Escolar Documentos
Profissional Documentos
Cultura Documentos
1
1. There is income, gain or profit (e.g. no reimbursement medrep)
Under realization there must be: 2. The income, gain or profit is received or realized Page | 1
2
1) change in substance
during the taxable year; (known as the
Q1.What is an income?
2) transaction with a 3rd party
realization concept) and (supports Fisher v. Trinidad)
3. The income, gain or profit is not exempt from
Income means the gain derived from capital, from
3
income tax.
labor, or from both combined, including profits gained
4. Complete Dominion (CIR v. Glenshaw Glass Co.)
from dealings in property or as well as any asset
Q3.1. What is the difference between Income
clearly realized whether earned or not.
from capital
income and capital?
& labor? Is
It refers to all wealth which flows into the taxpayer
Income is distinct from capital. Income means all the this a
other than as a mere return on capital. (RR No.2)
wealth which flows into the taxpayer other than a requisite for
mere return on capital while capital is a fund or what
Q2.What is an income tax?
constitutes
property existing at one distinct point in time while
income?
income denotes a flow of wealth during a definite
Income Tax is a tax on the net income or the entire
NO.
period of time. Income is gain derived and severed Because it
income received or realized in one taxable year. It is
from capital. (see CHAMBER OF REAL ESTATE AND can also
levied upon corporate and individual incomes in
BUILDERS ASSOCIATION, INC. V. ROMULO [M ARCH 9, arise from
excess of specified amounts, less certain deductions
2010]).
WINDFALL.
and/or specified exemptions permitted by law.
(See CIR v.
Income
as
contrasted
with
capital
or
property
is
to
be
Glenshaw &
The final tax on certain passive incomes and
the test. The essential difference between capital and Murphy v.
withholding tax on income are embraced within the
income is that capital is a fund; income is a flow. A IRS)
term.
fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by Does it
In CONWI V. CTA [AUGUST 31, 1992], the Supreme
the payment of money from it or any other benefit have to be
Court defined income tax as an amount of money
rendered by a fund of capital in relation to such fund severed
coming to a person or corporation within a specified
through a period of time is called an income. Capital from the
time, whether as payment for services, interest, or
is wealth, while income is the service of wealth. A tax capital
profit from investment.
on income is not a tax on property. "Income," as here before it is
used, can be defined as "profits or gains." (see considered
As stated by the Supreme Court in REPUBLIC OF THE
as income?
M ADRIGAL VS. RAFFERTY [AUGUST 7, 1918]).
PHILIPPINES VS. M ANILA ELECTRIC COMPANY
NO.
[NOVEMBER 15, 2002], income tax is imposed on an
Q3.1.1 Are stock dividends income or (Hevering v.
individual or entity as a form of excise tax or a tax on
Bruun)
capital?
the privilege of earning income. In exchange for the
protection extended by the State to the taxpayer, the
Generally, stock dividends represent capital and do
government collects taxes as a source of revenue to
not constitute as income to its recipient. Mere
finance its activities.
issuance thereof is not yet subject to income tax as
they are nothing but an enrichment through increase
Q3.When is income taxable? (or what are the
in value of capital investment. Such are considered
elements of a taxable income?)
In general
Segues into
the 3rd
requisite.
There may
be an
instance
whereby
those not
considered
as income
will be such
because the
law says
they are.
Direct taxes are those taxes wherein both the tax liability as well
as the impact or burden of the tax falls on the same person
6
Progressive taxes are those taxes imposed where the tax rate
increases as the tax base increases
Q4.2. How
do
you
distinguish
schedular treatment from global
treatment as used in income
taxation?
Definition of Terms
Q5.Define the following terms:
In Section 22(A) to (I), (Z), (GG), and (HH), Tax
Code:
Person
Corporation
General
Professional
Partnerships
(GPPs)
Domestic
(Corporation)
Foreign
(Corporation)
Nonresident
citizen
I:
INCOME TAX
Diff. bet. RC & NRC 2. who leaves the Philippines
during the taxable year to
is based on the
reside abroad either as an
physical presence
and on the nature of
immigrant or for employment
the stay.
on a permanent basis
3. 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. who has been previously
considered a non-resident
citizen and who arrives in
the Philippines at any time
during the taxable year to
reside permanently in the
Philippines with respect to
his income derived from
sources abroad until date of
his arrival in the Philippines
Resident alien
Nonresident
alien
Resident
foreign
corporation
Nonresident
Tokyo
Shipping foreign
case
corporation
Ordinary
Income
Statutory
Minimum
Wage
Minimum
Wage earner
Not subject to
Income Tax
Capital Assets
Net
Gain
Capital
Net
loss
Capital
which defines what capital assets are and those which are not.
are
considered
citizens
of
the
Non-resident citizens
Q9.Who is a non-resident citizen?
The term non-resident citizen means a citizen of
the Philippines:
1. who establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with intention to reside
therein
2. who is an one who leaves the Philippines
during the taxable year to reside abroad
either as an immigrant or for employment on
a permanent basis
3. who is one 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. who has been previously considered a nonresident citizen and who arrives in the
Philippines at any time during the taxable
year to reside permanently in the Philippines
with respect to his income derived from
sources abroad until date of his arrival in
the Philippines
(See Section 22E, NIRC and Section 2, RR No. 0179 [January 8, 1979])
I:
BUT this is
RR No. 01-79 states that to be physically present not solely
abroad most of the time during the taxable year, a controlling.
contract worker must have been outside the RATHER
Philippines for not less than 183 days during such Section 22.
taxable year.This applies to a citizen who needs to be abroad
for the most time but not a contract worker.
Note: As can be seen from the wording of RR No.The moment
01-79, most of the time applies to a contract worker. you leave the
In BIR Ruling 33-00 [September 5, 2000], however,Phils. you are
the CIR held that for overseas contract workers, theconsidered an
time spent abroad is not material as all that is NRC whether
required is for the workers employment contract to or not you
prove the
pass through and be registered with the POEA.
requisites.
Q9.3.
Dual Citizens
are
treated as nonresident citizens of
the Philippines
Q11.
Q12.
Q12.2.2.
Q12.2.3.
Q12.3.2.
A and B inherited properties.
They did not partition the
same and instead invested
them to a common fund and
divide the profits therefrom.
Should they be classified as
an unregistered partnership
subject to corporate income
tax?
Income15
Statutory Inclusions
Q13.
8.
9.
10.
11.
Annuities
Prizes and winnings
Pensions; and
Partners distributive share from the net
income of the GPP
16
Rents
Q13.3. Are improvements made by
lessees taxable as income on the
part of the lessor?
Yes, provided the such buildings or improvements
are not subject to the removal by the lessee. The
lessor may either: (1) report the improvements as
income at the time when such improvements are
completed based on its fair market value; or (2)
spread the life of the lease the estimated depreciate
value of the improvements at termination of the lease
14
It is also important to note in this BIR Ruling that the CIR held
that the allocation of saleable units does not constitute as a taxable
event as no income is actually realized by Avida or Aurora.
15
Previously, we looked into the types of taxpayers. Now, before
proceeding to general principles and source of income rules, let us
look into what is included in the term income; and what is
excluded therefrom.
16
Mere
issuance/
declaration
of stock
dividends
are doesnt
result to
income
Dividends
Q13.4. What are dividends?
The term dividends means any distribution made
by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders,
17
whether in money or in other property.
10
Q13.8.2.
May
cancellation
or
Inventories
Q13.9.1.
Exclusions
Q14.
21
23
The CIR shall not exercise this authority more often than every 3
years.
11
Q15.
24
ii.
pensions,
from
6. Certain
retirement
benefits,
gratuities, more particularly:
i.
7. Miscellaneous
including:
items,
likewise
exempt,
12
Retirement benefits
Q15.1. What are the requirements to
exempt retirement benefits from
income tax?
For the retirement benefits to be exempt from income
tax, the taxpayer is burdened to prove the
concurrence of the following elements:
1. a reasonable private benefit plan is
maintained by the employer;
2. the retiring official or employee has been in
the service of the same employer for at least
ten (10) years;
3. the retiring official or employee is not less
than fifty (50) years of age at the time of his
retirement; and
4. the benefit had been availed of only once
5. The retirement plan must be submitted to
and
approved
by
the
BIR
(see
INTERCONTINENTAL
BROADCASTING
CORPORATION VS. AMARILLA [OCTOBER
29, 2006])
Q15.2. An
employer
maintains
an
13
De Minimis/PERA
Q15.6. What are de minimis benefits?
As defined by RR 3-98 [MAY 21, 1998], de minimis
benefits are benefits of relatively small value offered
or furnished by the employer to his/her employees as
a means of promoting the health, goodwill,
contentment, efficiency of his/her employees. These
benefits are exempt from the withholding tax on
compensation income, and consequently from
income tax, regardless of whether or not the
recipients of the benefits are managerial or rank-andfile employees.
Q15.6.1.
14
Q15.6.2.
Is the enumeration of de
minimis benefits exclusive?
28
General Principles
Q16. What are the general principles of
income taxation in the Philippines
(Section 23, Title II, NIRC)?
Except as otherwise provided in this Code, the
general principles are:
Resident
Citizen
Non-Resident
Citizen
The Tax Credit is 5% of the tax due from you which is substracted. So if the
tax due from you (imposed on the net income) is 90k, and the tax credit rate
is 5%, then the tax due would only be 85k
15
Interests
Dividends
Additionally, it must be noted that only a nonresident alien not engaged in trade or business in
the
Philippines
and
non-resident
foreign
corporations are taxed on gross income while all
other types of taxpayers are subject to tax on net
income (i.e. may claim deductions).
Services
38
You need to
first know
what type
of income
you have,
then the
source and
whether it
would be
taxable in
the PH or
not.
Rents and
Royalties
Royalties
income from
intangible prop.
Rents
income from
tangible prop.
16
Royalties you
pay depending
on where the
capital in used.
So if you use
the intellectual
property
(construct the
design) here,
then you have
to pay taxes
here.
Sale
of
Real
Property
Sale
of
Personal
Property
The execution/
signing of the
contract is
insignificant to
determining
where the sale
of the property
would be taxed.
39
17
Note that in this case, Baier-Nickel argued that the services were
done in Germany. However, she failed to prove hat such was the
fact. Thus, the services were deemed performed in the Philippines,
and, as such, is subject to income tax.
44
A use tax is a type of excised tax levied in the United States
upon otherwise "tax free" tangible personal property purchased by
a resident of the assessing state for use, storage or consumption
of goods in that state (not for resale), regardless of where the
purchase took place.
18
The Indian taxing authorities argued that this was a lookthrough provision a look through provision so that if there was a
transfer, of a capital asset, situated in India, it meant income from
capital gains accruing or arising outside India would be fictionally
deemed to accrue or arise in India.
49
The Indian Supreme Court also noted that the existence of the
Direct Tax Code Bill of 2010 which expressly stated that income
accuring even from indirect transfer of capital assets situated in
India would be deemed to accrue in India but this is not yet in
force.
19
Deductions
Q19. What are the kinds of deductions?
2. Deductions
from
business
and/or
professional income refers to the itemized
deductions in Section 34 (A) to (M) including
those deductible from compensation income,
which a self-employed individual or professional
engaged in the practice of a profession may
deduct.
3. Deductions from corporate income refers to
the itemized deductions in Section 34 (A) to (J)
which corporations (including partnerships other
than GPPs) engaged in trade or business are
authorized to claim
4. Special deductions refer to the deductions
allowed in addition to the itemized deductions
allowable to corporations which may be availed
of by insurance companies and proprietary
educational institutions and non-profit hospitals
as well as estates and trusts.
Business expenses
Q21. What are the requisites for deductibility
of business expenses?50
The requisites are:
1. The expense must be ordinary and
necessary
2. Paid or incurred during the taxable year
3. In carrying on the trade or business of the
taxpayer
4. Reasonable in amount
5. Substantiated by sufficient evidence
Substantiated
What if the income to be taxed comes from a drug cartel
50
Q21.4.1.
Donations to
Yolanda are
deductible
2. Republic Act
Development Act)
51
8502
(Jewelry
Industry
21
Name
some
revenue
regulations
implementing
special laws which provide for
deductible business expenses.
Are
litigation
deductible as a
expense?
expenses
business
22
Q21.4.6.
REPRESENTATION EXPENSE:
a deductible expense on the part
of the employer. But it is not
considered as income on the part of
the employee.
In representation expense, there
must be some benefit to the
business of the taxpayer (e.g. dining
out of office guests/clients).
v. Fringe Benefits deductible
expense and income.
Q21.5.1.
23
Q21.7. Are
bonuses
to
employees
allowable deductions from gross
income?
Yes provided that:
1. They are made in good faith
2. They are given for personal services actually
rendered
3. They do not exceed a reasonable
compensation for the services rendered
when added to the stipulated salaries.
Q21.7.1.
Is
there
a
ceiling
on
entertainment,
amusement
and recreational expenses?
24
25
53
Interest arbitrage
Q26. What is interest arbitrage?
Interest arbitrage results in the reduction of the
interest expense by a percentage of the interest
income subject to final tax. It is also defined as a
circumstance which is presumed to exist because by
putting excess funds in deposits/securities subject to
20% withholding, taxpayers are able to avoid the
32% tax which will happen if the same funds are
invested in revenue-generating activities.
Another illustration of this is when a taxpayer borrows
money from the bank (interest payments on which
26
Taxes
Q27. Are all taxes deductible from gross
income?
No. Section 34(C)(1) provides that all taxes, national
or local, paid or accrued during the taxable year in
connection with the trade or business or
profession of the taxpayer are deductible from
gross income except:
Note that at the time this case was decided, resident aliens were
still allowed to claim a tax credit. The present rule is that only
resident citizens and domestic corporations can claim a tax credit.
Also, in this case, their net income for foreign sources was zero
and, thus, there was no need to apply the tax credit.
27
Rationale for
1.
allowing foreign
income taxes to
be deductible: To
prevent double
taxation.
HOWEVER, only
citizens and
domestic
corporations are 2.
allowed to claim
to tax deductions
because they are
the only ones
taxed globally
(e.g. Pacquiao)
Losses
28
from
wash
sales
29
Q32.1. What are the rules on the carryover of net operation loss by a
taxpayer?
1. The net operating loss of the business or
enterprise for any taxable year immediately
preceding the current taxable year, which had not
been previously offset as deduction from gross
income shall be carried over as a deduction from
gross income for the next 3 consecutive taxable
years immediately following the year of such loss
2. Any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax
shall not be allowed as a deduction
3. A net operating loss carry-over shall be allowed
only if there has been no substantial change in
the ownership of the business or enterprise in
that
(a) not less than 75% in nominal value 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
(b) Not less than 75% 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.
Forex losses
Q33. Are
foreign
deductible?
exchange
losses
30
Bad Debts
Q34. What are bad debts?
Bad debts shall refer to those debts resulting from
the worthlessness or uncollectibility, in whole or in
part, of amounts due the taxpayer by others, arising
from money lent or form uncollectable amounts of
income from goods sold or services rendered.
31
Depreciation
Q35. What is depreciation?
Depreciation is the gradual diminution in the useful
56
value of tangible property resulting from wear and
tear and normal obsolescense.
The term is also applied to amortization of the value
57
of intangible assets, the use of which in the trade or
business is definitely limited in duration.
rationale
behind
32
Capital
Recovery
Concept
you should
be able to
recover your 1.
capital during
the time that 2.
youre using
your asset.
3.
Such asset
can either be
tangible or 4.
intangible
(e.g. patents).
33
Depletion
Q36. What is depletion?
Depletion is the exhaustion of natural resources like
mines and opil and gas wells as a result of production
or severance from such mines or wells.
34
Q37.3. What
is
a
organization?
Is an
international
NGO
qualified
to
be
granted
accreditation?
58
Q38.1. When
is
the
inapplicable?
above
rule
non-government
35
Gross Receipts
Gross Sales
Gross Income
60
36
Non-deductible expenses
Section 36, Tax Code
61
Q42.1. Are
margin
fees
business expenses?
deductible
61
37
income
tax
payable
62
63
38
Individuals
Ordinary and Passive Income
Q47. Differentiate ordinary
passive income.
income
from
For ordinary income over P10,000 but not over P30,000 and
upper brackets, a fixed amount is added to the taxable amount
subject to the graduated income tax rate.
65
Only difference really is the source of income
Q47.3.1.
39
Q47.3.2.
The
long-term
Deposit
substitutes
68
Q47.3.3.
66
40
Ordinary loss
Capital Assets
Net
Gain
Capital
Net
Loss
Capital
69
70
other
Derived by FCDUs:
all
derived
41
Dealer
securities
in
Bank
Non-bank
financial
institution
Quasi-banking
activities
authority is
concerned,
1. Capital gains from the sale of shares of stock no
the seller is
trade in the stock exchange
liable for the
2. Capital gains from the sale of real property
tax.
EXCEPT for
Q49.3. From the above transactions, who mortgage
are the individual taxpayers whose where the
transactions would be subject to mortgagee
capital gains tax?
is the
statutory
The capital gains tax shall be imposed on such seller.
transactions by any individual taxpayer, whether
71
citizen or alien.
42
The tax base shall only be the gain on the sale and
such sale will always be subject to capital gains tax
without any exemption.
The capital gains tax must be paid within 30 days
following each sale or disposition. In case of
installment sale, the return shall be filed within 30
days following the receipt of the first down payment
and within 30 days following the subsequent
installment payments.
(See RR 06-2008 [APRIL 22, 2008])
respect
to For there to
be capital
gains tax, the
property
Q52. What is the rule on capital gains from should be a
dispositions of real property?
capital asset
PRESUMED GAIN you always assume they sell for gain
(property not
The rate of 6% shall be imposed on capital gains used in the
presumed to have been realized by the seller from business &
the sale, exchange, or other disposition of real not principal
properties located in the Philippines classified as residence)
capital assets, including pacto de retro sales and
other forms of conditional sales based on the gross
selling price or fair market value as determined by the
CIR, whichever is higher.
property
made
by an
individual
43
to
the
Yes. The buyer can retain the amount for the capital
74
gains tax and pay it upon authority of the seller, or
the seller can pay the tax, depending on the
agreement of the parties.
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new
Torrens title in his name.
75
Note Section 47 of the General Banking Act, judicial persons
whose property is being sold pursuant to an extrajudicial
foreclosure shall have the right to redeem the property until, but
not after, the registration of the certificate of foreclosure sale with
the Register of Deeds which in no case shall be more than 3
months after foreclosure
44
OCWs/Senior Citizens/Disabled
76
45
Personal
PERA
and
additional
77
Exemptions/
Q56.1. Which
kinds
of
individual
taxpayers can avail of personal
and additional exemptions?
Citizens and resident aliens are allowed personal
and additional exemptions; nonresident aliens
engaged in trade or business in the Philippines
are entitled to personal exemptions only by way of
78
reciprocity but not to additional exemptions.
78
46
Living
those who
are living
away by
force, are
still entitled
to claim
exemptions.
rule
for
married
Are
illegitimate
considered
for
exemptions?
children
additional
R.A. No.
9504
there are no
longer
heads of
families.
80
82
47
Corporations
Q63. Define taxable income and gross
income for purposes of corporate
income taxes.
Taxable
Income
Partnerships (GPPs)83
Q61. What is the tax treatment of a GPP?
The GPP as an entity is not liable for income tax.
However, the persons engaging in business as
partners in a GPP shall be liable for income tax only
in their separate and individual capacities for their
respective distributive share in the net income of the
GPP.
Gross Income
Domestic Corporations
Ordinary Income
Q64. What is the regular corporate income
tax imposed on corporations?
The rate of RCIT imposed on corporations is 30%.
84
83
84
48
subject
to
corporate
Passive Income
Q68. What are some of the certain passive
incomes received by corporations?
1. Interests from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements and
Royalties
2. Income derived under the Expanded Foreign
Currency Deposit System
3. Intercorporate Dividends
4. Capital gains from sale of shares of stock not
traded in the Stock exchange under
85
5. Capital gains from sale of real property
85
49
are
from
domestic
Domestic and resident foreign corporations are taxexempt as they are treated as inter-corporate
dividends. However, for resident foreign corporations,
they are subject to the 15% branch profit remittance
tax.
For non-resident foreign corporations, the dividend is
subject to:
1. Tax treaty rate, if applicable
2. 15% if no tax treaty but satisfies the tax-sparing
provision
3. 30% if no tax treaty and does not comply with the
tax-sparing provision
2. If the dividends are from a foreign corporation:
The income shall form part of the gross income of the
corporation but the situs of the income becomes
material except for a domestic corporation which is
taxed on worldwide income.
87
51
Subsidiary v. Branch
Subsidiary is a domestic corporation
whose equity ownership may be wholly
PM REYES NOTES ON TAXATION I: foreign
Branch and its foreign head office is one
and the same, with the branch being a
INCOME TAX
resident foreign corp. registered with the
(see
CIR
V
.
BOAC
[A
PRIL
30, 1987], AIR NEW
office or a sales agent in the
Z
EALAND
V
.
CIR
[CTA
C
ASE
,
J
ANUARY
30, 2008] and
Philippines which sells tickets?
UNITED AIRLINES V. CIR [SEPTEMBER 29, 2010])
RR No. 15-2002 provides that such off-line airline is
not considered engaged in business as an
international air carrier and is, therefore, not subject
to the Gross Philippine billings tax.
OBUs/FCDUs92
52
Regional
ROHQs
or
Area
Headquarters
and
53
54
Marubeni wanted
to be an RFC
because the tax
was lower than if it
was classified as
an NRFC, in which
case the dividends
are taxes at 15%.
the
non-resident
foreign
corporations whose income is subject to
preferential tax rates.
96
Such corporation shall pay a tax of 25% of its gross income from
sources within the Philippines
97
Such corporation shall be subject to a tax of 4.5% of gross
rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Marina
98
Such corporations shall be subject to a tax of 7.5% of gross
rentals of fees
55
400
200
120
120
80
120
Q80.2.1.
What
is
provision?
tax-sparing
This means that, at the end of the day, the foreign investor
would be paying the same total amount of taxes due to the foreign
country and the Philippines.
400
200
60
60
140
60
100
56
400
200
60
105
120
80
60
105
Q80.2.5.
106
57
In general
Q81. What is the withholding tax system?
The withholding tax system is a procedure through
which taxes (including income taxes) are collected.
58
If youre
Q81.3. When does the obligation to
already
withhold arise?
recognizing
Ex: debt was due on Feb. 17, but was paid 15th.
the paid
When is the tax due? 15th since it was paid
Either
when:
amount as a
then, but if it wasnt paid on the 15th nor 17th,
deduction in
then tax is due by the 17th.
1.
It
is
paid
your books,
2.
It
becomes
payable (i.e. it is legally due,
you will have
demandable,
or
enforceable)
to withhold
such at the 3. It is accrued as an asset or expense
end of the In FILIPINAS SYNTHETIC FIBER CORPORATION V. CA
[OCTOBER 12, 1999], the Supreme Court stated that
quarter.
the Tax Code is silent as to when the duty to withhold
taxes arises. In this case, to determine when the duty
to withhold the taxes arose, the Court inquired into
the nature of accrual method of accounting, the
procedure used by the taxpayer, and to the modus
vivendi of withholding tax at source come. It noted
that under the accrual basis method of accounting,
income is reportable when all the events have
occurred that fix the taxpayers right to receive the
income and the amount can be determined with
reasonable accuracy. Such method is allowed by law
in reporting incomes.
types
of
CWT
Taxes withheld on certain
income payments are
intended to equal or at
least approximate the tax
due of the payee on said
income.
Payee
of
income
59
is
The
payee
is
not
required to file an income
tax
return
for
the
particular income.
60
Q85.2. Since
CWT
is
but
an
approximation, what happens if
there is excess payment or
deficiency in payment?
Withholding on Wages
110
61
Q88. Are
backwages,
allowances
and
benefits awarded in a labor dispute
subject to withholding tax?
Yes. Backwages, allowances, and benefits awarded
in a labor dispute constitute remunerations for
services that would have been performed by the
employee in the year when actually received, or
during the period of his dismissal from the service
which was subsequently ruled to be illegal. The said
back wages, allowances and benefits are subject to
withholding tax on wages. (see RMC 39-2012
[August 3, 2012])
62
Withholding
Agencies
Tax
by
Government
Special Rules
Minimum Corporate Income Tax
Q90. What is the minimum corporate income
tax (MICT?)
A minimum corporate income tax of 2% of gross
income shall be imposed on a domestic
corporation and resident foreign corporation
beginning on the fourth taxable year immediately
following the year in which such corporation
commenced its business operations when:
1. the MCIT is greater than the RCIT for the taxable
year.
2. such operation has zero or negative taxable
income
(see Section 27(E), Section 28(A)(2), Tax Code and
RR 9-98 [August 5, 1998], as amended by RR 122007 [October 10, 2007])
63
RCIT
MCIT
112
Excess
MCIT
against
RCIT
This only shows that deductions are not taken into account in
MCIT.
113
This means that the term "gross income" will also include all
items of gross income enumerated under Section 32(A) of the Tax
Code, as amended, except income exempt from income tax and
income subject to final withholding tax
1998
50,000
1999
60,000
2000
100,000 (tax
to
be
115
paid)
75,000 (tax
to
be
114
paid)
100,000 (tax
to be paid)
60,000
25,000
40,000
114
64
119
65
66
Q91.9. Abbot-Phils,
a
domestic
corporation,
is
a
wholly
owned
The subsidiaries of foreign
corporations are exempt subsidiary of Abbot-US, a nonfrom IAET provided that
resident
foreign
corporation.
after applying the
Abbot-Phils claims that by virtue
grandfather rule, they are
of this, it is exempt from the IAET.
not closely-held
Is this contention correct?
corporations.
Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR
ruled that Abbot-Phils was exempt from IAET. Since
Abbott-Phils. is a wholly-owned subsidiary of AbbottUS, such shares will be considered as being owned
proportionately by the Abbott-US shareholders. The
ownership of a domestic corporation for purposes of
determining whether it is a closely held corporation or
a publicly held corporation is ultimately traced to the
individual shareholders of the parent company. Thus,
where at least 50% of the outstanding capital stock or
at least 50% of the total combined voting power of all
classes of stock entitled to vote in a corporation is
owned directly or indirectly by at least 21 or more
individuals, the corporation is considered publiclyheld corporation. As of the year-end 2000, Abbott-US
had 101,272 shareholders holding a combined
1,545,934,133 shares of common stock and the
twenty largest shareholders of Abbott-US as of
September 30, 2001 own an aggregate of 30.1
percent of Abbott-US' issued and outstanding shares.
Thus, Abbot-Phils is a publicly-held corporation
exempt from IAET.
67
PM
REYES NOTES ON TAXATION I:
T
INCOME TAX
FB no longer
form part of
the income
of the
employee
since FBT is
a final tax for
which the
employer is
paying
already.
The principle
behind TP is
It is the power of the CIR to distribute, apportion, that you
allocate, and shift income and expenses between want what is
related taxpayers to reflect their true taxable income an
or to prevent evasion of taxes.
acceptable
tax between
At present, the Philippines does not have any the parties.
guidelines on transfer pricing unlike in other
jurisdictions. RMC 026-08 [March 24, 2008] states
that while the BIR is still revising the final draft of the
RR on transfer pricing, the BIR as a matter of policy
subscribes to the OECD Transfer Pricing Guidelines
in the interim.
leave
behind three 122 A managerial employee refers to one who is vested with powers
or prerogatives to lay down and execute management policies
wheels to
pay for the and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees
tax.)
123
A supervisory employee is one who, in the interest of the
employer, effectively recommends such managerial actions if the
exercise of such authority is not merely routinary or clerical in
nature but requires the use of independent judgment.
124
A rank-and-file employee means all employees who are holding
neither managerial or supervisory position
125
The purpose of getting the grossed-up monetary value is to
preserve the benefit to the employer as a whole.
126
68
127
The arm's length interest rate shall be the rate of interest which
was charged or would have been charged at the time the
indebtedness arose in independent transaction with or between
unrelated parties under similar circumstances.
Filinvest
Development
Corporation (FDC) extended
advances in favour of its
affiliate. The BIR assesses
FDC for deficiency income by
unilaterally imputing an arms
length interest rate on its
advances. FDC disputes this
by saying the CIR lacks
authority to impute theoretical
interest and the rule is that
interests cannot be demanded
in the absence of a stipulation
to that effect. Is FDCs
contention correct?
Special Entities
Proprietary Educational Institutions and
Hospitals
Q94. What is the tax treatment of proprietary
education institutions and hospitals
which are non-profit?
Reconcile Sec.30 (activity for profit) & Article XIV of the Constitution (utilization)
harmonized in the sense that your activity is for the benefit of profit-making
and not exclusively for educational/charitable purposes. However, if it was
income from profit, then there would be contradiction with C.
128
100M derived from the education business. 60% is dedicated for non-educational
purposes. Under Sec.27, the 50% rule applies on (1) non-stock, proprietary schools
PIERRE MARTIN DE LEON REYES and (2) non-stock, non-proprietary hospitals.
69
The source has to arise from the primary purpose. Income should be generated by
the educational purpose. Otherwise, it is not shielded by the 10% benefit.
129
70
GOCCs
Q95. Are
GOCCs,
agencies
and
instrumentalities owned and control by
the government liable to pay income
tax? Passive income is not part of the exempted income.
All corporations, agencies, or instrumentalities owned
or controlled by the government shall pay such rate
of tax upon their taxable income except:
1.
2.
3.
4.
5.
GSIS
SSS
Phil Health
133
Local Water Districts
PCSO
133
Inserted by RA 10026.
The Court, however, made clear that PAGCOR remains to be
exempt from indirect taxes.
134
Exempt Corporations
Q96. What are the exempt corporations
enumerated in Section 30 of the Tax
Code?
1. Labor, agricultural or horticultural organization
not organized principally for profit
2. Mutual savings bank not having a capital stock
represented by shares and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit
3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or other
benefits exclusively to the members of such
society, order, or association, or non-stock
corporation or their dependents
4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Non-stock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any
specific person
6. Business 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 private stockholder or individual
7. Civil league or organization not organized for
profit but operated exclusively for the promotion
of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution
10. Farmers or mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company or like
organizstion of a purely local character, the
income of which consists solely of assessments,
dues, and fees collected from members for the
sole purpose of meeting its expenses; and
11. Farmers, fruit growers, 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 quantity of produce finished by
them.
71
clubs
exempt
Q96.1.1.
Q96.3. Are
all
the
activities
of
corporations enumerated in Q90
exempt from tax?
No. Notwithstanding that they are exempt
corporations, the income of whatever kind and
character of the organizations mentioned above from
any of their properties, real or personal, or form any
of their activities conducted for profit regardless of the
disposition made of such income shall be subject to
tax imposed under the Code.
If a non-stock, non-profit
educational
institution
charges tuition and other fees
for the different services it
renders, does the institution
lose its tax-exempt status?
72
135
73
A REIT
shall be subject to income tax on its
taxable net income defined in the Act as the pertinent
items of gross income less all allowable deductions,
less the dividends distributed by the REIT out of its
141
distributable income. In no case, shall the REIT be
subject to MCIT.
Note, however, that if the REIT (1) fails to maintain its
status as a public company as defined in the Act; (2)
fails to maintain the listed status of the investor
securities on the Exchange; and (3) fails to distribute
at least 90% of its distributable income, the income
tax shall be imposed on taxable net income not as
defined in the Act but as defined in the Tax Code.
Capital
assets/income
Assets/income
v.
Ordinary
140
74
Shares of
stock is
different
from stock
in trade.
142
75
Capital
Net
loss
Capital
HOLDING
76
Basis
of
Stocks
and
Securities
acquired
in
Wash Sales
144
Exchange
of
Property
Exchanges) A (6M) B (10M) C
(Tax-Free
Definitions not taxable to the extent that taxpayer does not have the
wherewithal to pay.
Merger
or
Consolidation
77
Control
substantial
portion
of
the
property of the transferor,
property shall be taken to
include cash assets
Means ownership or stocks in a
corporaion possessing at least
51% of the total voting power of
all classes of stock entitled to
vote
as
tax-free
Merger or Consolidation
Q101.1. A,
B,
C
were
majority
stockholders of ABC Theatrical
78
Q101.6. What
are
the
differences
between a de facto merger and a
statutory (ordinary) merger?
In a de facto merger, the Transferor is not
automatically dissolved unlike in the case of a
statutory merger. Likewise, there is no automatic
transfer to the Transferee of all the rights, privileges,
and liabilities of the Transferor in the case of de facto
merger.
merger
control
requirement
79
Assumption
Exchanges
of
Liability
in
Tax-Free
80
Business Purpose
Q101.12. A owns all the stock of ABC
Corp. ABC Corp. had 1,000
shares of XYZ Corp. A formed
a new corporation called DEF
Corp. A had ABC transfer all
1,000 XYZ shares to DEF. She
then
dissolved
DEF
and
liquidated the assets (the XYZ
shares). A then sold the XYZ
shares
and
paid
the
corresponding CGT based on a
lower cost basis. Is the transfer
valid?
.
Rulings
Q101.13. Is there a prescriptive period
for
rulings
issued
in
connection
to
tax-free
exchanges?
Yes. RMC 40-2012 [August 3, 2012] provides that
rulings issued under Section 40 (C) (2) of the NIRC,
as amended, shall be valid only for ninety (90) days
counted from the date of receipt of the ruling by any
of the parties to the exchange transaction. The
properties and shares of stocks involved in the
transfer should be conveyed to the transferee/s and
transferor/s, respectively, within this period.
81
Administrative Provisions
Accounting Methods
Q102. What are accounting methods that
may be used by taxpayers?
The methods are:
1. Cash Method a method of accounting
whereby all items of gross income received
during the year shall be accounted for in
such taxable year and that only expenses
actually paid shall be claimed as deductions
during the year
2. Accrual Method method of accounting for
income in the period it is earned, regardless
of whether it has been received or not.
Expenses are accounted for in the period
they are incurred and not in the period they
are paid.
3. Installment Method method of accounting
considered appropriate when collections of
the proceeds of sales and incomes extend
over relatively long periods of time and there
is strong possibility that full collection will not
be paid. As customers make installment
payments, the seller recognizes the gross
profit on sale in proportion to the cash
collected during the year. (see Section 49,
Tax Code)
4. Percentage of Completion Method
method of accounting applicable in the case
of a building, installation or construction
contract covering a period in excess of one
year, whereby gross income derived from
such contract may be reported upon the
Hybrid Method
Q102.1. Can
a
taxpayer
use
a
combination of two or more
methods of accounting?
No. The rule is that a taxpayer may use any one
method of accounting but not a combination of two or
more methods of accounting for each type of
business during the taxable year. The use of a hybrid
method of accounting is not allowed (see
CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])
Installment Basis
Q102.3. A sold lots to ABC Corp and was
"Discount" -- you "buy" the checks for a lower amount than what
the check stands for.
Whatever you get from discounted sales is no longer part of the
real estate. The tax on it is not tied to the sale of real82
property.
Accounting Period
Q103. What is the general rule for computing
the taxpayers taxable income?
The taxable income shall be computed upon the
basis of the taxpayers annual accounting period
fiscal year or calendar year as the case may be.
his
Individual Return
Who are required to pay
You are required to file However, a citizen of the Philippines and any
ITR even if you have no alien individual engaged in business or
net for the year because practice of profession within the Philippines
shall file an income tax return, regardless of
your deductions are
the amount of gross income.
always subject to scrutiny
2. An individual with respect to pure
compensation
income
derived
from
sources within the Philippines (substituted
filing)
Where to file
When to file
Q108. When is the income tax return filed?
The following rules shall govern the time of filing of
income tax returns:
15th day of the 4th month following the close of the taxable year
1. The return of any individual shall be filed on
or before April 15 of each year covering
income for the preceding taxable year.
2. Individuals subject to tax on capital gains
;
a. From the sale or exchange of shares of
stock not traded thru a local stock
exchange shall file a return within thirty
(30) days after each transaction and a
final consolidated return on or before
April 15 of year covering all stock
transactions of the preceding taxable
year; and
b. From the sale or disposition of real
property shall file a return within thirty
(30) days following each sale or other
disposition.
84
Where to pay
Corporation Returns
Q111. Who are required to file a corporate
return?
Every corporation, except foreign corporations not
engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return.
147
The return shall be filed by the president, vicepresident or other principal officer, and shall be sworn
to by such officer and by the treasurer or assistant
treasurer.
Where to file
Q114. Where should the quarterly income
tax declaration and final adjustment
return be filed?
They shall be filed with the
1.
2.
3.
4.
When to file
Q115. When should the quarterly income tax
declaration and final adjustment
return be filed?
The corporate quarterly declaration shall be filed
within 60 days following the close of each of the first
here quarters of the taxable year.
The final adjustment return shall be filed on or before
th
th
April 15, or on on or before the 15 day of the 4
month following the close of the fiscal year, as the
case may be.
When to pay
Q116. When should the income tax due be
paid?
The income due on the corporate quarterly returns
and final adjustment income tax returns shall be paid
at the time the declaration or return is filed.
86
Return of GPPs
Yes. Although
Return of Receivers,
Bankruptcy or Assignees
Trustees
in
87
88