MIDTERMS COVERAGE TRANSCRIPTIONS & NOTES BY O.GE.LU.SOT.ME.BAY 1. National internal revenue taxes (sec. 21 nirc) Sources of revenue.

- the following taxes, fees and charges are deemed to be national internal revenue taxes: (a) income tax; (b) estate and donor's taxes; (c) value-added tax; (d) other percentage taxes; (e) excise taxes; (f) documentary stamp taxes; and (g) such other taxes as are or hereafter may be imposed and collected by the bureau of internal revenue 2. Income The amount of money coming to a person or corporation within specified time, as payment for services or interest or profit for investment. Gains derived from services, use of capital or disposition of capital assets. (legal) Stock dividend is not an income. It merely evidences the interest of the stockholder in the increased capital of the corporation. An income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit for investment. A mere advance in the value of property of a person or corporation in no sense constitutes the income specified in the revenue law. Such advance constitutes and can be treated merely as an increase of capital. An income means cash received or its equivalent. It does not mean choses in action or unrealized increments in the value of the property. income vs capital Income Denotes a flow of wealth during a definite period of time Service of wealth Fruit Capital A fund or property existing at one distinct point of time Wealth Tree

Other than mere return, what is capital? So you are the income of your parents? Differentiate income from capital. While capital is the tree, income is the fruit. So you're thinking that income is the by-product of capital. If you have an existing fund, any interest earned from investing it will be the flow of the fund which is of course, the interest income. If there is what you call wealth, income - if it the wealth that you receive from inheritance - that is your capital. The income would the service of the wealth or any flow outside of that wealth. What?

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As you have said also, capital is the fund or property at an instant of time. You can consider at any point in time with your capital is even if you've (?) You can consider what your net worth at one instant of time. You can compute what your capital is for the day. So when you say income, it is the flow of services derived from that income within a specified period of time because income is something which includes the cost, as a general rule. For tax purposes, as well, income is considered within a specified time. Income tax for corporate taxpayers, their income is considered on a yearly basis. Individual taxpayers, income is also considered on a yearly basis unless if the income that you are considering is from one transaction alone which has to be reported for final tax purposes. So, those are the distinctions and the return of capital is non-taxable. So, example, if you pay premiums for an insurance and you would like to withdraw it and the premium is returned to you, the premiums that you have paid, in the law it is not income but rather a return of capital. But whenever an income is given to you, it will be taxable. Capital is non-taxable. 3. Income tax Tax on the net income or the entire income received or realized in one taxable year. Income tax system Schedular= different tax treatment to different types of income and the tax is computed on a per return or per schedule. Global= taxpayer is required to lump up all the items of income earned during a taxable period and pay under a single set of income tax rate on these different items. 4. Taxable income/ net income/ tax base/amount subject to tax/amount of income that is taxed. Pertinent items of income specified in the nirc, less the deductions and/or personal and additional exemptions, if any, authorized by such types of income by the nirc or other special laws. (sec31, nirc) 5. Gross income all income derived from whatever source. Exclusions= incomes that are exempt from tax. Deductions= gross income-items/amounts=net income 6. Test for determination that income is earned for income tax purposes Severance test As capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate use, benefit and disposal is income subject to tax. Example: stock dividends are initially not subject to tax. However, if it is redeemed, it is now separated from capital, such is taxable for there is now a change of ownership. Doctrine of ownership, command or control of income A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay. The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence, the realization of the income by him who exercises it. The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid.

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Doctrine of propriety of interest Income realized is taxable only to the extent that the taxpayer is economically benefited. Any economic benefit to the employee that increases his net worth is taxable Example: er giving stock option to ee. This may not be subject to tax when the ee does not exercise such right. Doctrine of actual receipt/cash method income may be actual receipt or physical receipt. example: when ee receives his salary there is physical transfer Doctrine of constructive receipt/ accrual method When money consideration or its equivalent is placed at the control of the person who rendered the service without restriction by the payor. Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. [section 52, revenue regulations 2] Examples of constructive receipt 1. Interest coupons which have matured and are payable, but have not been cashed.

2. Partners distributive share in the profits of a general professional partnership is regarded as received by the partner, although not yet distributed. Are the following items income? 7. Groups of taxpayer 1. Individuals=natural persons; human beings. A. Resident citizens B. Non-resident citizens 1. A citizen of the Philippines who established to the satisfaction of the commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. income from illegal sources - yes give away prizes yes stock dividends - no

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3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. 4. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. C. Resident aliens An individual whose residence is within the Philippines and who is not a citizen thereof. They have intention to stay in the Philippines permanently. D. Non-resident aliens An individual whose residence is not within the Philippines and who is not a citizen thereof. An intention to stay temporarily 2 kinds: i) engaged in trade or business in the Philippines, or Ii) not engaged in trade or business in the Philippines Note: a non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. [section 25(a)(1), nirc] In revenue regulation it is more than 183 days. (c) alien individual employed by regional or area headquarters and regional operating headquarters of multinational companies. - there shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: provided, however, that the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-pacific region and other foreign markets. (d) alien individual employed by offshore banking units. - there shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: provided, however, that the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (e) alien individual employed by petroleum service contractor and subcontractor. - an alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in

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the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: provided, however, that the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. (sec 25 nirc) 2. Corporations= juridical persons A corporation, as used in income taxation, includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), and associations or insurance companies.

however, it does not include: A. A general professional partnership; and B. A joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. A. Domestic corporations B. Resident foreign corporations The term applies to a foreign corporation engaged in trade or business within the Philippines. C. Non-resident foreign corporations The term applies to a foreign corporation not engaged in trade of business in the Philippines. 3. General partnership A. General professional partnerships General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. [section 22(b), nirc] Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. [section 26, nirc] For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. [section 26, nirc] Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. [section 26, nirc] Income of a general professional partnership are deemed constructively received by the partners. [section 73(d), nirc] B. General co partnership 4. Estates and trusts

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Estate- refers to all the property, rights and obligations of a person which are not extinguished by his death and also those that have accrued thereto since the opening of succession. To be taxable it must be under judicial settlement. Trusts- arrangement created by will or agreement under which title to the property is passed ro another for conservation or investment with the income therefrom and ultimately the corpus or principal to be distributed in accordance with the directions of the creator as expressed in the governing instrument. To be taxable, there must be an irrevocable trust both as to corpus and income. F. Individual tax payer 1. General principles of income taxation in the Philippines 1. Resident citizen-all income derived from sources within and without the Philippines are taxable 2. Non-resident citizen-only on income derived from sources within the Philippines are taxable. 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. Citizen+working& deriving income abroad- only on income from sources within the Philippines 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. Resident/non resident alien-within 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. 2. Two kinds of taxable income or gain 1. Capital gain- are gains or income from the sale or exchange of capital assets. These include: Income from dealings in shares of stock of domestic corporation whether or not through the stock exchange; income from dealings in real property located in the Philippines; and Income from dealings in other capital assets other than (a) and (b).

Capital gains tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale. What are the applicable tax rates of capital gains tax under the national internal revenue code of 1997? A. For shares of stocks not traded in the stock exchange, on the net capital gains - not over p100,000 - 5% - any amount in excess of p100,000 - 10%

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B.

Sale of real properties - 6 % General rule: a final tax of six percent (6%) is imposed on the gross selling price or current fair market value or zonal value, whichever is higher, for every sale or exchange of real property. optional: if the sale is made to the government or any of its political subdivisions or agencies or to government-owned or-controlled corporations, the taxpayer has the option to choose from the final tax of six percent (6%) of gross selling price or fair market value or zonal value, whichever is higher, or section 24 a, whichever is lower exception: the sale or disposition of the principal residence of natural persons is exempt from capital gains tax if certain conditions are met. Conditions for exemption of gain from sale or exchange of principal residence: 1. 2. 3. 4. Sale of residential house and lot. Proceeds are fully utilized in acquiring or constructing a new principal residence Within 18 months from the date of sale or disposition; Notice to the commissioner of internal revenue shall be given within thirty (30) days from the date of sale or disposition; and This exemption can only be availed of once every ten years.

5.

If the proceeds of the sale were not fully utilized, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. Gsp or fmv, whichever is higher x unutilized proceeds/gsp = taxable portion 2. Ordinary gain- are gains or income from the sale or exchange of property which are not capital assets. 3. Capital asset vs ordinary asset Capital asset Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or C) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (f) of sec. 34 of the code; or D) real property used in trade or business of the taxpayer.

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Ordinary asset Ordinary asset refers to all properties specifically excluded from the definition of capital assets under sec. 39 (a)(1) of the nirc.

Well try to look at 4 Major Corporate Taxes imposed to corporations including business partnership. So, let us start first with the definition of corporation.

Can you define corporation for taxation purposes? Sec. 22 (B).The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies

What are included? How many? 5.

How do you explain joint stock companies?

How about joint accounts? A: Sort of like a partnership between two persons and they engage in a business for profit.

How will you define partnership? An agreement between two or more persons to contribute, money, property, or industry to a common fund with the intention of dividing profits. So the ultimate purpose to divide profits from such undertaking? Yes? And, again how will you classify corporate taxpayers? A: Domestic corporation, resident foreign corporation, non resident foreign corporation

If you look at Sec 22, c and d, you may be able to classify corporations into domestic and foreign corporations.

How will you define each one? (C) The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws

(D) The term "foreign", when applied to a corporation, means a corporation which is not domestic In, d, it is a negative definition.

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When you say foreign corporation you can further subdivide that one into 2. What are they?

(H) The term 'resident foreign corporation' applies to a foreign corporation engaged in trade or business within the Philippines. (I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the Philippines.

A while ago, Miss Ong said, that corporation for taxation purposes includes partnership. Actually she is referring to business partnership and not general professional partnership. By the way, what are excluded from the term corporation for taxation purposes? There are how many? Three.

(Sec 22 (B)but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.)

How will you define GPP? 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.

Whats the ultimate purpose? Exercise of common profession, profit is incidental. It is an option.

Can you give me an example of GPP? Partnership of CPA, Engineering Firms

How will you explain joint venture? A: A in the definition, it is for the purpose of project construction. It is not necessary that it is governmentalit can be a private.

Let us say you have a huge parcel of land, and you negotiated with Miss Ong that she will. Or lets just say construct a condominium. You are the owner of the land and she will give the capital for the construction of the condominium, say 100 condo units, will that fall under the definition of joint venture?

A: I dont think so Sir because the definition says t wo corporations joining forces. In your situation, Miss Ong only contributed capital. She is not a corporation and therefore, we can only form a partnership.

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How about if we change the problem, say, two corporations, A will provide the land and B will provide for the capital. Both will manage. Will that be considered joint venture?

I dont think so. Because in joint venture there should only be one management in the venture. So there are two corporations, only one will have to manage.

Let us say, only B will manage? Will that now fall within the meaning of joint venture? I think so Sir.

Next question will be, is it taxable? Assuming that the 2 corporations will decide to divide the properties equitably. So let us say, the parcel of land is worth 30M and the building is worth 70M, so 70% of the condo units will be owned by corporation A and the 30% to B. is it taxable?

I think joint ventures not for construction are always taxable.

That is not for construction? No, and therefore not taxable.

You mean that construction for condo units are not doing construction of projects?

I think it is included in construction project. Not taxable. Why not? Because taxable only when the joint venture is for construction.

Assuming that B who owns the 30% of the units sells 50% of the 30% to 3rd parties, will that be taxable?

I think taxable

So, what will be the demarcation line with regards to joint venture of construction projects?

It would be. As long as the project is in line with the construction project then it is not taxable but if deviates like in the example, it will be taxable if not for the purpose of construction.

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(So in short when you talk about, joint venture or construction projects, when the 2 corporations will put together their investments and decided to divide the finished projects according to amount of investment deployed, that is a mere return of capital and it is not subject to income tax but once the finished projects, im referring to the condo units in my example, are sold then thats the time that it is not anymore considered as capital and there is already income connected with it and that will be the time the it subject to income tax. In short, it is taxable.)

How will you differentiate partnership from co-ownership?

A: In partnership, a partner may be an agent of the other while in co ownership, one cannot be an agent of the other co-owner. In P, parties contribute money, property, and industry but

What is the purpose of co ownership? Enjoyment of property.

Gatchalian vs CIR case Gatchalian together with his friends their money together to but a sweepstakes ticket, won 50K and divide among themselves.

Were they forming a partnership? Yes. Unregistered partnership. Because they invested their money and divided profits among themselves. And thus liable for taxation

Ona vs CIR In this case, Julia after her death, husband and children inherited her property. 3 children were minors and the court appointed the husband to be the administrator. Later on there was division of partnership but at that time there is only co-ownership before the division of the inheritance. Court then approved the division but the father continued to control the properties and there were income arising from rentsthats the time it became a partnership

Situation: Both parents died living a huge property, 10k sq m vacant lot among the 5 children. 2k sq m per child. At that exact time, it is a co ownership, there is undivided share of the lotnot yet definite division.

What if prior to death the property already earns income? That income will be transferred to children. Aside for share in lot, there is an additional income. Will it still be co-ownership? Yes. No partition yet.

If already partitioned? It is not a partnership if not intention to contribute it to a common fund.

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What if some of the children will invest additional money to further improve the income resulted from that parcel of land. It depends. If already partitioned, then partnership. But if not yet divided, no.

So what is the test here?

It will already be a partnership if a certain property will belong exclusively to a person, like an inheritance and decided to come up with a business. If no division yet and it cannot be determined who owns but produces fruit then there is co-ownership arising from the property of co-owners.

Domestic Corporations

SEC. 27. Rates of Income tax on Domestic Corporations. (A) In General. - Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

(A) Tax on Resident Foreign Corporations. - . (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

Who is a resident foreign corporation? Is there a possibility that it is not engaged in business here in the Philippines? Yes? Are you sure? Look at Sec 22 H

(H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines.

No possibility that it is not engaged in trade and business. Taxed only on sources within Phils.

(B) Tax on Nonresident Foreign Corporation. - (1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five

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percent (35%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and (d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

As to tax base: Domestic Corporation- Net income Resident Foreign- Net income Non resident Foreign Corp- Gross income

As to rate: 30% for all three starting 2009.

You need to know the kind of corporation because they are treated differently regarding tax rules.

What are the four major corporate taxes?

Normal Income Tax Minimum Corporate Income Tax Improperly Accumulated Earnings Gross Income Tax

Normal Income Tax What is the normal income tax rate? 30% starting 2009.

*Sir writes the formula to better understand NIT.*

Gross income Less: Allowable Deduction Personal exemptions

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PH/HITaxable Income X Rate Income Tax Payable- NORMAL INCOME TAX Less: Tax Credit Income Tax Still Due

In short I will not elaborate in NIT.

Since we are talking about corporations, you will exclude personal exemptions, you will exclude premium on health and or hospitalization insurance.

Focus on the gross income and allowable deductions.

We go now to MCIT. What is MCIT?

Self assessment- assessment done by the taxpayer itself

So in short when you talk about businesses they have tendency to misdeclare, or nondeclare the true income because it is self assessment. So the taxpayer will assess himself and report the income in the tax return except maybe for employees wherein another person on behalf of them who will compute their income taxes. So there is a slim chance of misdeclaring or non declaration of income but this is not the case of businesses especially in corporations. So it is based on self assessment so there is tendency of misdeclaration or non declaration. So whats the history of MCIT?

A: There are difficulty sometimes in declaring the true income of corp oration in self assessment thats why our law adopts this so as to be able to pay the minimum income, specific corporation. Not only because they will not declare or cannot declare but sometimes with the nature of their business that its sometimes hard to determine their taxes and so MCIT, there is a minimum amount being compared to the regular income and when the regular income is higher than the minimum income to the MCIT then the taxpayer is..

By the way,if you read management books, you will notice that you will be at a disadvantage because you will pay tax first. Say your income, the first portion of that will go to the government and you cannot do anything about it. But if you are engage in business or an investor the last five (???), meaning you have the control will

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be the tax. Meaning you pay yourself first before paying the government. So with that strategy, corporations will manipulate figures to report only enough ax to the government.

So the history of MCIT was that before there was a situation wherein a lot of corporations would declare losses for 10 years but operating. That is a big question mark. If you will declare loss, first year okay, 2nd okay, 3rd you will be thinking twice but if you are operating at a loss for 10 years, there must be something wrong. So in order to counter that behavior, so here beginning 1997, MCIT is imposed eventhough the corporation will declare loss, you still have to pay something to the government. Minimum amount.

When will MCIT be applicable.? A: 4th year?

So let us say, jan 1, 2005. When will it start to apply? 2009?

What will be the cases? Is it the date of registration of SEC or BIR? With the BIR.

So when you apply with BIR, you will fill up 1901 so that will be the time that you will be registered. So there is date of registration with the BIR, you will count the 4 years from that date of registration with the BIR.

Aside from that 4-year period what are the other benchmarks wherein you will be subject to MCIT rather than NIT? Take note mcit is the minimum meaning if you declare loss you will pay something .

Assuming let us say after 4 year instances when you cannot pay MCIT? What are they? Say even in your 5th year of operation is there a situation wherein you will be subject to MCIT?

Sec 27(E) Minimum Corporate Income Tax on Domestic Corporations. (1) Imposition of Tax - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

Subsection A, Referring to the normal income tax impose to domestic corporation.

So aside from 4 years, second if the MCIT is greater than the NIT, third if the company will declare loss .

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So in short when the accountant will compute the NIT, it will also compute the MCIT. Whichever is higher that will be the tax liability of the corporation of that taxable year.

3 situations. MCIT is applicable starting on the 5th year of operation. Four years immediately after, so 5th year of operation. Then if the MCIT is higher than NIT, then impliedly under that subsection E and if the corporation declared loss. First is a must, for 2 nd and 3rd, either. So first and either 2 or 3.

We go now to excess MCIT over NIT. This time you will work for how many years? This can be turnover for next 3 years. Going further, assuming that you are 4 years in operation, can there be a chance of suspension application for MCIT?

(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.

Prolonged Labor Dispute 2 elements: First is the strike lasting for more than 6 months. And there should be a temporary shutdown.

Force Majuere -act of God and act of man, example typhoon, flood,

Legitimate business reverses Example? Huge amount of loss. So what the applicability of MCIT?

Did you get my point? If loss will be the one of the gr ounds of MCIT then SEC 27meaning the taxpayer can ask reconsideration not to impose MCIT because of the loss suffered, so there is no applicability of SEC 27E.

It means loss arising from theft embezzlement. What else? Robbery and fire.

For corporation that will be 1702. Let us try to look at this sample.

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So Im referring to gross income. But you will have items above it, so you have sales, sales return, then add other income, you come up with gross income. But for lawyers you start with the gross income. Then you will have allowable deduction, taxable income, multiplied by tax rate and then you come up wit NORMAL CORPORATE INCOME TAX.

I want you to compute gross income. Problem: Mara Clara Inc. is a domestic corporation engaged in the retail of various household merchandise. For TY 2010, the company had the following account balances:

Cost of Sales Sales Returns allowance and disc. Administrative Expense Depreciation Expense Rental Expense Light and Water Expense Rental Income Sales

P400,000.00 50,000.00 230,000.00 20,000.00 100,000.00 50,000.00 100,000.00 1,050,000.00

P600, 000. How did you compute that? From 1, 050, 000 less 50, 000 of sales return, that will be net sales less 400, 000 COS. Gross income will be 600, 000.

Then compute allowable deductions. Everything here will be allowed. These are those allowed by the Tax Code. 230+20+100+50= 400, 000

Since corporate taxpayer, no personal deduction, no premium on health.

Then you come up with the Net Taxable Income of 200, 000

What is the corporate income tax rate? 30%

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So your normal corporate income tax is 60,000.

There another income, the rental income. So this will be

By the way ,later on, you will learn later on that the gross income is composed of the following: compensation, business, gains from sale of property, interest, rent, royalties, dividends, annuities, prizes and winnings, pension, partnership, GPP

So going back. We focus on business income and rent income. When I say gross business income, that will be 600, 000. But when I will say Gross Income that will be business and rent and that will be 700, 000.

A while ago we are focusing on

So the complete computation. SLIDE NUMBER 4. Here it refers to gross income from operation or business income. Now I want you to compute the NIT of a resident foreign corporation. Remember this is involving a domestic foreign corporation.

How much? So same. So 30%. Thats 90, 000. Same. Thats resident foreign corporation.

How about non resident foreign corporation? 210, 000. Why? It is based on gross income or gross business income. Gross times 30%

Read again 27A, 28A, 28B

2008

2009

2010

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Gross Sales

3,080,000

4,100,000

5,200,000

Sales Ret., Disc. & Allow.

80,000

100,000

200,000

Cost of Sales

1,500,000

2,000,000

2,500,000

Operating Expenses

1,450,000

1,900,000

2,100,000

We go to MCIT. We go annual MCIT. You are already given the allowable deduction. So operating expenses will be your allowable deduction. I want you to compute first the NIT for each year.

2008- 50, 000 2009- 100 000 2010- 400, 000 we are talking about taxable income.

When applicable? Starting 4th year of operation. It started operation in 2006 the MCIT will start on 2009. We change the facts on 2005. So it will start on 2009.

How much is the NIT for 2008? 15, 000. on 30, 000. Based on 120, 000 (NOT CLE AR sa recording) 2008, thats applicable.

Ill change the problem, how much is the rate? 2% of the gross income?

*Dili clear. Sorry, nag overlap and tingog ni sir and nagdiscuss si five ni price :D ----1:26 onwards*

Refer to slide number 8 and 9.

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MCIT 2009-40, 000 2010-50,000

condition aside from the 4 years?

When the MCIT is higher than NIT or when a corporation declaring a loss

So we try to test this one on whether MCIT is higher than the NIT. So, how much is the MCIT of 2009? 2% of 2, 000,000 is 40, 000 For 2010? 50, 000 For 2008? Theres nothing to compare.

2009, the MCIT is higher than NIT. So the corporation is liable based on MCIT. 2010, NIT is higher than MCIT. So liable for NIT.

Operating expenses that are allowed to be deducted are called allowable dedeuctions.

Clarification: When will it start? 5th year of operation.

Sec 27(E) Imposition of Tax - A minimum corporate income tax of two percent (2%0 of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

2008, 35% because only in 2009 did it start applying for the 30%.

Memorize 35 down to 30.

Tax credit, you will have the income tax still due for 2008, 2009, 2010 because there is so called carry over of MCIT over NIT.

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(2) Carry Forward of Excess Minimum Tax. - Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

So the excess MCIT over NIT can be carried over for the next 3 years. It will have the implication of decreasing your NIT. So compute the amount still due.

2008- 50, 000, no subject to MCIT 2009- 40, 000, how much is the excess? 10,000

compare. It can reduce your next 3 year income tax as long as your next 3 year is based on NIT. If the next 3 years is based on MCIT,it will not apply, you cannot use the excess.

2010- Your NIT is not 120, 00 because you can use this excess to reduce your NIT. So instead of 120,000 it will become 110, 000.

By the way MCIT is a bar question.

So if in the next year, your MCIT is higher than NIT, you cannot use the excess 10, 000.

Excess will be used to reduce your NIT for the next 3 years.

You can use the 10, 000 anymore (last)

We will not have computations. I gave you this for you to understand the theory. Do not complicate yourself. You are not an accountant. :D

I want you to look at the two columns NIT and MCIT. First step is to select. You will be taxed according to what?

NIT 2005 100,000

MCIT 80,000

Higher (excess) 100,000

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2006 2007 2008 2009 2010

80, 000 20,000 10,000 20,000 20,000

120,000 10, 000 5,000 30,000 10,000

120,000 (40,000) 0 (20,000)---1st 0 (10,000)---2nd 30,000---3rd 20,000

2005 NIT; 2006 MCIT 2007 NIT 2008 NIT 2009 MCIT 2010 NIT

2005, So income tax still due, Tax based on NIT, no excess

2006 MCIT and theres an excess of 40,000, that 40, 00 can be used to reduce your next 3 years. If ever in the next 3 years you will be taxed based on NIT. So 2007, 2008 but not 2009.

2007 (?) Instead of paying 20,000, you reduce that. Here you have much more than your tax liability so your tax liability here will be zero.

After 20 out of the 40 the remaining is 20.

2008 you will be taxed based on NIT. OK? Still you could reduce this with excess MCIT of 20,000. So you have remaining 10,000.

Supposed to be your last chance to use this 10,000 will be in 2009 but unfortunate for you because you are taxed based on MCIT. That will be forfeited already to the government. So will be taxed based on MCIT.

In 2010, you will again be taxed based on NIT.

2 MIDTERMS NOTES AND TRANSCRIPTIONS 2

So theres a new excess of 10, 000. Supposed to be this will be used to reduce your 2010 by 10, 000. Your new will be ___. This will be applied for the next 3 years.

So we go now to Improperly Accumulated Earnings Tax or IEAT.

Whats IEAT all about? Sec. 29 Tax equivalent to 10% of the improperly accumulated taxable income shall be imposed for each taxable year to every corporation formed or availed for the purpose of avoiding 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 divided or distributed.

Tax imposed on income purposely not distributed to shareholders so that they can avoid being imposed taxes.

Let me try to explain that.

So when a domestic corporation will engage in business that will earn income that income will be subject to a normal tax of 30% rate. So if that is 300,000, tax will be 90, 000. What is left to the corporation is 210, 000. That income will be forming part of the retained earnings of the corporation. Retained earnings meaning to say accumulation of income from the start of operation. And you are a stockholder you are interested when you invested your money in that corporation because you are expecting dividend. That dividend will be coming from the retained earnings. So if that is a closed corporation, in order to avoid the passive income tax on dividends, how much? 10%. Close corporation, family owned corporation, the best way to avoid 10% final tax is not to declare dividends. In such time that your retained earnings will become bigger and bigger. And theres no problem why? Because say, when you have a personal expense, charge that one of the expense the corporation. It will reduce the income of the corporation. Theres a tax implication of 10% and thats sort of avoidance before. In order to deter that practice, if the taxpayer is wise the BIR is wiser. There is that Sec 29 to prevent that behavior. Any improper accumulation of earnings will be subject to 10% tax.

Section 29. Imposition of Improperly Accumulated Earnings Tax. (A) In General. - In addition to other taxes imposed by this Title, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation described in Subsection B hereof, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. (B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax. (1) In General. - The improperly accumulated earnings tax imposed in the preceding Section shall apply to every corporation formed or availed for the purpose of avoiding 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 divided or distributed. (2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to:

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(a) Publicly-held corporations; (b) Banks and other nonbank financial intermediaries; and (c) Insurance companies.

BAR: the corporation is subject to 30% NIT? Yes. Same income when it will be distributed, it will be subject to stockholders, it will be subject to another tax of 10%? Is it a double taxation?

It is a double taxation but it is an indirect double taxation which is allowed by law.

Is there a test where a corporation is in fact accumulating improper earnings? What is the test? If you are the BIR examiner, how will you now that the corporation is in fact accumulating improper earnings? When current liabilities is not more than the current assets. 2:1 ratio. Are you sure?

Can you recall Sec 43 of the Corporation Code? The corporation is prohibited to accumulate earnings more than 100% of the paid up capital.

To simplify that one, if the stockholders will invest 1,000,000 the maximum allowed retained earnings will be 2,000,000. If that will become 2,000,001, that is an indication on the part of BIR that this corporation has in fact accumulated improper earnings and therefore subject to Sec 29 of the NIRC.

I will retrack.

IEAT. The reason for its imposition will be to discourage corporation to accumulate improper earnings by non declaration of dividends. Then how do you know that the corporation has in fact accumulating improper earnings? You go to Sec 43 of the corporation Code. If the corporation accumulates earnings more than 100% of the paid up capital.

So what are the corporation allowed to have more than 100% of the paid up capital? The Exemptions.

Sec 29--(2) Exceptions. - The improperly accumulated earnings tax as provided for under this Section shall not apply to: (a) Publicly-held corporations;

2 MIDTERMS NOTES AND TRANSCRIPTIONS 4

b) Banks and other nonbank financial intermediaries; and (c) Insurance companies.

What are the other 4 found in revenue regulations? Taxable partnerships, GPP, non taxable joint venture, and enterprises registered with PEZA, SBMA, CDA, and in special economic zones.

So there are 7 in total.

Going further, assuming that the corporation is not one of the 7 is there a chance that that particular corporation will not be subject to IEAT? When using the immediacy test when there are reasonable needs of the business.

(E) Reasonable Needs of the Business. - For purposes of this Section, the term 'reasonable needs of the business' includes the reasonably anticipated needs of the business.

So what are the elements? -anticipated and reasonable needs

Examples: 1. Corporate expansion but you need a board resolution for that. 2. Acquisition of property and land and equipments 3. those earnings reserved for compliance with any loan covenant or pre existing obligation 4. earnings required by law or applicable regulations 5. incase of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines

So in short there are corporation that are exempted from IEAT. (a) Publicly-held corporations; for the reason that no foreign investor will invest if that PHC will not give dividends. So the nature of the corporation itself will force it to declare dividends. (b) Banks and other nonbank financial intermediaries- reason: for safety on the part of the depositors. If you will not allow the bank retain higher earnings there is higher risk in declaring bankruptcy.

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(c) Insurance companies- Same reason, for safety of the insured.

Then you will have General Professional Partnership , joint ventures, the PEZA, but even though that corporation is not one of the 7, theres still a chance that it will be exempted from IEAT. When? When it fall under the IMMEDIACY TEST.

Examples: 1. Corporate expansion but you need a board resolution for that. 2. Acquisition of property and land and equipments 3. those earnings reserved for compliance with any loan covenant or pre existing obligation 4. earnings required by law or applicable regulations 5. incase of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines

how will you compute IEAT?

Taxable income Add: Income subject to final tax Income exempt from tax Income excluded fr gross income Amount of NOLCO deducted Total Less: Div. actually or const. paid/issued Income tax paid for the year Reserved for the reasonable needs of the business Improperly accumulated earnings === xxx xxx xxx Pxxx xxx xxx xxx xxx

P xxx

P xxx

xxx P xxx

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So you will start with taxable income, you add the 4 items, found in Sec 29. You come up with the total. Deduct the 2 items, here you have Dividends actually or const. paid/issued, then you have the immediacy test, reserved for the reasonable needs of the business. You will arrive at Improperly accumulated earnings, the basis of IEAT. It is not yet the tax. How will you compute the tax? Times 10%. You will get Improperly accumulated earnings TAX.

Last corporate TAX. Gross Income Tax. GIT.

What is it all about? Tax based on the gross income of the company. Is this being implemented now? My answer is NO.

What are the grounds for implementation?

Sec 27 (A) Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the following conditions have been satisfied: (1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP); (4) A ratio of forty percent (40%) of income tax collection to total tax revenues; (2) A VAT tax effort of four percent (4%) of GNP; and (3) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

*rearrange according to Sir

Once elected can you shift outright?

Irrevocable for 3 years *??? Not clear. Sorry.

Aside from the 4, it has to be that

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

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Applicability of IEAT: Within DC / Without / Tax Base Net Inc -27A Rate 30% MCIT / IAET / domestic only; this is in connection with tax sparing rule bec it is applicable only to DC; the giver is the DC. X X

RFC NRFC

/ /

X x

Net Inc-28A Gross Inc-28B

30% 30%

/ x

What are the four major corporate taxes? 1. 2. 3. 4. Normal Income Tax Minimum Corporate Income Tax Improperly Accumulated Earnings Tax Gross Income Tax

NIT stands for? Net Income Tax

GIT stands for? Gross income tax

IAET Cases? Commissioner v. Ayala Securities Corp

Facts: Ayala Securities Corp. (Ayala) failed to file returns of their accumulated surplus so Ayala was charged with 25% surtax by the Commissioner of internal Revenue. The CTA (Court of Tax Appeals) reversed the Commissioners decision and held that the assessment made against Ayala was beyond the 5 -yr prescriptive period as provided in section 331 of the National Internal Revenue Code. Commissioner now files a motion for reconsideration of this decision. Ayala invokes the defense of prescription against the right of the Commissioner to assess the surtax.

2 MIDTERMS NOTES AND TRANSCRIPTIONS 8

Issue: Whether or not the right to assess and collect the 25% surtax has prescribed after five years.

Held: No. There is no such time limit on the right of the Commissioner to assess the 25% surtax since there is no express statutory provision limiting such right or providing for its prescription. Hence, the collection of surtax is imprescriptible. The underlying purpose of the surtax is to avoid a situation where the corporation unduly retains its surplus earnings instead of declaring and paying dividends to its shareholders. SC reverses the ruling of the CTA.

Prescriptive period? 5 years

Based on your reading, what is the general rule as to the prescriptive period to tax? Imprescriptible unless specifically provided for by the law

When we talk about Improperly Accumulated Tax, it refers to the tax on improperly accumulated earnings, throughout the years. If the taxpayer as long as there is no fraud under the present tax code, it will not be liable after the prescriptive period of 3 years plus prescriptive period of collection for 5 years for a total period of 8 years. Ayala in this case said, how come it was subject to tax when the earning was already earned way way back before and there was 5-year prescriptive period (old tax code, now 3 years). Now, assessment prescriptive period will be 3 years and the prescriptive period for the collection will be 5 years. (Old tax code-both 5years). Apply the general rule, no prescription as to assessment and collection unless there is a law.

Cyanamid Philippines, Inc. v. CA

Facts: Petitioner is a corporation organized under Philippine laws and is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler of imported finished goods and an imported/indentor. In 1985 the CIR assessed on petitioner a deficiency income tax of P119,817) for the year 1981. Cyanamid protested the assessments particularly the 25% surtax for undue accumulation of earnings. It claimed that said profits were retained to

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increase petitioners working capital and it would be used for reasonable business needs of the company. The CIR refused to allow the cancellation of the assessments, petitioner appealed to the CTA. It claimed that there was not legal basis for the assessment because 1) it accumulated its earnings and profits for reasonable business requirements to meet working capital needs and retirement of indebtedness 2) it is a wholly owned subsidiary of American Cyanamid Company, a foreign corporation, and its shares are listed and traded in the NY Stock Exchange. The CTA denied the petition stating that the law permits corporations to set aside a portion of its retained earnings for specified purposes under Sec. 43 of the Corporation Code but that petitioners purpose did not fall within such purposes. It found that there was no need to set aside such retained earnings as working capital as it had considerable liquid funds. Those corporations exempted from the accumulated earnings tax are found under Sec. 25 of the NIRC, and that the petitioner is not among those exempted. The CA affirmed the CTAs decision.

Issue: Whether or not the accumulation of income was justified.

Held: In order to determine whether profits are accumulated for the reasonable needs of the business to avoid the surtax upon the shareholders, it must be shown that the controlling intention of the taxpayer is manifested at the time of the accumulation, not intentions subsequently, which are mere afterthoughts. The accumulated profits must be used within reasonable time after the close of the taxable year. In the instant case, petitioner did not establish by clear and convincing evidence that such accumulated was for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have invented the Immediacy Test which construed the words reasonable needs of the business to mean the immediate needs of the business, and it is held that if the corporation did not prove an immediate need for the accumulation of earnings and profits such was not for reasonable needs of the business and the penalty tax would apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business depend on the nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of accounts receivable, the collection rate, the availability of credit and other similar factors. The Tax Court opted to determine the working capital sufficiency by using the ration between the current assets to current liabilities. Unless, rebutted, the presumption is that the assessment is correct. With the petitioners failure to prove the CIR incorrect, clearly and conclusively, the Tax Courts ruling is upheld.

What are the three tests? 1. 2. 3. Immediacy test Reasonable test Anticipated test

Cannot just set aside money for project and expansion of the company without passing these three tests.

3 MIDTERMS NOTES AND TRANSCRIPTIONS 0

Prima facie evidence of having accumulated earnings? Examples? *Sir said already discussed previously*

Domestic Corporation Definition? A corporation created and organized under Philippine Laws.

Percentage? Also include tax base. 30%. Taxable Income, within and without.

Taxable Income? Income on Tax

How many special domestic corporations? What are these? 1. Proprietary Educational Institutions 2. Hospitals 3. Government owned and controlled corporations agencies or instrumentalities Governed by Section 27 (b) and (c)

Proprietary Educational Institutions, how many kinds? 1. 2. 3. Governmental Proprietary Non-stock non-profit educational institution

Government Educational institution, taxable? No, exempt.

Non stock non-profit educational institution, taxable? Income tax? Real property tax? Exempt income tax. Real property as long as used actually, directly and exclusively.

Proprietary EI? Taxable? Rate?

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30% based on taxable income. 10% based on taxable income if gross unrelated income does not exceed 50% in the gross total income.

Predominant Test/Dominant test/Dominancy Test? Dominant income is unrelated, tax is more than 30% of the taxable income

Imagine UC Banilad, is it subject to 30% income tax or 10% preferential tax rate? Since they are renting out the space in front, they will only be taxed 10% preferential tax rate if their gross income of the unrelated business does not exceed 50%. If it does, UC is already subject to 30% income tax.

How about Perpetual Soccour Hospital, what will be the tax rate? Religious-non profit, if unrelated activities exceeds 50% of the gross income they will be charged 30 % taxable income. If it be less that 50% only 10% preferential rate.

Government owned and controlled corporation, Section 27 (c). In connection, under the general principle the government shall not tax itself, what is the principle in section 27 (c)? Part of the inherent limitations? They are created under special or general laws, they are deemed separate entities from the government, doing proprietary functions.

What is the rule pertaining to proprietary functions? Exceptions? Taxable at 30% based on taxable income. Except GSIS, SSS, Phil Health Insurance, PCSO. Not anymore PAGCOR starting 2005.

Resident Foreign Corporation? Taxable? If the source is within, the tax base is taxable income at the rate of 30%

What are the three special resident foreign corporations? 1. 2. 3. International carriers Offshore banking units Regional Operating Headquarters

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Regional operating headquarters vis--vis regional area headquarters, how do we distinguish one from the other? Sec 22 (DD) The term "regional or area headquarters" shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. *COORDINATING ONLY-Sec 22 (EE) The term "regional operating headquarters" shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development. Which between the two is taxable? Why? Regional operating headquarters because they derive income here. There is nothing to subject to income tax if there is no income. Foreigners employed in regional operating headquarters? Taxed? Provisional basis? Yes, at 15% based on gross income. Sec 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. Regional operating headquarters are taxed at 10% based on taxable income but the employees of such is taxed at 15% based on gross income. How about Filipinos working at the regional operating headquarters? Same? If managerial position or technical positions they are still taxed at 15%. If not holding a managerial or technical position is taxed at 5-32% based on taxable income. Regional area headquarters are not subject to tax. But how about the foreigners working in RAH? Are they taxed? Yes, at a rate of 15% based on gross income.

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How about the Filipinos working in RAH? If managerial position or technical positions they are still taxed at 15%. If not holding/occupying a managerial or technical position is taxed at 5-32% based on taxable income. Enumerate the 3 special types of aliens 1. 2. 3. Aliens employed by in Regional Area Headquarters and Regional Operating Headquarters of Multinational Companies Alien employed by offshore banking units Alien employed by petroleum service contractor and subcontractor

And all of them are taxed at 15% based on gross income. Differentiate an offshore banking unit (offshore banking system) from a foreign currency deposit unit (foreign currency deposit system). Which of the following is an OBU and which one is an FCDU. Metrobank created and organized under the Philippine law.--FCDU Hongkong Shanghai bank not created and organized under the Philippine law. OBU Which one is subject to 10% based on taxable income? Shanghai What about the metrobank? Definitely not the 10% taxable income. Aside from that subject o gross receipt tax (not part of coverage) Offshore? Meaning? Foreign Banks? Permitted to conduct business in the Philippines. International Carrier Tax rate? Income taxation if there is fraction or decimal it is always .5 How do you define gross Philippine gross billings billings? Sec 28 3 (a) International Air Carrier. - "Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

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So from the port of the Philippines to the foreign destination? Yes Trans-shipment of passenger? One destination from one place to another where the carrier subcontracts with another to complete the destination. Hence, more about connecting flights. Gross Phil billings in that case? Let us say, Philippines to Hongkong is 25miles and from Hongkong to the US is 75 miles. Then the total cost is PhP10, 000. What will be your gross Philippine billings? Will not refer to the total amount but refer only to Phil -Hongkong. Hence, only 2500. What is an offline carrier? *Copied from Dimaampao for extensive understanding* (Bar) An offline airline having a branch office or a sales agent in the Philippines which sells passenger documents for compensation or commission to cover offline flight of its principal or head office, or for other airlines covering flights originating from Philippine ports or off-line flights, is not considered as engaged in business as an international air carrier in the Philippines and is, therefore not subject to Gross Phil Billings but without prejudice to classifying such taxpayer under a different category pursuant to a separate provision. Assuming that it will not stop over but there is an agent selling ticket for that offline carrier, is the income of the agent subject to 2.5 Gross Phil billings? Go back to the definition. Offline- not here in the Phil. Say Hongkong to US but buy tickets here in the Philippines. Is that ticket subject to 2.5 GPB? Not subject to GPB. Subject to income tax? Yes, if it is a corporation 30% but if not, 32% What if it is an offline carrier and there is an emergency. There was an emergency landing in the Philippines and the passengers were sent to Holiday Hotel for 3 days free accommodation with meals. Will that transaction be taxed based on the 2.5 based on GPB? Aircraft entered the Philippine jurisdiction. No. Isnt it Gross Phil Billings if there is stop over in the Philippines? What if that airline will stop over here for 3 days. What is stop over?

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It happens when you have not reached to destination yet. Say, no direct flight from Cebu-Manila. SO you took Cebu-Davao-Manila, hence there was a stopover. It will stop in Davao but you will not be required to go down from the plane.

Change the problem instead of emergency landing, just stayed inside the plane for 3 days. Is it subject to 2.5 Gross Philippine billings? Yes, subject to 2.5 GPB.

But what if you stay for 30 days? Exact number of hours? Sir to class: Is that clear? NOOOOOOOOOOO Sir: In short, there are 2 activities: a. b. One pertaining to the flight itself; and The selling of the tickets.

When we talk about Gross Philippine Billings of 2.5, it refers to the flight itself. If that will enter the Phil jurisdiction, it will be subject to 2.5 GPB except if it involves a stopover of not more than 48hrs except if due to fortuitous event and the state will need longer number of days. But the other activity, even though offline or there is only a agent here in the Phil, it is not subject to 2.5 GPB but subject to another type of income tax, either 30% normal income tax for a corporation or the 5-32%. So you will have to separate the document from the actual flight.

Non-resident foreign corporation is taxable based on? Based on gross income.

Is a Non-resident for corporation subject to MCIT? No, because MCIT is only 2% based on gross income based on 30% based on gross income tax. Always 30% based on gross income. What are the 3 special non-resident corporations? 1. 2. 3. Nonresident cinematographic film owner, lessor or distributor; Nonresident owner or lessor of vessels chartered by Philippine nationals Nonresident owner or lessor of aircraft, machineries and other equipment.

Start with cinematographic, tax rate?

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25% of gross income 2nd, tax rate? 4.5% 3rd, tax rate? 7.5% based on gross income.

Passive income taxes pertaining to a resident citizen? 1. 2. 3. 4. 5. 6. Interest for foreign deposit 7.5% Interest in local deposit 20% Prizes and winning 10% but if below 10K; lotto and sweepstakes-exempt Royalties 20% except musical, literary works and musical composition Capital gains tax on real properties: price or deed of sale, zonal value, or fair market value whichever is higher x 6% Dividends (20% if non resident alien engaged in trade or business; if not engaged letter c 25%! LOL)

Non-resident alien engaged in trade or business 20% Non-resident alien not engaged in trade or business 25% based on gross income Capital gains from sale of shares of stocks not traded in stock exchange First 100,000 is taxable at 5% and in excess is taxable at 10% Passive income tax on corporations: Domestic corporations: Interest- 20% Royalties- 20% Is there a possibility for prizes and winnings in a corporation, in any contests? (ex. Sweepstakes) Answer: it is highly unusual because what is usual is that prizes and winnings are for natural persons Dividend income- there is a possibility but is not subject to tax Capital gains from sale of stocks not traded in stock exchange First 100,00 taxable at 5%, in excess is taxable at 10%

Capital gains from the sale of real properties

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6% based on zonal value, gross selling price and market value whichever is higher

CONCLUSION: THE PASSIVE INCOME TAX FOR RESIDENT CITIZEN AND CORPORATIONS ARE THE SAME EXCEPT FOR DIVIDEND Is it possible that the banking institution will loan money from another banking institution and thereby, the first bank will earn interest? Is that possible? Yes sir. And it is an interest income and it is subject to tax at the rate of 30% because it is not a passive income tax. A banking institution is always a corporation and there is no possibility of being a partnership as it is mandated by law that banking institutions should be a corporation. Resident Foreign Corporations Interest- 20% Royalties- 20% Is there a possibility that a resident foreign corporation will win in a contest? It is highly unusual. Dividends- it is exempted the same as a domestic corporation Capital gains from the sale of shares of stocks not traded in the stock exchange First 100,000 is 5%, in excess is 10%

Can resident foreign corporation buy house and lot? It is not mentioned in section 28, so maybe it is not possible How will you compare a resident foreign corporation from a resident citizen? Are they the same? In general, they are the same except for dividends How about two banking institutions, a resident foreign corporation earns interest income from another banking institution, is that subject to tax? Or are there requirements or conditions? Take note that if the resident foreign corporation earns interest will be subject to 20% final tax. Two resident foreign corporations, the recipient is a resident corporation and the transaction is between two banking institutions, let us say a domestic bank. Will that be subject to tax? This time between a domestic and a resident corporation. Section 28 a number 7b. ANSWER: it shall be subject to 10% if it is involving a resident corporation which is a bank and a domestic corporation which is also a bank. What are the possible passive income taxes that will be imposed to a non-resident foreign corporation? Interest on foreign loans, (refer to section 28 a), capital gains, dividends

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Dividends- the general rule is 30%, the exception is the tax sparing rule which provides 15% tax on dividends on domestic corporation if the foreign government of the non-resident corporation grants tax credit to the tax paid by the non-resident foreign corporation to its income tax abroad, then the Philippines allow the 15% tax on dividends. Is there an exact amount? In 2005, it is 30% that is deducted but starting 2009, it is 15% deducted to the foreign corporate tax rate. The amount you spare will be used to reduce your foreign tax rate. The source of the dividend income is a domestic corporation to be given to another domestic corporation. Dividend income given by a domestic corporation to another domestic corporation. Should it be taxable? IT IS EXEMPT. Dividend income given by domestic corporation, received by resident foreign corporation. Is it taxable? IT IS EXEMPT. Domestic Corporation to non-resident foreign corporation. Is it taxable? YES, AT A RATE OF 30%, except the tax sparing rule of 15%. DIVIDEND INCOME Domestic corporation ----- domestic corporation Tax deferment Domestic corporation --- resident foreign corporation Tax deferment (exempt) Domestic corporation ------ non-resident foreign corporation General rule: 30%. Exception: 15% (tax sparing rule) Tax sparing rule: Illustration: Income. We are trying to entice foreign corporations to invest here in the Philippines. How well we entice them? Reduce the tax so a s not to subject their income to international duplicate income ( the income derived here in the Philippines will be taxed and the same income will be taxed abroad). The amount being spared is 15%, that 15% will be used to reduce the corporate tax rate abroad (foreign country). One of the conditions of giving the 15% will be the amount of the tax spared will be used to reduce the tax base rate abroad or the foreign country. What is tax deferment rule? Tax is deferred until it is received and declared by stockholders. The passive income tax of corporations will be deferred until it will reach to the individual taxpayers. DIVIDEND: Domestic corporation ----- resident citizen- 10% Domestic corporation ------ non-resident citizen- 10%

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Domestic corporation ------- resident alien- 10% Domestic corporation-------- non-resident alien engaged in trade or business- 20% Domestic corporation ----- non-resident alien not engaged in trade or business- 25% How about resident foreign corporation declaring or giving dividends to domestic corporation? It is governed by sections 27, 28a and 28b. Is it taxable? YES at a rate of 30% based on taxable income. ELEVEN CORPORATIONS EXEMPT FROM TAX UNDER SECTION 30 OF THE NIRC 1. 2. 3. 4. 5. 6. 7. 8. 9. Labor, agriculture, or horticulture organization not organized principally for profit Mutual savings banks and cooperative banks Fraternal beneficiary society, order or association Cemetery companies Religious, charitable, scientific, athletic or cultural corporations Business, chamber of commerce, or board of trade Civic league Non-stock, non-profit educational institutions Government educational institution

10. Mutual fire insurance companies and like organizations 11. Farmers, fruit growers or like association *for requisites for their exemptions, please refer to the book of Dimaampao COMMON ELEMENT/S AMONG THE ELEVEN CORPORATIONS: Non-profit Activities of these corporations are for the benefit of third parties not just members No shareholdings If the non-stock, non-profit educational institution is engaged in providing foods and drinks to the students through the canteen, is the canteen subject to income tax? No, because it is provided under the Constitution that all revenues and income derived from nonstock, non-profit educational institutions are exempt from tax. The selling of foods and drinks is incidental to the primary purpose. How about if the non-profit, non-stock educational institution is selling books to the students, will that be subject to income tax?

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No, because it is provided under the Constitution that all revenues and income derived from nonstock, non-profit educational institutions are exempt from tax. The selling of books is incidental to the purpose. Follow the constitution, do not apply the last paragraph of section 30 of the NIRC. Dividend income given by a resident foreign corporation to another resident foreign corporation, is it subject to tax? Yes at a rate of 30%.

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