!es not only stock or securities permitted to be recei!ed without the recognition of gain or loss, but also money and)or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market !alue of such other property recei!ed' &ro!ided, hat as to the shareholder, if the money and)or other property recei!ed has the effect of a distribution of a taxable di!idend, there shall be taxed as di!idend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation, the remainder, if any, of the gain recognized shall be treated as a capital gain. 8b; If, in connection with the exchange described in the abo!e exceptions, the transferor corporation recei!es not only stock permitted to be recei!ed without the recognition of gain or loss but also money and)or other property, then 8i; if the corporation recei!ing such money and)or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but 8ii; if the corporation recei!ing such other property and)or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market !alue of such other property so recei!ed, which is not distributed. 8L; Assumption of 7iability. * 8a; If the taxpayer, in connection with the exchanges described in the foregoing exceptions, recei!es stock or securities which would be permitted to be recei!ed without the recognition of the gain if it were the sole consideration, and as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or ac.uires from the taxpayer property, subKect to a liability, then such assumption or ac.uisition shall not be treated as money and)or other property, and shall not pre!ent the exchange from being within the exceptions. 8b; If the amount of the liabilities assumed plus the amount of the liabilities to which the property is subKect exceed the total of the adKusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. 8C; %asis * 8a; he basis of the stock or securities recei!ed by the transferor upon the exchange specified in the abo!e exception shall be the same as the basis of the property, stock or securities exchanged, decreased by 8+; the money recei!ed, and 8-; the fair market !alue of the other property recei!ed, and increased by 8a; the amount treated as di!idend of the shareholder and 8b; the amount of any gain that was recognized on the exchange' &ro!ided, hat the property recei!ed as NbootN shall ha!e as basis its fair market !alue' &ro!ided, further, hat if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or ac.uires form the latter property subKect to a liability, such assumption or ac.uisition 8in the amount of the liability; shall, for purposes of this paragraph, be treated as money recei!ed by the transferor on the exchange' &ro!ided, finally, hat if the transferor recei!es se!eral kinds of stock or securities, the /ommissioner is hereby authorized to allocate the basis among the se!eral classes of stocks or securities. 8b; he basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. 8B; <efinitions. *

35

INCOME TAX REVIEWER


8a; he term NsecuritiesN means bonds and debentures but not NnotesS of whate!er class or duration. 8b; he term NmergerN or NconsolidationN, when used in this 2ection, shall be understood to mean' 8i; the ordinary merger or consolidation, or 8ii; the ac.uisition by one corporation of all or substantially all the properties of another corporation solely for stock' &ro!ided, hat for a transaction to be regarded as a merger or consolidation within the pur!iew of this 2ection, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation' &ro!ided, further, hat in determining whether a bona fide business purpose exists, each and e!ery step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit' &ro!ided, finally , hat in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term NpropertyN shall be taken to include the cash assets of the transferor. 8c; he4term NcontrolN, when used in this 2ection, shall mean ownership of stocks in a corporation possessing at least fifty* one percent 8C+E; of the total !oting power of all classes of stocks entitled to !ote. 8d; he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to issue rules and regulations for the purpose Nsubstantially allN and for the proper implementation of this 2ection. a. /ost of basis of the property sold S9&. 39. &a8ita( :ains and Aosses. 'A) Definitions. * As used in this itle * '1) &a8ita( Assets . * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subKect to the allowance for depreciation pro!ided in 2ubsection 8(; of 2ection 4L, or real property used in trade or business of the taxpayer. '#) "et &a8ita( :ain . * he term Nnet capital gainN means the excess of the gains from sales or exchanges of capital assets o!er the losses from such sales or exchanges. '3) "et &a8ita( Aoss . * he term Nnet capital lossN means the excess of the losses from sales or exchanges of capital assets o!er the gains from such sales or exchanges. '4) +ercenta - e Ta=en into Account . * In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income' 8+;9ne hundred percent 8+==E; if the capital asset has been held for not more than twel!e 8+-; months, and 8-;(ifty percent 8C=E; if the capital asset has been held for more than twel!e 8+-; months, b. /ost or basis of prop. exchanged in corporate readKustment Section 39 '&, *) "IR&- -- 4asis.- 8a; he basis of the stock or securities recei!ed by the transferor upon the exchange specified in the abo!e exception shall be the same as the basis of the property, stock or securities exchanged, decreased by 8+; the money recei!ed, and 8-; the fair market !alue of the other property recei!ed, and increased by 8a; the amount treated as di!idend of the shareholder and 8b; the amount of any gain that was recognized on the exchange' &ro!ided, hat the property recei!ed as NbootN shall ha!e as basis its fair market !alue' &ro!ided, further, hat if as part of the consideration to the transferor, the transferee of property assumes a liability of the transferor or ac.uires form the latter property subKect to a liability, such assumption or ac.uisition 8in the amount of the liability; shall, for purposes of this paragraph, be treated as money recei!ed by the transferor on the exchange' &ro!ided, finally, hat if the transferor recei!es se!eral kinds of stock or securities, the /ommissioner is hereby authorized to allocate the basis among the se!eral classes of stocks or securities. 8b; he basis of the property transferred in the hands of the transferee shall be the same as it would be in the hands of the transferor increased by the amount of the gain recognized to the transferor on the transfer. c. "ecognition of gain)loss in exchange of prop. i. #eneral rule Sec. 39 '&). Aimita tion on &a8ita( Aosses . * 7osses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the &hilippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other e!idence of indebtedness issued by any corporation 8including one issued by a go!ernment or political subdi!ision thereof;, with interest coupons or in registered form, any loss resulting from such sale shall not be subKect to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses. Sec. 136 RR #. ii. 0xception' ?here no gain or loss shall be recognized

Sec. %C'&, #) 9xce8tion . * No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation* 8a; A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation, or 8b; A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation, or 8c; A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.

36

INCOME TAX REVIEWER


No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four 8L; persons, gains control of said corporation' &ro!ided, hat stocks issued for ser!ices shall not be considered as issued in return for property. ,eanin- of mer-er. conso(idation. contro(. securities Sec. %C '&, 6) Definitions. 8a; he term NsecuritiesN means bonds and debentures but not NnotesS of whate!er class or duration. 8b; he term NmergerN or NconsolidationN, when used in this 2ection, shall be understood to mean' 8i; the ordinary merger or consolidation, or 8ii; the ac.uisition by one corporation of all or substantially all the properties of another corporation solely for stock' &ro!ided, hat for a transaction to be regarded as a merger or consolidation within the pur!iew of this 2ection, it must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden of taxation' &ro!ided, further, hat in determining whether a bona fide business purpose exists, each and e!ery step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit' &ro!ided, finally , hat in determining whether the property transferred constitutes a substantial portion of the property of the transferor, the term NpropertyN shall be taken to include the cash assets of the transferor. 8c; he4term NcontrolN, when used in this 2ection, shall mean ownership of stocks in a corporation possessing at least fifty* one percent 8C+E; of the total !oting power of all classes of stocks entitled to !ote. 8d; he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to issue rules and regulations for the purpose Nsubstantially allN and for the proper implementation of this 2ection. &ommissioner vs. Rufino 1acts ' here are two corporations in this case* ** both are named 0astern heatrical /o. ?e will call them 0+ for the old corporation & 0- for the new corpo. In a special meeting of stockholders of 0+, a resolution was passed authorizing 0+ to J0"#0 w) 0- by transferring its business, assets, goodwill, & liabilities to the latter. In exchange, 0- would issue & distribute to the shareholders of 0+ one share for each share held by them in the said corpo. he merger was necessary to continue the exhibition of mo!ing pictures at the 7yric & /apitol heaters e!en after the corporate existence of 0+, in !iew of its pending booking contracts & /%A w) its 0es. he /I" declared that the merger was not undertaken for a bona fide business purpose but merely 9 A69I< 7IA%I7I D for the capital gains tax on the exchange of the old for the new shares of stock. /I" then imposed deficiency assessments on capital gains taxes on the stocks recei!ed by the shareholders of 0+. 3e(d ' No taxable gain was deri!ed by the shareholders fr. the transaction. here was a !alid merger although the actual transfer of the properties subKect of the <eed of Assignment was not made on the date of the merger. he merger in .uestion in!ol!ed a pooling of resources aimed at the continuation & expansion of business & so came under the letter & intendment of the NI"/, as amended, 0O0J& IN# fr. the capital gains tax exchanges of property effected under lawful corporate combinations. he fact is that the merger merely deferred the claim for taxes w)c may be asserted by the go!t later, when gains are "0A7IU0< & benefits are distributed among the stockholders as a result of the merger. &o((ector vs. 4ina(<a-a n 9state 1acts ' %inalbagan & Isabela 2ugar /o. proposed to J0"#0 their assets to form a N0? /9"&., %I2/9J, w) a capital stock of L== hous Non &ar !alue shares. he assets of both merging companies were assessed & the market !alue of %inalbagans tangible assets was fixed as &-,CL+,+4L.B3, & the sugar .uota at &C)picul or &+,L:-,B-3.-:. 9n the basis of such, the merger was realized w) %inalbagan being allocated -+B,=== shares in exchange for its tangible assets & sugar .uota. In +3L:, %inalbagans e.uity was reduced to +5B,3LC when it ga!e away -3,=CC shares to 4 small sugar centrals. In +3C+, these shares were sold for &B.+ J payable in installments* ** 8&+.C in @C+, &4C= hous Q interest in @C-, A total of &+C thou for @C4;. he income tax was paid. (or +3C+, %inalbagan deducted the book !alue of its tangible assets at &:-L,CC3.3+ fr. the initial payment of &+.C J. C=E of the remainder was reported as income or gain fr. the sale of capital assets. In @CL, /I" assessed deficiency income tax for @C+, @C-, & @C4. 3e(d ' ?here - corporations merged their assets to form a new corporation, each recei!ing non par !alue shares corresponding to their assets contributed, it is held that the basis in computing the taxable gain fr. the sale of its shares of stock in the new corporation is the fair market !alue of its assets gi!en in exchange for said shares at the time of said exchange. Revenue ,e mo Order #6- 9# 9n <ec. -B, @3+ & Ran. 4, @3-, "e!enue "eg. No. +*3- & "e!. Jem. /irc. No. +*3- were respecti!ely issued by this 9ffice clarifying that the increased basic personal & additional exemptions under the amendatory pro!isions of "A 5+B5 shall apply to earnings)income of indi!idual taxpayers starting taxable year @3- 8& N9 @3+; w)c shall be declared for income tax purposes in their tax returns to be filed on or before April +C, @34. 7ikewise, "e!. "eg. No. +*3- shall take effect on compensation income earned or recei!ed fr. Ran. +, @3-. $owe!er, in a decision in the consolidated cases of "eynaldo 6. 1mali !s. $on. Resus &. 0stanislao, 2ec. of (inance & $on. Resus 1. 9ng, /I" & "ene %. #orospe, et al, !s. /I", promulgated Jay -3, @3-, the 2upreme /ourt held that* ** H?$0"0(9"0, 2ecs. +, 4 & C of "e!. "eg. No. +*3- w)c pro!ide that the regulations shall take effect on compensation income earned or recei!ed fr. + Ran. @3- are hereby 20 A2I<0. hey should take effect on compensation income earned or recei!ed fr. + Ran. @3+. H2ince this decision is promulgated after +C April @3-, the indi!idual taxpayers entitled to the increased exemptions on compensation income earned during a calendar year @3+ who may ha!e filed their income tax returns on or before +C April @3- 8later extended to -L April +33-; w)o the benefit of such increased exemptions, are entitled

37

INCOME TAX REVIEWER


to the corresponding tax refunds &)or credits, & respondents are ordered to effect such refunds &)or credits. No costs.I he %I" is filing a motion for recon of the aforementioned decision. Accordingly, pending resolution of our Jotion for "econ, the basic personal & additional exemptions allowable to indi!idual taxpayers for income tax purposes under 2ec. -3 87; of the NI"/ before its amendment by "A No. 5+B5 shall still apply for purposes of w)holding of income tax on wages as well as in the computation of the second installment payable on or before Ruly +C, @3- of indi!idual income tax for taxable year @3+. iii. 0xception' ?here gain recognized but not the loss aa. 0xchange not solely in kind Sec. 39 '&, 3) "IR& Exchange )ot %olely in Aind. 8a; If, in connection with an exchange described in the abo!e exceptions, an indi!idual, a shareholder, a security holder or a corporation recei!es not only stock or securities permitted to be recei!ed without the recognition of gain or loss, but also money and)or property, the gain, if any, but not the loss, shall be recognized but in an amount not in excess of the sum of the money and fair market !alue of such other property recei!ed' &ro!ided, hat as to the shareholder, if the money and)or other property recei!ed has the effect of a distribution of a taxable di!idend, there shall be taxed as di!idend to the shareholder an amount of the gain recognized not in excess of his proportionate share of the undistributed earnings and profits of the corporation, the remainder, if any, of the gain recognized shall be treated as a capital gain. 8b; If, in connection with the exchange described in the abo!e exceptions, the transferor corporation recei!es not only stock permitted to be recei!ed without the recognition of gain or loss but also money and)or other property, then 8i; if the corporation recei!ing such money and)or other property distributes it in pursuance of the plan of merger or consolidation, no gain to the corporation shall be recognized from the exchange, but 8ii; if the corporation recei!ing such other property and)or money does not distribute it in pursuance of the plan of merger or consolidation, the gain, if any, but not the loss to the corporation shall be recognized but in an amount not in excess of the sum of such money and the fair market !alue of such other property so recei!ed, which is not distributed. bb. 9ther transactions where gain is recognized but not the loss ?ash sales) compared w) short selling S9&. 3$. Losses from !ash %ales of %tock or %ecurities. 8A; In the case of any loss claimed to ha!e been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty 84=; days before the date of such sale or disposition and ending thirty 84=; days after such date, the taxpayer has ac.uired 8by purchase or by exchange upon which the entire amount of gain or loss was recognized by law;, or has entered into a contact or option so to ac.uire, substantially identical stock or securities, then no deduction for the loss is shall be allowed under 2ection 4L unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 8%; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire; is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8/; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire which; resulted in the non* deductibility of the loss, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. ransactions bet. related taxpayers 6o are re(ated tax8a5ersL

Sec. 36 "IR&. '4) Losses from %ales or Exchanges of 'roperty . * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly T 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust, or 8B; %etween a fiduciary of a trust and beneficiary of such trust. Illegal transactions i!. #ains & losses attributable 8to; taxpayers failure to exercise pri!ileges or options to buy)sell prop. d. 0xclusions' #ains deri!ed fr. buying & selling shares of stock listed & traded through the local exchange

38

INCOME TAX REVIEWER


excluded) exempt from income tax but subKect to percentage tax S9&. 1#!. (ax on %ale5 4arter or Exchange of %hares of %tock Listed 0 (raded through the Local %tock Exchange or through initial 'ublic 3ffering($) %a& o! Sale, Barter or '&c#ange o! S#ares o! Stock (isted ) %raded %#ro"g# t#e (ocal Stock '&c#ange here shall be le!ied, assessed & collected on e!ery sale, barter, exchange or other disposition of shares of stock listed & exchange traded through the local stock 8-; -amil, ) Partners#ip *+ners#ip T An indi!idual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. (or purposes of this par., the @ fami(5 of an individua(; includes only his brothers & sisters 8whether by whole or half* blood;, spouse, ancestors & lineal descendants. 84; *ptions * If any person has an option to ac.uire stock, such stock shall be considered as owned by such person. (or purposes of this paragraph, an option to ac.uire such an option & each one of a series of options shall be considered as an option to ac.uire such stock. 8L; Constr"cti e *+ners#ip as $ct"al *+ners#ip * 2tock constructi!ely owned by reason of the application of paragraph 8+; or 84; hereof shall, for purposes of applying paragraph 8+; or 8-;, be treated as actually owned by such person, but stock constructi!ely owned by the indi!idual by reason of the application of paragraph 8-; hereof shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructi!e owner of such stock. 8/; Ret"rn on Capital .ains Reali/ed !r. Sale o! S#ares o! Stocks * in primary 8+ ) Ret"rn on Capital .ains Reali/ed !r. Sale o! S#ares o! Stock (isted ) %raded in t#e (ocal Stock '&c#ange T It shall be the duty of e!ery stock broker who effected the sale subKect to the tax imposed herein to collect the tax & remit the same to the %ureau of Internal "e!enue w)in fi!e 8C; banking days fr. the date of collection thereof & to submit on Jondays of each week to the secretary of the stock exchange, of w)c he is a member, a true & complete return as such determination is based on stock ownership, the following rules shall be applied' 8+; Stock No+ *+ned b, Indi id"als T 2tock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.

other than the sale by a dealer in securities, +)- of +E of the gross selling price or gross !alue in money of the shares of stock

a tax at the rate of

sold, bartered, exchanged or otherwise disposed w)c shall be paid by the seller or transferor. (B) %a& on S#ares o! Stock Sold or '&c#anged t#ro"g# Initial P"blic *!!ering here shall be le!ied, assessed & collected on e!ery sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates pro!ided hereunder based on the gross selling price or gross !alue in money of the shares of stock sold bartered, exchanged or otherwise disposed in accordance w) the proportion of shares of stock sold, bartered, exchanged or otherwise disposed

to the total outstanding shares of stock after the listing in the local stock exchange' 1p to -CE ' LE 9!er -CE but not o!er 44 +)4E ' -E 9!er 44 +)4E ' +E he tax herein imposed shall be paid by the offering issuing corporation

or by the seller in secondary offering.

(or purpose of this 2ection, the term @closely held corporation means any corporation at least C=E in !alue of the outstanding capital stock or at least C=E of the total combined !oting power of all classes of stock entitled to !ote is owned directly or indirectly by or for not more than -= indi!iduals. (or purposes of determining whether the corporation is a closely held corporation insofar

39

INCOME TAX REVIEWER


w)c shall contain a declaration of all his transactions effected through him during the preceding week & taxes collected by him & turned o!er to the %ureau of Internal "e!enue. Not o!er &+=,===PPPPPPPPPPPPP CE 9!er &+=,=== but not o!er &4=,===PPPP &C== Q+=E of the excess o!er &+=,=== 9!er &4=,=== but not o!er &5=,===PPP &-,C== Q+ CE of the excess o!er &4=,=== 9!er &5=,=== but not o!er &+L=,===PP.&:,C== Q- =E of the excess o!er &5=,=== 9!er &+L=,=== but not o!er &-C=,===P &--,C== Q - CE of the excess o!er &+L=,=== 9!er &-C=,=== but not o!er &C==,===P &C=,=== Q 4 =E of the excess o!er &-C=,=== 9!er &C==,=== PPPPPPPPPPPP &+-C,=== Q 4 L E of the excess o!er &C==,=== in +33:. &ro!ided, hat effecti!e Ranuary +, +333, the top marginal rate shall be thirty* three percent 844E; and effecti!e Ranuary +, -===, the said rate shall be thirty* two percent 84-E;. (or married indi!iduals, the husband and wife, subKect to the pro!ision of 2ection C+ 8<; hereof, shall compute separately their indi!idual income tax based on their respecti!e total taxable income' &ro!ided, hat if any income cannot be definitely attributed to or identified as income exclusi!ely earned or realized by either of the spouses, the same shall be di!ided e.ually between the spouses for the purpose of determining their respecti!e taxable income. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than 8L; years * +-E, and 7ess than three 84; years * -=E

8-; Ret"rn o! P"blic *!!ering o! S#ares o! Stock T In case of primary offering, the corporate issuer shall file the return & pay the corresponding tax w)in thirty 84=; days fr. the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the pro!ision of 2ubsection 8/;8+; of this 2ection shall apply as to the time & manner of the payment of the tax. 8<; Common Pro isions T Any gain deri!ed fr. the sale, barter, exchange or other disposition of shares of stock under this 2ection shall be exempt fr. the tax imposed in 2ections -L8/;, -58<;8-;, -:8A;8:;8c;, & -:8%; 8C;8c; of this /ode & fr. the regular indi!idual or corporate income tax. ax paid under this 2ection shall not be deductible for income tax purposes . e. Applicable tax rate S9&. #%. Income Tax Rates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein, 8b; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual citizen of the &hilippines who is residing outside of the &hilippines including o!erseas contract workers referred to in 2ubsection8/; of 2ection -4 hereof, and 8c; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8b;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual alien who is a resident of the &hilippines. he tax shall be computed in accordance with and at the rates established in the following schedule'

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INCOME TAX REVIEWER


8-; /ash and)or &roperty <i!idends * A final tax at the following rates shall be imposed upon the cash and)or property di!idends actually or constructi!ely recei!ed by an indi!idual from a domestic corporation or from a Koint stock company, insurance or mutual fund companies and regional operating head.uarters of multinational companies, or on the share of an indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or on the share of an indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture or consortium taxable as a corporation of which he is a member or co* !enturer' 2ix percent 8BE; beginning Ranuary +, +33:, 0ight percent 8:E; beginning Ranuary +, +333, en percent 8+=E beginning Ranuary +, -===. &ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including estates and trusts' &ro!ided, hat the tax liability, if any, on gains from sales or other dispositions of real property to the go!ernment or any of its political subdi!isions or agencies or to go!ernment* owned or controlled corporations shall be determined either under 2ection -L 8A; or under this 2ubsection, at the option of the taxpayer. 8-; 0xception. * he pro!isions of paragraph 8+; of this 2ubsection to the contrary notwithstanding, capital gains presumed to ha!e been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in ac.uiring or constructing a new principal residence within eighteen 8+:; calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this 2ubsection' &ro!ided, hat the historical cost or adKusted basis of the real property sold or disposed shall be carried o!er to the new principal residence built or ac.uired' &ro!ided, further, hat the /ommissioner shall ha!e been duly notified by the taxpayer within thirty 84=; days from the date of sale or disposition through a prescribed return of his intention to a!ail of the tax exemption herein mentioned' &ro!ided, still further, hat the said tax exemption can only be a!ailed of once e!ery ten 8+=; years' &ro!ided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to ha!e been realized from the sale or disposition shall be subKect to capital gains tax. (or this purpose, the gross selling price or fair market !alue at the time of sale, whiche!er is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph 8+; of this 2ubsection shall be imposed thereon. %EC. BC. (ax on )onreside nt Alien "ndividual. 8A; Nonresident Alien 0ngaged in trade or %usiness ?ithin the &hilippines. * 8+; In #eneral. * A nonresident alien indi!idual engaged in trade or business in the &hilippines shall be subKect to an income tax in the same manner as an indi!idual citizen and a resident alien indi!idual, on taxable income recei!ed from all sources within the &hilippines. A nonresident alien indi!idual who shall come to the &hilippines and stay therein for an aggregate period of more than one hundred eighty 8+:=; days during any calendar year shall be deemed a Nnonresident alien doing business in the &hilippinesN. 2ection -- 8#; of this /ode notwithstanding. 8-; /ash and)or &roperty <i!idends from a <omestic /orporation or Roint 2tock /ompany, or Insurance or Jutual (und /ompany or "egional 9perating $ead.uarter or Jultinational /ompany, or 2hare in the <istributable Net Income of a &artnership 80xcept a #eneral &rofessional &artnership;, Roint Account, Roint 6enture axable as a /orporation or Association., Interests, "oyalties, &rizes, and 9ther ?innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co*!enturer, interests, royalties 8in any form;, and prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8%;8+; of 2ection -L; and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, shall be subKect to an income tax of twenty percent 8-=E; on the total amount thereof' &ro!ided, howe!er, that royalties on books as well as other literary works, and royalties on musical compositions shall be subKect to a final tax of ten percent 8+=E; on the total amount thereof' &ro!ided, further, hat cinematographic films and similar works shall be subKect to the tax pro!ided under 2ection -: of this /ode' &ro!ided, furthermore, hat interest income from long* term

41

INCOME TAX REVIEWER


deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, that should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, and 7ess than three 84; years * -=E. 84; /apital #ains. * /apital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subKect to the tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8%; Nonresident Alien Indi!idual Not 0ngaged in rade or %usiness ?ithin the &hilippines. * here shall be le!ied, collected and paid for each taxable year upon the entire income recei!ed from all sources within the &hilippines by e!ery nonresident alien indi!idual not engaged in trade or business within the &hilippines as interest, cash and)or property di!idends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax e.ual to twenty* fi!e percent 8-CE; of such income. /apital gains realized by a nonresident alien indi!idual not engaged in trade or business in the &hilippines from the sale of shares of stock in any domestic corporation and real property shall be subKect to the income tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8/; Alien Indi!idual 0mployed by "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by regional or area head.uarters and regional operating head.uarters established in the &hilippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area head.uarters and regional operating head.uarters, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same position as those of aliens employed by these multinational companies. (or purposes of this /hapter, the term Nmultinational companyN means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia* &acific "egion and other foreign markets. 8<; Alien Indi!idual 0mployed by 9ffshore %anking 1nits. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by offshore banking units established in the &hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off* shore banking units, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. 80; Alien Indi!idual 0mployed by &etroleum 2er!ice /ontractor and 2ubcontractor. * An Alien indi!idual who is a permanent resident of a foreign country but who is employed and assigned in the &hilippines by a foreign ser!ice contractor or by a foreign ser!ice subcontractor engaged in petroleum operations in the &hilippines shall be liable to a tax of fifteen percent 8+CE; of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, recei!ed from such contractor or subcontractor' &ro!ided, howe!er, hat the same tax treatment shall apply to a (ilipino employed and occupying the same position as an alien employed by petroleum ser!ice contractor and subcontractor. Any income earned from all other sources within the &hilippines by the alien employees referred to under 2ubsections 8/;, 8<; and 80; hereof shall be subKect to the pertinent income tax, as the case may be, imposed under this /ode. %EC. BD. (ax Liability of *embe rs of General 'rofessional 'artne rships. * A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership. &3A+T9R ID - TAE O" &OR+ORATIO"S %EC. BE. &ates of "ncome tax on omestic Corpora tions. 8A; In #eneral. * 0xcept as otherwise pro!ided in this /ode, an income tax of thirty* fi!e percent 84CE; is hereby imposed upon the taxable income deri!ed during each taxable year from all sources within and without the &hilippines by e!ery corporation, as defined in 2ection --8%; of this /ode and taxable under this itle as a corporation, organized in, or existing under the laws of the &hilippines' &ro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date

42

INCOME TAX REVIEWER


when specific sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, further, hat the &resident, upon the recommendation of the 2ecretary of (inance, may effecti!e Ranuary +, -===, allow corporations the option to be taxed at fifteen percent 8+CE; of gross income as defined herein, after the following conditions ha!e been satisfied' 8+; A tax effort ratio of twenty percent 8-=E; of #ross National &roduct 8#N&;, 8-; A ratio of forty percent 8L=E; of income tax collection to total tax re!enues, 84; A 6A tax effort of four percent 8LE; of #N&, and 8L; A =.3 percent 8=.3E; ratio of the /onsolidated &ublic 2ector (inancial &osition 8/&2(&; to #N&. he option to be taxed based on gross income shall be a!ailable only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty* fi!e percent 8CCE;. he election of the gross income tax option by the corporation shall be irre!ocable for three 84; consecuti!e taxable years during which the corporation is .ualified under the scheme. (or purposes of this 2ection, the term Ngross incomeN deri!ed from business shall be e.ui!alent to gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goodsN sold shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit. (or a manufacturing concern, Ncost of goods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances and discounts. 8%; &roprietary 0ducational Institutions and $ospitals. * &roprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent 8+=E; on their taxable income except those co!ered by 2ubsection 8<; hereof' &ro!ided, that if the gross income from unrelated trade, business or other acti!ity exceeds fifty percent 8C=E; of the total gross income deri!ed by such educational institutions or hospitals from all sources, the tax prescribed in 2ubsection 8A; hereof shall be imposed on the entire taxable income. (or purposes of this 2ubsection, the term Nunrelated trade, business or other acti!ityN means any trade, business or other acti!ity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A N&roprietary educational institutionN is any pri!ate school maintained and administered by pri!ate indi!iduals or groups with an issued permit to operate from the <epartment of 0ducation, /ulture and 2ports 8<0/2;, or the /ommission on $igher 0ducation 8/$0<;, or the echnical 0ducation and 2kills <e!elopment Authority 8 02<A;, as the case may be, in accordance with existing laws and regulations. 8/; #o!ernment* owned or /ontrolled* /orporations, Agencies or Instrumentalities. * he pro!isions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the #o!ernment, except the #o!ernment 2er!ice Insurance 2ystem 8#2I2;, the 2ocial 2ecurity 2ystem 8222;, the &hilippine $ealth Insurance /orporation 8&$I/;, the &hilippine /harity 2weepstakes 9ffice 8&/29; and the &hilippine Amusement and #aming /orporation 8&A#/9";, shall pay such rate of tax upon their taxable income as are imposed by this 2ection upon corporations or associations engaged in s similar business, industry, or acti!ity. 8<; "ates of ax on /ertain &assi!e Incomes. * 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8-; /apital #ains from the 2ale of 2hares of 2tock Not raded in the 2tock 0xchange. * A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP. CE Amount in excess of &+==,===PPPPP.. +=E 84; ax on Income <eri!ed under the 0xpanded (oreign /urrency <eposit 2ystem. * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including

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INCOME TAX REVIEWER


interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8L; Intercorporate <i!idends. * <i!idends recei!ed by a domestic corporation from another domestic corporation shall not be subKect to tax. 8C; /apital #ains "ealized from the 2ale, 0xchange or <isposition of 7ands and)or %uildings. * A final tax of six percent 8BE; is hereby imposed on the gain presumed to ha!e been realized on the sale, exchange or disposition of lands and)or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, of such lands and)or buildings. 80; Jinimum /orporate Income ax on <omestic /orporations. * 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimu m ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimu m /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. 20/. -:. "ates of Income ax on (oreign /orporations. * 8A; ax on "esident (oreign /orporations. * 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subKect to an income tax e.ui!alent to thirty* fi!e percent 84CE; of the taxable income deri!ed in the preceding taxable year from all sources within the &hilippines' pro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, howe!er, hat a resident foreign corporation shall be granted the option to be taxed at fifteen percent 8+CE; on gross income under the same conditions, as pro!ided in 2ection -5 8A;. 8-; Jinimum /orporate Income ax on "esident (oreign /orporations. * A minimu m corporate income tax of two percent 8-E; of gross income, as prescribed under 2ection -5 80; of this /ode, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph 8+; of this 2ubsection. 84; International /arrier. * An international carrier doing business in the &hilippines shall pay a tax of two and one* half percent 8- +)-E; on its N#ross &hilippine %illingsN as defined hereunder'

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INCOME TAX REVIEWER


8a; International Air /arrier. * N#ross &hilippine %illingsN refers to the amount of gross re!enue deri!ed from carriage of persons, excess baggage, cargo and mail originating from the &hilippines in a continuous and uninterrupted flight, irrespecti!e of the place of sale or issue and the place of payment of the ticket or passage document' &ro!ided, hat tickets re!alidated, exchanged and)or indorsed to another international airline form part of the #ross &hilippine %illings if the passenger boards a plane in a port or point in the &hilippines' &ro!ided, further, hat for a flight which originates from the &hilippines, but transshipment of passenger takes place at any port outside the &hilippines on another airline, only the ali.uot portion of the cost of the ticket corresponding to the leg flown from the &hilippines to the point of transshipment shall form part of #ross &hilippine %illings. 8b; International 2hipping. * N#ross &hilippine %illingsN means gross re!enue whether for passenger, cargo or mail originating from the &hilippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 8L; 9ffshore %anking 1nits. * he pro!isions of any law to the contrary notwithstanding, income deri!ed by offshore banking units authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with offshore banking units, including any interest income deri!ed from foreign currency loans granted to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with said offshore banking units shall be exempt from income tax. 8C; ax on %ranch &rofits "emittances. * Any profit remitted by a branch to its head office shall be subKect to a tax of fifteen 8+CE; which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof 8except those acti!ities which are registered with the &hilippine 0conomic Uone Authority;. he tax shall be collected and paid in the same manner as pro!ided in 2ections C5 and C: of this /ode' pro!ided, that interests, di!idends, rents, royalties, including remuneration for technical ser!ices, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains recei!ed by a foreign corporation during each taxable year from all sources within the &hilippines shall not be treated as branch profits unless the same are effecti!ely connected with the conduct of its trade or business in the &hilippines. 8B; "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. 8a; "egional or area head.uarters as defined in 2ection --8<<; shall not be subKect to income tax. 8b; "egional operating head.uarters as defined in 2ection --800; shall pay a tax of ten percent 8+=E; of their taxable income. 5. ax on /ertain Incomes "ecei!ed by a "esident (oreign /orporation. T 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8b; Income <eri!ed under the 0xpanded (oreign /urrency <eposit 2ystem. * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8c; /apital #ains from 2ale of 2hares of 2tock Not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP CE 9n any amount in excess of &+==,===PP. +=E 8d; Intercorporate <i!idends. * <i!idends recei!ed by a resident foreign corporation from a domestic corporation liable to tax under this /ode shall not be subKect to tax under this itle. 8%; ax on Nonresident (oreign /orporation. * 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a foreign corporation not engaged in trade or business in the &hilippines shall pay a tax e.ual to thirty* fi!e percent 84CE; of the gross income recei!ed during each taxable year from all sources within the &hilippines, such as interests, di!idends, rents, royalties, salaries, premiums 8except reinsurance premiums;, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subKect to tax under subparagraphs 8/; and 8d;' &ro!ided, hat effecti!e +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and, effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. 8-; Nonresident /inematographic (ilm 9wner, 7essor or <istributor. * A cinematographic film owner, lessor, or distributor shall pay a tax of twenty* fi!e percent 8-CE; of its gross income from all sources within the &hilippines.

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INCOME TAX REVIEWER


84; Nonresident 9wner or 7essor of 6essels /hartered by &hilippine Nationals. * A nonresident owner or lessor of !essels shall be subKect to a tax of four and one* half percent 8L +)-E; of gross rentals, lease or charter fees from leases or charters to (ilipino citizens or corporations, as appro!ed by the Jaritime Industry Authority. 8L; Nonresident 9wner or 7essor of Aircraft, Jachineries and 9ther 0.uipment. * "entals, charters and other fees deri!ed by a nonresident lessor of aircraft, machineries and other e.uipment shall be subKect to a tax of se!en and one* half percent 85 +)-E; of gross rentals or fees. 8C; ax on /ertain Incomes "ecei!ed by a Nonresident (oreign /orporation. * 8a; Interest on (oreign 7oans. * A final withholding tax at the rate of twenty percent 8-=E; is hereby imposed on the amount of interest on foreign loans contracted on or after August +, +3:B, 8b; Intercorporate <i!idends. * A final withholding tax at the rate of fifteen percent 8+CE; is hereby imposed on the amount of cash and)or property di!idends recei!ed from a domestic corporation, which shall be collected and paid as pro!ided in 2ection C5 8A; of this /ode, subKect to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to ha!e been paid in the &hilippines e.ui!alent to twenty percent 8-=E; for +335, nineteen percent 8+3E; for +33:, eighteen percent 8+:E; for +333, and se!enteen percent 8+5E; thereafter, which represents the difference between the regular income tax of thirty* fi!e percent 84CE; in +335, thirty* four percent 84LE; in +33:, and thirty* three percent 844E; in +333, and thirty* two percent 84-E; thereafter on corporations and the fifteen percent 8+CE; tax on di!idends as pro!ided in this subparagraph, 8c; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange' Not o!er &+==,===PPPP..PPPPPPP CE 9n any amount in excess of &+==,===PPPP +=E i. 2pecial rates' Sec. %3, Rev. Re-. #. Gross income fr. business . T In the case of a a; manufacturing, b; merchandising, or c; mining business, H gross income I means the total sales, less the cost of goods sold, plus any income fr. in!estments & fr. incidental or outside operations or sources. In determining the gross income, subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. Sec. %*, Rev. Re-. #. Gross income of farme rs. * A farmer reporting on the basis of receipts & disbursements 8in w)c no in!entory to determine profits is used; shall include in his gross income for the taxable year +. the amount of cash or the !alue of merchandise or other property recei!ed fr. the sale of li!estock & produce w)c were raised during the taxable year or prior years, -. the profits fr. the sale of any li!estock or other items w)c were purchased, & 4. gross income fr. all other sources. xxx xxx xxx Sec. #! #E$ *inimu m Corpora t e "ncome (ax on omestic Corpora tions. 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimum ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimum /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

2tock transactions T sale of domestic shares classified as capital assets but not traded and listed in the &hil. 2tock 0xch. CE * +=E 2ale of real prop classified as capital asset T BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher 2ale of land and building by a corp. BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher ii. "egular tax on N0 #AIN /A&I A7

<. #ross income deri!ed from the /onduct of rade or %usiness or the 0xercise of a &rofession, +. /omputation of taxable income fr. business) conduct of trade or profession.

46

INCOME TAX REVIEWER


(or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. a. Jerchandising #ross 2ales less returns and discounts less /ost of 2ales less 0xpenses [ N0 IN/9J0 b. Janufacturing #ross sales less returns and discounts less cost of goods manufactured and sold less expenses [ N0 IN/9J0 c. 2er!ice concern) /onduct of trade #ross receipts less cost of ser!ice less expenses [ N0 IN/9J0 d. &ractice of &rofession #ross professional fees less expenses IN/9J0 e. (arming)Agribusiness f. &erformance public office [ N0 8b; Income <eri!ed by the #o!ernment or its &olitical 2ubdi!isions. * Income deri!ed from any public utility or from the exercise of any essential go!ernmental function accruing to the #o!ernment of the &hilippines or to any political subdi!ision thereof. +.D. 193 1 S9&TIO" 1. he pro!isions of special or general law to the contrary notw)standing, all exemptions fr. the payment of duties, taxes, fees, imposts & other charges heretofore granted in fa!or of go!ernment* owned or controlled corporations including their subsidiaries, are hereby w)drawn. S9&. #. he &resident of the &hilippines &)or the Jinister of (inance, upon the recommendation of the (iscal Incenti!es "e!iew %oard created under &residential <ecree No. 55B, is hereby empowered to restore, partially or totally, the exemptions w)drawn by 2ec. + abo!e or otherwise re!ise the scope & co!erage of any applicable tax & duty, taking into account, among others, any or all of the following' +; he effect on the relati!e price le!els, -; he relati!e contribution of the corporation to the re!enue generation effort, 4; he nature of the acti!ity in w)c the corporation is engaged in, or L; In general, the greater national interest to be ser!ed. S9&. 3 . he Jinistry of (inance shall promulgate the necessary rules & regulations to effecti!ely implement the pro!isions of this <ecree. +D 19** S9&TIO" 1. he pro!isions of special or general law to the contrary notw)standing, all exemptions fr. or any preferential treatment in the payment of duties, taxes, fees, imposts & other charges heretofore granted to pri!ate business enterprise &)or persons engaged in any economic acti!ity are hereby w)drawn, except those enKoyed by the following' 8a; hose registered by the %oard of In!estments under &< No. +5:3, as amended by %& %lg. 43+, & those registered by the 0xport &rocessing Uone Authority under &< No. BB, as amended by &< Nos. +LL3, +55B, +55B* A, & +5:B, 8b; he copper mining industry in accordance w) the pro!isions of 79I +L+B, 8c; hose co!ered by international agreements to w)c the &hilippines is a signatory, 8d; hose co!ered by the non* impairment clause of the /onstitution, & 8e; hose that will be appro!ed by the &resident of the &hilippines upon the recommendation of the Jinister of (inance. 9.O. 93 S9&TIO" 1 . he pro!isions of any general or special law to the contrary notw)standing, all tax & duty incenti!es granted to the go!ernment & pri!ate entities are hereby w)drawn, except' a; those co!ered by the non* impairment clause of the /onstitution,

of the functions

of a

82ec.-- 8s; , NI"/ T su8ra. ; g. other types of business -. 0xclusions a. Income exempt under a treaty Sec. 3# '4 *)M "ncome Exempt under (rea ty . - Income of any kind, to the extent re.uired by any treaty obligation binding upon the #o!ernment of the &hilippines. b. Income deri!ed by the go!t. or its political subd. fr. the exercise of any essential go!t. function. Sec. 3# '4 !) "IR& '!) ,isce((aneous Items. 'a) Income Derived <5 1orei-n :overnm e n t . Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments.

47

INCOME TAX REVIEWER


b; those conferred by effecti!e international agreements to w)c the #o!t. of the "ep. of the &hil. is a signatory, c; those enKoyed by enterprises registered w)' 8i; 8ii; 8iii; the %oard of In!estments pursuant to &< No. +5:3, as amended, the 0xport &rocessing Uone Authority pursuant to &< No. BB, as amended, the &hil 6eterans In!estment <e!elopment /orporation Industrial Authority pursuant to &< 4C: as amended, used for religious, charitable or educational purposes shall be exempt fr. taxation. 1inance De8t. Order 13!- $! 0duc. inst. means a non* stock, non* profit corporation association duly registered under &hil. law, & operated exclusi!ely for educational purposes, maintained & administered by pri!ate indi!idual or group offering formal education issued permit to operate by the <0/2. "e!enues deri!ed fr. & assets used in the operation of cafeterias)canteens, dormitories, bookstores are exempt fr. taxation pro!ided they are owned & operated by the educational institution as ancillary acti!ities & the same are located w)in the school premises. De8t. of 1inance Order 1%9- 9* Re2 9xem8tion of "on- stoc= "on- +rofit 9ducationa( 9ntities Amendin- 1inance de8ar t m e n t Order 13!- $! Non* stock, non* profit educational institutions are exempt fr. taxes on all their re!enues & assets used actually, directly & exclusi!ely for educational purposes. $owe!er, they shall be subKect to internal re!enue tax on such educational institution of its educational purposes or function. Interest income shall be exempt fr. taxation only when used directly, exclusi!ely for educational purposes. o substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the %oard resolution on the proposed proKect to be funded out of the money deposited in banks. +=. &artners distributi!e share of the gross income of gen. professional partnership ?hat is a gen. prof. partnershipM HP exercising their common profession, no part of the income is deri!ed from engaging in any trade or business.I Sec. ##. 8%; he term @cor8ora tion@ shall include partnerships, no matter how created or organized, Koint* stock companies, Koint accounts 8cuentas en participacion;, association, or insurance companies, but does not include general professional partnerships and a Koint !enture or consortium formed for the purpose of undertaking construction proKects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a ser!ice contract with the #o!ernment . @:enera( 8rofessiona( 8artne rs 6i8s@ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is deri!ed from engaging in any trade or business. ID. Situs of t6e sources of income A. Jeaning of situs in income taxation)determining factors in fixing the situs of income under &hil. tax law +. /lassification of income as to source S9&. %#. "ncome from %ources !ithin the 'hilippines.'A) :ross Income 1rom Sources it6in t6e +6i(i88ines . * he following items of gross

d; those enKoyed by the copper mining industry pursuant to the pro!isions of 79I No. +L+B, e; those conferred under the four basic codes namely' 8i; 8ii; 8iii; 8i!; the ariff & /ustoms /ode, as amended, the National Internal "e!enue /ode, as amended, the 7ocal ax /ode, as amended, the "eal &roperty ax /ode, as amended,

f; those appro!ed by the &resident upon the recommendation of the (iscal Incenti!es "e!iew %oard. S9&. #. he (iscal Incenti!es "e!iew %oard, created under &< No. 55B, as amended, is hereby authorized to' a; restore tax &)or duty exemptions w)drawn hereunder in whole or in part, b; re!ise the scope & co!erage of tax &)or duty exemption, c; impose conditions for the restoration of tax &)or duty exemption, d; prescribe the date or period of effecti!ity of the restoration of tax &)or duty exemption, e; formulate & submit to the &resident for appro!al, a complete system for the grant of subsidies to deser!ing beneficiaries, in lieu of or in combination w) the restoration of tax & duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries & the terms & conditions for the grant thereof taking into consideration the international commit ments of the &hilippines & the necessary precautions such that the grant of subsidies does not become the basis for counter!ailing action. Sec. % '3), Art EID, &onstitution **All re!enues & assets of non* stock, non* profit educational institutions used actually, directly & exclusi!e for educational purposes shall be exempt fr. taxes & duties. 1pon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner pro!ided by law. Sec. % '%), Art. EID, &onstitu tion ** 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, & exclusi!ely for educational purposes shall be exempt fr. tax. Sec. #$ '3), Art. DI, &onstitution **/haritable institutions, churches & parsonages or con!ents appurtenant thereto, mos.ues, non* profit cemeteries, & all lands, buildings, & impro!ements, actually, directly & exclusi!ely

48

INCOME TAX REVIEWER


income shall be treated as gross income from sources within the &hilippines' '1) Interes ts . * Interests deri!ed from sources within the &hilippines, and interests on bonds, notes or other interest* bearing obligation of residents, corporate or otherwise, '#) Dividends . * he amount recei!ed as di!idends' 8a; from a domestic corporation, and 8b; from a foreign corporation, unless less than fifty percent 8C=E; of the gross income of such foreign corporation for the three* year period ending with the close of its taxable year preceding the declaration of such di!idends or for such part of such period as the corporation has been in existence; was deri!ed from sources within the &hilippines as determined under the pro!isions of this 2ection, but only in an amount which bears the same ration to such di!idends as the gross income of the corporation for such period deri!ed from sources within the &hilippines bears to its gross income from all sources. '3) Services. * /ompensation for labor or personal ser!ices performed in the &hilippines, '%) Renta(s and ro5a(ties . * "entals and royalties from property located in the &hilippines or from any interest in such property, including rentals or royalties for * 8a; he use of or the right or pri!ilege to use in the &hilippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right, 8b; he use of, or the right to use in the &hilippines any industrial, commercial or scientific e.uipment, 8c; he supply of scientific, technical, industrial or commercial knowledge or information, 8d; he supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enKoyment of, any such property or right as is mentioned in paragraph 8a;, any such e.uipment as is mentioned in paragraph 8b; or any such knowledge or information as is mentioned in paragraph 8c;, 8e; he supply of ser!ices by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person, 8f; echnical ad!ice, assistance or ser!ices rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, !enture, proKect or scheme, and 8g; he use of or the right to use' 8i; Jotion picture films, 8ii; (ilms or !ideo tapes for use in connection with tele!ision, and 8iii; apes for use in connection with radio broadcasting. '*) Sa(e of Rea( +ro8ert5 . * gains, profits and income from the sale of real property located in the &hilippines, and '6) Sa(e of +ersona( +ro8er t5 . * gains, profits and income from the sale of personal property, as determined in 2ubsection 80; of this 2ection. '4) Taxa<(e Income 1rom Sources it6in t6e +6i(i88ines. '1) :enera( Ru(e . * (rom the items of gross income specified in 2ubsection 8A; of this 2ection, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effecti!ely connected with the business or trade conducted exclusi!ely within the &hilippines which cannot definitely be allocated to some items or class of gross income' &ro!ided, hat such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. he remainder, if any, shall be treated in full as taxable income from sources within the &hilippines. '#) 9xce8tion . * No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection 8A; unless indebtedness was actually incurred to pro!ide funds for use in connection with the conduct or operation of trade or business in the &hilippines. '&) :ross Income 1rom Sources it6out t6e +6i(i88ines . * he following items of gross income shall be treated as income from sources without the &hilippines' 8+; Interests other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8+; of 2ubsection 8A; of this 2ection, 8-; <i!idends other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8-; of 2ubsection 8A; of this 2ection, 84; /ompensation for labor or personal ser!ices performed without the &hilippines, 8L; "entals or royalties from property located without the &hilippines or from any interest in such property including rentals or royalties for the use of or for the pri!ilege of using without the &hilippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties, and 8C; #ains, profits and income from the sale of real property located without the &hilippines. 'D) Taxa<(e Income 1rom Sources it6ou t t6e +6i(i88ines . * (rom the items of gross income specified in 2ubsection 8/; of this 2ection there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be treated in full as taxable income from sources without the &hilippines. '9) Income 1rom Sources +art(5 it6in and +art(5 it6ou t t6e +6i(i88ines .* Items of gross income, expenses, losses and deductions, other than those specified in 2ubsections 8A; and 8/; of this 2ection, shall be allocated or apportioned to sources within or without the &hilippines, under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. ?here items of gross income

49

INCOME TAX REVIEWER


are separately allocated to sources within the &hilippines, there shall be deducted 8for the purpose of computing the taxable income therefrom; the expenses, losses and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be included in full as taxable income from sources within the &hilippines. In the case of gross income deri!ed from sources partly within and partly without the &hilippines, the taxable income may first be computed by deducting the expenses, losses or other deductions apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income, and the portion of such taxable income attributable to sources within the &hilippines may be determined by processes or formulas of general apportionment prescribed by the 2ecretary of (inance. #ains, profits and income from the sale of personal property produced 8in whole or in part; by the taxpayer within and sold without the &hilippines, or produced 8in whole or in part; by the taxpayer without and sold within the &hilippines, shall be treated as deri!ed partly from sources within and partly from sources without the &hilippines. #ains, profits and income deri!ed from the purchase of personal property within and its sale without the &hilippines, or from the purchase of personal property without and its sale within the &hilippines shall be treated as deri!ed entirely form sources within the country in which sold' &ro!ided, howe!er, hat gain from the sale of shares of stock in a domestic corporation shall be treated as deri!ed entirely form sources within the &hilippines regardless of where the said shares are sold. he transfer by a nonresident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in its book unless' 8+; the transferor has filed with the /ommissioner a bond conditioned upon the future payment by him of any income tax that may be due on the gains deri!ed from such transfer, or 8-; the /ommissioner has certified that the taxes, if any, imposed in this itle and due on the gain realized from such sale or transfer ha!e been paid. It shall be the duty of the transferor and the corporation the shares of which are sold or transferred, to ad!ise the transferee of this re.uirement. '1) Definitions . * As used in this 2ection the words NsaleN or NsoldN include NexchangeN or NexchangedN, and the word NproducedN includes NcreatedN, Nfabricated,N NmanufacturedN, Nextracted,N NprocessedN, NcuredN or Naged.N a. #ross) taxable Income fr. sources w)in the &hils. the &hilippines which cannot definitely be allocated to some items or class of gross income' &ro!ided, hat such items of deductions shall be allowed only if fully substantiated by all the information necessary for its calculation. he remainder, if any, shall be treated in full as taxable income from sources within the &hilippines. 8-; 0xception. * No deductions for interest paid or incurred abroad shall be allowed from the item of gross income specified in subsection 8A; unless indebtedness was actually incurred to pro!ide funds for use in connection with the conduct or operation of trade or business in the &hilippines. &ommissione r vs. NAA, su8ra &om. vs. 4OA& , su8ra "D& vs. &om. 1acts ' N</ made +L promissory notes for the balance of the purchase price of +- !essels it had contracted a okyo firm to build. 2aid balance & interests were timely remitted in okyo. N</ w)held no tax. he /I" assessed it liable for interest tax. he / A affirmed. N</ now contends no tax was due as all the related acts. in the transxn. were done in okyo. 3e(d2 Income fr. sources w)in the &hils. include interest & other interest* bearing obligations of residents, corporate or otherwise. he law speaks of HsourceI w)c, in /A%, is the N</, a resident domestic corporation. Nothing in the law speaks of the Hact or acti!ity I of non* resident corps. in the &hils. or the place where the contract is signed. he residence of the obligor who pays the interest & not the physical location of the securities, bonds or notes, or the place of payment, is the determining factor of the source of interest income. hus, if the obligor is a &hil. resident, the interest payment he made can ha!e sources other than w)in the &hils. he interest is paid not by the bond, note or other interest* bearing obligations but by the obligor. 3o0de n vs. &o((ector 1acts ' /ommonwealth, a domestic corporation, entered into reinsurance contracts w) %ritish reinsurance companies not engaged in trade or business in the &hils., whereby former agreed to cede to the latter a portion of the premiums on indemnity insurances it had underwritten in the &hils. $owden, another %ritish corporation, not engaged in trade or business in the &hils. represented said %ritish companies. /ontracts were prepared & signed by the %ritish in 7ondon, & sent to Janila for /ommonwealths signing. hus, /ommonwealth remitted &53:,-35 w) accrued interest at &L,3:C as $owdens gross income. $owden filed refund claim for &BC,++C. $owden agreed to pay &355 as income tax on the &L,3:C accrued interest. $e in!oked a /I" ruling exempting fr. w)holding tax reinsurance premiums recei!ed fr. a domestic insurance company by foreign insurance companies not authorized to do business here. Its action to reco!er was denied by the / A. 3e(d ' he income source is the property, ser!ice or acti!ity that produced it. "einsurance premiums remitted to $owden had for their source the undertaking 8an acti!ity ; to indemnify /ommonwealth. his took place in the &hils. he risks originally underwritten by /ommonwealth on w)c the reinsurance premiums & indemnity were based were all situated in the &hils. he latter contracts were perfected in the &hils. under Art. ++

Sec. %#. #4$ (axable "ncome +rom %ources !ithin the 'hilippines. 8+; #eneral "ule. * (rom the items of gross income specified in 2ubsection 8A; of this 2ection, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effecti!ely connected with the business or trade conducted exclusi!ely within

50

INCOME TAX REVIEWER


thereof, the parties intended &hil. law to go!ern by pro!iding for arbitration in Janila. Also, the contract pro!ided for the use of &hil. currency as a medium of exchange & tax payment. Appellant should not confuse acti!ity that creates income w) business in the course of w)c an income is realized, for acti!ity may consist of a single act while business implies continuity of transactions. An income may be earned by a corp. in the &hils. although such corp. conducts all its business abroad. he ax /ode does not re.uire a foreign corp. to be engaged in business in the &hils. for its income fr. sources w)in the &hils. to be taxable. b. #ross) axable Income fr. sources w)o the &hils. member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual, whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines, 80; A domestic corporation is taxable on all income deri!ed from sources within and without the &hilippines, and 8(; A foreign corporation, whether engaged or not in trade or business in the &hilippines, is taxable only on income deri!ed from sources within the &hilippines. &IR vs. 4OA& A"D T39 &TA 19AI&IA"O, N. dissentin- ' ?hether the foreign corporate taxpayer is doing business in the &hilippines & therefore a resident foreign corporation, or not doing business in the &hilippines & therefore a non resident foreign corporation, I I2 7IA%70 9 IN/9J0 AO 9N7D 9 $0 0O 0N $A I <0"I60< IN/9J0 ("9J 291"/02 ?I $IN $0 &$I7I&&IN02. 291"/0 9( IN/9J0 "07A 0 9 $0 &"9&0" D, A/ I6I D 9" 20"6I/0 ?$I/$ &"9<1/0< $0 IN/9J0, not to the flow of money or site of payment ?here income taxation of ser!ices in in!ol!ed, the income is sources in the &7A/0 ?$0"0 $0 20"6I/0 I2 "0N<0"0<. . Income fr. transportation or other ser!ices done outside the &hilippine must be treated as deri!ed entirely fr. sources outside the &hilippines . Income of a foreign airline for carriage of passengers & cargo between points located outside the &hilippines is not an income fr. sources w)in the &hilippines although the tickets are sold here, such tickets being merely e!idence of the contract of carriage. 1nder &.<. +4CC, international carriers issuing passage documentation in the &hilippines for uplifts between points outside the &hilippine are not charged any &hilippine income tax on their &hilippine billings. In place thereof, a -.CE excise tax on billings in respect of passengers & cargoes originating fr. the &hilippine regardless of embarkation or debarkation is imposed. D. A. A((o0a <(e deductions in dete r mi ni ntaxa<(e income #eneral &rinciples <eductions #o!erning ax

Sec. %#. '&) :ross Income 1rom Sources it6out t6e +6i(i88ines . * he following items of gross income shall be treated as income from sources without the &hilippines' 8+; Interests other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8+; of 2ubsection 8A; of this 2ection, 8-; <i!idends other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8-; of 2ubsection 8A; of this 2ection, 84; /ompensation for labor or personal ser!ices performed without the &hilippines, 8L; "entals or royalties from property located without the &hilippines or from any interest in such property including rentals or royalties for the use of or for the pri!ilege of using without the &hilippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties, and 8L; #ains, profits and income from the sale of real property located without the &hilippines. Sec. #%. # $ (axable "ncome +rom %ources !ithou t the 'hilippines . * (rom the items of gross income specified in 2ubsection 8/; of this 2ection there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be treated in full as taxable income from sources without the &hilippines. -. #eneral principles of income taxation in the &hilippines and situs of sources of income S9&. #3. General 'rinciples of "ncome (axation in the 'hilippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a

%EC. 2=. eductions from Gross "ncome . * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, 'A) 9x8enses . *

51

INCOME TAX REVIEWER


'1) Ordinar5 and "ecessar5 Trade, 4usiness or +rofessiona( 9x8enses .* 8a; In #eneral. * here shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the de!elopment, management, operation and)or conduct of the trade, business or exercise of a profession, including' 8i; A reasonable allowance for salaries, wages, and other forms of compensation for personal ser!ices actually rendered, including the grossed* up monetary !alue of fringe benefit furnished or granted by the employer to the employee' &ro!ided, hat the final tax imposed under 2ection 44 hereof has been paid, 8ii; A reasonable allowance for tra!el expenses, here and abroad, while away from home in the pursuit of trade, business or profession, 8iii; A reasonable allowance for rentals and)or other payments which are re.uired as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no e.uity other than that of a lessee, user or possessor, 8i!; A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the de!elopment, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the 2ecretary of (inance may, by rules and regulations prescribe, upon recommendation of the /ommissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer' &ro!ided, hat any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. 8b; 2ubstantiation "e.uirements. * No deduction from gross income shall be allowed under 2ubsection 8A; hereof unless the taxpayer shall substantiate with sufficient e!idence, such as official receipts or other ade.uate records' 8i; the amount of the expense being deducted, and 8ii; the direct connection or relation of the expense being deducted to the de!elopment, management, operation and)or conduct of the trade, business or profession of the taxpayer. 8c; %ribes, Fickbacks and 9ther 2imilar &ayments. * No deduction from gross income shall be allowed under 2ubsection 8A; hereof for any payment made, directly or indirectly, to an official or employee of the national go!ernment, or to an official or employee of any local go!ernment unit, or to an official or employee of a go!ernment* owned or *controlled corporation, or to an official or employee or representati!e of a foreign go!ernment, or to a pri!ate corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. '#) 9x8enses A((o0a<(e to +rivate 9ducationa( Institu tions . * In addition to the expenses allowable as deductions under this /hapter, a pri!ate educational institution, referred to under 2ection -5 8%; of this /ode, may at its option elect either' 8a; to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 8b; to deduct allowance for depreciation thereof under 2ubsection 8(; hereof. '4) Inte res t.'1) In :enera( . * he amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayerNs profession, trade or business shall be allowed as deduction from gross income' &ro!ided, howe!er, hat the taxpayerNs otherwise allowable deduction for interest expense shall be reduced by an amount e.ual to the following percentages of the interest income subKected to final tax' (orty* one percent 8L+E; beginning Ranuary +, +33:, hirty* nine percent 843E; beginning Ranuary +, +333, and hirty* eight percent 84:E; beginning Ranuary +, -===, '#) 9xce8tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness is incurred to finance petroleum exploration. '3) O8tiona( Trea t m e n t of Inte res t 9x8ense . * At the option of the taxpayer, interest incurred to ac.uire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. '&) Taxes.'1) In :enera( . * axes paid or incurred within the taxable year in connection with the taxpayerNs profession, trade or business, shall be allowed as deduction, except 8a; he income tax pro!ided for under this itle, 8b; Income taxes imposed by authority of any foreign country, but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to ha!e to any extent the benefits of paragraph 84; of this subsection 8relating to credits for taxes of foreign countries;, 8c; 0state and donorNs taxes, and 8d; axes assessed against local benefits of a kind tending to increase the !alue of the property assessed.

52

INCOME TAX REVIEWER


&ro!ided, hat taxes allowed under this 2ubsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. '#) Aimita tions on Deductions . * In the case of a nonresident alien indi!idual engaged in trade or business in the &hilippines and a resident foreign corporation, the deductions for taxes pro!ided in paragraph 8+; of this 2ubsection 8/; shall be allowed only if and to the extent that they are connected with income from sources within the &hilippines. '3) &redit A-ainst Tax for Taxes of 1orei-n &ountries . * If the taxpayer signifies in his return his desire to ha!e the benefits of this paragraph, the tax imposed by this itle shall be credited with' 8a; /itizen and <omestic /orporation. * In the case of a citizen of the &hilippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country, and 8b; &artnerships and 0states. * In the case of any such indi!idual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributi!e share of the income of such partnership or trust is reported for taxation under this itle. An alien indi!idual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. '%) Aimita tions on &redit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. '*) Ad>ustm e n ts on +a5me n t of Incurred Taxes . * If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the /ommissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the /ommissioner, or the amount of tax o!erpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the /ommissioner as a condition precedent to the allowance of this credit may re.uire the taxpayer to gi!e a bond with sureties satisfactory to and to be appro!ed by the /ommissioner in such sum as he may re.uire, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. he bond herein prescribed shall contain such further conditions as the /ommissioner may re.uire. '6) Bear in 6ic6 &redit Ta=en . * he credits pro!ided for in 2ubsection 8/;84; of this 2ection may, at the option of the taxpayer and irrespecti!e of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subKect, howe!er, to the conditions prescribed in 2ubsection 8/;8C; of this 2ection. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subse.uent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. '!)+roof of &redits . * he credits pro!ided in 2ubsection 8/;84; hereof shall be allowed only if the taxpayer establishes to the satisfaction of the /ommissioner the following' 8a; he total amount of income deri!ed from sources without the &hilippines, 8b; he amount of income deri!ed from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the 2ecretary of (inance, and 8c; All other information necessary for the !erification and computation of such credits. 'D) Aosses. '1) In :enera( .* 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. '#) +roof of Aoss . * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of

53

INCOME TAX REVIEWER


indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, hat the time to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss, and '3) "et O8era ti n- Aoss &arr5- Over . * he net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been pre!iously offset as deduction from gross income shall be carried o!er as a deduction from gross income for the next three 84; consecuti!e taxable years immediately following the year of such loss' &ro!ided, howe!er, hat any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this 2ubsection' &ro!ided, further, hat a net operating loss carry* o!er shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that * 8i; Not less than se!enty* fi!e percent 85CE; in nominal !alue of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons, or 8ii; Not less than se!enty* fi!e percent 85CE; of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. S(or purposes of this subsection, the term Nnot operating lossN shall mean the excess of allowable deduction o!er gross income of the business in a taxable year. &ro!ided, hat for mines other than oil and gas wells, a net operating loss without the benefit of incenti!es pro!ided for under 0xecuti!e 9rder No. --B, as amended, otherwise known as the 9mnibus In!estments /ode of +3:5, incurred in any of the first ten 8+=; years of operation may be carried o!er as a deduction from taxable income for the next fi!e 8C; years immediately following the year of such loss. he entire amount of the loss shall be carried o!er to the first of the fi!e 8C; taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four 8L; years. '%) &a8ita( Aosses. 8a; 7imitation. * 7oss from sales or 0xchanges of capital assets shall be allowed only to the extent pro!ided in 2ection 43. 8b; 2ecurities %ecoming worthless. * If securities as defined in 2ection -- 8 ; become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. '*) Aosses 1rom as6 Sa(es of Stoc= or Securities . * 7osses from Nwash salesN of stock or securities as pro!ided in 2ection 4:. '6) a-erin- Aosses . * 7osses from wagering transactions shall b allowed only to the extent of the gains from such transactions. '!) A<andon m e n t Aosses . * 8a; In the e!ent a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and de!elopment expenditures pertaining thereto shall be allowed as a deduction' &ro!ided, hat accumulated expenditures incurred in that area prior to Ranuary +, +353 shall be allowed as a deduction only from any income deri!ed from the same contract area. In all cases, notices of abandonment shall be filed with the /ommissioner. 8b; In case a producing well is subse.uently abandoned, the unamortized costs thereof, as well as the undepreciated costs of e.uipment directly used therein , shall be allowed as a deduction in the year such well, e.uipment or facility is abandoned by the contractor' &ro!ided, hat if such abandoned well is reentered and production is resumed, or if such e.uipment or facility is restored into ser!ice, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. '9) 4ad De<ts. '1) In :enera( . * <ebts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under 2ection 4B 8%; of this /ode' &ro!ided, hat reco!ery of bad debts pre!iously allowed as deduction in the preceding years shall be included as part of the gross income in the year of reco!ery to the extent of the income tax benefit of said deduction. '#) Securities 4ecominort6( ess . * If securities, as defined in 2ection -- 8 ;, are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the &hilippines a substantial part of whose business is the receipt of deposits, for the purpose of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. '1) De8recia tion. '1) :enera( Ru(e . * here shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent pro!isions of the instrument creating the trust, or in the absence of such pro!isions, on the basis of the trust income allowable to each.

54

INCOME TAX REVIEWER


'#) Use of &ertain ,et6ods and Rates . * he term Nreasonable allowanceN as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, under any of the following methods' 8a; he straight* line method, 8b; <eclining* balance method, using a rate not exceeding twice the rate which would ha!e been used had the annual allowance been computed under the method described in 2ubsection 8(; 8+;, 8c; he sum* of*the* years* digit method, and 8d; any other method which may be prescribed by the 2ecretary of (inance upon recommendation of the /ommissioner. '3) A-ree m e n t as to Usefu( Aife on 6ic6 De8recia tion Rate is 4ased . * ?here under rules and regulations prescribed by the 2ecretary of (inance upon recommendation of the /ommissioner, the taxpayer and the /ommissioner ha!e entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national #o!ernment in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. he responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effecti!e for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is ser!ed by the party initiating such change to the other party to the agreement' &ro!ided, howe!er, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written obKection on the part of the /ommissioner or his duly authorized representati!es, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this 2ubsection. '%) De8recia tion of +ro8erti es Used in +etro(eu m O8era tions . * An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in ser!ice in a taxable year shall be allowed under the straight* line or declining* balance method of depreciation at the option of the ser!ice contractor. $owe!er, if the ser!ice contractor initially elects the declining* balance method, it may at any subse.uent date, shift to the straight* line method. he useful life of properties used in or related to production of petroleum shall be ten 8+=; years of such shorter life as may be permitted by the /ommissioner. &roperties not used directly in the production of petroleum shall be depreciated under the straight* line method on the basis of an estimated useful life of fi!e 8C; years. '*) De8recia tion of +ro8er ties Used in ,ininO8era tions. * an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows' 8a; At the normal rate of depreciation if the expected life is ten 8+=; years or less, or 8b; <epreciated o!er any number of years between fi!e 8C; years and the expected life if the latter is more than ten 8+=; years, and the depreciation thereon allowed as deduction from taxable income' &ro!ided, hat the contractor notifies the /ommissioner at the beginning of the depreciation period which depreciation rate allowed by this 2ection will be used. '6) De8recia tion Deducti<(e <5 "onreside nt A(iens 9n-a-ed in Trade or 4usiness or Resident 1orei-n &or8ora tions . * In the case of a nonresident alien indi!idual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of &roperty arising out of its use or employment or its non* use in the business trade or profession shall be permitted only when such property is located in the &hilippines. ':) De8(etion of Oi( and :as e((s and ,ines. '1) In :enera( . * In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost* depletion method shall be granted under rules and regulations to be prescribed by the 2ecretary of finance, upon recommendation of the /ommissioner. &ro!ided, hat when the allowance for depletion shall e.ual the capital in!ested no further allowance shall be granted' &ro!ided, further, hat after production in commercial .uantities has commenced, certain intangible exploration and de!elopment drilling costs' 8a; shall be deductible in the year incurred if such expenditures are incurred for non* producing wells and)or mines, or 8b; shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and)or mines in the same contract area. NIntangible costs in petroleum operationsN refers to any cost incurred in petroleum operations which in itself has no sal!age !alue and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum' &ro!ided, hat said costs shall not pertain to the ac.uisition or impro!ement of property of a character subKect to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this 2ubsection. Any intangible exploration, drilling and de!elopment expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adKusted cost basis for the purpose of computing allowable cost depletion. '#) 9(ection to Deduct 9x8(ora tion and Deve(o8m e n t 9x8enditu res . * In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and de!elopment expenditures accumulated as cost or adKusted basis for cost depletion as of date of prospecting, as well as exploration and de!elopment expenditures paid or incurred

55

INCOME TAX REVIEWER


during the taxable year' &ro!ided, hat the amount deductible for exploration and de!elopment expenditures shall not exceed twenty* fi!e percent 8-CE; of the net income from mining operations computed without the benefit of any tax incenti!es under existing laws. he actual exploration and de!elopment expenditures minus twenty* fi!e percent 8-CE; of the net income from mining shall be carried forward to the succeeding years until fully deducted. he election by the taxpayer to deduct the exploration and de!elopment expenditures is irre!ocable and shall be binding in succeeding taxable years. NNet income from mining operationsN, as used in this 2ubsection, shall mean gross income from operations less Nallowable deductionsN which are necessary or related to mining operations. NAllowable deductionsN shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. his paragraph shall not apply to expenditures for the ac.uisition or impro!ement of property of a character which is subKect to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and de!elopment of oil and gas. he term Nexploration expendituresN means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or .uality of any deposit of ore or other mineral, and paid or incurred before the beginning of the de!elopment stage of the mine or deposit. he term Nde!elopment expendituresN means expenditures paid or incurred during the de!elopment stage of the mine or other natural deposits. he de!elopment stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial .uantity and .uality and shall end upon commencement of actual commercial extraction. '3) De8(e tion of Oi( and :as e((s and ,ines Deducti<(e <5 a "onreside nt A(ien individua( or 1orei-n &or8ora tion . * In the case of a nonresident alien indi!idual engaged in trade or business in the &hilippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph 8+; of this 2ubsection shall be authorized only in respect to oil and gas wells or mines located within the &hilippines. '3) &6arita<(e and Ot6er &ontri<u tions. '1) In :enera( . * /ontributions or gifts actually paid or made within the taxable year to, or for the use of the #o!ernment of the &hilippines or any of its agencies or any political subdi!ision thereof exclusi!ely for public purposes, or to accredited domestic corporation or associations organized and operated exclusi!ely for religious, charitable, scientific, youth and sports de!elopment, cultural or educational purposes or for the rehabilitation of !eterans, or to social welfare institutions, or to non* go!ernment organizations, in accordance with rules and regulations promulgated by the 2ecretary of finance, upon recommendation of the /ommissioner, no part of the net income of which inures to the benefit of any pri!ate stockholder or indi!idual in an amount not in excess of ten percent 8+=E; in the case of an indi!idual, and fi!e percent 8E; in the case of a corporation, of the taxpayerNs taxable income deri!ed from trade, business or profession as computed without the benefit of this and the following subparagraphs. '#) &ontri<u tions Deducti<(e in 1u((. * Notwithstanding the pro!isions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full, 8a; <onations to the #o!ernment. * <onations to the #o!ernment of the &hilippines or to any of its agencies or political subdi!isions, including fully* owned go!ernment corporations, exclusi!ely to finance, to pro!ide for, or to be used in undertaking priority acti!ities in education, health, youth and sports de!elopment, human settlements, science and culture, and in economic de!elopment according to a National &riority &lan determined by the National 0conomic and <e!elopment Authority 8N0<A;, In consultation with appropriate go!ernment agencies, including its regional de!elopment councils and pri!ate philantrophic persons and institutions' &ro!ided, hat any donation which is made to the #o!ernment or to any of its agencies or political subdi!isions not in accordance with the said annual priority plan shall be subKect to the limitations prescribed in paragraph 8+; of this 2ubsection, 8b; <onations to /ertain (oreign Institutions or International 9rganizations. * donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commit ments entered into by the #o!ernment of the &hilippines and the foreign institutions or international organizations or in pursuance of special laws, 8c; <onations to Accredited Nongo!ernment 9rganizations. * the term Nnongo!ern ment organizationN means a non profit domestic corporation' 8+; 9rganized and operated exclusi!ely for scientific, research, educational, character* building and youth and sports de!elopment, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any pri!ate indi!idual, 8-; ?hich, not later than the +C th day of the third month after the close of the accredited nongo!ern ment organizations taxable year in which contributions are recei!ed, makes utilization directly for the acti!e conduct of the acti!ities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the 2ecretary of (inance in accordance with the rules and regulations to be promulgated, upon recommendation of the /ommissioner, 84; he le!el of administrati!e expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, but in no case to exceed thirty percent 84=E; of the total expenses, and 8L; he assets of which, in the e!en of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public

56

INCOME TAX REVIEWER


purpose, or would be distributed by a court to another organization to be used in such manner as in the Kudgment of said court shall best accomplish the general purpose for which the dissol!ed organization was organized. 2ubKect to such terms and conditions as may be prescribed by the 2ecretary of (inance, the term NutilizationN means' 8i; Any amount in cash or in kind 8including administrati!e expenses; paid or utilized to accomplish one or more purposes for which the accredited nongo!ernment organization was created or organized. 8ii; Any amount paid to ac.uire an asset used 8or held for use; directly in carrying out one or more purposes for which the accredited nongo!ern ment organization was created or organized. An amount set aside for a specific proKect which comes within one or more purposes of the accredited nongo!ernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongo!ern ment organization has established to the satisfaction of the /ommissioner that the amount will be paid for the specific proKect within a period to be prescribed in rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner, but not to exceed fi!e 8C; years, and the proKect is one which can be better accomplished by setting aside such amount than by immediate payment of funds. '3) Da(ua tion. * he amount of any charitable contribution of property other than money shall be based on the ac.uisition cost of said property. '%) +roof of Deductions. * /ontributions or gifts shall be allowable as deductions only if !erified under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 'I) Researc6 and Deve(o8 me n t . '1) In :enera(. * a taxpayer may treat research or de!elopment expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. '#) Amorti?a tion of &ertain Researc6 and Deve(o8m e n t 9x8endi tur es . * At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, the following research and de!elopment expenditures may be treated as deferred expenses' 8a; &aid or incurred by the taxpayer in connection with his trade, business or profession, 8b; Not treated as expenses under paragraph 3+; hereof, and 8c; /hargeable to capital account but not chargeable to property of a character which is subKect to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed o!er a period of not less than sixty 8B=; months as may be elected by the taxpayer 8beginning with the month in which the taxpayer first realizes benefits from such expenditures;. he election pro!ided by paragraph 8-; hereof may be made for any taxable year beginning after the effecti!ity of this /ode, but only if made not later than the time prescribed by law for filing the return for such taxable year. he method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subse.uent taxable years unless with the appro!al of the /ommissioner, a change to a different method is authorized with respect to a part or all of such expenditures. he election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. '3) Aimita tions on deduction. * his 2ubsection shall not apply to' 8a; Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and 8b; Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas. 'N) +ension Trusts. * An employer establishing or maintaining a pension trust to pro!ide for the payment of reasonable pensions to his employees shall be allowed as a deduction 8in addition to the contributions to such trust during the taxable year to co!er the pension liability accruing during the year, allowed as a deduction under 2ubsection 8A; 8+; of this 2ection ; a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount 8+;has not theretofore been allowed as a deduction, and 8-; is apportioned in e.ual parts o!er a period of ten 8+=; consecuti!e years beginning with the year in which the transfer or payment is made. '/) Additiona( ReKuire m e n ts for Deducti<i(it5 of &ertain +a5me n ts . * Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this 2ection, shall be allowed as a deduction only if it is shown that the tax re.uired to be deducted and withheld therefrom has been paid to the %ureau of Internal "e!enue in accordance with this 2ection C: and :+ of this /ode. 'A) O8tiona( Standa rd Deduction. * In lieu of the deductions allowed under the preceding 2ubsections, an indi!idual subKect to tax under 2ection -L, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent 8+=E; of his gross income. 1nless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as ha!ing a!ailed himself of the deductions allowed in the preceding 2ubsections. 2uch election when made in the return shall be irre!ocable for the taxable year for which the return is made' &ro!ided, hat an indi!idual who is entitled to and claimed for the optional standard deduction shall not be

57

INCOME TAX REVIEWER


re.uired to submit with his tax return such financial statements otherwise re.uired under this /ode' &ro!ided, further, hat except when the /ommissioner otherwise permits, the said indi!idual shall keep such records pertaining to his gross income during the taxable year, as may be re.uired by the rules and regulations promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. ',) +remiu m +a5men ts on 3ea(t6 and.or 3os8ita(i?a tion Insurance of an Individua( Tax8a5e r . * the amount of premiums not to exceed wo thousand four hundred pesos 8&-,L==; per family or wo hundred pesos 8&-==; a month paid during the taxable year for health and)or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income' &ro!ided, hat said family has a gross income of not more than wo hundred fifty thousand pesos 8&-C=,===; for the taxable year' &ro!ided, finally, hat in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the pro!ision of the preceding 2ubsections, he 2ecretary of (inance, upon recommendation of the /ommissioner, after a public hearing shall ha!e been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under 2ubsections 8A; to 8R; of this 2ection' &ro!ided, hat for purposes of determining such ceilings or limitations, the 2ecretary of (inance shall consider the following factors' 8+; ade.uacy of the prescribed limits on the actual expenditure re.uirements of each particular industry, and 8-;effects of inflation on expenditure le!els' &ro!ided, further, hat no ceilings shall further be imposed on items of expense already subKect to ceilings under present law. +. Jeaning 9f <eductions) <ifferentiated (rom 9ther erms /apital expenses are expenses that result in obtaining benefits of a permanent nature such as lands, buildings, & machinery. DI119R9"TIAT9D 1RO, 9E9,+TIO" . 9E&AUSIO" ' basically the taxpayer does not ha!e to pay at all for items excluded)exemp t fr. tax ("9J AO /"0<I ' it is the taxpayers rt. to deduct fr. income tax due the amt. of tax he has paid to a foreign country subKect to limitations. Jamora Ds. &o((ector 1acts2 Uamora, owner of %ay 6iew $otel & (armacia Uamora filed his I " for @C+ & @C-. he /ollector found that he failed to file his return of the capital gains deri!ed fr. the sale of certain real properties & claimed dedns w)c were not allowed. U appealed to the 2/ arguing the / A erred when it 8+; disallowed &+=,L5:.C= as promotion expenses incurred by wife for promoting hotel & pharmacy 8+)of alleged &-=,3C5 bus. expense;,8-; disallowed 4.CE per annum rate of depreciation , 84; disregarded the price in deed of sale, as costs of Jla. prop. for det. alleged cap. gains, & 8L; applied the %allantyne 2cale of 6alues in det. the cost of said prop. 3e(d2 &"9J9 I9N 0O&0N202 constitute one of the deductions in conducting a business & shld. satisfy the re.uirements of the ax /ode 2ec.4= w)c pro!ides the in computing net inc. there shall be allowed as dedns all the ord. & nec. expenses paid or incurred during the taxable year in carrying on any trade or business)c must be substantiated by records. Jrs. U went abroad on a combined business & medical trip. Not all of her expenses came under the ord. & nec. expenses. 89nly half of it are deductible;. he 2/ upheld the / A when it based its decision on the 12 +3CC &$ (ederal axes &ar.+L +B=* F w)c is based on scientific studies & obser!ations for a long period regarding the useful life of a hotel bldg. he sale of the properties in R&N notes partly realized a capital gain when con!erted to &$& &eso. 4. i. ii. iii. L. 9xam8(e2 %ec. 2= #9$ Charitable and 3ther Contribu tions. #1$ "n General. * /ontributions or gifts actually paid or made within the taxable year to, or for the use of the #o!ernment of the &hilippines or any of its agencies or any political subdi!ision thereof exclusi!ely for public purposes, or to accredited domestic corporation or associations organized and operated exclusi!ely for religious, charitable, scientific, youth and sports de!elopment, cultural or educational purposes or for the rehabilitation of !eterans, or to social welfare institutions, or to non* go!ernment organizations, in accordance with rules and regulations promulgated by the 2ecretary of Finds 9f <eductions Itemized T indi!idual) corps. 9ptional 2tandard T ind. taxpayer only 2pecial deductions 7imitations Imposed %y 7aw

D91I"ITIO" . <eductions are items or amounts w)c the law allows to be deducted fr. gross income in order to arri!e at taxable income. -. %asic &rinciples In <eductions) "e.uisites #o!erning

he taxpayer seeking a deduction must point to some specific pro!isions of the statute authorizing the deduction. deductions are allowed only when there is a clear pro!ision in the statute for the deduction claimed. $e must be able to pro!e that he is entitled to the deduction authorized or allowed. As a rule, if the taxpayer does not w)in any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them form the income o the next or any succeeding year. 4USI"9SS 9E+9"S9 DS. &A+ITAA 9E+9"S9 %usiness expenses deductible fr. gross income are the ordinary & necessary expenses paid or incurred during the taxable year in carrying on the taxpayers trade, profession or business.

58

INCOME TAX REVIEWER


finance, upon recommendation of the /ommissioner, no part of the net income of which inures to the benefit of any pri!ate stockholder or indi!idual in an amount not in excess of ten percent 8+=E; in the case of an indi!idual, and fi!e percent 8E; in the case of a corporation, of the taxpayerNs taxable income deri!ed from trade, business or profession as computed without the benefit of this and the following subparagraphs. C. 2ubstantiation "e.uirements A. 2alaries, wages, and other forms of compensation for personal ser!ices to determine ser!ices actually rendered factors to consider reasonableness of amount.

Sec. 3% 8A, +, a, i;. A reasonable allowance for salaries, wages, and other forms of compensation for personal ser!ices actually rendered, including the grossed* up monetary !alue of fringe benefit furnished or granted by the employer to the employee' &ro!ided, hat the final tax imposed under 2ection 44 hereof has been paid, Rev. Re-. 6- $# as amende d <5 Rev. Re-. 1#$! his co!ers the collection at the source of the D tax on compensation D of employed indi!idual taxpayers. he only impt. sections in this "" co!er the defn. of /ompensation 8A2 IN/9J0 (9" $0 00 AN< A2 <0<1/ I%70 0O&0N20 (9" $0 0"; & its other forms 8tra!eling, representation, etc.; Secs. !C- !3 Rev. Re-. # Section !C. Compensa tion for personal services . Among the ordinary & necessary expenses paid for incurred in carrying on any trade or business maybe included a reasonable allowance for salaries or other compensation for personal ser!ices actually rendered. he test of deductibility in the area of compensation payments is whether they T Are reasonable & Are, in fact, purely for ser!ice. his test & its practical application may be further stated & illustrated as follows' Any amount paid in the form of compensation, but not in fact as the purchase price ser!ices, is not deductible. An ostensible salary paid by a corporation may be distribution of di!idend on stock. his is likely to occur in the case of a corporation ha!ing few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar ser!ices, & the excessi!e payments corresponds or bear a close holding to the relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for ser!ices rendered, but that excessi!e payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. his may occur, for example, where a partnership sells our a corporation, the farmer partners agreeing to continue in the ser!ice of the corporation. In such a case it may be found that the salaries of the farmer partners are not merely for ser!ices, but in part constitute payment of the transfer of the business. he form of method of fixing compensation is not decisi!e as to deductibility. ?hile any form of contingent compensation in!ites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different fr. that

Sec. 3% '1,<) %ubstanti a tion &e:uire m e n ts . No deduction from gross income shall be allowed under 2ubsection 8A; hereof unless the taxpayer shall substantiate with sufficient e!idence, such as official receipts or other ade.uate records' 8i; the amount of the expense being deducted, and 8ii; the direct connection or relation of the expense being deducted to the de!elopment, management, operation and)or conduct of the trade, business or profession of the taxpayer. B. Allocation of expenses and deductions S9&. *C. Allocation of "ncome and eductions . * In the case of two or more organizations, trades or businesses 8whether or not incorporated and whether or not organized in the &hilippines; owned or controlled directly or indirectly by the same interests, the /ommissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to pre!ent e!asion of taxes or clearly to reflect the income of any such organization, trade or business. %. Allowable deduction from business income) trade or practice of profession +. 9rdinary) Necessary %usiness 0xpenses

S9&. 3%. Deductions from :ross Income . * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, 'A) 9x8enses . * '1) Ordinar5 and "ecessar5 Trade, 4usiness or +rofessiona( 9x8enses .* 8a; In #eneral. * here shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the de!elopment, management, operation and)or conduct of the trade, business or exercise of a profession, including'

59

INCOME TAX REVIEWER


applying to compensation at a flat rate. #enerally speaking, if contingent compensation is paid pursuant to a free bargain between the employer & the indi!idual made before the ser!ices are rendered, not influenced by any consideration on the part of the employer other than that a securing on fair & ad!antageous terms the ser!ices of the indi!idual, it should be allowed as a deduction e!en though in the actual working out of the contract it may pro!e to be greater than the amount w)c would ordinarily be paid. In any e!ent the allowance for compensation paid may not exceed what is reasonable under the circumstances. It is in general Kust to assume the reasonable & true compensation is only such amount as would ordinarily be paid for like ser!ices by are those existing at the date when the contract for ser!ices was made, not those existing at the date when the contract is .uestioned. Section !1. (reat m e n t of excessive compensa tion 6 he income tax liability of the recipient in respect of an amount of ostensible paid to him as compensation, but not allowed to be deducted as such by the payer, will depend upon the circumstances of each case. hus, in the case of payments by corporations, if such payments T /orresponds or bear a close relationship to stockholdings, & Are found to be distribution of earnings or profits, the excessi!e payments will be treated as di!idend If such payments constitute payment for property, they should be treated by the payer as capital expenditure & by the recipient as part of the purchase price. Section !#. 4onuses to employe es. %onuses to employees will constitute allowable deductions fr. gross income when such payments are made T in good faith & as additional compensation for the ser!ices actually rendered by the employees, pro!ided such payments, when added to the stipulated salaries do not exceed a reasonable compensation for the ser!ice rendered. It is immaterial whether such bonuses are paid T in cash or in kind or partly cash & partly in kind. <onations made to employees & others , w)c T do no ha!e in them the element of compensation or are in excess of reasonable compensation for ser!ices, are not deductible fr. gross income. Section !3. 'ensions5 compensa tions for in>uries. 6 Amounts paid T for pensions to retired employees or to their families or others dependent upon them or on account of inKuries recei!ed by employees & lump* sum amounts paid or accrued as compensations for inKuries, are proper deductions as ordinary & necessary expenses 2uch deductions are limited to the amount not compensated for by insurance or otherwise. ?hen the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs in recognition of the ser!ices rendered by the indi!idual, such payments may be deducted. 2alaries paid by 0" to employees T who are absent in the military, na!al, or other ser!ice of the go!ernment but who intent to return at the conclusion of such ser!ice, are allowable deductions. 8relati!e to pension trust.; Additiona( deduction under t6e +roductivit5 Incentive Act. Sec.! . 4enefits 0 tax incentives * 8a; 2ubKect to the pro!s. of 2ec.B hereof 8defined what a producti!ity incenti!e program V&I&Wis;, a bus. enterprise w)c adopts a &I& , duly & mutually agreed upon by the parties to the labor* mgt committee, shall be granted a special deduction fr. gross D e.ui!alent to C=E of the total producti!ity bonuses gi!en to 0es under the program o!er & abo!e the total allowable ord. & nec. bus. dedn for said bonuses under the NI"/... 8b; #rants for manpower training & special studies gi!en to rank* &* file 0es pursuant to a program prepared by the labor* mgt. committee for the de!t. of skills identified as nec. by the appropriate go!t. agency shall also entitle the bus. enterprise to a special dedn fr. gross D e.ui!. to C= E of the total grants o!er & abo!e the allowable ... &.,. 3OS/I"S DS. &O,,ISSIO"9R 1acts2 $ was the chairman of the %d. of <irs. of the corp. w)c bears his name. $e owns 33.BE of the capital stock. $e was also a salesman* broker for his co. recei!ing C=E share on the sales commission earned by the co. besides his monthly salary for a total annual compensation of &LC,=== plus annual salary bonus of &L=,=== & free use of the co. car & receipt of other allowances & benefits. $e also recei!ed the addl D of &33,355.3+ as his C=E share of the super!isors fee recei!ed by the co. as managing agent of a real estate proKect. 3e(d2 As a general rule bonuses to 0es are deductible as such as addl compensation for the ser!ices actually rendered by the 0es when such payments when added to the stipulated salaries do not exceed a reasonable compensation for the ser!ices rendered. In /A%, the petitioner fails the tests of reasonableness. /U9"JA9 DS. &O,,ISSIO"9R 1acts2 /omm. assessed F deficiency D tax on the grd. that the bonuses paid to the 0es were not reasonable. 3e(d2 Not reasonable. In arri!ing at the conclusion, the / . ga!e due consideration to all

60

INCOME TAX REVIEWER


the material factors 8200 0N1J0"A I9N A%960;that to decide accordingly. &olicy of gi!ing bonuses in not unreasonable but net loss resulting fr. it is. A:UI"AADO I"D. DS. &O,,ISSIO"9R 1acts ' &et. was engaged in - businesses' fishnet mfg. & furniture mfg. It bought a pc. of land in Junti. for the fishnet industry & then sold it to mo!e to another location in Jka. hey cited bonuses gi!en to officers of &et. as their share of the profit realized fr. the sale was a deductible expense. 3e(d2 Not deductible \ 2ale was effected through a broker who was paid a commission. here is no e!id. of any ser!ice incurred by pets officers w)c cld. be the basis of the grant to them of a bonus out of the gain realized fr. the sale. <octrine' he taxpayer must show that its claimed deductions must clearly come w)in the language of the law, since allowances, like exemptions, are matters of legislati!e. &O,,ISSIO"9R DS. AA:U9, su8ra. b. "A607 0O&0N202 is also repaid his actual tra!eling expenses, he shall include in gross income, the amount so repaid & may deduct such expenses. If an indi!idual T recei!es a salary & also an allowance for meals & lodging, xxx the amount of the allowance should be included in gross income & the cost of such meals & lodging may be deducted therefr.. Oxx c. "epairs

to maintain efficient working condition does not prolong life or add !alue repair and maintenance expense !. capital expense

Sec. 3%., see a<ove na lang please. Sec. 6$. Rev. Re-. "o. #. &epairs. he cost of incidental repairs w)c neither T materially add to the !alue of the property nor appreciably prolong its life but keep it in an ordinary)efficient operating condition may be deducted as an expense, pro!ided the plans or property account is not increased by the amount of such expenditure. "epairs in the nature of replacement, to the extent that they arrest deterioration, & appreciably prolong the life of the property depreciation

here and abroad while away from home in the pursuit of trade, business or profession

Sec. 3%. 'A, 1, a). 8ii; A reasonable allowance for tra!el expenses, here and abroad, while away from home in the pursuit of trade, business or profession, Sec. 66. Rev. "o. # (raveling expenses . ra!eling expenses as ordinarily understood, include transportation expenses & meals & lodging. If the trip is undertaken for other than business purposes, * the transportation expenses are personal expense, & the meals & lodgings are li!ing expenses, & therefore, not deductible. If the trip solely on business, the reasonable & necessary tra!eling expenses, including transportation expenses, meals & lodging, becomes business instead of personal expenses. If then, an indi!idual whose business re.uires him to tra!el, * recei!es a salary as full compensation for his ser!ices w)o reimbursement for tra!eling expenses, or is employed on a commission basis w) no expenses allowance, his tra!eling expenses, including the entire amount expended for meals & lodging are deductible fr. gross income. If an indi!idual recei!es a salary &

should be charged against the reser!es if such an account is kept.

&ommissione r Ds. Soriano 3e(d2 0xpenditures for replacements, alterations & impro!s.)additions w)c either prolong the life of the property or increase its !alue are capital in nature & are not deductible. :UTI9RR9J DS. &OAA9&TOR 1acts2 # was primarily engaged in the business of leasing property for w)c he paid real estate brokers pri!ilege tax. $e claimed dedns for electrical supplies, paint, labor, cement, tiles, gra!el, masonry & labor used to repair the taxpayers rental apartments did not increase the !alue nor prolong its life, but merely kept the apartments in an ordinary operating condition, hence necessary expenditures for the maintenance of his business. 3e(d2 0xpenses for watching o!er laborers in construction work are not deductible. he acti!ity is more akin to construction work than running a business. /onstruction costs are capital expenditure. d. "0N A72)70A20 and)or other payments which are re.uired as a condition for the continued use or possession

61

INCOME TAX REVIEWER


for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no e.uity other than that of a lessee, user or possessor Sec. 3%. A, 1, a. 8iii; A reasonable allowance for rentals and)or other payments which are re.uired as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no e.uity other than that of a lessee, user or possessor, $d anced rental0 deposit: Sec. !%, RR "o. #. &entals. ?here a leasehold is ac.uired for business purposes for a specified sum, the purchaser may take as deduction in his return & ade.uate part of such sum each year based on the number of years the lease has to run. axes paid by a tenant to or for a landlord for business property T are additional rent & constitute a deductible item to the tenant & taxable income to the landlord, the amount of the tax being deductible by the latter. he cost borne by the lessee in T erecting buildings or making permanent impro!ements on ground of w)c he is lessee is held to be capital in!estment & not deductible as a business expense. In order to return such taxpayer to his in!estment of capital, an annual deduction may be made fr. gross income of an amount e.ual to the cost of such impro!ements di!ided by the number of years remaining of the terms of the lease, & such deduction shall be in lieu of deduction for depreciation. If the remainder of the term of the lease is greater that the probable life of the buildings erected or of the impro!ements made, his deduction shall take the form of an allowance for depreciation. Rev. Re-. 19- $6O 0a(a a=on- =o85a e6. O8eratin- (ease. finance (ease. conditiona( sa(e e. 0ntertainment) &resentation 0xpense profession of the taxpayer' &ro!ided, hat any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. 6en deducti<(e2 R97UISIT9S2 1. Incurred during the taxable year, #. <irectly connected to the de!elopment, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his trade, business or exercise of a profession, 3. Not to exceed such ceilings as the 2ec of (in may, by rules & regs prescribe, upon recommendation of the /ommissioner, taking into acct the needs as well as the special circumstances, nature & character of the industry, trade, business or profession of the taxpayer. %. Any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy or public order shall in no case be allowed as a deduction. ROEAS vs. &TA 1acts2 "oxas D /ia. a partnership formed to manage the prop. left by <o &edro "oxas deducted fr. its gross D &L= for tickets to a ban.uet in honor of <on 2ergio 9smena & &-: for beer gi!en as gifts to !arious persons, claimed as representation expenses. 3e(d2 "epresentation expenses are deductible fr. gross D as expenditures incurred in carrying on a business or trade under the ax /ode , pro!ided the taxpayer pro!es that they are reasonable in amt., nec., incurred in connection w) the bus. Not pro!en in this case. f. 0xpenses 9f (armers) In Agribusiness hose 0ngaged

Sec. 3%. A. 1. a. 'iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the de!elopment, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the 2ecretary of (inance may, by rules and regulations prescribe, upon recommendation of the /ommissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or

A farmer who operates a farm for profit is entitled to deduct amounts actually expended in carrying on the business. <eductible' /ost of 8+; tools of short life or small cost & 8-;of feeding & raising li!estock in so far as it represents actual outlay but not including the !alue of the farm produce grown upon the farm & 84; of gasoline or fuel, repairs & upkeep of the transportation e.pt. N9 deductible' 8+; costs of farm machinery, e.pt & farm bldgs. & 8-; amts. expended in the de!t. of farm orchards & ranches, prior to the time when the producti!e state is reached. 2uch are regarded as in!estments of capital or capital expenditures & may be depreciated. :A"&AB&O DS. &OAA9&TOR 1acts2 <eficiency D taxes le!ied. #ancayco claims farming expenses are deductible 8for the de!t. & culti!ation of his prop;. 3e(d2 No e!id. presented as to the nature of the farming expenses, other than #s statement. /ollector claims that the expense was for clearing & de!t., nec. to place it in a producti!e state. It is not an ordinary expense but a capital expenditure.

62

INCOME TAX REVIEWER


g. 9ther business expenses. 8C; O8tiona( Trea t m e n t of Inte res t 9x8ense . At the option of the taxpayer, interest incurred to ac.uire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

Trea t m e n t of t6e ff.2 +. Ad!ertising expense -. &romotional expense 4. 7itigation expense L. /apitalization) reorganization expense

a. "0G1I2I 02 (9" <0<1/ I9N. i. paid or incurred taxable year, during the

h.

2pecial <eductions (or 0ducational Institutions ' 2ec. -3 8-; NI"/

ii.

9n indebtedness in connection w) the taxpayers profession, trade or business howe!er

Sec. 3%. A. '#). 9x8enses A((o0a<(e to +rivate 9ducationa( Institu tions . * In addition to the expenses allowable as deductions under this /hapter, a pri!ate educational institution, referred to under 2ection -5 8%; of this /ode, may at its option elect either' 8a; to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 8b; to deduct allowance for depreciation thereof under 2ubsection 8(; hereof. -. IN 0"02 0O&0N20

iii. 2ubKect to limitation' Interest paid on back* to* back loan shall be reduced by an amount [ to the ff. percentages of the in. income subK. to final tax' (orty* one percent 8L+E; beginning Ranuary +, +33:, hirty* nine percent 843E; beginning Ranuary +, +333, and hirty* eight percent 84:E; beginning Ranuary +, -===,

b. N9N*<0<1/ I%70 IN 0"02 Sec. 3%. '4) Inte res t. '1) In :enera( . * he amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayerNs profession, trade or business shall be allowed as deduction from gross income' &ro!ided, howe!er, hat the taxpayerNs otherwise allowable deduction for interest expense shall be reduced by an amount e.ual to the following percentages of the interest income subKected to final tax' (orty* one percent 8L+E; beginning Ranuary +, +33:, hirty* nine percent 843E; beginning Ranuary +, +333, and hirty* eight percent 84:E; beginning Ranuary +, -===, '#) 9xce8tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness petroleum exploration. is incurred to finance c. IN 0"02 &AI< IN 0"02 AJ9" IU0<. IN A<6AN/0) &0"I9<I/A77D

Sec. 3%. '#) 9xce8tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness is incurred to finance petroleum exploration. d. 9ptional expense. treatment of interest

Sec. 3%. 4. '3) 3ptional (rea t m e n t of "nte res t Expense . * At the option of the taxpayer, interest incurred to ac.uire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. 4. AO02

Sec. 3% &. (axes.

63

INCOME TAX REVIEWER


8+; In #eneral. * axes paid or incurred within the taxable year in connection with the taxpayerNs profession, trade or business, shall be allowed as deduction, except 8a; he income tax pro!ided for under this itle, 8b; Income taxes imposed by authority of any foreign country, but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to ha!e to any extent the benefits of paragraph 84; of this subsection 8relating to credits for taxes of foreign countries;, 8c; 0state and donorNs taxes, and 8d; axes assessed against local benefits of a kind tending to increase the !alue of the property assessed. &ro!ided, hat taxes allowed under this 2ubsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. 8-; 7imitations on <eductions. * In the case of a nonresident alien indi!idual engaged in trade or business in the &hilippines and a resident foreign corporation, the deductions for taxes pro!ided in paragraph 8+; of this 2ubsection 8/; shall be allowed only if and to the extent that they are connected with income from sources within the &hilippines. 84; /redit Against ax for axes of (oreign /ountries. * If the taxpayer signifies in his return his desire to ha!e the benefits of this paragraph, the tax imposed by this itle shall be credited with' 8a; /itizen and <omestic /orporation. * In the case of a citizen of the &hilippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country, and 8b; &artnerships and 0states. * In the case of any such indi!idual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributi!e share of the income of such partnership or trust is reported for taxation under this itle. An alien indi!idual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. 8L; 7imitations on /redit. * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. 8C; AdKustments on &ayment of Incurred axes. * If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the /ommissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the /ommissioner, or the amount of tax o!erpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the /ommissioner as a condition precedent to the allowance of this credit may re.uire the taxpayer to gi!e a bond with sureties satisfactory to and to be appro!ed by the /ommissioner in such sum as he may re.uire, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. he bond herein prescribed shall contain such further conditions as the /ommissioner may re.uire. 8B; Dear in ?hich /redit aken. * he credits pro!ided for in 2ubsection 8/;84; of this 2ection may, at the option of the taxpayer and irrespecti!e of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subKect, howe!er, to the conditions prescribed in 2ubsection 8/;8C; of this 2ection. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subse.uent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. 85;&roof of /redits. * he credits pro!ided in 2ubsection 8/;84; hereof shall be allowed only if the taxpayer establishes to the satisfaction of the /ommissioner the following' 8a; he total amount of income deri!ed from sources without the &hilippines, 8b; he amount of income deri!ed from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the 2ecretary of (inance, and 8c; All other information necessary for the !erification and computation of such credits. &O,,ISSIO"9R DS. +AAA"&A 1acts2 &alanca donated shares of stock to his son. $e was assessed a gift tax, surcharge & interest for failure to file a return. $e claimed a dedn for interest paid on the donees gift tax. he %I" then considered the transfer as made in contemplation of death & was assessed inheritance & estate taxes. 3e(d2 Although taxes already due ha!e not the same concept as debts strictly speaking, they are obligations w)c may be considered as such. In /I" !s. &rieto, it was held that the distinction bet. taxes & debts is recognized in this Kurisdiction, the !ariance in their legal conception does not extend to the interest paid on them. "e.uisites are 8+; to 8L; gi!en abo!e. Indebtedness, as used in the ax /ode, is the unconditional & legally enforceable oblign. for the payment of money. As 2uch, a tax may be deemed as an indebtedness.

64

INCOME TAX REVIEWER


&O,,ISSIO"9R DS. +RI9TO 1acts2 &rieto ga!e gifts of real prop. to her L kids. /I" assessed gift taxes, interests & compromises thereon. & now claims the interest as dedn. 3e(d2 (or interest to be allowed as dedn fr. gross D, it must be shown that there be indebtedness, interest upon such & that what is claimed as int. dedn should ha!e been paid or incurred w)in the yr. "" No. -, implementing 4=8a; pro!iding that no dedn shld. be allowed for amts. representing interest, surcharge & penalties incident to <G is inapplicable to cases where the taxpayer seeks to come under 4=8b; w)c pro!ides for dedn of interest on indebtedness. /U9"JA9 DS. &OAA9&TOR 1acts2 Fuenzle is a domestic corp. engaged in the importation of textiles, hardware, etc. It deducted fr. its gross D certain items such as interest on earned but unpaid salaries & bonuses of its 0es. 3e(d2 1nder the law, in order that interest may be deductible , it must be paid on HindebtednessI. It is imperati!e that there is an existing indebtedness w)c may be subKect to the payment of interest. he unclaimed salaries & bonuses do not constitute indebtedness w)in the meaning of the law. a. IN #0N0"A7. axes paid or incurred within the taxable year in connection w) the taxpayers profession, trade or business, shall be allowed as deduction. b. N9 <0<1/ I%70' i. ii. &hil. income tax Income taxes imposed by authority of any foreign country, but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to ha!e to any extent the benefits of tax credit. axes assessed !s. local benefits of a kind tending to increase the !alue of the property assessed. paragraph, the tax imposed by this itle shall be credited with' 8a; /itizen and <omestic /orporation. * In the case of a citizen of the &hilippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country, and 8b; &artnerships and 0states. * In the case of any such indi!idual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributi!e share of the income of such partnership or trust is reported for taxation under this itle. An alien indi!idual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. '%) Aimita tions on &redit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. '*) Ad>ustm e n ts on +a5me n t of Incurred Taxes . * If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the /ommissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the /ommissioner, or the amount of tax o!erpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the /ommissioner as a condition precedent to the allowance of this credit may re.uire the taxpayer to gi!e a bond with sureties satisfactory to and to be appro!ed by the /ommissioner in such sum as he may re.uire, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. he bond herein prescribed shall contain such further conditions as the /ommissioner may re.uire. '6) Bear in 6ic6 &redit Ta=en . * he credits pro!ided for in 2ubsection 8/;84; of this 2ection may, at the option of the taxpayer and irrespecti!e of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subKect, howe!er, to the conditions prescribed in 2ubsection 8/;8C; of this 2ection. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subse.uent years shall

iii. 0state and donors taxes, and i!.

c.

reatment of tax deducted and subse.uently credited or refunded shall be included as part of gross income in the year of receipt.

d. 7imitations on <eductions Nonresident alien) resident foreign corp. connected w) income fr. sources w)in the &hils. e. ax /"0<I .

Sec. 3%. &. '3) Credit Against (ax for (axes of +oreign Countries . * If the taxpayer signifies in his return his desire to ha!e the benefits of this

65

INCOME TAX REVIEWER


be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. '!)+roof of &redits . * he credits pro!ided in 2ubsection 8/;84; hereof shall be allowed only if the taxpayer establishes to the satisfaction of the /ommissioner the following' 8a; he total amount of income deri!ed from sources without the &hilippines, 8b; he amount of income deri!ed from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the 2ecretary of (inance, and 8d; All other information necessary for the !erification and computation of such credits. i. ii. iii. ax credit !. tax deduction axpayers entitled to tax credit axes allowed as credit. !i. !ii. ?hen crediting allowed. 2ubstantiation &roof of credit. re.uirements)

i!. 7imitations on credit. %a& Credit * refers to the tax payers right to deduct fr. the income tax due the amount of the tax he has paid in a foreign country subKect to limitation. It is allowed to lessen the rigor of Intl double or multiple taxation 1istinct !r. %a& 1ed"ction TAE &R9DIT ax deducted fr. income tax itself all taxes, as a general rule are allowed as deduction w) the exception of the 5 kinds of taxes expressly excluded TAE D9DU&TIO" tax deducted fr. computing the taxable income only three kinds of foreign taxes may be claimed as credits against &hil. income tax i.e. foreign income, war* profits & excess* profits tax.

Secs. $C- $3 Rev. Re-. # Sec. $C. RR "o. #. (axes in General .* As a general rule, taxes are deductible w) the exception of those w) respect to w)c the law does not permit deduction. $owe!er, in the case of a nonresident alien indi!idual & a foreign corporation, deduction is allowed only if & to the extent that the taxes for w)c deduction is claimed are connected w) the income fr. sources w)in "&. Import duties paid to the proper customs officers, & business occupation, license pri!ilege, excise & stamp taxes & any other taxes of e!ery name & nature paid directly to the #o!ernment of the "& or to any political sub. thereof, are deductible. he word 2ta&es3 means ta&es. Proper ) no ded"ction s#o"ld be allo+ed !or amo"nts representing interest, s"rc#arge or penalties incident to delin4"enc,.. &ostage is not a tax. Automobile registration fees are considered taxes. Htaxes are deductible as such only by the person upon whom they are imposed.I hus the merchants sales tax imposed by law upon sales is not deductible by the indi!idual purchaser e!en though the tax may be billed to him as a separate item. In computing the net income of an indi!idual, no deduction is allowed for the tax is imposed upon his interest as a shareholder of a bank or other corporation. w)c are paid by the corporation w)o reimbursements fr. the taxpayer. he amount s paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax* free co!enant clause, the corporation paying the tax or any part of it, for someone else, pursuant to its agreement is not entitled to deduct such payment fr. gross income on any ground. Sec. $1. RR. "o. #. "ncome tax imposed by the govern m e n t . - he law does not permit the deduction of the income tax paid or accrued in fa!or of the go!ernment & in no case may the taxpayer a!ail of such deduction. Sec. $#. RR "o. # "ncome5 war- profits 0 excess profits taxes imposed by the au t6orit5 of a forei-n countr5 . T Income, war* profits & excess* profits taxes imposed by the authority of a foreign country are allowed as deductions only if the taxpayer does not signify in his return his desire to ha!e to any extent the benefits of the pro!isions of law allowing credits against the tax for taxes of foreign countries. Sec. $3. RR "o. # Estate inheri ta nc e 0 gift taxesF taxes as sessed a-ainst (oca( <enefi ts.- 9state , in6eri ta nc e H -ift taxes are not deducti<(e. 2o*called taxes, property assessments paid for local benefits such as street, sidewalk & other impro!ements imposed bec. of & measured by some benefit inuring directly to the property against w)c the assessment is to be le!ied, do not constitute an allowable deduction fr. gross income tax. A tax is considered assessed against

%ec. 2=. C. #=$ Limita tions on Credit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. !. 9ther re.uirements.

?hen there are adKustments on payment of incurred taxes.

66

INCOME TAX REVIEWER


local benefits when the property subKect to the tax is limited to the property benefited. &O,,ISSIO"9R DS. A9D"I&/B 1acts2 he 7ednicky spouses are American citizens li!ing in the &hils. & ha!e deri!ed all their D fr. &hil. sources for the taxable year in .uestion. In their amended I " for @CB they claimed a deduction of &-=C,343 as paid in +3CB to the 12 #o!t. as federal D tax for said year. "e.uested for refund of &++-,L45. 3e(d2 No deduction nor tax credit allowed. Alien residents who deri!e their income fr. sources w)in the &hils. solely may not deduct fr. gross D the D tax paid to his home country for the taxable year. 2uch rt. is gi!en only as an alternati!e to his rt. to claim a tax credit for such foreign D taxes, such that unless he has a right to claim such a credit if he chooses, he is precluded fr. such deduction. o allow a resident alien to deduct fr. his taxes whate!er he pays to his go!t amounts to conferring upon him the power to reduce the tax due to the &hil go!t simply by increasing the tax rates on the alien resident. C. 792202. declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, hat the time to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss, and 84; Net 9perating 7oss /arry* 9!er. * he net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been pre!iously offset as deduction from gross income shall be carried o!er as a deduction from gross income for the next three 84; consecuti!e taxable years immediately following the year of such loss' &ro!ided, howe!er, hat any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this 2ubsection' &ro!ided, further, hat a net operating loss carry* o!er shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that * 8i; Not less than se!enty* fi!e percent 85CE; in nominal !alue of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons, or 8ii; Not less than se!enty* fi!e percent 85CE; of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. S(or purposes of this subsection, the term Nnot operating lossN shall mean the excess of allowable deduction o!er gross income of the business in a taxable year. &ro!ided, hat for mines other than oil and gas wells, a net operating loss without the benefit of incenti!es pro!ided for under 0xecuti!e 9rder No. --B, as amended, otherwise known as the 9mnibus In!estments /ode of +3:5, incurred in any of the first ten 8+=; years of operation may be carried o!er as a deduction from taxable income for the next fi!e 8C; years immediately following the year of such loss. he entire amount of the loss shall be carried o!er to the first of the fi!e 8C; taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four 8L; years. 8L; /apital 7osses. * 8a; 7imitation. * 7oss from sales or 0xchanges of capital assets shall be allowed only to the extent pro!ided in 2ection 43. 8b; 2ecurities %ecoming worthless. * If securities as defined in 2ection -- 8 ; become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. 8C; 7osses (rom ?ash 2ales of 2tock or 2ecurities. * 7osses from Nwash salesN of stock or securities as pro!ided in 2ection 4:. 8B; ?agering 7osses. * 7osses from wagering transactions shall b allowed only to the extent of the gains from such transactions.

Sec. 3%. 'D) Aosses. F '1) "n General . * 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. 8-; &roof of 7oss. * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a

67

INCOME TAX REVIEWER


85; Abandonment 7osses. * 8a; In the e!ent a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and de!elopment expenditures pertaining thereto shall be allowed as a deduction' &ro!ided, hat accumulated expenditures incurred in that area prior to Ranuary +, +353 shall be allowed as a deduction only from any income deri!ed from the same contract area. In all cases, notices of abandonment shall be filed with the /ommissioner. 8b; In case a producing well is subse.uently abandoned, the unamortized costs thereof, as well as the undepreciated costs of e.uipment directly used therein , shall be allowed as a deduction in the year such well, e.uipment or facility is abandoned by the contractor' &ro!ided, hat if such abandoned well is reentered and production is resumed, or if such e.uipment or facility is restored into ser!ice, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. a. <efinition Sec. 3%. D. '1) "n General . * 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. 4. Just be e!idenced by a closed & completed transaction L. Just not be compensated for by insurance or other form of indemnity C. A sworn declaration must be filed w)in LC days after the date of the occurrence of casualty or robbery, theft or embezzlement B. he taxpayer must pro!e the elements of the loss claimed, such as the actual nature & occurrence of the e!ent & amount of the loss, & 5. he loss must be connected w) the trade or business of the taxpayer. A casualty loss is not deductible e!en though the abo!e re.uisites are present, if it has been claimed as a deduction for estate tax purposes in the estate tax return. 'Sec. 93 RR#) &(osed H com8(e te d transaction 'Sec. 96 RR #) he law re.uires that the loss should be sustained during the taxable year. A loss is actually sustained when it is e!idenced by a closed & completed transaction. here should be an identifiable e!ent w)c Kustifies the loss, such as when there is a complete destruction of property or when insurance proceedings are finally settled & the loss not reco!erable therein is finally ascertained. i. ii. /A21A7 D 7922 NI"/ pro!ision'

b.

ypes) /lassification of 7osses

+. 9rdinary 7osses') %usiness 7oss -. /asualty 7oss 4. /apital 7oss S8ecia( =inds of (osses2 +. 7osses fr. wash sales of stock or securities, -. 7osses due to in!oluntary remo!al of buildings, machinery, etc. incident to renewal or replacement, 4. 7osses of the useful !alue of capital assets due to some change in business conditions, & L. Abandonment losses in petroleum operations. Secs. 9% F 1CC . 1C% of rev. Re-. "o. # are incorporated in the following topics'

Sec. 3%. D. 1. <. x x x he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. 8-; &roof of 7oss. * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, hat the time to be so prescribed in the rules and regulations shall not

c.

"e.uisites for deductibility

+. Just be that of the taxpayer -. Just be actually sustained & charged off w)in the taxable year

68

INCOME TAX REVIEWER


be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss, and iii. Net operating loss carry* o!er. 19R"A"D9J 39R,A"OS v. &O,,. In this case, the 2/ held that there was ade.uate basis for allowance of the writing off as worthless securities the stock of a lumber company, it appearing that it had closed operations although it still had its sawmill & e.uipment of some !alue, for e!en assuming that the company would later somehow realize some proceeds fr. its sawmill & e.uipment & such proceeds would later be distributed to its stockholders, the amount so recei!ed by the taxpayer would then be properly reportable as income of the taxpayer in the year it is recei!ed. In the meantime, it may properly be claimed as loss in his tax return pursuant to 2ec. -3 d,L,b or 2ec. -3, e 8%ad debts;. !. 9ther kinds of losses'

'3) "et O8era ti n- Aoss &arr5- Over . * he net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been pre!iously offset as deduction from gross income shall be carried o!er as a deduction from gross income for the next three 84; consecuti!e taxable years immediately following the year of such loss' &ro!ided, howe!er, hat any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this 2ubsection' &ro!ided, further, hat a net operating loss carry* o!er shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that * 8i; Not less than se!enty* fi!e percent 85CE; in nominal !alue of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons, or 8ii; Not less than se!enty* fi!e percent 85CE; of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. S(or purposes of this subsection, the term Nnot operating lossN shall mean the excess of allowable deduction o!er gross income of the business in a taxable year. &ro!ided, hat for mines other than oil and gas wells, a net operating loss without the benefit of incenti!es pro!ided for under 0xecuti!e 9rder No. --B, as amended, otherwise known as the 9mnibus In!estments /ode of +3:5, incurred in any of the first ten 8+=; years of operation may be carried o!er as a deduction from taxable income for the next fi!e 8C; years immediately following the year of such loss. he entire amount of the loss shall be carried o!er to the first of the fi!e 8C; taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four 8L; years. i!. /A&I A7 7922.

Sec. 3%. D. '*) Aosses 1rom as6 Sa(es of Stoc= or Securities . * 7osses from Nwash salesN of stock or securities as pro!ided in 2ection 4:. '6) a-erin- Aosses . * 7osses from wagering transactions shall b allowed only to the extent of the gains from such transactions. '!) A<andon m e n t Aosses . * 8a; In the e!ent a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and de!elopment expenditures pertaining thereto shall be allowed as a deduction' &ro!ided, hat accumulated expenditures incurred in that area prior to Ranuary +, +353 shall be allowed as a deduction only from any income deri!ed from the same contract area. In all cases, notices of abandonment shall be filed with the /ommissioner. 8b; In case a producing well is subse.uently abandoned, the unamortized costs thereof, as well as the undepreciated costs of e.uipment directly used therein , shall be allowed as a deduction in the year such well, e.uipment or facility is abandoned by the contractor' &ro!ided, hat if such abandoned well is reentered and production is resumed, or if such e.uipment or facility is restored into ser!ice, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. 7osses fr. wash sales of stock or securities wagering losses abandonment losses 8petroleum operations.; +(aride( Suret5 D. &o((ector of IR

Sec. 3%. D. #=$ Capital Losses. 8a; 7imitation. * 7oss from sales or 0xchanges of capital assets shall be allowed only to the extent pro!ided in 2ection 43. 8b; 2ecurities %ecoming worthless. * If securities as defined in 2ection -- 8 ; become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. 7osses fr. sales or exchange of capital assets 2ecurities becoming worthless.

1acts2 he /ollector of Internal "e!enue disallowed a 7922 deduction by the petitioner, said deduction was for the payment of a performance bond w)c &laridel pre!iously issued on behalf of certain debtor)principals who defaulted on their obligation. 3e(d2 he /ourt upheld the /I" in disallowing the deduction bec. the loss sustained by &laridel 2urety was compensated for 8by insurance or; otherwise &, therefore, it has not in fact & in law suffered any loss. he alleged deductible loss was co!ered by a Kudicially enforceable right based on a contract T an indemnity agreement signed by the debtor)principals in fa!or of the 2urety /o., w)c had

69

INCOME TAX REVIEWER


not yet exhausted all its a!ailable remedies under the indemnity agreement. &U U"NI9": v. 4oard of Tax A88ea(s 1acts2 &etitioner claimed war losses 8actually incurred in the years +3LC to +3L5; in its +3C= return, after it was ad!ised by the ?ar <amage /ommission that no other payments would be a!ailable other than those already effected. /I" disallowed the deduction & assessed deficiency taxes. 3e(d2 &etitioner could not deduct the said losses beyond the years when they were actually sustained. V he wordW H9therwise I should be construed to refer to compensation due under a title analogous or similar to insurance. he loss sustained by the taxpayer must be co!ered by Kudicially enforceable right arising fr. any of the sources of obligations, namely' law, contract, .uasi* contract, tort or crime, in order that it may be considered Hcompensated for otherwise than by insurance.I he appro!al of the &hil. rehabilitation Act in +3LB did not authorize the petitioner to postpone for another year, its claim for deduction arising fr. the war losses in .uestion. &O,,. v. +RIS&IAAA 9STAT9 I"&. 1acts ' &riscilla 0state had a barong* barong in one of its lots, w)c was being rented at &4,54= per month. he /ity 0ngineer of Janila declared the property a fire hazard & forced the company to demolish it. he !alue of the property was conse.uently declared by the /o., as a loss. he /ommish of I" disallowed the deduction & claims that the amount should form part of the cost of the new bldg., constructed in the place of the old structure. 3e(d ' he /I"s contention is erroneous bec. the remo!al of the barong* barong was forced upon the corporation, the fact that the latter was earning fr. the said structure & that it had no funds to construct a new one belied any intention to demolish the old one. 2ince the demolished bldg., was not compensated for by insurance or otherwise, its loss should be charged as a deduction fr. gross income. B. %A< <0% Sec. 3%. #E$ 4ad ebts. '1) In :enera( . * <ebts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under 2ection 4B 8%; of this /ode' &ro!ided, hat reco!ery of bad debts pre!iously allowed as deduction in the preceding years shall be included as part of the gross income in the year of reco!ery to the extent of the income tax benefit of said deduction. '#) Securities 4ecominort6( ess . * If securities, as defined in 2ection -- 8 ;, are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the &hilippines a substantial part of whose business is the receipt of deposits, for the purpose of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. Sec. 36. '4) Aosses from Sa(es or 9xc6an-es of +ro8ert5 . * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly T 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust, or 8B; %etween a fiduciary of a trust and beneficiary of such trust. a. ?hat are bad debtsM b. ?ho are related taxpayersM c. +. -. 4. L. C. "e.uisites for deduction. <ebts due taxpayer Actually ascertained to be worthless /harged off w)in the taxable year /onnected w) profession, trade or business Not those sustained in a transaction entered into bet. related parties. d. reatment reco!ered bad debts pre!iously allowed as deduction.

included as part of the gross income in the year of reco!ery to the extent of the income tax benefit of said deduction. e. 2ecurities becoming worthless. +. -. 4. L. ascertained to be worthless and charged off w)in the taxable year are capital assets the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust co. incorporated under the laws of the &hils. a substantial part of whose business is the

70

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receipt of deposits, for the purpose of this itle, be considered as a loss fr. the sale or exchange, on the last day of such taxable year, of capital assets. 19R"A"D9J 39R,A"OS v. &O,, 1acts2 ($ Inc., ga!e ad!ances to a subsidiary mining company w)c the latter could not repay due to its difficulties. ($ Inc., wrote off said ad!ances w)c were disallowed by the /I" & sustained by the /ourt. 3e(d2 1nder the memorandu m agreement, the mining company was to pay ($ Inc., +CE of its net income, the ad!ances were not loans but in!estments of ($ Inc., w)c ga!e the ad!ances w)o actually expecting repayment as debts. he loss cannot be written off bec. there is no !alid & subsisting debt. Ascertainment of 0ort6(essness. %efore a debt can be ascertained to be worthless, the creditor must take reasonable steps to collect the debt w)in the period of prescription. he duty of ascertainment re.uires proof of two facts' 4. A(&/02 T the mere fact that A(&/02 is a go!t. agency does not preclude & fr. filing suit since the agency was discharging proprietary functions. he taxpayer must be able to demonstrate that the debt is not only uncollectible as of the taxable year but also at any time in the future. 2o when the reco!ery is merely doubtful, the deduction is not allowed. 1sually the ff. steps are re.uired' +. 2ending of statements of accounts, -. 2ending of collection letters, 4. #i!ing the account to a lawyer for collection, & L. (iling a collection case in court. Deduction of <ad de<t su<seKuen t(5 co((ected T A debt w)c was pre!iously found to be worthless & written off in a prior year & subse.uently collected does not render the deduction unallowable or illegal. he amount of the debt must be reported as income in the taxable year in w)c it is recei!ed. 5. <0&"0/IA I9N Sec.3% 'f) "IR& eprecia tion. 8+; #eneral "ule. * here shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent pro!isions of the instrument creating the trust, or in the absence of such pro!isions, on the basis of the trust income allowable to each. 8-; 1se of /ertain Jethods and "ates. * he term Nreasonable allowanceN as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, under any of the following methods' 8a; he straight* line method, 8b; <eclining* balance method, using a rate not exceeding twice the rate which would ha!e been used had the annual allowance been computed under the method described in 2ubsection 8(; 8+;, 8c; he sum* of*the* years* digit method, and 8d; any other method which may be prescribed by the 2ecretary of (inance upon recommendation of the /ommissioner. 84; Agreement as to 1seful 7ife on ?hich <epreciation "ate is %ased. * ?here under rules and regulations prescribed by the 2ecretary of (inance upon recommendation of the /ommissioner, the taxpayer and the /ommissioner ha!e entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate

hat the taxpayer did in fact ascertain the debt to be worthless in the year for w)c deduction was sought, & hat in doing so acted in good faith. &OAA9&TOR v. :OODRI&3

1acts2 #oodrich claimed deductions on se!eral bad debts. Jost of the debtors were merely sent demand letters. 2ome debtors mad partial payments, others later paid the debt in full. he /I" disallowed these as deductions. 3e(d2 he claimed deductions should be reKected. he re.uirement of ascertainment needs proof of two facts 8see abo!e discussion;. #ood faith on the part of the taxpayer is not enough. $e must show also that he had reasonably in!estigated the rele!ant facts & had drawn a reasonable inference fr. the information thus obtained by him. "espondent herein has not ade.uately made such showing. he payments made, some in full, after the accounts had been characterized as bad debts, merely stresses the undue haste w) w)c the same had been written off. +R& v. &A 1acts2 &hil. "efining /ompany protested the disallowance by the /I" of bad debts & interest expenses w)c the former listed as deductions in its return. 3e(d ' hese particular bad debts were not allowable deductions bec. they do not meet the re.uirements stated in the #oodrich case. here was lack of proof or e!idence of good faith & reasonable ascertainment of collection. Among the accounts disallowed as deductions were the ff.' +. "emoblas store & /J 6ariety store T not a single document was offered to show that the stores were indeed burned, e!en Kust a police report. &"/ did not e!en send demand letters. -. Aboitiz 2hipping /orp. T no proof was gi!en of &"/ policy that gi!es rebates to clients in case of loss arising fr. fortuitous e!ents, w)c it now passes off as uncollectible debts,

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INCOME TAX REVIEWER


so agreed upon shall be binding on both the taxpayer and the national #o!ernment in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. he responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effecti!e for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is ser!ed by the party initiating such change to the other party to the agreement' &ro!ided, howe!er, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written obKection on the part of the /ommissioner or his duly authorized representati!es, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this 2ubsection. 8L; <epreciation of &roperties 1sed in &etroleum 9perations. * An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in ser!ice in a taxable year shall be allowed under the straight* line or declining* balance method of depreciation at the option of the ser!ice contractor. $owe!er, if the ser!ice contractor initially elects the declining* balance method, it may at any subse.uent date, shift to the straight* line method. he useful life of properties used in or related to production of petroleum shall be ten 8+=; years of such shorter life as may be permitted by the /ommissioner. &roperties not used directly in the production of petroleum shall be depreciated under the straight* line method on the basis of an estimated useful life of fi!e 8C; years. 8C; <epreciation of &roperties 1sed in Jining 9perations. * an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows' 8a; At the normal rate of depreciation if the expected life is ten 8+=; years or less, or 8b; <epreciated o!er any number of years between fi!e 8C; years and the expected life if the latter is more than ten 8+=; years, and the depreciation thereon allowed as deduction from taxable income' &ro!ided, hat the contractor notifies the /ommissioner at the beginning of the depreciation period which depreciation rate allowed by this 2ection will be used. 8B; <epreciation <eductible by Nonresident Aliens 0ngaged in rade or %usiness or "esident (oreign /orporations. * In the case of a nonresident alien indi!idual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of &roperty arising out of its use or employment or its non* use in the business trade or profession shall be permitted only when such property is located in the &hilippines. a. ?hat is depreciationM obsolescenceM what is

(or the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property Definition2 '4asi(an 9states Inc., v. &omm H Secs. 11C F 11* RR #) De8recia tion - the gradual diminution in the useful !alue of tangible property used in the trade or business resulting fr. exhaustion, wear & tear, & normal obsolescence he term is also applied to amortization of the !alue of intangible assets the use of w)c in the trade or business is definitely limited in duration. he necessity for depreciation allowance arises fr. the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. %y using the property, a gradual sale is made of it, & the depreciation charged is the measure of the cost w)c has been sold. ?hen then the property is disposed of after years of use, it is no longer the whole thing originally used. b. "e.uisites for deductibility' +. he allowance for depreciation must be reasonable. -. It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year. 4. It must be charged off during the taxable year. L. A statement on the allowance must be attached to the return. H "easonable allowanceI as used in the ax /ode, includes 8but is not limited to; an allowance computed in accordance w) the regulations prescribed by the (inance 2ecretary under any of the ff. methods' +. 2traight* line method, -. <eclining balance method, 4. 2um* of* the* years digits method, & L. Any other method prescribed by the 2ec. of (inance upon recommendation of the /ommissioner. c. ?ho may expenseM deduct depreciation

In the case of property held by one person for life with remainder to another person in the case of property held in trust d. /9J&1 A I9N ) methods allowed. AI,+A" I"&., v. &O,,. 1acts2 7impan is the owner of se!eral apartment units. /I" assessed deficiency taxes & reduced depreciation expense at the rate stated in the petitioners return bec. these were excessi!e. &etitioners witness tried to establish that some of

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INCOME TAX REVIEWER


its buildings were old & out of style, hence they were entitled to higher rates of depreciation. 3e(d2 (indings of the /I" & the / A should be upheld, the deductions claimed by 7impan were excessi!e. <epreciation is a .uestion of fact & is not measured by theoretical yardstick but should be determined by a consideration of actual facts. 4ASIAA" 9"T9R+RIS9S I"&., v. &O,,. 1acts ' %0I claimed deductions for the depreciation of its assets up to +3L3 on the basis of their ac.uisition cost. As of Ran. +3C=, it changed the depreciable !alue of said assets by increasing it to conform w) the increase in cost for their replacement. Accdgly, for its +3C= T +3C4 returns, it deducted fr. gross income, the !alue of depreciations computed on the reappraised !alue. 3e(d2 he income tax law does not authorize the depreciation of an asset beyond its ac.uisition cost. $ence a deduction o!er & abo!e such cost cannot be claimed or allowed. he reason is that deductions fr. gross income are pri!ileges, not matters of right. hey are not created by implication but upon clear expression in the law. Joreo!er, the reco!ery, free of income tax , of an amount, more than the in!ested capital in an asset, will transgress the underlying purpose of depreciation allowance. (or then, what the taxpayer would reco!er would be, not only the ac.uisition cost, but also some profit. "eco!ery in due time through depreciation of in!estment made is the philosophy behind depreciation, the idea of profit on the in!estment made has ne!er been the underlying reason for the allowance of a deduction for depreciation. I((ustration2 A machine w) a cost of &C=,C== w)c has an estimated useful life of += years & sal!age !alue of &C== after its useful life should ha!e an annual depreciation of &C,=== computed as follows' /92 &C=,C== 7ess T 2al!age 6alue 8C==; Amount subKect to depreciation &C=,=== [[[ [ [ [ [ Annual depreciation will be' &C=,=== += years [ &C,=== YY No depreciation will be allowed in the case of property w)c has been amortized to its scrap !alue & is no longer in use. 82ec. +=:, "" -; +ro8er t5 not su<>ect to de8recia tion F +. In!entories or stock in trade, -. 7and, apart fr. the impro!ements or physical de!elopment added to it, 4. %odies of minerals w)c through the process of remo!al suffer depletion already subK. to depletion allowance;, L. Automobiles solely for personal purposes, C. Intangibles, the use of w)c in business or trade is not of limited duration, & B. Incidental repairs w)c neither materially add up to the !alue or prolong the life, but keep it in an ordinary efficient operating condition. &roperty kept in repair may ne!ertheless, be subKect of a depreciation allowance. e. Agreement as to useful life) economic life conditions) restrictions f. 2pecial types properties i. ii. of depreciable

&roperties used operations &roperties used operation

in in

petroleum mining

iii. <epreciation of properties used by nonresident aliens engaged in trade or business or resident foreign corps. :. <0&70 I9N <epletion is the exhaustion of natural resources like mines & oil & gas wells as a result of production or se!erance fr. such mines or wells. Sec. 3%. #G$ epletion of 3il and Gas !ells and *ines. 8+; In #eneral. * In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost* depletion method shall be granted under rules and regulations to be prescribed by the 2ecretary of finance, upon recommendation of the /ommissioner. &ro!ided, hat when the allowance for depletion shall e.ual the capital in!ested no further allowance shall be granted' &ro!ided, further, hat after production in commercial .uantities has commenced, certain intangible exploration and de!elopment drilling costs' 8a; shall be deductible in the year incurred if such expenditures are incurred for non* producing wells and)or mines, or 8b; shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and)or mines in the same contract area. NIntangible costs in petroleum operationsN refers to any cost incurred in petroleum operations which in itself has no sal!age !alue and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum' &ro!ided, hat said costs shall not pertain to the ac.uisition or impro!ement of property of a character subKect to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this 2ubsection. Any intangible exploration, drilling and de!elopment expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adKusted cost basis for the purpose of computing allowable cost depletion. 8-; 0lection to <educt 0xploration and <e!elopment 0xpenditures. * In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and de!elopment expenditures accumulated as cost or adKusted basis for cost depletion as of

73

INCOME TAX REVIEWER


date of prospecting, as well as exploration and de!elopment expenditures paid or incurred during the taxable year' &ro!ided, hat the amount deductible for exploration and de!elopment expenditures shall not exceed twenty* fi!e percent 8-CE; of the net income from mining operations computed without the benefit of any tax incenti!es under existing laws. he actual exploration and de!elopment expenditures minus twenty* fi!e percent 8-CE; of the net income from mining shall be carried forward to the succeeding years until fully deducted. he election by the taxpayer to deduct the exploration and de!elopment expenditures is irre!ocable and shall be binding in succeeding taxable years. NNet income from mining operationsN, as used in this 2ubsection, shall mean gross income from operations less Nallowable deductionsN which are necessary or related to mining operations. NAllowable deductionsN shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. his paragraph shall not apply to expenditures for the ac.uisition or impro!ement of property of a character which is subKect to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and de!elopment of oil and gas. he term Nexploration expendituresN means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or .uality of any deposit of ore or other mineral, and paid or incurred before the beginning of the de!elopment stage of the mine or deposit. he term Nde!elopment expendituresN means expenditures paid or incurred during the de!elopment stage of the mine or other natural deposits. he de!elopment stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial .uantity and .uality and shall end upon commencement of actual commercial extraction. 84; <epletion of 9il and #as ?ells and Jines <eductible by a Nonresident Alien indi!idual or (oreign /orporation. * In the case of a nonresident alien indi!idual engaged in trade or business in the &hilippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph 8+; of this 2ubsection shall be authorized only in respect to oil and gas wells or mines located within the &hilippines. a. b. I. <epletion of oil and gas wells and mines Jethod allowed' /92 <0&70 I9N ?hen depletion shall e.ual the capital in!ested) no more deduction reatment of intangible costs in petroleum products 9ption to deduct exploration de!elopment expenditures and ?hat are exploration de!elopment expendituresM d. expendituresM

Amount deductible by a nonresident alien indi!idual or foreign corporation

'ersons entitled to claim deple tion allowa nce #%ec. 25 &ev. &eg. C- ED$ Allowed only to mining entities w)c own an economic interest in mineral deposits 9conomic interes t T the taxpayer has ac.uired by in!estment any interest in mineral & secures it, by any form of legal relationship, such as but not limited to, operating agreement & ser!ice contract agreement, income deri!ed fr. the extraction of mineral, to w)c it must look for the return of its capital A corporation w)c has no capital in!estment in the mineral deposit does not possess an economic interest merely bec. through a contractual relation it possesses a mere pecuniary ad!antage deri!ed fr. production. A resident foreign corporation is entitled only to deduct depreciation allowance for oil & gas wells located w)in the &hilippines. &onso(ida te d ,ines D. &TA 1acts2 /onsolidated is a domestic mining corp. w)c claimed deductions for depletion, the rates of w)c petr & the /I" disagreed on. 3e(d2 he ax /ode pro!ides in case of mines for a deduction on depletion * a reasonable allowance not to exceed the market !alue of the product thereof w)c has been mined & sold during the year for w)c the return was made. he formula depletion is' for computing the rate of

&ost of mine 8ro8ert5 0stimated ore deposit [ "ate depletion per unit of product mined & sold &ost of mine 8ro8ert5 2 +. Jine cost -. 0xpenses of de!elopment before production As an income tax concept, depletion is wholly a creation of the statute, Hsolely a matter of legislati!e graceI, hence the petr has the burden of Kustifying the allowance of any deduction claimed. he company must pro!ide the e!idence for its assertion that /I" erred. 3. "020A"/$ AN< <06079&J0N 0O&0N20 Sec. 3%. #"$ &esearch and evelop me n t . 8+; In #eneral. * a taxpayer may treat research or de!elopment expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 8-; Amortization of /ertain "esearch and <e!elopment 0xpenditures. * At the election of of

II. c.

74

INCOME TAX REVIEWER


the taxpayer and in accordance with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, the following research and de!elopment expenditures may be treated as deferred expenses' 8a; &aid or incurred by the taxpayer in connection with his trade, business or profession, 8b; Not treated as expenses under paragraph 3+; hereof, and 8c; /hargeable to capital account but not chargeable to property of a character which is subKect to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed o!er a period of not less than sixty 8B=; months as may be elected by the taxpayer 8beginning with the month in which the taxpayer first realizes benefits from such expenditures;. he election pro!ided by paragraph 8-; hereof may be made for any taxable year beginning after the effecti!ity of this /ode, but only if made not later than the time prescribed by law for filing the return for such taxable year. he method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subse.uent taxable years unless with the appro!al of the /ommissioner, a change to a different method is authorized with respect to a part or all of such expenditures. he election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election. 84; 7imitations on deduction. * his 2ubsection shall not apply to' 8a; Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and 8b; Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas. a. b. c. ?hat items expensesM are treated as "& < R9D. R9:. 13- 9$. Sec. 3%. #9$ Charita bl e and 3ther Contribu tions. 8+; In #eneral. * /ontributions or gifts actually paid or made within the taxable year to, or for the use of the #o!ernment of the &hilippines or any of its agencies or any political subdi!ision thereof exclusi!ely for public purposes, or to accredited domestic corporation or associations organized and operated exclusi!ely for religious, charitable, scientific, youth and sports de!elopment, cultural or educational purposes or for the rehabilitation of !eterans, or to social welfare institutions, or to non* go!ernment organizations, in accordance with rules and regulations promulgated by the 2ecretary of finance, upon recommendation of the /ommissioner, no part of the net income of which inures to the benefit of any pri!ate stockholder or indi!idual in an amount not in excess of ten percent 8+=E; in the case of an indi!idual, and fi!e percent 8E; in the case of a corporation, of the taxpayerNs taxable income deri!ed from trade, business or profession as computed without the benefit of this and the following subparagraphs. 8-; /ontributions <eductible in (ull. * Notwithstanding the pro!isions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full, 8a; <onations to the #o!ernment. * <onations to the #o!ernment of the &hilippines or to any of its agencies or political subdi!isions, including fully* owned go!ernment corporations, exclusi!ely to finance, to pro!ide for, or to be used in undertaking priority acti!ities in education, health, youth and sports de!elopment, human settlements, science and culture, and in economic de!elopment according to a National &riority &lan determined by the National 0conomic and <e!elopment Authority 8N0<A;, In consultation with appropriate go!ernment agencies, including its regional de!elopment councils and pri!ate philantrophic persons and institutions' &ro!ided, hat any donation which is made to the #o!ernment or to any of its agencies or political subdi!isions not in accordance with the said annual priority plan shall be subKect to the limitations prescribed in paragraph 8+; of this 2ubsection, 8b; <onations to /ertain (oreign Institutions or International 9rganizations. * donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commit ments entered into by the #o!ernment of the &hilippines and the foreign institutions or international organizations or in pursuance of special laws, 8c; <onations to Accredited Nongo!ernment 9rganizations. * the term Nnongo!ern ment organizationN means a non profit domestic corporation' 8+; 9rganized and operated exclusi!ely for scientific, research, educational, character* building and youth and sports de!elopment, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any pri!ate indi!idual,

$ow deduction is computed reated as deferred expenses 8optional; of some " and < expense <

conditions and limitations d. 7imitations on deduction) " & pro!isions shall not apply to' i.

ii.

Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas. +=. /$A"I A%70 /9N "I%1 I9N2 AN< 9 $0"

75

INCOME TAX REVIEWER


8-; ?hich, not later than the +C th day of the third month after the close of the accredited nongo!ern ment organizations taxable year in which contributions are recei!ed, makes utilization directly for the acti!e conduct of the acti!ities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the 2ecretary of (inance in accordance with the rules and regulations to be promulgated, upon recommendation of the /ommissioner, 84; he le!el of administrati!e expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, but in no case to exceed thirty percent 84=E; of the total expenses, and 8L; he assets of which, in the e!en of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the Kudgment of said court shall best accomplish the general purpose for which the dissol!ed organization was organized. 2ubKect to such terms and conditions as may be prescribed by the 2ecretary of (inance, the term NutilizationN means' 8i; Any amount in cash or in kind 8including administrati!e expenses; paid or utilized to accomplish one or more purposes for which the accredited nongo!ernment organization was created or organized. 8ii; Any amount paid to ac.uire an asset used 8or held for use; directly in carrying out one or more purposes for which the accredited nongo!ern ment organization was created or organized. An amount set aside for a specific proKect which comes within one or more purposes of the accredited nongo!ernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongo!ern ment organization has established to the satisfaction of the /ommissioner that the amount will be paid for the specific proKect within a period to be prescribed in rules and regulations to be promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner, but not to exceed fi!e 8C; years, and the proKect is one which can be better accomplished by setting aside such amount than by immediate payment of funds. 84; 6aluation. * he amount of any charitable contribution of property other than money shall be based on the ac.uisition cost of said property. 8L; &roof of <eductions. * /ontributions or gifts shall be allowable as deductions only if !erified under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. a. b. c. d. ?hat donations deductibleM or gifts are i. ii. iii. e. f. <onations to the go!t. <onations to certain foreign institutions or intl organizations <onations to accredited non* go!t. organizations

!aluation of donation &roof of donation for tax deduction purposes Roxas D. &TA

1acts ' 2upra 3e(d2 /ontributions to the /hristmas (und of the &asay /ity &olice & (iremen & the %aguio /ity &olice are not deductible for the reason that /hristmas (unds were not spent for public purposes but as gifts to the families of the members of said entities. 1nder the ax /ode, a contribution to a go!t. entity is deductible when used exclusi!ely for public purposes. /ontributions to the &hil. $eralds fund for Janilas neediest families were disallowed on the ground that &$ is not a corporation or assn. /ontemplated in the ax /ode. It should be noted howe!er, that the contributions were not made to the &$ but to a group of ci!ic* spirited citizens organized by the &$ solely for charitable purposes. ++. /9N "I%1 I9N 9 A &0N2I9N "12 %ec. 2=. #8$ 'ension (rusts. * An employer establishing or maintaining a pension trust to pro!ide for the payment of reasonable pensions to his employees shall be allowed as a deduction 8in addition to the contributions to such trust during the taxable year to co!er the pension liability accruing during the year, allowed as a deduction under 2ubsection 8A; 8+; of this 2ection ; a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount 8+;has not theretofore been allowed as a deduction, and 8-; is apportioned in e.ual parts o!er a period of ten 8+=; consecuti!e years beginning with the year in which the transfer or payment is made. <eduction of lump* sum contribution "0G1I2I 02 (9" <0<1/ I%I7I D /. I 0J2 $A /ANN9 %0 <0<1/ 0<

<eduction with limitation /ontributions deductible in full. reatment of the ff. donations'

S9&. 36 . "tems not eductible.#A$ General &ule . - In computing net income, no deduction shall in any case be allowed in respect to 8+; &ersonal, li!ing or family expenses, 8-; Any amount paid out for new buildings or for permanent impro!ements, or betterments made to increase the !alue of any property or estate, his 2ubsection shall not apply to intangible drilling and de!elopment costs incurred in petroleum operations which are deductible under 2ubsection 8#; 8+; of 2ection 4L of this /ode. 84; Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, or

76

INCOME TAX REVIEWER


8L; &remiums paid on any life insurance policy co!ering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, indi!idual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. 8%; 7osses from 2ales or 0xchanges of &roperty. * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly * 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust, or 8B; %etween a fiduciary of a trust and beneficiary of such trust. +. &ersonal li!ing expenses fees, and other and family other &OAA9&TOR DS. NA,IR 1acts ' Ramir claimed as dedn the salary of his dri!er. he /I" assessed the tax due. / A allowed 4)Ls of the salary to be deducted. 3e(d2 It appears that the dri!er was used for personal & business purposes. he 2/ is not inclined to disturb the finding of the court the Ramir used the car Hmore for business than for personal purposesI. -. /apital 0xpenditure i. ii. Ac.uisition of asset "epairs that prolong life and add !alue on an with

iii. Addition) impro!ement existing asset i!. /ompare) differentiate ordinary expense

0xamples' tuition household expense

groceries

Sec. 119 Rev. Re-. # +ersona(, (ivin-, H fami(5 ex8enses are not deductible. 8+; Insurance paid on a dwelling owned & occupied by a taxpayer is a personal expense & not deductible. 8-; &remiums paid for life for life insurance are not deductible. In the case of a professional man who T "ents a property for residential purposes %ut incidentally recei!es his clients, patients, or callers in connection w) his professional work 8his place of business being elsewhere;, no part of the rent is deductible as a business expense. If, howe!er, he uses part of the house for his office, such portion of the rent as is properly attributed to such office is deductible. ?here the father is legally entitled to the ser!ices of his minor children, any allowances w)c he gi!es them whether said to be in consideration of ser!ices or otherwise, are not allowable salary deductions in his returns of income. Alimony & an allowance paid under a separation agreement are not deductible fr. gross income.

Sec. 1#C Rev. Re-. #. Capital expendi tur e No deduction fr. gross income may be made T (or any amounts made for the new buildings or for permanent impro!ements or betterments made to increase the !alue of the taxpayers property, or (or any amount expended in restoring property or in making good the exhaustion thereof for w)c an allowance of depreciation expended for securing a copyright & plates, w)c remain the property of the person making the payments, are in!estment of capital. he cost of defending of perfecting title of property, constitutes a part of the cost on the property & is not a deductible expense. he amount expended for architects ser!ices is part of the cost of the building. /ommissions paid in purchasing securities are an offset against the selling price. 0xpenses of the administration of an 0state, such as T court costs attorneys fee & executors commissions are chargeable against the HcorpusI of the estate & are not allowable deductions. Amounts T to be assessed & placed under an agreement between bondholders or shareholders of a corporation. to be used in a reorganizing of the corporation, are in!estments of capital an not deductible for any purpose in return of income. In the case of a corporation, e&penses !or organi/ations, s"c# as incorporation fees attorneys fees accountants charges, are ordinary capital expenditures, but where such expenditures are limited to purely incidental expenses, a taxpayer may be charge such item against income in the year in w)c they are incurred.

77

INCOME TAX REVIEWER


A holding company w)c guarantees di!idend at a specified rate on the stock of the subsidiary corporation for the purpose of T securing new capital for the subsidiary & increasing the !alue of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guarantee in computing its net income, but such payments may be added to the cost of its stock in the subsidiary. &ommissione r Ds. Soriano 1acts2 he taxpayer had a piece of land in Jla. o carry out a proKect, it hired an architect as a contractor for pile* dri!ing lumber into the grd. he taxpayer sold the prop. & later claimed as deductible the amt. paid to the architect & ser!ice fee for pile* dri!ing. 3e(d2 0xpenses constitute capital expenditure w)c the owner)taxpayer was entitled to consider as part of the total cost of its property in det. the amt. of profit it realized fr. the sale. 0xpenditures for replacements, alterations & impro!ements)additions w)c either prolong the life of the prop. or increase its !alue are capital in nature & therefore are part of the cost. Not deductible. 4. Insurance premium payment same person is a grantor with respect to each trust, or 8B; %etween a fiduciary of a trust and beneficiary of such trust. C. 7osses on wash sales

?hen deductible ?hen N9 deductible Insurance premium as fringe benefit

L.

7osses between related taxpayers

Sec. 36. ' 4$ Losses from %ales or Exchanges of 'roperty . * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly * 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the

%EC. 2G. Losses from !ash %ales of %tock or %ecurities. * 8A; In the case of any loss claimed to ha!e been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty 84=; days before the date of such sale or disposition and ending thirty 84=; days after such date, the taxpayer has ac.uired 8by purchase or by exchange upon which the entire amount of gain or loss was recognized by law;, or has entered into a contact or option so to ac.uire, substantially identical stock or securities, then no deduction for the loss shall be allowed under 2ection 4L unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 8%; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire; is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8/; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire which; resulted in the non* deductibility of the loss, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. Sec. 1C1 Rev. Re-. #. Capital losses on wash sales of stock or securities 7osses on sale or exchange of capital assets are allowed to the extent pro!ided in 2ec 4L of the /ode. If any securities w)c are capital assets become worthless during the taxable year, the loss resulting, therefr. shall be considered as a low fr. the sale or exchange on the last day of such taxable year, of capital losses assets. 7osses on Hwash salesI of stock or securities are treated in 2ec. 44 of /ode +.

B.

Illegal expense

&a(anoc Ds. &o((ector 1acts2 %y authority of a solicitors permit, /alanoc financed & promoted a boxing match to solicit contributions for orphans & destitute children. Included in the expenditures was an amt. for police protection.

78

INCOME TAX REVIEWER


3e(d2 he expenditure is disallowed as it is illegal. It is a consideration gi!en for the performance of the police of functions re.uired of them to be rendered under the law. Sec. 3%. 1. #c$ 4ribes5 Aickbacks and 3ther %imilar 'aymen ts . * No deduction from gross income shall be allowed under 2ubsection 8A; hereof for any payment made, directly or indirectly, to an official or employee of the national go!ernment, or to an official or employee of any local go!ernment unit, or to an official or employee of a go!ernment* owned or *controlled corporation, or to an official or employee or representati!e of a foreign go!ernment, or to a pri!ate corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. OT39RS2 i. ii. &rotection money "ansom paid to kidnappers for the release of a corporate officer pursuant to law, as additions to guarantee or reser!e funds. +. Insurance companies -. Jutual insurance companies 4. Jutual marine insurance companies L. Assessment insurance cos. 0. <0<1/ I9N2 AO&AD0"2. A779?0< 9 IN<I6I<1A7

+. 9ptional standard deduction. Sec. 3%. #L$ 3ptional %tandard eduction. * In lieu of the deductions allowed under the preceding 2ubsections, an indi!idual subKect to tax under 2ection -L, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent 8+=E; of his gross income. 1nless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as ha!ing a!ailed himself of the deductions allowed in the preceding 2ubsections. 2uch election when made in the return shall be irre!ocable for the taxable year for which the return is made' &ro!ided, hat an indi!idual who is entitled to and claimed for the optional standard deduction shall not be re.uired to submit with his tax return such financial statements otherwise re.uired under this /ode' &ro!ided, further, hat except when the /ommissioner otherwise permits, the said indi!idual shall keep such records pertaining to his gross income during the taxable year, as may be re.uired by the rules and regulations promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. in lieu of itemized deductions not exceeding +=E of his gross income ?hat is gross incomeM Sec. #!. 9. #=$ Gross "ncome efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to

iii. "e!olutionary tax paid to N&A <. <0<1/ I9N2 A779?0< /9"&9"A I9N2 (9" 2&0/IA7

S9&. 3!. %pecial 'rovisions &egarding "ncome and eductions of "nsurance Companies5 !heth e r omes tic or +oreign. 'A) S8ecia( Deduction A((o0ed to Insurance &om8anies. * In the case of insurance companies, whether domestic or foreign doing business in the &hilippines, the net additions, if any, re.uired by law to be made within the year to reser!e funds and the sums other than di!idends paid within the year on policy and annuity contracts may be deducted from their gross income' &ro!ided, howe!er, hat the released reser!e be treated as income for the year of release. '4) ,utua( Insurance &om8anies . * In the case of mutual fire and mutual employersN liability and mutual workmenNs compensation and mutual casualty insurance companies re.uiring their members to make premium deposits to pro!ide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income recei!ed by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reser!es. '&) ,utua( ,arine Insurance &om8anies . * Jutual marine insurance companies shall include in their return of gross income, gross premiums collected and recei!ed by them less amounts paid to policyholders on account of premiums pre!iously paid by them and interest paid upon those amounts between the ascertainment and payment thereof. 'D)Assessme n t Insurance &om8anies .* Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the #o!ernment of the &hilippines

79

INCOME TAX REVIEWER


pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. $ow to a!ail of the optional deduction ?ho is entitledM -. &remium payments on health and)or hospitalization insurance of an indi!idual taxpayer. Sec. 3%. #*$ 'remiu m 'ayme n ts on 9ealth and7or 9ospitali<a tion "nsurance of an "ndividual (axpayer . * the amount of premiums not to exceed wo thousand four hundred pesos 8&-,L==; per family or wo hundred pesos 8&-==; a month paid during the taxable year for health and)or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income' &ro!ided, hat said family has a gross income of not more than wo hundred fifty thousand pesos 8&-C=,===; for the taxable year' &ro!ided, finally, hat in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. a. b. (. &0"29NA7 0O0J& I9N AO&AD0". 7imitation) ceiling) conditions for deductions ?ho is entitledM (9" IN<I6I<1A7 incapable of self* support because of mental or physical defect. 8%; Additional 0xemption for <ependents. * here shall be allowed an additional exemption of 0ight thousand pesos 8&:,===; for each dependent not exceeding four 8L;. he additional exemption for dependent shall be claimed by only one of the spouses in the case of married indi!iduals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children' &ro!ided, hat the total amount of additional exemptions that may be claimed by both shall not exceed the maximu m additional exemptions herein allowed. (or purposes of this 2ubsection, a NdependentN means a legitimate, illegitimate or legally adopted child chiefly dependent upon and li!ing with the taxpayer if such dependent is not more than twenty* one 8-+; years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self* support because of mental or physical defect. 8/; /hange of 2tatus. * If the taxpayer marries or should ha!e additional dependent8s; as defined abo!e during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent8s; as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty* one 8-+; years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty* one 8-+; years old or became gainfully employed at the close of such year. 8<; &ersonal 0xemption Allowable to Nonresident Alien Indi!idual. * A nonresident alien indi!idual engaged in trade, business or in the exercise of a profession in the &hilippines shall be entitled to a personal exemption in the amount e.ual to the exemptions allowed in the income tax law in the country of which he is a subKect * or citizen, to citizens of the &hilippines not residing in such country, not to exceed the amount fixed in this 2ection as exemption for citizens or resident of the &hilippines' &ro!ided, hat said nonresident alien should file a true and accurate return of the total income recei!ed by him from all sources in the &hilippines, as re.uired by this itle. +. %asic personal exemption Sec. #.! 9 'I) 1. a. Rev. Re-. #- 9$. a. 2ingle indi!idual or married indi!idual Kudicially decreed as legally separated w) no .ualified dependents &-=,=== b. $ead of family & -C,===

%EC. 2C. Allowance of 'ersonal Exemption for "ndividual (axpayer. 8A; In #eneral. * (or purposes of determining the tax pro!ided in 2ection -L 8A; of this itle, there shall be allowed a basic personal exemption as follows' (or single indi!idual or married indi!idual Kudicially decreed as legally separated with no .ualified dependents &-=,=== (or $ead of (amily &-C,=== (or each married Indi!idual &4-,=== In the case of married indi!iduals where only one of the spouses is deri!ing gross income, only such spouse shall be allowed the personal exemption. (or purposes of this paragraph, the term Nhead of familyN means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children li!ing with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twenty* one 8-+; years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are

80

INCOME TAX REVIEWER


<ependent 2ec. -.53 8%; 8+; 8d; "e! "eg. -*3: %enefactors of senior citizens 2ingle unmarried parentM c. 0ach 8legally; married indi!idual 4-,=== -. Additional exemption for dependents Sec. #.! 9 'I) '1) '<) Rev Re-. #- 9$ a. b. $ow many dependents are allowedM ?ho are the .ualified dependentsM Are senior citizens .ualified dependentsM Are spurious children co!eredM &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual , whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines, 80; A domestic corporation is taxable on all income deri!ed from sources within and without the &hilippines, and 8(; A foreign corporation , whether engaged or not in trade or business in the &hilippines, is taxable only on income deri!ed from sources within the &hilippines. %. /9"&9"A I9N2 +. <efinition of corp.) corporate taxpayer

<ependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and li!ing with the taxpayer if such dependent is not more than -+ years of age, unmarried & not gainfully employed or if such dependent, regardless of age, is incapable of self* support because of mental or physical defect. c. d. Amount allowed &:,=== each max of L dependents ?ho may claim the additional exemptionM Jaya single parent claim the deductionM taxpayer and

4. /hange of status of the the dependent marriage death reaching the age of -+ gainfully employed ha!ing children

Sec. ##. 8%; he term @cor8ora tion@ shall include partnerships, no matter how created or organized, Koint* stock companies, Koint accounts 8cuentas en participacion;, association, or insurance companies, but does not include general professional partnerships and a Koint !enture or consortium formed for the purpose of undertaking construction proKects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a ser!ice contract with the #o!ernment . @:enera( 8rofessiona( 8artne rs6i8s@ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is deri!ed from engaging in any trade or business. +ART"9RS3I+ ' includes gen. partnerships & limited partnerships, whether registered or not, %1 not gen. professional partnerships NOI"T STO&/ &O,+A"I9S2 constituted when one a group of indi!iduals, acting Kointly, establish & operate a business enterprise under an artificial name, w) an in!ested capital di!ided into transferable shares, an elected board of directors, & other corporate characteristics, %1 w)out formal go!ernmental authority. NOI"T A&&OU"TS '&U9"TAS 9" +ARTI&I+A&IO")2 constituted when one interests himself in the business of another by contributing capital thereto, & sharing in the profits or losses in the proportion agreed upon, not subKect to any formality & may be pri!ately contracted orally or in writing. ASSO&IATIO"S2 include all orgs. w)c ha!e substantially the same features of a corporation 8substantial resemblance in purpose, gen. form & mode of operations. NOI"T D9"TUR92 commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single proKect, its

L. personal exemption allowable nonresident alien indi!idual reciprocity re.uirements DI. A. &AASSI1I&ATIO" TAE+AB9RS. O1 9(

to

I"&O,9 IN/9J0

#0N0"A7 &"IN/I&702 AOA I9N IN $0 &$I72.

%EC. B2. General 'rinciples of "ncome (axation in the 'hilippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the

81

INCOME TAX REVIEWER


duration is limited to the period in w)c the goods are soled or the proKect is carried on. 6o are (ar-e tax8a5ersL Revenue Re-. 1- 9$ 0xceptions T general professional partnership Sec. ## '4), su8ra. %EC. BD. (ax Liability of *embe rs of General 'rofessional 'artne rships . * A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership. %EC. E2. istribu tion of dividends or Assets by Corpora tions. 6 # $ )et "ncome of a 'artne rship eeme d Constructiv ely &eceived by 'artne rs. * he taxable income declared by a partnership for a taxable year which is subKect to tax under 2ection -5 8A; of this /ode, after deducting the corporate income tax imposed therein, shall be deemed to ha!e been actually or constructi!ely recei!ed by the partners in the same taxable year and shall be taxed to them in their indi!idual capacity, whether actually distributed or not. 4IR ru(in- #*%- 91, #6- 11- 1991 0mpire 2tateland & "esources, IN/ 80mpire;, a domestic corp. entered into a business tie* up w) 1niphil Jarketing 81niphil; another domestic corp., whereby both firms agreed to pool their resources together for the purpose of de!eloping & constructing condominium units & selling them to the public. 1niphil was to contribute the lot, materials & labor, while 0mpire was to supply labor & materials. he de!elopment & construction of the units & the e!entual sale thereof was to be undertaken & managed by 1niphil 0mpire 6enture 86enture;, an entity put up by the contracting parties solely for that !enture. 0mpire will recei!e 4=E of the profits of the 6enture while 1niphil will recei!e 5=E. 0mpire argues that the respecti!e shares of 1niphil & 0mpire in the net profits is not subKect to income tax, the same ha!ing been taxes in the hands of 6enture o.w. the same income would be subKected to 4CE tax each in the hands of 6enture, 1niphil & 0mpire or a total tax of 5=E ISSU92 ?hat is the tax status of 6entureM Is it considered a Koint !enture 8R6; & therefore taxable as a domestic corp.M ?hat is the tax treatment of the distributi!e shares of 1niphil & 0mpire in the respecti!e amount of 5=E & 4=EM RUAI": ' essential' o constitute a R6, certain factors are each party must make a contribution, not necessarily of capital, but by way of ser!ices, skill, knowledge, material or money profits must be shared amount the parties, there must be a R9IN &"9&"I0 A"D IN 0"02 , & the right of mutual control o!er the subKect matter of the enterprise, usually there is a single business than a general or continuous ON ON rather

7ikewise, a R6 was created when - corps. while registered & operating separately where placed under one sole management w)c operated the business affairs of said co.Ns as though they constituted as single entity thereby obtaining substantial economy & profits in the operation. 8/ollector !s. % /; hus the 6enture w)c has been constituted as a single entity whereby 0mpire & 1niphil agreed to pool their resources for the de!Nt of a parcel of land, is a R6 w)c is subKect to the 4CE under 2ec. -L of the ax /ode. $owe!er, the shares of 1niphil & 0mpire from the profits of the R6 are N9 21%R0/ to income tax since said profits are in the nature of di!idends w)c are not subKect to tax under 2ec. -L8e;. -. 9rdinary taxpayer a. partnership as a corporate

est whether an entity is a taxable partnership

a partnership no matter how organized Sec. ## '4), supra. Sec. !3 'D), supra. Ona vs. &ommissioner 1acts2 ?hen %onales died, she left her husband & C children. he heirs partitioned the estate in such a way that they had a +)- undi!ided interest in += lots, B houses & an undetermined amount of damages fr. the ?ater <amage /ommission. Although the proKect of partition was appro!ed by the court. the property remained undi!ided & the husband managed the properties. $e either sold the property or leased them, & then in!ested the proceeds in real estate & securities. (rom these in!estments, the 9nas recei!ed income. hey did not, howe!er, actually recei!e their shares in the yearly income as it was left in the hands of their father who in!ested them in real properties & securities. 3e(d2 he heirs formed an unregistered partnership. (rom the moment they allowed not only the incomes from their respecti!e shares in the inheritance but e!en the inherited properties themsel!es to be used by the husband as a common fund in undertaking se!eral ONNs or in business, w) the intention of deri!ing profit to be shared by them proportionally, such act was tantamount to actually contributing such income to a common fund &, in effect, they thereby formed an unregistered partnership w)in the pur!iew of the NI"/. :atc6a(ian vs. &o((ector 1acts2 his is case where the pets. contributed to buy a sweepstakes ticket.

82

INCOME TAX REVIEWER


3e(d2 he pets. organized a partnership of a ci!il nature bec. each of them put up money to buy a ticket for the sole purpose of di!iding e.ually the prize w)c they may win, as they did in fact in the amount of &hp C=,===. he partnership was not only formed, but also, upon winning the prize, one of the pets., in his capacity as a co*partner, collected the prize. hese circumstances repel the idea that the one formed & organized among them was a community of property. $a!ing organized a partnership, the said entity is one bound to pay the income tax. he tax should not be pro* rated among them & paid indi!idually resulting in their exemption from corporate taxes. 9van-e(ista vs. &o((ector 1acts2 he pets. 8siblings I suppose; borrowed money from their father w)c they used together w) their own money to buy real properties. heir father was appointed by them to manage their properties w) full power to lease, collect rents, etc. hen the /I" demanded payment of income tax on corps., real estate dealers fixed tax & corporation residence tax for a period of 3 years. 3e(d2 Des, a partnership was formed. According to the /i!il /ode 8A+5B5;, the essential elements of a partnership are' an agreement to contribute money, property or industry to a common fund, & intent to di!ide the contracting parties. profits among the In 0!angelista, there was a series of transactions where petitioners purchased twenty* four 8-L; lots showing that the purpose was not limited to the conser!ation or preser!ation of the common fund or e!en the properties ac.uired by them. he character of habituality peculiar to business transactions engaged in for the purpose of gain was present. In the instant case, petitioners bought two 8-; parcels of land in +3BC. hey did not sell the same nor make any impro!ements thereon. In +3BB, they bought another three 84; parcels of land from one seller. It was only +3B: when they sold the two 8-; parcels of land after w)c they did not make any additional or new purchase. he remaining three 84; parcels were sold by them in +35=. he transactions were isolated. he character of habituality peculiar to business transactions for the purpose of gain was not present. b. 1nregistered partnership distinguished from /o*ownership for tax purposes. O<i((os. vs. &om. 1acts2 Rose 9billos bought two parcels of land w)c he transferred to the names of his children. After a year, the children sold them for a profit, for w)c they paid capital gains tax. he /I" demanded payment of corp. income tax & considered the share of each child as his distributi!e di!idend. his was based on the theory that the children formed an unregistered partnership. 3e(d2 hey formed a co*ownership & not a partnership. he /i!il /ode pro!ides that the sharing of gross returns does not of itself establish a partnership, ?9N the persons sharing them ha!e a Koint or common right or interest in any of the property from w)c the returns are deri!ed. here must be an unmistakable intention to form a partnership or R6. All co*ownerships are not deemed unreg. partnership. /o*owners who own properties w)c produce income should not automatically be considered partners of an unregistered partnership or a corp. w)in the pur!iew of the income tax law. In the /A%, they had no such intention. hey were co*owners pure & simple. o consider them as partners would obliterate the distinction between co*ownership & partnership. he pets. were not engaged in a R6 by reason of that isolated ON. heir original plan was to di!ide the lots for residential purposes. If later they found it not feasible to build their residences on the lots bec. of the high cost of construction, then they had no choice but to resell the same to dissol!e the co* ownership. he di!ision of the profit was merely incidental to the dissolution of the co*ownership w)c was in the nature of things a temporary state. Re5es vs. &om 1acts2 (ather & son tandem bought a lot & a building. he building were occupied by tenants. (ather & son di!ided the income coming from the tenants. hey e!en hired an administrator to collect rents. he /om. assessed them corp. income tax, surcharge & compromise for a period of C years.

he first element is present in this case. he petitioners agreed to contribute to a common fund. $ence, the issue narrows down to their intent in acting as they did. 1pon consideration of all the facts & circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate for monetary gain & di!ide it among themsel!es, because' 2aid common fund was not something they found already in existence. It was not property inherited by them pro* indi!iso. hey created it purposely. hey borrowed a substantial portion thereof in order to establish the common fund. hey in!ested the same, not merely in one but in a series of ON. ON

he properties bought by them were not de!oted to residential purposes, or to other personal uses. Instead, they were leased.

(or o!er a decade, these conditions existed. +ascua( vs. &om. 1acts2 &ascual & <ragon bought a total of fi!e lots in - sales. hey then sold these lots. (rom these sales they earned profits. hey paid capital gains tax but the /om. demanded they pay corp. income tax for being an unregistered partnershipM 3e(d2 In the present case, there is no e!idence that petitioners entered into an agreement to contribute money, property or industry to a common fund, & that they intended to di!ide the profits among themsel!es. "espondent commissioner &) or his representati!e Kust assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land & became co*owners thereof.

83

INCOME TAX REVIEWER


3e(d2 &artnership 80!angelista !s. /oll; applies. $owe!er, the difference w) that case & the /A% is that in the latter a single ON occurred. %ut the 2/ ruled that such minor differentiation does not relie!e them from the 0!angelista ruling. Joreo!er, the case satisfies one of the re.t of partnerships ** an agreement to contribute money, property or industry to a common fund. c. ax liability of partnership & partners Sec. ##. 8/; he term @domes tic,@ when applied to a corporation, means created or organized in the &hilippines or under its laws. S9&. #!. &ates of "ncome tax on omes tic Corpora tions. 6 A. In :enera(. * 0xcept as otherwise pro!ided in this /ode, an income tax of thirty* fi!e percent 84CE; is hereby imposed upon the taxable income deri!ed during each taxable year from all sources within and without the &hilippines by e!ery corporation, as defined in 2ection --8%; of this /ode and taxable under this itle as a corporation, organized in, or existing under the laws of the &hilippines' &ro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, further, hat the &resident, upon the recommendation of the 2ecretary of (inance, may effecti!e Ranuary +, -===, allow corporations the option to be taxed at fifteen percent 8+CE; of gross income as defined herein, after the following conditions ha!e been satisfied' +. A tax effort ratio of twenty percent 8-=E; of #ross National &roduct 8#N&;, -. A ratio of forty percent 8L=E; of income tax collection to total tax re!enues, 4. A 6A tax effort of four percent 8LE; of #N&, and L. A =.3 percent 8=.3E; ratio of the /onsolidated &ublic 2ector (inancial &osition 8/&2(&; to #N&. he option to be taxed based on gross income shall be a!ailable only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty* fi!e percent 8CCE;. he election of the gross income tax option by the corporation shall be irre!ocable for three 84; consecuti!e taxable years during which the corporation is .ualified under the scheme. (or purposes of this 2ection, the term Ngross incomeN deri!ed from business shall be e.ui!alent to gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, @cost of -oods@ sold shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the

Revenue Re-. 1 - $9. 0xcept as herein otherwise pro!ided, there shall be w)held a creditable income tax at the rates herein specified for each class of payee from the ff. items of income payments to persons residing in the &hils. Any amount paid or payable periodically or at the end of the taxable year by a gen. professional partnership to the partners, such as* drawings ad!ances sharings allowances stipends, etc. +CE, 0O/0& the amount paid to a partner who is a non* resident alien whether or not engaged in trade or business in the &hils. w)c shall be subKect to a final w)holding tax of 4=&. S9&. #6. Tax Aia<i(it5 of ,e m<e rs of :enera( +rofessiona( +artne rs6i8s . * A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership. Sec. !3 'D), supra. d. Roint !enture unincorporated) inc. 4IR Ru(in- #*%- 91 su8ra 8/ase of 0mpire 1niphil & the 1niphil 0mpire R6; 7ueries2 $ow is a R6 createdM ?hat is the tax treatment of a R6 for the purposes of income taxationM

4.

/lassification of /orporate Income ax %ase

axpayers)

a. <omestic 8N0 ?9"7<?I<0;

84

INCOME TAX REVIEWER


goods are actually sold, including insurance while the goods are in transit. (or a manufacturing concern, Ncost of goods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances and discounts. #4$ 'roprie t a ry Educational "nstitu tions and 9ospitals. * &roprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent 8+=E; on their taxable income except those co!ered by 2ubsection 8<; hereof' &ro!ided, that if the gross income from unrelated trade, business or other acti!ity exceeds fifty percent 8C=E; of the total gross income deri!ed by such educational institutions or hospitals from all sources, the tax prescribed in 2ubsection 8A; hereof shall be imposed on the entire taxable income. (or purposes of this 2ubsection, the term Nunrelated trade, business or other acti!ityN means any trade, business or other acti!ity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A N&roprietary educational institutionN is any pri!ate school maintained and administered by pri!ate indi!iduals or groups with an issued permit to operate from the <epartment of 0ducation, /ulture and 2ports 8<0/2;, or the /ommission on $igher 0ducation 8/$0<;, or the echnical 0ducation and 2kills <e!elopment Authority 8 02<A;, as the case may be, in accordance with existing laws and regulations. 8/; #o!ernment* owned or /ontrolled* /orporations, Agencies or Instrumentalities. * he pro!isions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the #o!ernment, except the #o!ernment 2er!ice Insurance 2ystem 8#2I2;, the 2ocial 2ecurity 2ystem 8222;, the &hilippine $ealth Insurance /orporation 8&$I/;, the &hilippine /harity 2weepstakes 9ffice 8&/29; and the &hilippine Amusement and #aming /orporation 8&A#/9";, shall pay such rate of tax upon their taxable income as are imposed by this 2ection upon corporations or associations engaged in s similar business, industry, or acti!ity. 8<; "ates of ax on /ertain &assi!e Incomes. * 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8-; /apital #ains from the 2ale of 2hares of 2tock Not raded in the 2tock 0xchange. * A final tax at the rates prescribed below shall be imposed on net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP. CE Amount in excess of &+==,===PPPPP.. +=E 84; ax on Income <eri!ed under the 0xpanded (oreign /urrency <eposit 2ystem. * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency depository system units and other depository banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8L; Intercorporate <i!idends. * <i!idends recei!ed by a domestic corporation from another domestic corporation shall not be subKect to tax. 8C; /apital #ains "ealized from the 2ale, 0xchange or <isposition of 7ands and)or %uildings. * A final tax of six percent 8BE; is hereby imposed on the gain presumed to ha!e been realized on the sale, exchange or disposition of lands and)or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, of such lands and)or buildings. 80; Jinimum /orporate Income ax on <omestic /orporations. * 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimu m ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimu m /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of

85

INCOME TAX REVIEWER


force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. b. (oreign Sec. 8<; he term @forei-n,@ when applied to a corporation, means a corporation which is not domestic. S9&. #*. (ax on )onreside nt Alien "ndividual. 6 8A; Nonresident Alien 0ngaged in trade or %usiness ?ithin the &hilippines. * 8+; In #eneral. * A nonresident alien indi!idual engaged in trade or business in the &hilippines shall be subKect to an income tax in the same manner as an indi!idual citizen and a resident alien indi!idual, on taxable income recei!ed from all sources within the &hilippines. A nonresident alien indi!idual who shall come to the &hilippines and stay therein for an aggregate period of more than one hundred eighty 8+:=; days during any calendar year shall be deemed a Nnonresident alien doing business in the &hilippinesN. 2ection -- 8#; of this /ode notwithstanding. 8-; /ash and)or &roperty <i!idends from a <omestic /orporation or Roint 2tock /ompany, or Insurance or Jutual (und /ompany or "egional 9perating $ead.uarter or Jultinational /ompany, or 2hare in the <istributable Net Income of a &artnership 80xcept a #eneral &rofessional &artnership;, Roint Account, Roint 6enture axable as a /orporation or Association., Interests, "oyalties, &rizes, and 9ther ?innings. * /ash and)or property di!idends from a domestic corporation, or from a Koint stock company, or from an insurance or mutual fund company or from a regional operating head.uarter of multinational company, or the share of a nonresident alien indi!idual in the distributable net income after tax of a partnership 8except a general professional partnership; of which he is a partner, or the share of a nonresident alien indi!idual in the net income after tax of an association, a Koint account, or a Koint !enture taxable as a corporation of which he is a member or a co*!enturer, interests, royalties 8in any form;, and prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8%;8+; of 2ection -L; and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, shall be subKect to an income tax of twenty percent 8-=E; on the total amount thereof' &ro!ided, howe!er, that royalties on books as well as other literary works, and royalties on musical compositions shall be subKect to a final tax of ten percent 8+=E; on the total amount thereof' &ro!ided, further, hat cinematographic films and similar works shall be subKect to the tax pro!ided under 2ection -: of this /ode' +rovided , furthermore, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' +rovided , finally, that should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining maturity thereof' (our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, and 7ess than three 84; years * -=E. 84; /apital #ains. * /apital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subKect to the tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8%; Nonresident Alien Indi!idual Not 0ngaged in rade or %usiness ?ithin the &hilippines. * here shall be le!ied, collected and paid for each taxable year upon the entire income recei!ed from all sources within the &hilippines by e!ery nonresident alien indi!idual not engaged in trade or business within the &hilippines as interest, cash and)or property di!idends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax

86

INCOME TAX REVIEWER


e.ual to twenty* fi!e percent 8-CE; of such income. /apital gains realized by a nonresident alien indi!idual not engaged in trade or business in the &hilippines from the sale of shares of stock in any domestic corporation and real property shall be subKect to the income tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. 8/; Alien Indi!idual 0mployed by "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by regional or area head.uarters and regional operating head.uarters established in the &hilippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area head.uarters and regional operating head.uarters, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same position as those of aliens employed by these multinational companies. (or purposes of this /hapter, the term Nmultinational companyN means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia* &acific "egion and other foreign markets. 8<; Alien Indi!idual 0mployed by 9ffshore %anking 1nits. * here shall be le!ied, collected and paid for each taxable year upon the gross income recei!ed by e!ery alien indi!idual employed by offshore banking units established in the &hilippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off* shore banking units, a tax e.ual to fifteen percent 8+CE; of such gross income' &ro!ided, howe!er, hat the same tax treatment shall apply to (ilipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. 80; Alien Indi!idual 0mployed by &etroleum 2er!ice /ontractor and 2ubcontractor. * An Alien indi!idual who is a permanent resident of a foreign country but who is employed and assigned in the &hilippines by a foreign ser!ice contractor or by a foreign ser!ice subcontractor engaged in petroleum operations in the &hilippines shall be liable to a tax of fifteen percent 8+CE; of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, recei!ed from such contractor or subcontractor' &ro!ided, howe!er, hat the same tax treatment shall apply to a (ilipino employed and occupying the same position as an alien employed by petroleum ser!ice contractor and subcontractor. Any income earned from all other sources within the &hilippines by the alien employees referred to under 2ubsections 8/;, 8<; and 80; hereof shall be subKect to the pertinent income tax, as the case may be, imposed under this /ode. i. "esident 8N0 9N7D; (". 291"/02 ?)IN &om. v. +rocter H :am<(e #C% S #!! 1acts2 &&# &hils declared di!idends payable to its parent company & sole stockholder, &&# 12A, fr. w)c the 4CE w)holding tax at source was &om. vs. 4OA& 1acts2 2upra 3e(d2 In order that a foreign corp. may be regarded as doing business w)in a state, there must be continuity of conduct & intention to establish a continuous business, such as the appointment of a local agent & not one of a temporary character. %9A/, although it does not operate any airplane in the &hils., is a resident foreign corp. It maintains a general sales agent in the country w)c is engaged in selling & issuing tickets, recei!ing fare, etc.* acti!ities in the exercise of the functions normally incident to, & are in progressi!e pursuit of, the purpose & obKect of its organization as an international carrier. ii. Non* resident 8#"922 291"/02 ?)IN 9N7D; (".

Sec. ## 'I). he term Hnon* resident foreign corp.I applies to a foreign corporation N9 engaged in trade or business w)in the &hilippines. ,aru<e ni vs. &om. 1acts2 Jarubeni is a Rapanese corp. duly licensed in the &hils. to do business. J had e.uity in!estments w) Atlantic, #ulf & &acific. A,# & & declared & paid cash di!idends to J by directly remitting the cash di!idend to Js okyo office net of the +=E final intercorporate di!idend tax & +CE branch profit remittance tax. J argues that following the principal* agent relationship theory, it is a resident foreign corp., subKect only to the +=E final tax on di!idends. It argues that must be considered a resident foreign corp. because it is engaged in business in the &hils. through its &hil. branch. It reasons that the &hil. branch & the okyo head office are one & the same corp. entity, whoe!er made the in!estment in A,#, & &. 3e(d2 he gen. rule that a foreign corp. is the same Kuridical entity as its branch office in the &hils. cannot apply here. his rule is based on the premise that the business of the foreign corp. is conducted through its branch office, following the principal* agent theory. It is understood that the branch becomes its agent here. 2o that when the foreign corp. transacts business independently of its branch, the prin.* agent relationship is set aside. he ON becomes one of the foreign corp., not of the branch. /onse.uently, the taxpayer is the foreign corp., not the branch or resident foreign corp. /orollarily, is the business ON is conducted through the branch office the latter becomes the taxpayer & not the foreign corp. In the /A%, the in!estment was made for the purposes peculiarly germane to the conduct of the corporate affairs of J, but certainly not of the branch in the &hils. It is thus clear that J, ha!ing made the independent in!estment attributable only to the head office, cannot now claim the increments as ordinary conse.uence of its trade or business in the &hils.

Sec. ## '6). he term Hresident foreign corporation,I applies to a foreign corporation engaged in trade or business w)in the &hilippines.

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INCOME TAX REVIEWER


deducted. &&# &hils claimed a refund based on -L8b; 8+; allowing a reduced rate at +CE if the country of the domicile of the foreign stockholder corporation Hshall allowI such corp. a tax credit for taxes deemed paid in the &hils. 3e(d2 2ec. -L8b;8+; does not re.uire that the 12 must gi!e a deem paid tax credit for the di!idend tax wai!ed by the &hil. to make the preferred rate applicable. the law only re.uires that the 12 shall allow tax credit in an amount e.ui!alent to -= E percentage points. the court interpreted the 12 ax /ode & ruled that the 12 allow such tax credit. A re.uirement relating to administrati!e implementation is not property imposed as a condition for the applicability, as a matter of law, of a particular rate. Nor an interpretation of a tax statute that produces a re!enue flow for the go!t is not, for that reason alone, nec. the correct reading of the statute. &om. v. +rocter H :am<(e 16C S *6C 1acts2 &&#* &hil. declared di!idends in fa!or of &&# 12A, w)c was subKected to the 4CE tax in +35C. In +355, &E# &hil. sought a refund of -=E in!oking the tax sparing credit pro!ision under 2ec. -L8b; of NI"/. 3e(d ' &&# &hils is not entitled to the refund. It is merely a w)holding agent of the go!t. the real party to file the claim should ha!e been &&# 12A. &&# &hil. also failed to meet certain re.ts in order that the di!idends recei!ed by its non* resident for. com. may be subK. to preferential tax rate of +CE. +. It did not show actual amount credited to &&# 12A by 12 go!t against the income tax due on the di!idends recei!ed by it fr. the &hils. (ailed to present I " of mother co. when di!idends were recei!ed. (ailed to submit a duly authenticated doc. showing that the 12 go!t credited the &&# 12A the -=E tax deemed paid in the &hils. ande r +6i(i88ines 1acts2 ?ander &hils is a domestic corp. organized under &hil. laws. It is wholly owned subsidiary of the #laro 2A ltd, a 2wiss /orp. not engaged in trade or business in the &hils. It claimed a preferential tax rate on di!idends remitted to #laro. 1nder 2wiss law, no tax is imposed on di!idends recei!ed by the 2wiss /orp. fr. corp. domiciled in foreign countries. 3e(d2 ?hile it is true that the claims for refund are construed strictly against the claimant, ne!ertheless, the fact that 2witzerland did not impose any tax on the di!idends recei!ed by #laro should be considered as a full satisfaction of the gi!en condition. <omestic sources w)in sources w)o +. /itizens a. Net Income tax base b. "esident 8N0 from 291"/02 ?I $IN AN< ?I $91 ; Non* resident citizen 8N0 sources ?I $IN 9N7D; from (oreign 2ources w)o resident resident net income income gross sources w)in non*

c.

%ranch & 2ubsidiary of a (oreign /orporation for income tax purposes

,aru<e ni v. &ommissione r 1acts2 Jarubeni is a foreign corp. organized under the laws of Rapan. It in!ested in a construction business in the &hils. in A#&&. A#&& remitted the profits to Jarubeni w)holding the +CE profit remittance tax. he /I" ruled that the profit remitted to Jarubeni shld. not be subKect to the +CE profit remittance tax bec. only profits remitted abroad to its head office w)c are effecti!ely connected w) its trade or business in the &hils. are subK. to the tax. Jarubeni is now claiming a refund of the +CE tax paid. 3e(d ' Jarubeni is not liable to pay the +CE profit remittance tax bec. the profits remitted to it were not income effecti!ely connected w) its business in Rapan. 8 Note' J/ was liable to pay other kind of tax, as it deri!ed income fr. source w)in the &hils. but not a profit remittance tax;. /. IN<I6I<1A7 AO&AD0"2

-. 4.

%EC. B2. General 'rinciples of "ncome (axation in the 'hilippines. * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual, whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines,

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INCOME TAX REVIEWER


Sec. ##. 80; he term @nonreside nt citi?en@ means' 8+; A citizen of the &hilippines who establishes to the satisfaction of the /ommissioner the fact of his physical presence abroad with a definite intention to reside therein. 8-; A citizen of the &hilippines who lea!es the &hilippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 84; A citizen of the &hilippines who works and deri!es income from abroad and whose employment thereat re.uires him to be physically present abroad most of the time during the taxable year. 8L; A citizen who has been pre!iously considered as nonresident citizen and who arri!es in the &hilippines at any time during the taxable year to reside permanently in the &hilippines shall likewise be treated as a nonresident citizen for the taxable year in which he arri!es in the &hilippines with respect to his income deri!ed from sources abroad until the date of his arri!al in the &hilippines. 8C; he taxpayer shall submit proof to the /ommissioner to show his intention of lea!ing the &hilippines to reside permanently abroad or to return to and reside in the &hilippines as the case may be for purpose of this 2ection. Sec. #3 '4). A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, Revenue Re-. 1- !9. Re-u(ations :overnint6e taxa tion of non- resident citi?ens Sec. #. !ho are considered as non resident citi<ens. he term Hnon* resident citizen I* means one who establishes to the satisfaction of the /I" the fact of his physical presence abroad w) the definite intention to reside therein & shall include any (ilipino who lea!es the country during the taxable year as ' during the taxable year [ outside of the &hils. for not less than +:= days during such taxable year 2ec. 4. &roof of Intention 2ec. L. Janner of filing returns. xxx 8+; ?hat to include as gross income. he gross income of a non* resident citizen deri!ed from sources outside of the &hils. includes all income enumerated under 2ec. -3 of NI"/, ?9N such income is exempted from the income tax in the foreign country where it was deri!ed. -.; "ate of tax.

D >B=== >B=== >-=,=== D >-=,=== D

+E >B= plus -E if excess o!er >B=== >4L= plus 4E of excess o!er >-=,===

84; /omputation of gross income #ross income less' &ersonal exemptions 8>-=== if single or married but legally separated; total amt. of national income tax actually paid to the national go!t of the foreign country of his residence. [ #"922 A<R12 0< IN/9J0 &on0i vs. IA& 1acts2 &etitioners are employees of &rocter & #amble* &hils. & were assigned to other subsidiaries of & & # in other countries. he .uestion is ' what exchange rate should be used. /ir' pre!ailing free market exchange rate. &ets' par !alue of the peso as per /% circular' 3e(d2 (or the proper enforcement of the NI"/, the 2ec. of (inance is empowered to promulgate all needful rules & regulations to effecti!ely enforce its pro!isions. &ursuant to this authority, "J/ 5*5+ & L+* 5+ were issued to pro!ide a uniform rate of exchange for > & &hp for internal tax re!enue purposes. &ets. argue that since there were no remittances & acceptances of their salaries & wages in > into &hils. they are exempt from the co!erage of such circulars. &ets. forge that they are citizens of the &hils. & their income, w)in or w)o & in this case wholly w)o, are subKect to income tax. c. (ilipino o!erseas workers 8N0 from 291"/02 ?I $IN 9N7D;

1. Immi-ra n t

one who lea!es the &hils. to reside abroad as an immigrant for w)c a foreign !isa as such has been secured. one who lea!es the &hils. to reside abroad for employment on a more or less permanent basis. one who lea!es the &hils. on account of a contract of employment w)c is renewed from time to time w)in or during the taxable year under such circumstances as to re.uire him to be physically present abroad most of the time during the taxable year 8physically present abroad most of the time

#. +erma ne n t 99 #. &ontrac t 0or=e r

Sec. #3. 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker,

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INCOME TAX REVIEWER


-. Aliens 8not (ilipino citizens; a. "esident alien 8N0 ?I $IN 9N7D; from 291"/02 %EC. DH. "mposition of (ax. 8A; Application of ax. * he tax imposed by this itle upon indi!iduals shall apply to the income of estates or of any kind of property held in trust, including' 8+; Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust, 8-; Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct, 84; Income recei!ed by estates of deceased persons during the period of administration or settlement of the estate, and 8L; Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. 8%; 0xception. * he tax imposed by this itle shall not apply to employeeNs trust which forms part of a pension, stock bonus or profit* sharing plan of an employer for the benefit of some or all of his employees 8+; 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 principal of the fund accumulated by the trust in accordance with such plan, and 8-; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be 8within the taxable year or thereafter; used for, or di!erted to, purposes other than for the exclusi!e benefit of his employees' &ro!ided, hat any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. 8/; /omputation and &ayment. * 8+; In #eneral. * he tax shall be computed upon the taxable income of the estate or trust and shall be paid by the fiduciary, except as pro!ided in 2ection B4 8relating to re!ocable trusts; and 2ection BL 8relating to income for the benefit of the grantor;. 8-; /onsolidation of Income of wo or Jore rusts. * ?here, in the case of two or more trusts, the creator of the trust in each instance is the same person, and the beneficiary in each instance is the same, the taxable income of all the trusts shall be consolidated and the tax pro!ided in this 2ection computed on such consolidated income, and such proportion of said tax shall be assessed and collected from each trustee which the taxable income of the trust administered by him bears to the consolidated income of the se!eral trusts. %EC. D1. (axable "ncome . * he taxable income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an indi!idual, except that' 8A; here shall be allowed as a deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for the taxable year which is to be

Sec. ##. 8(; he term @residen t a(ien@ means an indi!idual whose residence is within the &hilippines and who is not a citizen thereof. b. Non* resident alien

Sec. ##. 8#; he term @nonreside nt a(ien@ means an indi!idual whose residence is not within the &hilippines and who is not a citizen thereof. i. 0ngaged in trade or business 8N0 from 291"/02 ?I $IN 9N7D;

1$C da5 test Sec. #*. #4$ )onreside nt Alien "ndividual )ot Engaged in (rade or 4usiness !ithin the 'hilippines. * here shall be le!ied, collected and paid for each taxable year upon the entire income recei!ed from all sources within the &hilippines by e!ery nonresident alien indi!idual not engaged in trade or business within the &hilippines as interest, cash and)or property di!idends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax e.ual to twenty* fi!e percent 8-CE; of such income. /apital gains realized by a nonresident alien indi!idual not engaged in trade or business in the &hilippines from the sale of shares of stock in any domestic corporation and real property shall be subKect to the income tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. ii. not engaged in trade or business 8#"922 from 291"/02 ?I $IN 9N7D;

Sec. #*. #4$ supra. iii. 2pecial Aliens

employed by' +. regional $Gs or area $Gs of multinational corps. -. off* shore banking units 4. petroleum ser!ice contractors. <. (iduciary +. axpayers' 0states & of taxable rusts & trust)

<efinition exception

estate

Sec. ##. 8R; he term @fiduciar5@ means a guardian, trustee, executor, administrator, recei!er, conser!ator or any person acting in any fiduciary capacity for any person.

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INCOME TAX REVIEWER


distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the taxable income of the beneficiaries, whether distributed to them or not. Any amount allowed as a deduction under this 2ubsection shall not be allowed as a deduction under 2ubsection 8%; of this 2ection in the same or any succeeding taxable year. 8%; In the case of income recei!ed by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the taxable income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir or beneficiary but the amount so allowed as a deduction shall be included in computing the taxable income of the legatee, heir or beneficiary. 8/; In the case of a trust administered in a foreign country, the deductions mentioned in 2ubsections 8A; and 8%; of this 2ection shall not be allowed' &ro!ided, hat the amount of any income included in the return of said trust shall not be included in computing the income of the beneficiaries. -. axable income of fiduciary taxpayers 3e(d2 he terminal lea!e pay recei!ed by a go!t official or employee is not subK. to w)holding income tax. In the exercise of sound policy. the go!t encourages unused lea!es to be accumulated. he go!t recognizes that for most public ser!ants, retirement pay is always less than generous. It is not a part of the gross salary or income of the go!t official but a retirement benefit not subK. to income tax.

L.

<eductions allowed

S9&. 6#. Exemption Allowed to Estates and (rusts . - (or the purpose of the tax pro!ided for in this itle, there shall be allowed an exemption of wenty thousand pesos 8&-=,===; from the income of the estate or trust. C. "e!ocable trust

S9&. 63. &evocable trusts . * ?here at any time the power to re!est in the grantor title to any part of the corpus of the trust is !ested 8+; in the grantor either alone or in conKunction with any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, or 8-; in any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. B. Income for benefit of grantor

S9&. 61. (axable "ncome . * s"pra. 4. rust exempt from income tax

%EC. DH. "mposition of (ax. 8%; 0xception. * he tax imposed by this itle shall not apply to employeeNs trust which forms part of a pension, stock bonus or profit* sharing plan of an employer for the benefit of some or all of his employees 8+; 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 principal of the fund accumulated by the trust in accordance with such plan, and 8-; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be 8within the taxable year or thereafter; used for, or di!erted to, purposes other than for the exclusi!e benefit of his employees' &ro!ided, hat any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. &ommissioner v. &A 1acts2 /astaneda retired fr. the go!t ser!ice in +3:-. $e recei!ed benefits including terminal benefits pay fr. w)c the /I" w)held income tax. /astaneda filed a claim for refund contending that the cash e.ui!alent of his terminal lea!e is exempt fr. tax.

S9&. 6%. "ncome for 4enefit of Grantor.8A; ?here any part of the income of a trust 8+; is, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or 8-; may, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income, be distributed to the grantor, or 84; is, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. 8%; As used in this 2ection, the term Nin the discretion of the grantorN means in the discretion of the grantor, either alone or in conKunction with any person not ha!ing a substantial ad!erse interest in the disposition of the part of the income in .uestion.

0.

"0#I2 "A I9N and N9. of taxpayers

AO I<0N I(I/A I9N

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INCOME TAX REVIEWER


Sec. #36 'A) &e:uire m e n ts . 0!ery person subKect to any internal re!enue tax shall register once w) the appropriate "e!. <ist. 9fficer' 1. ?ithin += days fr. date of employment, or #. 9n or before the commencement of the business, or 3. %efore payment of any tax due, or %. 1pon filing of a return, statement or declaration as re.uired in this /ode. he registration shall contain the taxpayers name, style, place of residence, business, and such other information as may be re.uired by the commissioner in the form prescribed therefor. A person maintaining the head office, branch or facility shall register w) the "<9 ha!ing Kurisdiction o!er the head office, branch or facility. (or purposes of this 2ection, the term faci(it5 may include but not be limited to sales outlets, places of production, warehouses or storage places. Sec. #36 'N). %upplying of ("). Any person re.uired under the authority of this /ode to make, render or file a return, statement or other document shall be supplied with or assigned a IN which shall indicate in such return, statement or doc filed w) the %I" for his proper identification for tax purposes, and w)c shall indicate in certain docs, such as, but not ltd. to, the ff.' 1. sugar .uedans, refined sugar release order or similar instruments, #. domestic bills of lading, 3. docs to be registered w) the "egister of <eeds or Assessors office, %. registration cert. of transportation e.uipment by land, sea or air, *. docs to be registered w) the 20/, 6. bldg. construction permits, !. application for loan w) banks, financial institutions, or other financial intermediaries, $. application for mayors permit, 9. application for business license w) the < I, & 1C. such other docs w)c may hereafter be re.uired under rules and regs to be promulgated by the 2ec. of (inance, upon recommendation of the /ommissioner. In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance w) subsection A hereof & a new IN shall be supplied in accordance w) the pro!ision of this 2ec. In the case of a nonresident decedent, the exec or admin of the estate shall register the estate w) the "<9 where he is registered, Pro ided, #o+e er, hat in case such exec or admin is not registered, registration of the estate shall be made w) P & the IN supplied by the "<9 ha!ing Kurisdiction o!er his legal residence. 9nly one IN shall be assigned to a taxpayer. Any person who shall secure more than one IN shall be criminally liable x x x. Rev. ,e mo. &ircu(ar 63- 91. "ssuance of the new (") to taxpaye rs and its use on docume n ts and receipts. Use of ne0 TI". 9nly persons re.uired to make, render, or file a return, statement or document w) the %I" shall be supplied w) or assigned a IN to be indicated on such documents. In addition to the persons enumerated in "J9 -4* 3+, (ilipinos who are immigrants to other countries may apply for the issuance of a IN. he new IN shall replace the existing AN 6A reg. numbers non* 6A reg. numbers & w)holding tax agent identification numbers. herefore, only the IN shall be reflected on all documents, papers, &)or records that pre!iously re.uired the indication)reflection of any of the aforementioned numbers. 6II. 0O0J& I9N AN< A&&7I/A%70 AO "A 02. A. /orporations +. AO*0O0J& /9"&2.

S9&. 3C. Exemptions from (ax on Corpora tions. he following organizations shall not be taxed under this itle in respect to income recei!ed by them as such' 8A; 7abor, agricultural or horticultural organization not organized principally for profit, 8%; Jutual sa!ings bank not ha!ing a capital stock represented by shares, and cooperati!e bank without capital stock organized and operated for mutual purposes and without profit, 8/; A beneficiary society, order or association, operating fort he exclusi!e benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees pro!iding for the payment of life, sickness, accident, or other benefits exclusi!ely to the members of such society, order, or association, or nonstock corporation or their dependents, 8<; /emetery company owned and operated exclusi!ely for the benefit of its members, 80; Nonstock corporation or association organized and operated exclusi!ely for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of !eterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person, 8(; %usiness league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any pri!ate stock* holder, or indi!idual, 8#; /i!ic league or organization not organized for profit but operated exclusi!ely for the promotion of social welfare, 8$; A nonstock and nonprofit educational institution, 8I; #o!ernment educational institution, 8R; (armersN or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperati!e telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from

92

INCOME TAX REVIEWER


members for the sole purpose of meeting its expenses, and 8F; (armersN, fruit growersN, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the .uantity of produce finished by them, Notwithstanding the pro!isions in the preceding paragraphs, the income of whate!er kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their acti!ities conducted for profit regardless of the disposition made of such income, shall be subKect to tax imposed under this /ode. exempted fr. paying income tax on gains to be deri!ed fr. the sale of its properties w)c are no longer needed for its operations. 8It is not among those specifically exempted by the ax /ode, 2ec. -B; As such it is liable to the CE creditable w)holding tax based on gross selling price or total amount of consideration or its e.ui!alent paid to the N A as seller, gross selling price being, sale price on the document, the fair market !alue, or zonal !alue w)ce!er is higher. 8=L- T 3+; he amount of tax to be paid by a non* resident foreign corporation 8non* stock foundation, duly organized under the laws of the 2tate of $awaii; , not engaged in business in the &hilippines as to its income deri!ed fr. &hil. currency bank deposit [ shall be 4CE of gross income recei!ed during the taxable year fr. all sources w)in the &hilippines such as interest, di!idends, rents, royalties etc. except capital gains. $owe!er, under the "&*12 ax reaty, Art. +-, Interest deri!ed by a resident of the /ontracting 2tates fr. sources w)in the other /ontracting 2tate shall not be taxed by the other /2 at a rate in excess of +C E of the gross amount of such interest. hus, said income fr. its &hil, currency bank deposit is to be taxed at +CE of gross income. 8=++ T 3+; Junicipal corporation is not exempt form tax on interest income fr. time & sa!ings deposits. &< +34+, 8B)++):L;, has w)drawn all the tax & duty pri!ileges, including preferential tax treatment of all units of go!ernment, the Natl. go!t., all its agencies & political subdi!isions as well as #9//s. Also 09 34 84)+=):5; w)drew all tax & duty incenti!es granted to go!t., & pri!ate entities subKect to certain exceptions. ?ith tax exemption laws strictly construed, the burden is on the claimant to pro!e he is w)in the terms of the statute. In the absence of a clear grant of exemption, the Jun. is subKect to -=E final w)holding tax on its interest income on bank deposits. 3os8ita( de San Nuan de Dios v. +asa5 &it5 1acts ' &etr paid under protest electrical & inspection fees allegedly due the /ity by !irtue of an 9rdinance that was passed. he hospital claimed that as a charitable institution, it was exempt fr. the payment of the inspection fees pro!ided in the ordinances. %ut the Jayor refused to issue a building permit if the said fees were not paid. 3e(d2 he lower court erred in not considering the hospital as a charitable institution & thus exempt fr. the payment of the fees under 2ec. C of the said ordinance. he articles of incorporation of the hospital show that it has no capital stock & that no part of the net income inures to the benefit of any indi!idual. A ruling by the ?orkmens /ompensation /ommissioner said it is a charitable institution exempt fr. the scope of the Act. Also, the hospital cashier attested that it maintains - free wards at B= beds each & B free beds at the pediatric ward. hus there is sufficient e!idence that the hospital doles out charity & should therefore be exempt. "ote2 he fact that the hospital is charging fees for paying beds does not make it lose its character

R9DI9 2 9E9,+TIO"S &O"STITUTIO "

U"D9R

T39

2ec. -: 84; Art. 6I . /haritable institutions, churches, & parsonages or con!ents appurtenant thereto, mos.ues, non* profit cemeteries & all lands, buildings & impro!ements actually, directly & exclusi!ely used for religious, charitable or educational purposes shall be exempt form taxation. 2ec. L 84,L; Art. OI6. All re!enues & assets of non* stock non* profit educ. institutions used A,<,0 for educ. purposes shall be exempt fr. taxes & duties. O O O &roprietary educ. institutions including those cooperati!ely owned may be entitled to such exemptions subKect to the limitations pro!ided by lawP 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used A,<, 0, for educ, purposes shall be exempt fr. tax. 4IR RUAI":S 8+54 T ::; Non* stock non* profit educ. institutions, they are exempted fr. internal re!enue taxes & customs duties, in appropriate cases imposed by natl. go!t. on all re!enues & assets used A,<,0, for educational purposes. '&empt !r. ta& T tuition, matriculation & other similar fees, income fr. bank deposit interests & money market placement incident to school operations, canteen owned & operated by the school as ancillary acti!ity & located w)in the school premises, !alue* added tax on sale of books, school supplies, uniform, & other school related items & sale of misc. school items like car stickers. Not e&empt !r. ta& T income fr. trade, business or other acti!ity not related to the exercise of its educational purpose or function 8i.e. school canteen operated by a concessionaire; 8+5+ T :: ; A technical)!ocational school accepting Kobs fr. the public in order to fully utilize its machines, income deri!ed is not exempt fr. tax. 8+=C T 3+; he National obacco Admin., an attached agency of the <ept of Agriculture is not

93

INCOME TAX REVIEWER


as a charitable institution if the same were used to partly finance the expenses of the free wards maintained by the hospital. he mere charging of medical & hospital fees fr. those who could afford to pay does not make an institution one established for profit or gain. +. Jinimu m /orporate Income ax 9n <omestic & "esident (oreign /orps. 8J/I ; sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. S9&. #$. &ates of "ncome (ax on +oreign Corpora tions. ($) %a& on Resident -oreign Corporations. 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the &hilippines, shall be subKect to an income tax e.ui!alent to thirty* fi!e percent 84CE; of the taxable income deri!ed in the preceding taxable year from all sources within the &hilippines' pro!ided, hat effecti!e Ranuary +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. In the case of corporations adopting the fiscal* year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. heir income and expenses for the fiscal year shall be deemed to ha!e been earned and spent e.ually for each month of the period. he reduced corporate income tax rates shall be applied on the amount computed by multiplying the number of months co!ered by the new rates within the fiscal year by the taxable income of the corporation for the period, di!ided by twel!e. &ro!ided, howe!er, hat a resident foreign corporation shall be granted the option to be taxed at fifteen percent 8+CE; on gross income under the same conditions, as pro!ided in 2ection -5 8A;. 8-; Jinimum /orporate Income ax on "esident (oreign /orporations. * A minimu m corporate income tax of two percent 8-E; of gross income, as prescribed under 2ection -5 80; of this /ode, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph 8+; of this 2ubsection. 84; International /arrier. * An international carrier doing business in the &hilippines shall pay a tax of two and one* half percent 8- +)-E; on its N#ross &hilippine %illingsN as defined hereunder' 8a; International Air /arrier. * N#ross &hilippine %illingsN refers to the amount of gross re!enue deri!ed from carriage of persons, excess baggage, cargo and mail originating from the &hilippines in a continuous and uninterrupted flight, irrespecti!e of the place of sale or issue and the place of payment of the ticket or passage document' &ro!ided, hat tickets re!alidated, exchanged and)or indorsed to another international airline form part of the #ross &hilippine %illings if the passenger boards a plane in a port or point in the &hilippines' &ro!ided, further, hat for a flight which originates from the

Sec. #!. #E$ *inimu m Corpora t e "ncome (ax on omestic Corpora tions. 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimu m ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimu m /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less

94

INCOME TAX REVIEWER


&hilippines, but transshipment of passenger takes place at any port outside the &hilippines on another airline, only the ali.uot portion of the cost of the ticket corresponding to the leg flown from the &hilippines to the point of transshipment shall form part of #ross &hilippine %illings. 8b; International 2hipping. * N#ross &hilippine %illingsN means gross re!enue whether for passenger, cargo or mail originating from the &hilippines up to final destination, regardless of the place of sale or payments of the passage or freight documents. 8L; 9ffshore %anking 1nits. * he pro!isions of any law to the contrary notwithstanding, income deri!ed by offshore banking units authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with offshore banking units, including any interest income deri!ed from foreign currency loans granted to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with said offshore banking units shall be exempt from income tax. 8C; ax on %ranch &rofits "emittances. * Any profit remitted by a branch to its head office shall be subKect to a tax of fifteen 8+CE; which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof 8except those acti!ities which are registered with the &hilippine 0conomic Uone Authority;. he tax shall be collected and paid in the same manner as pro!ided in 2ections C5 and C: of this /ode' pro!ided, that interests, di!idends, rents, royalties, including remuneration for technical ser!ices, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains recei!ed by a foreign corporation during each taxable year from all sources within the &hilippines shall not be treated as branch profits unless the same are effecti!ely connected with the conduct of its trade or business in the &hilippines. 8B; "egional or Area $ead.uarters and "egional 9perating $ead.uarters of Jultinational /ompanies. 8a; "egional or area head.uarters as defined in 2ection --8<<; shall not be subKect to income tax. 8b; "egional operating head.uarters as defined in 2ection --800; shall pay a tax of ten percent 8+=E; of their taxable income. 85; ax on /ertain Incomes "ecei!ed by a "esident (oreign /orporation. * 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. 8b; Income <eri!ed under the 0xpanded (oreign /urrency <eposit 2ystem. * Income deri!ed by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the %angko 2entral ng &ilipinas 8%2&; to transact business with foreign currency deposit system units, including interest income from foreign currency loans granted by such depository banks under said expanded foreign currency deposit system to residents, shall be subKect to a final income tax at the rate of ten percent 8+=E; of such income. Any income of nonresidents, whether indi!iduals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax. 8c; /apital #ains from 2ale of 2hares of 2tock Not raded in the 2tock 0xchange. * A final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange' Not o!er &+==,===PPPPPPPPPP CE 9n any amount in excess of &+==,===PP. +=E 8d; Intercorporate <i!idends. * <i!idends recei!ed by a resident foreign corporation from a domestic corporation liable to tax under this /ode shall not be subKect to tax under this itle. R9D9"U9 R9:UAATIO" 9- 9$. a. ?hen imposed Sec. #.# ! '9) '1) RR 9- 9$ /onditions' beginning on the L th taxable year immediately ff. the year in w)c such corp. commenced its business operations, when the min income tax is greater than the tax regular tax 2pecific rules' Sec. #.! ! '9) '*) RR 9- 9$. b. tax rate T -E of gross income as of the end of the taxable year Sec. #! '9). #=$ Gross "ncome efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.

95

INCOME TAX REVIEWER


(or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to pro!ide the ser!ices re.uired by the customers and clients including 8A; salaries and employee benefits of personnel, consultants and specialists directly rendering the ser!ice and 8%; cost of facilities directly utilized in pro!iding the ser!ice such as depreciation or rental of e.uipment used and cost of supplies' &ro!ided, howe!er, hat in the case of banks, Ncost of ser!icesN shall include interest expense. H normal tax rateI defined in 2ec. -.-5 80; 8+; "" 3* 3: c. /arry forward of excess min tax T for the 4 immediately succeeding taxable years. 4. IJ&92I I9N 9( IJ&"9&0"7D A//1J17A 0< 0A"NIN#2 AO. a. #en. rule S9&. # J. "mposition of "mprope rly Accumula t e d Earnings (ax. 6 8A; In #eneral. * In addition to other taxes imposed by this itle, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in 2ubsection % hereof, an improperly accumulated earnings tax e.ual to ten percent 8+=E; of the improperly accumulated taxable income. b. c. ax rate' +=E of the improperly accumulated taxable income ?hen applicable

Sec. #! 9. #B$ Carry +rowa rd of Excess *inimu m (ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. See i((ustra tion in RR 9- 9$ d. "elief fr. the J/I

Sec. #9. #4$ (ax on Corpora tions %ub>ect to "mprope rly Accumula t e d Earnings (ax. 8+; In #eneral. * he improperly accumulated earnings tax imposed in the preceding 2ection shall apply to e!ery corporation formed or a!ailed for the purpose of a!oiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being di!ided or distributed. 8-; 0xceptions. * he improperly accumulated earnings tax as pro!ided for under this 2ection shall not apply to' 8a; &ublicly* held corporations, 8b; %anks and other nonbank intermediaries, and 8c; Insurance companies. 8d; 0xceptions.

financial

Sec. #! '9) #2$ &elief from the *inimu m Corpora t e "ncome (ax Inder Certain Conditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. ?hen corp. suffers losses on account prolonged labor dispute, 9r because of force maKeure, 9r because of legit business re!erses. e. 0xceptions' Sec. #.# ! '9) '$) RR 9- 9$ Sec. #.# $ 'A) '#) RR 9- 9$ of

&ublicly* held corps., %anks and other intermediaries, and Insurance companies.

nonbank

financial

e. 0!idence of purpose to a!oid income tax f. 0!idence to determine needs of business reasonable taxable income

g. Improperly accumulated income means taxable adKusted by'

Income exempt fr. tax, Income excluded fr. gross income, Income subKect to final tax, & he amount of net operating loss carry* o!er deducted, And reduced by the sum of'

96

INCOME TAX REVIEWER


<i!idends actually or constructi!ely paid, and Income tax paid for the taxable year. (. IN<I6I<1A7 IN/9J0 AO AO&AD0"2 0O0J& ("9J #o!t. he obli. to fulfill in #( a treaty engagement re.uires that the stipulations be obser!ed in their spirit as well as accdg. to their letter & that what has been promised be performed w)o e!asion or subterfuge. DIII. 1IAI": O1 TAE R9TUR". +AB,9"T O1 TAE. &O,+AIA"&9 R97UIR9,9"TS.

+. 2enior citizens &A E=2 B . %ec. C he go!t shall pro!ide the ff. assistance to those caring for & li!ing w) the senior citizen' a; the senior citizen shall be treated as dependents pro!ided in the NI"/ & as such, indi!idual taxVpayers caring for them, be they relati!es or not shall be accorded the pri!ileges granted by the /ode insofar as ha!ing dependents are concerned. b; Ind. or non* go!ernmental institutions establishing homes, residential communities or retirement !illages solely for the senior citizens shall be accorded the ff.' +. realty tax holiday for the first C years starting fr. the first year of operation, -. &riority in the bldg. &) or maintenance of pro!. or mun. roads leading to the aforesaid home, res. com. & retirement !illage. &ev. &eg. B- J= KE. A .ualified senior citizen li!ing w) & taken care of by a benefactor whether related to him or not, shall be treated as a personal exemption of &+-,=== as head of the family. (or the purpose of claiming personal exemption as head of the family w) dependent senior citizen, the identification card number issued by the 92/A 89ffice for 2enior /itizens Affairs; shall be indicated in the Income ax "eturn to be filed by the benefactor who will be granted the exclusi!e right to claim him as dependent for tax purposes. /aring for a dependent senior citizen shall not, howe!er, entitle the benefactor to claim additional exemption allowable to a married woman or head of a family w) .ualified dependent children under 2ection -3 8l; -. In 2hort' 2enior citizen as a .ualified dependent to enable Hsingle I benefactor to claim exemption as head* of*the* family. -. 0xemptions granted under International Agreements and tax treaty Rea-an v. &om,2 su8ra &om. v. Ro<ertson 1acts2 he "obertsons are &hil. born 12 citizens working in the 12 bases in 2ubic. hey are claiming exemptions under the "& 12 Jil. %ases Agreement of +3L5 fr. income tax. he %I" ruled that the "obertsons are not entitled to the exemption as they are born in the &hils. 3e(d2 he "obertsons are exempt fr. taxation by !irtue of the treaty. In order to a!ail oneself of the tax exemption under the "& 12 mil. %ases Agreement' he must be a national of the 12 employed in connection w) the const., maintenance, operation or defense of the bases residing in the &hils. by reason of such employment & the income deri!ed is fr. the 12

A. IN<I6I<1A7. Sec. #.$ 3 '%) RR #- 9$ %EC. C1. "ndividual &eturn. 8A; "e.uirements. * 8+; 0xcept as pro!ided in paragraph 8-; of this 2ubsection, the following indi!iduals are re.uired to file an income tax return' 8a; 0!ery (ilipino citizen residing in the &hilippines, 8b; 0!ery (ilipino citizen residing outside the &hilippines, on his income from sources within the &hilippines, 8c; 0!ery alien residing in the &hilippines, on income deri!ed from sources within the &hilippines, and 8d; 0!ery nonresident alien engaged in trade or business or in the exercise of profession in the &hilippines. 8-; he following indi!iduals shall not be re.uired to file an income tax return, 8a; An indi!idual whose gross income does not exceed his total personal and additional exemptions for dependents under 2ection 4C' &ro!ided, hat a citizen of the &hilippines and any alien indi!idual engaged in business or practice of profession within the &hilippine shall file an income tax return, regardless of the amount of gross income, 8b; An indi!idual with respect to pure compensation income, as defined in 2ection 48A;8+;, deri!ed from sources within the &hilippines, the income tax on which has been correctly withheld under the pro!isions of 2ection 53 of this /ode' &ro!ided, hat an indi!idual deri!ing compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return' &ro!ided, further, hat an indi!idual whose compensation income deri!ed from sources within the &hilippines exceeds 2ixty thousand pesos 8&B=,===; shall also file an income tax return, 8c; An indi!idual whose sole income has been subKected to final withholding tax pursuant to 2ection C58A; of this /ode, and 8d; An indi!idual who is exempt from income tax pursuant to the pro!isions of this /ode and other laws, general or special. 84; he forgoing notwithstanding, any indi!idual not re.uired to file an income tax return may ne!ertheless be re.uired to file an information return pursuant to rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8L; he income tax return shall be filed in duplicate by the following persons'

97

INCOME TAX REVIEWER


8a; A resident citizen * on his income from all sources, 8b; A nonresident citizen * on his income deri!ed from sources within the &hilippines, 8c; A resident alien * on his income deri!ed from sources within the &hilippines, and 8d; A nonresident alien engaged in trade or business in the &hilippines * on his income deri!ed from sources within the &hilippines. 8%; ?here to (ile. * 0xcept in cases where the /ommissioner otherwise permits, the return shall be filed with an authorized agent bank, "e!enue <istrict 9fficer, /ollection Agent or duly authorized reasurer of the city or municipality in which such person has his legal residence or principal place of business in the &hilippines, or if there be no legal residence or place of business in the &hilippines, with the 9ffice of the /ommissioner. 8/; ?hen to (ile. * 8+; he return of any indi!idual specified abo!e shall be filed on or before the fifteenth 8+Cth; day of April of each year co!ering income for the preceding taxable year. 8-; Indi!iduals subKect to tax on capital gains, 8a; (rom the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under 2ection -L8c; shall file a return within thirty 84=; days after each transaction and a final consolidated return on or before April +C of each year co!ering all stock transactions of the preceding taxable year, and 8b; (rom the sale or disposition of real property under 2ection -L8<; shall file a return within thirty 84=; days following each sale or other disposition. 8<; $usband and ?ife. * Jarried indi!iduals, whether citizens, resident or nonresident aliens, who do not deri!e income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the %ureau for purposes of !erification for the taxable year. 80; "eturn of &arent to Include Income of /hildren. * he income of unmarried minors deri!ed from properly recei!ed from a li!ing parent shall be included in the return of the parent, except 8+; when the donorNs tax has been paid on such property, or 8-; when the transfer of such property is exempt from donorNs tax. 8(; &ersons 1nder <isability. * If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representati!e or by the guardian or other person charged with the care of his person or property, the principal and his representati!e or guardian assuming the responsibility of making the return and incurring penalties pro!ided for erroneous, false or fraudulent returns. 8#; 2ignature &resumed /orrect. * he fact that an indi!idualNs name is signed to a filed return shall be prima facie e!idence for all purposes that the return was actually signed by him. +. Indi!idual taxpayers %EC. C1. "ndividual &eturn. #A$ &e:uire m e n ts . 8+; 0xcept as pro!ided in paragraph 8-; of this 2ubsection, the following indi!iduals are re.uired to file an income tax return' 8a; 0!ery (ilipino citizen residing in the &hilippines, 8b; 0!ery (ilipino citizen residing outside the &hilippines, on his income from sources within the &hilippines, 8c; 0!ery alien residing in the &hilippines, on income deri!ed from sources within the &hilippines, and 8d; 0!ery nonresident alien engaged in trade or business or in the exercise of profession in the &hilippines. 8-; he following indi!iduals shall not be re.uired to file an income tax return, 8a; An indi!idual whose gross income does not exceed his total personal and additional exemptions for dependents under 2ection 4C' &ro!ided, hat a citizen of the &hilippines and any alien indi!idual engaged in business or practice of profession within the &hilippine shall file an income tax return, regardless of the amount of gross income, 8b; An indi!idual with respect to pure compensation income, as defined in 2ection 48A;8+;, deri!ed from sources within the &hilippines, the income tax on which has been correctly withheld under the pro!isions of 2ection 53 of this /ode' &ro!ided, hat an indi!idual deri!ing compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return' &ro!ided, further, hat an indi!idual whose compensation income deri!ed from sources within the &hilippines exceeds 2ixty thousand pesos 8&B=,===; shall also file an income tax return, 8c; An indi!idual whose sole income has been subKected to final withholding tax pursuant to 2ection C58A; of this /ode, and 8d; An indi!idual who is exempt from income tax pursuant to the pro!isions of this /ode and other laws, general or special. a. "e.uired to file b. 0xempt fr. filing return -. (iling of return by husband & wife) consolidated but computing separately Sec. *1. # $ 9usband and !ife. * Jarried indi!iduals, whether citizens, resident or nonresident aliens, who do not deri!e income purely from compensation, shall file a return for the taxable year to include the income of both spouses, but where it is impracticable for the spouses to file one return, each spouse may file a separate return of income but the returns so filed shall be consolidated by the %ureau for purposes of !erification for the taxable year.

98

INCOME TAX REVIEWER


Sec. #.$ 3 '%C '&) RR #- 9$ 4. ?hen and where to file regular) special return) annual adKusted return) .uarterly returns Sec. *1. #4$ !here to +ile . * 0xcept in cases where the /ommissioner otherwise permits, the return shall be filed with an authorized agent bank, "e!enue <istrict 9fficer, /ollection Agent or duly authorized reasurer of the city or municipality in which such person has his legal residence or principal place of business in the &hilippines, or if there be no legal residence or place of business in the &hilippines, with the 9ffice of the /ommissioner. 8/; ?hen to (ile. * 8+; he return of any indi!idual specified abo!e shall be filed on or before the fifteenth 8+Cth; day of April of each year co!ering income for the preceding taxable year. 8-; Indi!iduals subKect to tax on capital gains, 8a; (rom the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under 2ection -L8c; shall file a return within thirty 84=; days after each transaction and a final consolidated return on or before April +C of each year co!ering all stock transactions of the preceding taxable year, and 8b; (rom the sale or disposition of real property under 2ection -L8<; shall file a return within thirty 84=; days following each sale or other disposition. S9&. !%. eclara tion of "ncome (ax for "ndividuals. #A$ "n General. * 0xcept as otherwise pro!ided in this 2ection, e!ery indi!idual subKect to income tax under 2ections -L and -C8A; of this itle, who is recei!ing self* employment income, whether it constitutes the sole source of his income or in combination with salaries, wages and other fixed or determinable income, shall make and file a declaration of his estimated income for the current taxable year on or before April +C of the same taxable year. In general, self* employment income consists of the earnings deri!ed by the indi!idual from the practice of profession or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member. Nonresident (ilipino citizens, with respect to income from without the &hilippines, and nonresident aliens not engaged in trade or business in the &hilippines, are not re.uired to render a declaration of estimated income tax. he declaration shall contain such pertinent information as the 2ecretary of (inance, upon recommendation of the /ommissioner, may, by rules and regulations prescribe. An indi!idual may make amendments of a declaration filed during the taxable year under the rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. '4) Return and +a5men t of 9stima te d Income Tax <5 Individua(s . * he amount of estimated income as defined in 2ubsection 8/; with respect to which a declaration is re.uired under 2ubsection 8A; shall be paid in four 8L; installments. he first installment shall be paid at the time of the declaration and the second and third shall be paid on August +C and No!ember +C of the current year, respecti!ely. he fourth installment shall be paid on or before April +C of the following calendar year when the final adKusted income tax return is due to be filed. '&) Definition of 9stima te d Tax. * In the case of an indi!idual, the term @estima t e d tax@ means the amount which the indi!idual declared as income tax in his final adKusted and annual income tax return for the preceding taxable year minus the sum of the credits allowed under this itle against the said tax. If, during the current taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall file an amended declaration during any inter!al of installment payment dates. &evenue &egulation E- J2 &e, +iling of :uarte rly return 0 payme n t of income tax :uarte rly by self- employe d taxpay e rs Sec. 1 2elf*employment income refers to income from the practice of profession or conduct of trade or business carried on as a sole proprietor or by general partnership of which he is a member, taxable under 2NI 2. Sec. # A return of summary declaration of gross income and deductions for each of the first 4 .uarters of the calendar year, and a final or adKustment return shall be filed by the indi!idual. Sec. 3 his is lieu of the filing of a declaration of estimated income for the current taxable year and the payment of estimated tax under 2ec. B5 NI"/. %#e ta& ret"rns s#all be !iled on or be!ore: (irst .uarterly return year 2econd .uarterly return current year hird .uarterly return year (inal return ' April ' Jay +C of the current ' August +C of the

' No!. +C of the current +C of the following year

%ec. C o determine the taxable income to be reported in the .uarterly returns, the gross income and deductions shall be computed on a cumulati!e basis. he gross income to be reported are those subKect to tax under 2ec. -+ 8f; NI"/. he deduction shall be computed on a cumulati!e basis. he gross income to be reported are those subKect to tax under 2ec. -+ 8(; NI"/. he deductions that shall be allowed for the first 4 .uarters shall not include the amount for the personal and additional exemptions of the indi!idual. It is only in the last .uarter when these amounts for exemptions can be claimed as deduction. Income tax due e!ery .uarter shall be computed in accordance with 2ec. -+ 8f; based on the cumulati!e taxable income for the .uarters. he amount if income tax to be paid shall be the balance of the income tax after deducting

99

INCOME TAX REVIEWER


therefrom the total .uarterly tax pre!iously paid and any taxes withheld. Any excess of the total .uarterly payment and taxes withheld o!er the income tax computed in the final return shall at the option of the taxpayer, either be 8+; issued a tax refund or tax credit certificate, or 8-; treated as a credit for the succeeding year. &evenue &egulation 1=- J2 payme n t of taxes by checks 0 banks debit memo %ec. B H&ayment of the internal re!enue taxes amounting to &+=,=== or more shall be made in check or bank debit memos. $owe!er, payment for capital gains tax and creditable withholding tax by indi!iduals on sales or transfers of real property classified as capital assets as well as doc stamp tax shall be made only by or through Janagers or /ashiers check or %<J regardless of amount. &ro!ided, that, in the case of check payment, the taxpayer shall issue a separate check for each kind and nature of tax to be paid. If the payment is through a %<J, the kind and nature of the tax to be paid should also be separately identified by the bank and reflected in its reports. 9nly checks specially issued and drawn for credit to %I" and collectible within the local clearing facilities of the /%, the &hil. /learing $ouse /orp., other established clearing channels may be accepted as payment for national internal re!enue taxes. $owe!er, the following checks are not acceptable' a; Accommoda ti on checks * issued)drawn by a party other than the taxpayer except the following' +. Janagers or cashiers checks. -. /hecks drawn against Koint or multiple accounts for the payment purposes by anyone of them or either himself or in behalf of other members thereof. 4. /hecks issued by either of the spouses to pay the tax liability of anyone of them. L. /hecks issued by a parent for the tax liability of his)her child or !ice* !ersa. C. /hecks drawn by a corp.)partnership for the tax liability of its officers)partners only, and B. 9ther special, arrangements duly appro!ed by the %I". b; 3ut of town checks * drawn on banks outside the local area co!erage of the /%M &/$/ clearing house c; %tale checks * dated more than B months prior to presentation d; postda te d checks e; unsigne d checks , and f; checks with unauthori<ed erasure7al te rn a ti ons Sec. 3 HP/hecks, including managers or cashiers checks, shall be made payable to the %I" and parenthetical reference to the payor and the kind of tax to be paid.I L. Income of minor children and disabled Sec. *1. #E$ &eturn of 'arent to "nclude "ncome of Children. * he income of unmarried minors deri!ed from properly recei!ed from a li!ing parent shall be included in the return of the parent, except 8+; when the donorNs tax has been paid on such property, or 8-; when the transfer of such property is exempt from donorNs tax. 8(; &ersons 1nder <isability. * If the taxpayer is unable to make his own return, the return may be made by his duly authorized agent or representati!e or by the guardian or other person charged with the care of his person or property, the principal and his representati!e or guardian assuming the responsibility of making the return and incurring penalties pro!ided for erroneous, false or fraudulent returns. C. #eneral professional partnership %EC. CC. &eturns of General 'rofessional 'artne rships . * 0!ery general professional partnership shall file, in duplicate, a return of its income, except income exempt under 2ection 48%; of this itle, setting forth the items of gross income and of deductions allowed by this itle, and the names, axpayer Identification Numbers 8 IN;, addresses and shares of each of the partners. B. (iduciary taxpayers' 0state and trust 5. &ayment of tax %EC. CD. 'aymen t and Assessment of "ncome (ax for "ndividuals and Corpora tion. #A$ 'ayme n t of (ax. 8+; In #eneral. * he total amount of tax imposed by this itle shall be paid by the person subKect thereto at the time the return is filed. In the case of tramp !essels, the shipping agents and)or the husbanding agents, and in their absence, the captains thereof are re.uired to file the return herein pro!ided and pay the tax due thereon before their departure. 1pon failure of the said agents or captains to file the return and pay the tax, the %ureau of /ustoms is hereby authorized to hold the !essel and pre!ent its departure until proof of payment of the tax is presented or a sufficient bond is filed to answer for the tax due. 8-; Installment of &ayment. * ?hen the tax due is in excess of wo thousand pesos 8&-,===;, the taxpayer other than a corporation may elect to pay the tax in two 8-; e.ual installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before Ruly +C following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delin.uency penalties. 84; &ayment of /apital #ains ax. * he total amount of tax imposed and prescribed under 2ection -L 8c;, -L8<;, -580;8-;, -:8A;8:;8c; and

100

INCOME TAX REVIEWER


-:8%;8C;8c; shall be paid on the date the return prescribed therefor is filed by the person liable thereto' &ro!ided, hat if the seller submits proof of his intention to a!ail himself of the benefit of exemption of capital gains under existing special laws, no such payments shall be re.uired ' &ro!ided, further, hat in case of failure to .ualify for exemption under such special laws and implementing rules and regulations, the tax due on the gains realized from the original transaction shall immediately become due and payable, subKect to the penalties prescribed under applicable pro!isions of this /ode' &ro!ided, finally, hat if the seller, ha!ing paid the tax, submits such proof of intent within six 8B; months from the registration of the document transferring the real property, he shall be entitled to a refund of such tax upon !erification of his compliance with the re.uirements for such exemption. SIn case the taxpayer elects and is .ualified to report the gain by installments under 2ection L3 of this /ode, the tax due from each installment payment shall be paid within 84=; days from the receipt of such payments. No registration of any document transferring real property shall be effected by the "egister of <eeds unless the /ommissioner or his duly authorized representati!e has certified that such transfer has been reported, and the tax herein imposed, if any, has been paid. 8%; Assessment and &ayment of <eficiency ax. * After the return is filed, the /ommissioner shall examine it and assess the correct amount of the tax. he tax or deficiency income tax so disco!ered shall be paid upon notice and demand from the /ommissioner. As used in this /hapter, in respect of a tax imposed by this itle, the term NdeficiencyN means' 8+; he amount by which the tax imposed by this itle exceeds the amount shown as the tax by the taxpayer upon his return, but the amount so shown on the return shall be increased by the amounts pre!iously assessed 8or collected without assessment; as a deficiency, and decreased by the amount pre!iously abated, credited, returned or otherwise repaid in respect of such tax, or 8-; If no amount is shown as the tax by the taxpayer upon this return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts pre!iously assessed 8or collected without assessment; as a deficiency, but such amounts pre!iously assessed or collected without assessment shall first be decreased by the amounts pre!iously abated, credited returned or otherwise repaid in respect of such tax. Installment payment special returns %. /orporation. +. (iling .uarterly returns) final adKusted return corporations not engaged in trade or business in the &hilippines, shall render, in duplicate, a true and accurate .uarterly income tax return and final or adKustment return in accordance with the pro!isions of /hapter OII of this itle. he return shall be filed by the president, !ice* president or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer. 8%; axable Dear of /orporation. * A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return' &ro!ided, hat the corporation shall not change the accounting period employed without prior appro!al from the /ommissioner in accordance with the pro!isions of 2ection L5 of this /ode. 8/; "eturn of /orporation /ontemplating <issolution or "eorganization. * 0!ery corporation shall, within thirty 84=; days after the adoption by the corporation of a resolution or plan for its dissolution, or for the li.uidation of the whole or any part of its capital stock, including a corporation which has been notified of possible in!oluntary dissolution by the 2ecurities and 0xchange /ommission, or for its reorganization, render a correct return to the /ommissioner, !erified under oath, setting forth the terms of such resolution or plan and such other information as the 2ecretary of (inance, upon recommendation of the commissioner, shall, by rules and regulations, prescribe. he dissol!ing or reorganizing corporation shall, prior to the issuance by the 2ecurities and 0xchange /ommission of the /ertificate of <issolution or "eorganization, as may be defined by rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, secure a certificate of tax clearance from the %ureau of Internal "e!enue which certificate shall be submitted to the 2ecurities and 0xchange /ommission. 8<; "eturn on /apital #ains "ealized from 2ale of 2hares of 2tock not raded in the 7ocal 2tock 0xchange. * 0!ery corporation deri!ing capital gains from the sale or exchange of shares of stock not traded through a local stock exchange as prescribed under 2ections -L 8c;, -C 8A;84;, -5 80;8-;, -:8A;8:;8c; and -: 8%;8C;8c;, shall file a return within thirty 84=; days after each transactions and a final consolidated return of all transactions during the taxable year on or before the fifteenth 8+Cth; day of the fourth 8Lth; month following the close of the taxable year. %EC. C2. Extension of (ime to +ile &eturns . * he /ommissioner may, in meritorious cases, grant a reasonable extension of time for filing returns of income 8or final and adKustment returns in case of corporations;, subKect to the pro!isions of 2ection CB of this /ode. %EC. C=. &eturns of &eceivers5 (rustees in 4ankrup tcy or Assignees. * In cases wherein recei!ers, trustees in bankruptcy or assignees are operating the property or business of a corporation, subKect to the tax imposed by this itle, such recei!ers, trustees or assignees shall make returns of net income as and for such corporation, in the same manner and form as such organization is hereinbefore re.uired to make returns, and any tax due on the income as returned by recei!ers, trustees or assignees shall be assessed and collected in the same manner as

%EC. CB. Corpora tion &eturns. 8A; "e.uirements. * 0!ery corporation subKect to the tax herein imposed, except foreign

101

INCOME TAX REVIEWER


if assessed directly against the organizations of whose businesses or properties they ha!e custody or control. S9&. !* . - eclara tion of Luarte rly Corpora te "ncome (ax. * 0!ery corporation shall file in duplicate a .uarterly summary declaration of its gross income and deductions on a cumulati!e basis for the preceding .uarter or .uarters upon which the income tax, as pro!ided in itle II of this /ode, shall be le!ied, collected and paid. he tax so computed shall be decreased by the amount of tax pre!iously paid or assessed during the preceding .uarters and shall be paid not later than sixty 8B=; days from the close of each of the first three 84; .uarters of the taxable year, whether calendar or fiscal year. %EC. ED. - +inal Ad>ustme n t &eturn. - 0!ery corporation liable to tax under 2ection -5 shall file a final adKustment return co!ering the total taxable income for the preceding calendar or fiscal year. If the sum of the .uarterly tax payments made during the said taxable year is not e.ual to the total tax due on the entire taxable income of that year, the corporation shall either' 8A;&ay the balance of tax still due, or 8%;/arry* o!er the excess credit, or 8/;%e credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated .uarterly income taxes paid, the excess amount shown on its final adKustment return may be carried o!er and credited against the estimated .uarterly income tax liabilities for the taxable .uarters of the succeeding taxable years. 9nce the option to carry* o!er and apply the excess .uarterly income tax against income tax due for the taxable .uarters of the succeeding taxable years has been made, such option shall be considered irre!ocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. %EC. EE. 'lace and (ime of +iling and 'aymen t of Luarte rly Corpora te "ncome (ax. 8A;&lace of (iling. *0xcept as the /ommissioner other wise permits, the .uarterly income tax declaration re.uired in 2ection 5C and the final adKustment return re.uired I 2ection 5B shall be filed with the authorized agent banks or "e!enue <istrict 9fficer or /ollection Agent or duly authorized reasurer of the city or municipality ha!ing Kurisdiction o!er the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. 8%; ime of (iling the Income ax "eturn. * he corporate .uarterly declaration shall be filed within sixty 8B=; days following the close of each of the first three 84; .uarters of the taxable year. he final adKustment return shall be filed on or before the fifteenth 8+C th ; day of April, or on or before the fifteenth 8+C th ; day of the fourth 8L th ; month following the close of the fiscal year, as the case may be. 8/; ime of &ayment of the Income ax. * he income tax due on the corporate .uarterly returns and the final adKustment income tax returns computed in accordance with 2ections 5C and 5B shall be paid at the time the declaration or return is filed in a manner prescribed by the /ommissioner. %EC. =E. +inal or Ad>ustm e n t &eturns for a 'eriod of Less than (welve #1B$ *onths. 8A; "eturns for 2hort &eriod "esulting from /hange of Accounting &eriod. * If a taxpayer, other than an indi!idual, with the appro!al of the /ommissioner, changes the basis of computing net income from fiscal year to calendar year, a separate final or adKustment return shall be made for the period between the close of the last fiscal year for which return was made and the following <ecember 4+. If the change is from calendar year to fiscal year, a separate final or adKustment return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year, a separate final or adKustment return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year. 8%; Income /omputed on %asis of 2hort &eriod. * ?here a separate final or adKustment return is made under 2ubsection 8A; on account of a change in the accounting period, and in all other cases where a separate final or adKustment return is re.uired or permitted by rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate final or adKustment return is made. -. ?hen and where to file

%EC. EE. 'lace and (ime of +iling and 'aymen t of Luarte rly Corpora te "ncome (ax. 8A;&lace of (iling. *0xcept as the /ommissioner other wise permits, the .uarterly income tax declaration re.uired in 2ection 5C and the final adKustment return re.uired I 2ection 5B shall be filed with the authorized agent banks or "e!enue <istrict 9fficer or /ollection Agent or duly authorized reasurer of the city or municipality ha!ing Kurisdiction o!er the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. 8%; ime of (iling the Income ax "eturn. * he corporate .uarterly declaration shall be filed within sixty 8B=; days following the close of each of the first three 84; .uarters of the taxable year. he final adKustment return shall be filed on or before the fifteenth 8+C th ; day of April, or on or before the fifteenth 8+C th ; day of the fourth 8L th ; month following the close of the fiscal year, as the case may be. 8/; ime of &ayment of the Income ax. * he income tax due on the corporate .uarterly returns and the final adKustment income tax

102

INCOME TAX REVIEWER


returns computed in accordance with 2ections 5C and 5B shall be paid at the time the declaration or return is filed in a manner prescribed by the /ommissioner. &om. v. T,E Sa(es 1acts2 JO filed its .uarterly return in the first .uarter of +3:+ & paid the income tax due thereon. $owe!er, in its Annual Income ax filed for year ended <ec. 4+, +3:+, it declared a net loss. JO is now claiming a refund on the tax it paid during the first .uarter of +3:+. he /I" denied the same on the ground that the claim is now already barred considering that two years ha!e already elapsed between the time of payment, Jay, +C, +3:+ & the filing of the claim, Jarch +L, +3:L. 3e(d ' the two year prescripti!e period commenced fr. the date of filing the final annual return on Apr. +C, +3:-, not fr. the filing on Jay +C, +3:+. he audit is to be conducted yearly, it is the final adKusted return where the figures of the gross receipts & deductions ha!e been audited & adKusted that is truly reflecti!e of the results of the operations of a business enterprise. hus, it is only when the adKustment return co!ering the whole year is filed that the taxpayer would know whether a tax is still due or refund can be claimed based on the adKusted & audited figures. he filing of .uarterly I "s re.. by 2ec. B: & payment of .uarterly income tax should be considered mere installments of the annual tax due. these payments w)c are computed based on the cumulati!e figures of gross receipts & deductions in order to arri!e at net taxable income shld. be treated as ad!ances on portions of annual income tax due, to be adKusted at the end of the fiscal year. A&&RA Investm e n t v. &A 1acts2 &etitioner A//"A is a domestic /orporation engaged in bus. of real estate in!est. & management consultancy. 9n Apr. +C, +3:-, pet. filed w) %I" annual corp. income tax return for cal. year ending <ec. 4+, +3:+ 8 he end of fiscal year of the corp. ;. he corp. declared a net loss of -,3C5,+L-.== & declared all taxes w)held at source by w)holding agents in the total amount of :-, 5C+.=+. he w)holding agents remitted the w)held taxes to the %I" fr. (eb. to <ec. +3:+. he corp. is now claiming a refund as it had no tax liability against w)c to credit the amounts w)held 8 the corp. declared a loss;, as o!erpaid income taxes. he / A dismissed the pet. on the ground that the claim for refund had already prescribed . 3e(d2 /laims for tax refunds, accdg. to 2ec. : of "e!. "eg. +4* 5: shall be gi!en in due course only when it is shown on the return that the income payment recei!ed was declared as part of the gross income & the fact of w)holding is established by a copy of the statement. (urthermore, the return contemplated under the "06. "eg. is not the .uarterly ret. filed by corp. but the final adKusted return filed after the close of the fiscal year. 9b!iously, the corp. cannot claim a tax refund 1N7022 it files its return first so that it can be det. ?9N it is really entitled to the refund. hus, the tow year period should commence, at the latest, fr. the time of filing the final adK., return, w)c in /A%, on Apr. +C, +3:+. San &ar(os ,i((in- &o. v. &om. 1acts2 2/J is a domestic corp. & paid its taxes for +3:-. It an o!erpayment reflected as creditable income tax in its annual final adK. return. In +3:L, 2/J informed the /I" of its intent to apply the total creditable amount against the +3:L tax dues consistent w) 2ec. :B coupled w) a comforting alternati!e re.uest for a refund or tax credit. he /I" disallowed the automatic credit scheme & held that prior authority fr. the /I" is nec. before a taxpayer could a!ail of the pro!isions of 2ec. :B of the ax /ode. 3e(d2 he choice of a corporate taxpayer for an automatic tax credit does not ipso facto confer on it the right to immediately a!ail of the same. prior appro!al by the /I" of the tax credit is nec. An opportunity must be gi!en to the internal re!. branch of the go!t to in!estigate & confirm the !eracity of the claims of the taxpayer. /. ?ithholding of IN/9J0 tax Rev. Re-. #- 9$. %EC. CE. !ithholding of (ax at %ource. 8A; ?ithholding of (inal ax on /ertain Incomes. * 2ubKect to rules and regulations the 2ecretary of (inance may promulgate, upon the recommendation of the /ommissioner, re.uiring the filing of income tax return by certain income payees, the tax imposed or prescribed by 2ections -L8%;8+;, -L8%;8-;, -L8/;, -L8<;8+;, -C8A; 8-;, -C8A;84;, -C8%;, -C8/;, -C8<;, -C80;, -58<;8];, -58<;8-;, -58<;84;, -58<;8C;, -: 8A;8L;, -:8A;8C;, -:8A;85;8a;, -:8A;85;8b;, -:8A;85;8c;, -:8%;8+;, -:8%;8-;, -:8%;84;, -:8%;8L;, -:8%;8C;8a;, -:8%;8C; 8b;, -:8%;8C;8c;, 44, and -:- of this /ode on specified items of income shall be withheld by payor* corporation and)or person and paid in the same manner and subKect to the same conditions as pro!ided in 2ection C: of this /ode. 8%; ?ithholding of /reditable ax at 2ource. * he 2ecretary of (inance may, upon the recommendation of the /ommissioner, re.uire the withholding of a tax on the items of income payable to natural or Kuridical persons, residing in the &hilippines, by payor* corporation)persons as pro!ided for by law, at the rate of not less than one percent 8+E; but not more than thirty* two percent 84-E; thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. 8/; ax* free /o!enant %onds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or pro!isions by which the obligor agrees to pay any portion of the tax imposed in this itle upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be re.uired or permitted to pay thereon or to retain therefrom under any law of the &hilippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the

103

INCOME TAX REVIEWER


interest or other payment thereon paid, within or without the &hilippines, if the interest or other payment is payable to a nonresident alien or to a citizen or resident of the &hilippines. %EC. CG. &eturns and 'ayme n t of (axes !ithhel d at %ource. 8A; Guarterly "eturns and &ayments of axes ?ithheld. * axes deducted and withheld under 2ection C5 by withholding agents shall be co!ered by a return and paid to, except in cases where the /ommissioner otherwise permits, an authorized reasurer of the city or municipality where the withholding agent has his legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located. he taxes deducted and withheld by the withholding agent shall be held as a special fund in trust for the go!ernment until paid to the collecting officers. he return for final withholding tax shall be filed and the payment made within twenty* fi!e 8-C; days from the close of each calendar .uarter, while the return for creditable withholding taxes shall be filed and the payment made not later than the last day of the month following the close of the .uarter during which withholding was made' &ro!ided, hat the /ommissioner, with the appro!al of the 2ecretary of (inance, may re.uire these withholding agents to pay or deposit the taxes deducted or withheld at more fre.uent inter!als when necessary to protect the interest of the go!ernment. 8%; 2tatement of Income &ayments Jade and axes ?ithheld. * 0!ery withholding agent re.uired to deduct and withhold taxes under 2ection C5 shall furnish each recipient, in respect to his or its receipts during the calendar .uarter or year, a written statement showing the income or other payments made by the withholding agent during such .uarter or year, and the amount of the tax deducted and withheld therefrom, simultaneously upon payment at the re.uest of the payee, but not late than the twentieth 8-=th; day following the close of the .uarter in the case of corporate payee, or not later than Jarch + of the following year in the case of indi!idual payee for creditable withholding taxes. (or final withholding taxes, the statement should be gi!en to the payee on or before Ranuary 4+ of the succeeding year. 8/; Annual Information "eturn. * 0!ery withholding agent re.uired to deduct and withhold taxes under 2ection C5 shall submit to the /ommissioner an annual information return containing the list of payees and income payments, amount of taxes withheld from each payee and such other pertinent information as may be re.uired by the /ommissioner. In the case of final withholding taxes, the return shall be filed on or before Ranuary 4+ of the succeeding year, and for creditable withholding taxes, not later than Jarch + of the year following the year for which the annual report is being submitted. his return, if made and filed in accordance with the rules and regulations appro!ed by the 2ecretary of (inance, upon recommendation of the /ommissioner, shall be sufficient compliance with the re.uirements of 2ection B: of this itle in respect to the income payments. he /ommissioner may, by rules and regulations, grant to any withholding agent a reasonable extension of time to furnish and submit the return re.uired in this 2ubsection. 8<; Income of "ecipient. * Income upon which any creditable tax is re.uired to be withheld at source under 2ection C5 shall be included in the return of its recipient but the excess of the amount of tax so withheld o!er the tax due on his return shall be refunded to him subKect to the pro!isions of 2ection -=L, if the income tax collected at source is less than the tax due on his return, the difference shall be paid in accordance with the pro!isions of 2ection CB. All taxes withheld pursuant to the pro!isions of this /ode and its implementing rules and regulations are hereby considered trust funds and shall be maintained in a separate account and not commingled with any other funds of the withholding agent. 80; "egistration with "egister of <eeds. * No registration of any document transferring real property shall be effected by the "egister of <eeds unless the /ommissioner or his duly authorized representati!e has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid' &ro!ided, howe!er, hat the information as may be re.uired by rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, shall be annotated by the "egister of <eeds in the ransfer /ertificate of itle or /ondominium /ertificate of itle' &ro!ided, further, hat in cases of transfer of property to a corporation, pursuant to a merger, consolidation or reorganization, and where the law allows deferred recognition of income in accordance with 2ection L=, the information as may be re.uired by rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner, shall be annotated by the "egister of <eeds at the back of the ransfer /ertificate of itle or /ondominium /ertificate of itle of the real property in!ol!ed' &ro!ided, finally, hat any !iolation of this pro!ision by the "egister of <eeds shall be subKect to the penalties imposed under 2ection -B3 of this /ode. %EC. CJ. (ax on 'rofits Collectible from 3wner or 3ther 'ersons. - he tax imposed under this itle upon gains, profits, and income not falling under the foregoing and not returned and paid by !irtue of the foregoing or as otherwise pro!ided by law shall be assessed by personal return under rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. he intent and purpose of the itle is that all gains, profits and income of a taxable class, as defined in this itle, shall be charged and assessed with the corresponding tax prescribed by this itle, and said tax shall be paid by the owners of such gains, profits and income, or the proper person ha!ing the receipt, custody, control or disposal of the same. (or purposes of this itle, ownership of such gains, profits and income or liability to pay the tax shall be determined as of the year for which a return is re.uired to be rendered.

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INCOME TAX REVIEWER


+. Items of gross income) payments placed under the w)holding system payable to a nonresident alien or to a citizen or resident of the &hilippines. S9&. !$. Definitions . * As used in this /hapter' 8 A) a-es . * he term NwagesN means all remuneration 8other than fees paid to a public official; for ser!ices performed by an employee for his employer, including the cash !alue of all remuneration paid in any medium other than cash, except that such term shall not include remuneration paid' 8+; (or agricultural labor paid entirely in products of the farm where the labor is performed, or 8-; (or domestic ser!ice in a pri!ate home, or 84; (or casual labor not in the course of the employerNs trade or business, or 8L; (or ser!ices by a citizen or resident of the &hilippines for a foreign go!ernment or an international organization. If the remuneration paid by an employer to an employee for ser!ices performed during one* half 8+)-; or more of any payroll period of not more than thirty* one 84+; consecuti!e days constitutes wages, all the remuneration paid by such employer to such employee for such period shall be deemed to be wages, but if the remuneration paid by an employer to an employee for ser!ices performed during more than one *half 8+)-; of any such payroll period does not constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be deemed to be wages. S9&. !9. "ncome (ax Collected at %ource.#A$ &e:uire m e n t of !ithholding . * 0!ery employer making payment of wages shall deduct and withhold upon such wages a tax determined in accordance with the rules and regulations to be prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner' &ro!ided, howe!er, hat no withholding of a tax shall be re.uired where the total compensation income of an indi!idual does not exceed the statutory minimu m wage, or fi!e thousand pesos 8&C,===.==; per month, whiche!er is higher. 4. (inality of the tax on compensation income S9&. *!. !ithholding of (ax at %ource. - #A$ !ithholding of +inal (ax on Certain "ncomes . * 2ubKect to rules and regulations the 2ecretary of (inance may promulgate, upon the recommendation of the /ommissioner, re.uiring the filing of income tax return by certain income payees, the tax imposed or prescribed by 2ections -L8%;8+;, -L8%;8-;, -L8/;, -L8<;8+;, -C8A; 8-;, -C8A;84;, -C8%;, -C8/;, -C8<;, -C80;, -58<;8];, -58<;8-;, -58<;84;, -58<;8C;, -: 8A;8L;, -:8A;8C;, -:8A;85;8a;, -:8A;85;8b;, -:8A;85;8c;, -:8%;8+;, -:8%;8-;, -:8%;84;, -:8%;8L;, -:8%;8C;8a;, -:8%;8C; 8b;, -:8%;8C;8c;, 44, and -:- of this /ode on specified items of income shall be withheld by payor* corporation and)or person and paid in the same manner and subKect to the same conditions as pro!ided in 2ection C: of this /ode. Sec. #.* !. 1 RR #C9$ -. Items exempt from w)holding tax

%EC. CE. !ithholding of (ax at %ource. 8A; ?ithholding of (inal ax on /ertain Incomes. * 2ubKect to rules and regulations the 2ecretary of (inance may promulgate, upon the recommendation of the /ommissioner, re.uiring the filing of income tax return by certain income payees, the tax imposed or prescribed by 2ections -L8%;8+;, -L8%;8-;, -L8/;, -L8<;8+;, -C8A; 8-;, -C8A;84;, -C8%;, -C8/;, -C8<;, -C80;, -58<;8];, -58<;8-;, -58<;84;, -58<;8C;, -: 8A;8L;, -:8A;8C;, -:8A;85;8a;, -:8A;85;8b;, -:8A;85;8c;, -:8%;8+;, -:8%;8-;, -:8%;84;, -:8%;8L;, -:8%;8C;8a;, -:8%;8C; 8b;, -:8%;8C;8c;, 44, and -:- of this /ode on specified items of income shall be withheld by payor* corporation and)or person and paid in the same manner and subKect to the same conditions as pro!ided in 2ection C: of this /ode. 8%; ?ithholding of /reditable ax at 2ource. * he 2ecretary of (inance may, upon the recommendation of the /ommissioner, re.uire the withholding of a tax on the items of income payable to natural or Kuridical persons, residing in the &hilippines, by payor* corporation)persons as pro!ided for by law, at the rate of not less than one percent 8+E; but not more than thirty* two percent 84-E; thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. 8%; ax* free /o!enant %onds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or pro!isions by which the obligor agrees to pay any portion of the tax imposed in this itle upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be re.uired or permitted to pay thereon or to retain therefrom under any law of the &hilippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the &hilippines, if the interest or other payment is

Sec. !9. #9$ Mear- end Ad>ustme n t . * 9n or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with 2ection -L8A;. he difference between the tax due from the employee for the entire year and the sum of taxes withheld from Ranuary to No!ember shall either be withheld from his salary in <ecember of the current calendar year or refunded to the employee not later than Ranuary -C of the succeeding year. L. (inal tax !. creditable w)holding tax

Sec. #.* ! RR #- 9$

105

INCOME TAX REVIEWER


C. &ersons w)hold RR #- 9$. re.uired to deduct and confusion w)c may disturb my thinking power & obfuscate my memory. hen, 9 7ord, guide also my teachers that they may form their .uestions clearly & intelligently that I may be able to answer them in such a way as it is expected of me. And after the test, 9 7ord, 0ternal ?isdom, illuminate the mind of the correctors & open their eyes that they may be able to read my handwriting & understand my answers & e!aluate them fairly & Kustly. 9 lo!ing Jother, who are called by your children H2eat of ?isdom, I assist me in my examination that I may pass them. If it is the will of your <i!ine 2on, the Incarnate ?isdom, and all you my dear patron saints, be with me during these crucial moments of my examination which mean so much to me in reaching my goal. 7ord, we pray to Dou, let our doings be prompted by Dour inspiration & furthered by Dour help, so that e!ery prayer & work of ours may begin from Dou & through Dou be accomplished. Amen . 4ased on t6e out(ine of +rof. N. Rica(de and as U+DAT9D 4B 9AAA &.3. D9A ROSARIO, T39 3biter *aster@ it6 in8ut from2 Ric=5 Sandova(, Dennis 7uinte ro, Dina6 de(a +ena, Ni- 1ado, Aourie :arcia, ,arisa ,auricio, ,a ma5 7uitain, &6i8 +erdon, S6aron Rivera, A<<ie Santia-o, 1rit?ie Tan-=ia, H ,arc Aseoc6e .

Sec. #.* !. 3

+ra5er <efore 9xamina tion ,5 Nesus , who listened so attenti!ely to the doctors in the temple, humbly asked them .uestions, & aroused their admiration by prudent answers, grant me the light to seek out & remember important matters of this subKect I am studying for Dour greater honor & glory. 9 #od, I ask Dour help, as I approach the coming examination with some anxiety, that I may be able to pass the test successfully, if it is Dour will, 9 7ord. 0nlighten my mind, 9 $ea!enly <ispenser of #race, #od the $oly 2pirit, that I may understand rightly the .uestions to be answered by me, that I may see clearly the solution of problems put before me, & that I may a!oid the pitfalls of superficial, hasty & wrong answers, that I may keep my cool in the face of trying circumstances, & thus a!oid

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