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1
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
DON’T CONFUSE YOURSELF WITH THE PROGRESSIVE TAX - all income actually and constructively received
RATE FROM THE PROGRESSIVE SYSTEM OF TAXATION. including the income already earned but not yet
received without deducting anything.
c. COMPREHENSIVE - HOW DO YOU GET GROSS INCOME? It’s all income
The Philippine income taxation is comprehensive received by the taxpayer without applying any of the
because: deductions.
1. It lists down the types of income which are subject - example: non-resident foreign corporations
to Philippine income tax; They are taxable on their income
2. There’s a specific provision in the NIRC which covers earned in the Philippines only and they
all types of income, even if they are not specifically are taxed at gross. Meaning, the
listed in the NIRC. nonresident foreign corporations may
not be allowed any sort of deductions.
2
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Now, we’ve been talking about tax. Preliminarily we have the BIR and pay the corresponding taxes before I will be
discussed that income tax is actually a double tax. This has given a clearance for the closure of my business.
something to do with the tax period. Normally, income tax
is an annual tax. It is yearly imposed – 12 months. There are
three types of accounting periods. KINDS OF TAXPAYERS
Definition of taxpayer – Sec. 22(n), NIRC
KINDS OF TAXABLE PERIODS
(Secs. 43, 46, 47, NIRC) SEC. 22 Definitions - When used in this Title:
xxx
1. Calendar Period (N) The term "taxpayer" means any person subject to
tax imposed by this Title.
The twelve (12) consecutive months starting on
January 1 and ending on December 31. SEC. 22 Definitions - When used in this Title:
(A) The term "person" means an individual, a trust,
2. Fiscal Period estate or corporation.
Fiscal Period is allowable only when the taxpayer Even if these entities have no legal personality, but for
involved is a corporation. purposes of income taxation, these entities, estate and
trust, are considered as a person. Again, just for purposes
3. Short Period of income taxation.
It is a shortened tax period, not the entire 12-month That’s why when someone dies, you will have to notify the
that is supposedly the annual period for accounting. BIR, mag notice of death kayo. It is important, that is one of
the requirements of estate taxation because an estate will
It is that shortened tax period resulting from: have to be issued another TIN.
3
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
PERMANENT EMPLOYEES
INDIVIDUALS Second, Sec. 22 (E)(2) pertains to PERMANENT EMPLOYEES.
There are 2 definitions given here:
Individuals are covered under Section 23, subsection A, B, 1. Immigrant – These are Filipinos who leave the
C, and D. Philippines to permanently reside abroad. (So
pwedeng green card holder sa US)
Classification of Individuals 2. For employment on a permanent basis – These
(1) CITIZENSHIP – you have citizens and aliens persons leave the Philippines to permanently
reside abroad as an immigrant because his
CITIZENS permanent employment requires him to stay
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
abroad. (i.e. nurses, butchers in Australia, The Filipino citizen is The Filipino citizen is
embalmers) permanently abroad abroad most of the time
because of employment. during the taxable year
Problem: because of his
Suppose I’m a Filipino residing and working in Davao City. I employment.
operate a funeral parlor. In the middle of the year, my visa
“PHYSICALLY PRESENT ABROAD MOST OF THE TIME”
for permanent residency in Japan was approved. I have to
Under Revenue Regulation 1-1979, the phrase means:
leave the Philippines because I have to work there as an
A Filipino citizen whose stay outside the Philippines
embalmer permanently. Despite of, I keep my funeral parlor
for not less than 183 days.
open in Davao City. So I have an employment in Japan and
When Kim Henares came, the not-less-than-183-day rule
permanent employment. On July 1, I left the Philippines for
changed.
good. What is the taxability of my income?
BIR Ruling 517-2011
This is a very tricky question because it has something to do
Facts: This involves local engineers whose employment
with the classification of a tax payer.
contract is with a domestic corporation (Filipino
Corporation) but then from time to time, they are sent
The NIRC will not give us the answer. Let’s look at Revenue
abroad because their duties and responsibilities involves
Regulations 1-1979.
work to be done abroad. If you count the days they were
1. Is my income here in the PH in my funeral parlor,
abroad, although they are employed here in the
taxable or not? TAXABLE. As a Filipino citizen, my
Philippines, it exceeds 183 days.
income in the Philippines will be subjected to
Philippine income taxation..
Issue: What is the taxability of the income received by the
local engineers?
2. What about my compensation income earned in
Japan beginning July? So the question here is: When
BIR Ruling: The Engineers cannot qualify as a non-resident
will I begin to be considered as a non-resident
citizen because of the phrase “employment thereat”.
citizen? According to the Revenue Regulation 1-
1979: It begins from the time the taxpayer ACTUALLY
Meaning, for all the work they have done abroad, even
DEPARTED from the Philippines. Meaning if I am able
if its 183 days, it’s still taxable under the Philippine
to prove to the Commissioner of the Internal Revenue
jurisdiction. Sabi nang BIR, “employment thereat” as
that I have a permanent employment abroad and
used in paragraph 3 Section 22(e) means that the
from the time I left the PH on July 1, I am already
individual must be employed in such country.
considered as a non-resident citizen.
Meaning, the BIR somehow disregarded the 183 day-
rule and looked at where the employment contract
So from January to July I will still be considered as a
was entered. It doesn’t matter if you render service
resident citizen. But after July 1 upon the satisfaction
abroad as long as the employment contract is entered
of the Commissioner proving my intention to be
here in the Philippines and the employee is still
permanently employed abroad I will be considered as
connected to the Filipino Corporation or Domestic
a non-resident citizen. I will taxable only in my income
Corporation.
earned within the PH. Legal basis for that is the
Revenue Regulation 1-1979.
The above rule is kind of weird for 3 reasons:
1. It disregarded the 183-day rule. There is a Revenue
xxx Regulation providing this 183-day ruling and yet,
(3) A citizen of the Philippines who works and the BIR seems to disregard that Revenue
derives income from abroad and whose Regulation.
employment thereat requires him to be
2. For the first time, the BIR tried to define the term
physically present abroad most of the time “employment thereat”. In here, it said that there
during the taxable year.
must be an employment contract and that said
xxx employment contract must be abroad.
3. The ruling disregarded the rules on situs of
Loosely speaking, let’s call them contract workers. Please taxation. For purposes of rendition of service, if
do not quote this in your exam notebook. This is just my way there is an income arising from rendition of service,
of referring to the provision. what is the situs of the income? It is supposed to be
SEC. 23. (E) (2) SEC. 23 (E)(3) the place where service was rendered. In this case,
where was the service rendered, is it in the Ph? No!
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
The BIR said that he is considered as a resident citizen. (continuation of Sec. 23(E))
Because, the secondment abroad does not necessarily xxx
make an employee a non-resident citizen. In this case, (4) A citizen who has been previously considered as
the secondment was merely temporary, he continued nonresident citizen and who arrives in the
to be employed with the DSWD and has no intent to Philippines at any time during the taxable year
reside abroad. to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen for
Again the question, what about the Revenue Regulation the taxable year in which he arrives in the
defining a non-resident citizen on top of temporary Philippines with respect to his income derived
employment? And second, what is the situs of the income? from sources abroad until the date of his arrival
So which is which? in the Philippines.
If we look at the BIR ruling, what seems to be the factor The taxpayer shall submit proof to the Commissioner to
now is the EMPLOYMENT CONTRACT, where that show his intention of leaving the Philippines to reside
employment contract is entered by the parties. Wala na tay permanently abroad or to return to and reside in the
pakealam sa situs, wala na tay pakealam sa time-frame, as Philippines as the case may be for purpose of this
long as the employee remains to be employed in a domestic Section.
entity, he will still be considered as a resident citizen for
purposes of this compensation income even if he or she is BALIKBAYAN
abroad most of the time during the taxable year. A citizen who has been previously considered as
nonresident citizen and who arrives in the Philippines at any
Looking at the BIR Rulings and the BIR Regulation, which do time during the taxable year to reside permanently in the
we follow? Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines
As of now there is no SC decision yet. Dean and I with respect to his income derived from sources abroad
discussed this and he said that he doesn’t believe in until the date of his arrival in the Philippines. (Section
this ruling because it is merely a Ruling, it may be 22(E)(4), NIRC)
overturned later on. Probably this was only brought
about by Kim Henares.
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
To answer that, we must ask the question: What is my That is why, kung intention lang, it’s very difficult for you
status as a taxpayer here in the Philippines? Status as to determine that intention, the take of Dean is, his
an individual. position is:
Am I a resident citizen? Or am I still considered as a From the ENTIRE TAXABLE YEAR, you will still be
non-resident citizen? considered as A NON-RESIDENT CTIZEN, but the
following year, in 2019, RESIDENT NA AKO.
If you will read the provision, ”A citizen who has been
previously considered as nonresident citizen and who That’s how Dean interprets it. Because of that
arrives in the Philippines at any time during the taxable “INTENTION”, how are you supposed to show that?
year to reside permanently in the Philippines shall
likewise be treated as a nonresident citizen….” Sinasabi ko bang mali si Dean?
7
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
“That a seaman who is a citizen of the Philippines and To summarize it all, only resident citizens are taxable on
who receives compensation for services rendered their income globally.
abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be
treated as an overseas contract worker. (Section 23(C), ALIENS
NIRC)”
1. RESIDENT ALIEN/S
OFW/OCW REGISTERED IN THE POEA
Now, there is also this rule that if OFW is registered in Section 22(F),NIRC:
the POEA, wala na tayong problema. Kasi pag
rehistrado na, AUTOMATICALLY considered as (F) The term "resident alien" means an individual whose
OFW/OCW within the meaning of this provision. residence is within the Philippines and who is not a
citizen thereof.
But if these people are not registered in the POEA, YOU
CANNOT APPLY THE OCW. You apply the 183 DAY RULE.
a. He is not a mere transient or sojourner
Sir is referring to this provision: b. He has no definite intention as to his or her stay
A citizen of the Philippines who works and derives c. His purpose is of such nature that an extended
income from abroad and whose employment thereat stay may be necessary for its accomplishment (i.e.
requires him to be physically present abroad most of Germans brought by NGOs to the Philippines to
the time during the taxable year. (Section 22(E)(3), stay for 1 to 2 years are considered Resident
NIRC) Aliens)
8
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Those who don’t fall under these 2 Why are MWEs considered as a special type of taxpayer?
classifications, will fall under NETBs. Maybe because they are exempt from income
taxation.
2. NONRESIDENT ALIEN NOT ENGAGED IN TRADE
AND BUSINESS (NRANETB) - refers to
nonresident aliens who stay in the Philippines for
an aggregate period of 180 days or less. (Revenue CORPORATIONS
Regulation 8-2018, Section 2(L).
There is a technical definition of Corporation. Iba ang
Why is there distinction? Because later on there are definition ng Corporation sa taxation and sa Corporation
different tax consequences for these types of Code. So, don’t be confused.
individuals.
SEC. 22. Definitions. - When used in this Title: x x x
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
2. Joint Venture or Consortium formed for the General Co-Partnership is taxed as a corporation. It is
purpose of undertaking construction projects or subjected to regular corporate tax.
engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating Co-ownerships - as a rule are not taxable. They are not
consortium agreement under a service contract considered entities to begin with. The fact that they are co-
with the Government. owners does not mean that they formed a partnership.
2 CLASSIFICATIONS OF CORPORATIONS Joint Ventures - in joint ventures, you have first identify the
1) DOMESTIC CORPORATION activities of that joint ventures.
GR: Joint ventures are corporations.
2) FOREIGN CORPORATION XPN: Joint venture or consortium formed for the
a. RESIDENT FOREIGN CORPORATIONS purpose of
b. NON-RESIDENT FOREIGN CORPORATIONS 1) undertaking construction projects or
2) engaging in petroleum, coal, geothermal
ONLY DOMESTIC CORPORATIONS ARE TAXABLE ON THEIR and other energy operations pursuant to
INCOME GLOBALLY. The rest of the corporations are taxable an operating consortium agreement
on their income earned within the Philippines. under a service contract with the
Government.
10
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
SOURCES OF INCOME What is being taxed by our NIRC is the income not the
capital. There must be something which increases your
1. Services rendered or labor wealth.So anoang ita-tax ninyo? Yung increase lang. its not
2. Capital enough that ypu determine if it is income going further you
This is not limited to money or property. You can must determine if that income is taxable.
also have your own profession or own services as
capital
Ex: If maayo ka mamasahe, you can make
a business out of it; if you’re a lawyer, you TAXABLE INCOME
render services A stupid definition would be – “Taxable income is net
3. Gains from Exchange of Properties income subject to tax.” But it works! Section 31 of
The most basic definition of income is a “gains the NIRC provides for the definition of taxable income:
from profit.” It is not limited merely on money
or property which you Section 31. Taxable Income Defined.
The term taxable income means the pertinent items
Is income synonymous from receipts? of gross income specified in this Code, less the
No. Pagsinabi mong income it’s the gain or profit deductions and/or personal and additional exemptions,
pag sinabi mong receipt it doesn’t necessarily result to if any, authorized for such types of income by this
income. Receipts is a broader term something which you Code or other special laws.
receive and includes income.
So if you go by the definition you start with Gross Income.
This is not yet your taxable income. This is the point
CAPITAL AND INCOME before any deductions – wala pang bawas. To
One favorite bar question is distinguish income from demonstrate:
capital, so how do you distinguish it?
Gross Income xx
INCOME CAPITAL Less: Deductions (xx)
Flow of such wealth Wealth Personal Exemptions (xx)
Taxable Income xx
Fruit Tree
11
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Facts:
So the BIR investigated the corporation’s income tax
return. They found out that there was under preparation
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
of income, so meron syang tax assessment. BIR asked accounting period in accordance with the method of
the corporation to pay. Anong sabi nang corporation? accounting regularly employed in keeping the books of
One of their defense sabi nila “why do we have to pay such taxpayer xxx
the taxes, we didn’t actually receive the income? Sabi ng
BIR “No, natanggap mo, tinanggap na ng president mo, The only time that the BIR can compel the tax payer to a
ng representatives mo ” The corporation said “there has particular accounting method or accounting system:
been an internal turmoil in the corporation, we already
remove the authority of the president to relthe rent and 1. When the method chosen by the tax payer does
we also revoke the authority of existing agents or not reflect the true income of the company or
representatives from receiving the rent.” business;
2. When the tax payer does not employ any
Issue: method at all.
Should the corporation declare that income received by
the president and representative of the corporation?
Q: Now what are the different accounting methods that are
being used or that is allowed by the BIR?
Ruling:
Yes. It should have been declared income because there A: In general, there are 2 ACCOUNTING METHODS:
was a constructive receipt of the rent income. A 1.) Cash method
corporation can only act through its officers, agents and 2.) Accrual method
representative. Whatever payment that has been made
through its agent, it is good as if it was received by the
corporation regardless of internal turmoil that have Cash Method:
been happening in the corporation.
This is mostly employed in small businesses. The
moment you receive cash, It’s part of your income and
Example 4: Consignment in court the moment you spend cash its already part of your
*Excerpt From 2017 TSN, Sir did not discuss this in detail. expenses. Regardless of your dealing with your client in
your business or company, you will not recognize it as an
What about the money paid to the court? Consignment to income as long as you did not receive any cash, and as
the court is also a constructive receipt. Once you deposit it an expense, if you did not spent anything in cash.
in court, you lose control of the money and the person who
is entitled to receive the money has the complete control
and discretion whether or not to withdraw the money. In Accrual Method:
other words, sala sa corporation why it did not withdraw
the money from the court. In accrual method, income is recognized when it is
earned regardless where it has been received or not, or
Since there is a constructive receipt of an income, the expenses are accounted for in the period when they are
taxpayer is obliged to report it and pay the corresponding incurred, even when not yet paid.
income tax
Lets put it this way:
ACCOUNTING METHOD: In accrual method, the moment that you render the
service, or the moment you delivered the good, there is
Q: Why is it important for you to know about accounting already an income. This is even if you have not received
method? the money yet. In the same way if there is an incurring
A: It is because the accounting method or methods billing or an expense, even if you have not spent
employed by the tax payer has a bearing on the anything on it, you will treat as part of your expenses.
recognition or realization as an income.
(Excerpt from 2016 TSN)
Take note that the BIR does not prescribe any accounting
method to be used by the taxpayer. So in choosing the Under the accrual method, income is recognized when
accounting system, it is an actual part of the tax payer. the requisites of the test has been complied with. What
are the 2 requisites?
Sec 43: General Rule.— The taxable income shall be 1.) Fixing a right to income or liability to pay.
computed upon the basis of the taxpayer’s annual
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
3. Deferred Payment Method (from 2016 TSN) Why is it important to know this? Because generally
It is applied when the initial payments will exceed 25% speaking, because the income subject to tax is the Net
of the contract price. This is in installments but your Taxable Income.
downpayment is bigger. Malaki ang matatanggap mo
within a single year because it is more than 25%. What In determining gross income, you must identify the ff.:
is the effect of that? In the deferred payment, the 1. Whether or not the property or money you
entire income will be recognized on the first year of the received is income?
contract even if there are payments still to be made by 2. If what you received is income, is it part of your
the buyer or the payor for the succeeding years. gross income?
For you to find you regular income tax, you must look for
4. Percentage of Completion Method (from the 2016 the Net Taxable Income.
TSN)
More on the construction.
14
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
I repeat this is not about the computations, this is not about speaking,when you say “except as otherwise provided in
the numbers, but this is about the compositions. this Title”, it is refers to two things which are:
1. It is excluded by law- meaning there is specific
This is about what composes gross income; what provision under the NIRC or any special law
composes exclusions; what composes exemptions and exempting the income from income taxation; or
deductions. 2. If the income is subject to Final Tax.
15
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
3. Other Income necessarily mean that it’s part of the business income.
It probably is part of the other income. This is because
So basically, if you sum it up, the composition of gross we also have this concept of a (?) director that can be
income is only three. We will discuss them one by one. someone outside the corporation but is a sitting
director of a corporation.
So it may form part of business income or other 1. The allowance is a necessary and ordinary
income, but definitely not compensation income. expense of the employer.
o It’s normal for the employer to give such
kind of allowance to the employee.
MODE OF COMPENSATION IS IMMATERIAL 2. The allowance given to the employee is subject
Also please take note that the mode of compensation to accounting and liquidation.
is immaterial. So long as the person or taxpayer is 3. The expenses must be substantiated.
receiving the money or property under an ER-EE o This means that the expenses are
relationship, it’s considered as compensation income. supported by receipts and documents.
16
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
does not take the form of compensation at all because SEPARATION PAY
it is not money given by the employer as payment for What if a person gets separated from work? What if he
services rendered by the employee. is re-trenched?
As we discussed earlier, there are two types of allowances: GR: Retirement pay and separation pay form part of
fixed or variable. Does it matter? your gross income. Vacation leaves, sick leaves,
No. Please take note of the 3 requirements. It doesn’t service incentive leaves, still form part of gross
really matter if it’s fixed or variable, but once it is income.
subject to liquidation and it’s an ordinary and XPN: Monetized unused vacation leave credits of
necessary expense for the employer, it will be employees not exceeding ten (10) days or less;
excluded from the compensation income. - as provided under revenue regulations
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind; Recap: Compensation Income is one of the lengthy
(4) Household personnel, such as maid, driver and others; discussions mainly because there are many forms of
(5) Interest on loan at less than market rate to the extent compensation income which has different tax
of the difference between the market rate and actual treatments. Some of them are subject to the regular tax,
rate granted; some of them are subject to final tax and some of them
(6) Membership fees, dues and other expenses borne by are actually excluded from the gross income.
the employer for the employee in social and athletic
clubs or other similar organizations; We are still in fringe benefits. Before that, I’ve already
(7) Expenses for foreign travel; defined to you the compensation income, the different
(8) Holiday and vacation expenses; types of compensation income. And we discuss a few
(9) Educational assistance to the employee or his compensation income and their respective tax
dependents; and treatments and now we are in fringe benefits or the FB’s.
(10) Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
FRINGE BENEFITS
They are benefits given to an employee which is over
What about the facilities and complements? Necessary ba
and above his regular salary. So basically it includes
na ibigay ng employer yan?
facilities and complements.
That can be considered as a fringe benefit because that
is over and above the salaries and wages of the
NATURE OF FRINGE BENEFIT
employee.
It is a compensation income. Normally it would form part
of your gross income but not all the time because
Who gives the fringe benefits?
(1) it may be possible that the fringe benefit is subject
It is given by the employer. These are compensation
to a final tax and
income received by the employee. It’s given by the
(2) it is entirely possible that the fringe benefit received
employer to the employees.
by the employee will be excluded from the gross
income.
Strictly speaking, fringe benefits is COMPENSATION
INCOME. The type of employer does not really matter.
What does fringe benefit include?
What is important in this case is the type of employee
involved. Sec. 33 (B) Fringe Benefit defined.- For purposes of this
Section, the term "fringe benefit" means any good,
service or other benefit furnished or granted in cash or
(C) Fringe Benefits Not Taxable. - The following fringe
in kind by an employer to an individual employee (except
benefits are not taxable under this Section:
rank and file employees as defined herein) such as, but
(1) Fringe benefits which are authorized and exempted
not limited to, the following:
from tax under special laws;
(1) Housing;
(2) Contributions of the employer for the benefit of the
(2) Expense account;
employee to retirement, insurance and hospitalization
(3) Vehicle of any kind;
benefit plans;
(4) Household personnel, such as maid, driver, and
(3) Benefits given to the rank and file employees, whether
others;
granted under a collective bargaining agreement or
(5) Interest on loan at less than market rate to the
not; and
extent of the difference between the market
(4) De minimis benefits as defined in the rules and
rate and actual rate granted;
regulations to be promulgated by the Secretary of
(6) Membership fees, dues and other expenses
Finance, upon recommendation of the Commissioner.
borne by the employer for the employee;
The Secretary of Finance is hereby authorized to
(7) Expenses for foreign travel;
promulgate, upon recommendation of the Commissioner,
(8) Holiday and vacation expenses;
such rules and regulations as are necessary to carry out
(9) Educational assistance to the employee or his
efficiently and fairly the provisions of this Section, taking
dependents; and
into account the peculiar nature and special need of the
(10) Life or health insurance and other non-life
trade, business or profession of the employer.
insurance premiums or similar accounts in
excess of what the law allows.
18
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Who gives the fringe benefit? Since this is compensation, RANK AND FILE EMPLOYEES
this is given by the employer and it is actually the employee Section 22(AA), NIRC provides:
who receives it. (AA) The term "rank and file employees" shall mean all
But for purposes of income taxation, we have to employees who are holding neither managerial nor
classify the type of employee that receives the fringe supervisory position as defined under existing provisions
benefit. This is because there are different income tax of the Labor Code of the Philippines, as amended.
consequences.
Let’s first read the provision relative to the fringe benefit. So alam natin, if you come to read the definition of rank and
It’s found in Sec. 33. By the way, this is amended by the file, it sounds like it’s residual in nature. ‘Pag hindi siya
Train Law ha. Please take note of that. managerial, hindi siya supervisory, that person is a rank and
file employee.
SEC. 33. Special Treatment of Fringe Benefit.-
MANAGERIAL EMPLOYEES
(A) Imposition of Tax.- Effective January 1, 2018 and How do they define a managerial or supervisory employee?
onwards, a final tax of thirty-five percent (35%) is Art. 212 (m) of the Labor Code.
hereby imposed on the grossed-up monetary value “Managerial employee” is one who is vested with the
of fringe benefit furnished or granted to the powers or prerogatives to lay down and execute
employee (except rank and file employees as management policies and/or to hire, transfer, suspend,
defined herein) by the employer, whether an lay-off, recall, discharge, assign or discipline employees.
individual or a corporation (unless the fringe benefit
is required by the nature of, or necessary to the When you say Supervisory Employee, how is this type of
trade, business or profession of the employer, or employee different from the managerial? Basically in the
when the fringe benefit is for the convenience or supervisory employee, if you come to the definition,:
advantage of the employer). The tax herein
imposed is payable by the employer which tax shall Supervisory employees are those who, in the interest of
be paid in the same manner as provided for under the employer, effectively recommend such managerial
Section 57 (A) of this Code. The grossed-up actions if the exercise of such authority is not merely
monetary value of the fringe benefit shall be routinary or clerical in nature but requires the use of
determined by dividing the actual monetary value independent judgment. All employees not falling within
of the fringe benefit by sixty-five percent (65%) any of the above definitions are considered rank-and-file
effective January 1, 2018 and onwards: Provided, employees for purposes of this Book.
however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), Now, what is the tax consequence? We said earlier that the
(D) and (E) of Section 25 shall be taxed at the type of employees matter.
applicable rates imposed thereat: Provided, further,
That the grossed -Up value of the fringe benefit shall a. If the fringe benefit is given to a rank and file
be determined by dividing the actual monetary employee, the
value of the fringe benefit by the difference
between one hundred percent (100%) and the GR: It forms part of the gross income
applicable rates of income tax under Subsections XPN: It does not form part of the gross income if
(B), (C), (D), and (E) of Section 25. it is excluded by law.
Following the Train Law, what is different here is just the tax b. If the fringe benefit is received by a managerial
rate because prior to Train Law, this used to be 32%. or supervisory employee,
Ngayon mas mahal na siya. It is already pegged at 35%.
GR: It does not form part of the gross income
because the fringe benefit is subject to a
There is Fringe Benefit Taxation because a fringe benefit tax fringe benefit tax or FBT, which is a final tax.
is different from your regular income tax.
For purposes of discussion for (Fringe Benefit Tax) FBT’s, NATURE OF FRINGE BENEFIT TAX
there are two types of employees involved: FBT is a final tax. It is the tax imposed on the fringe
1. Rank-and-File Employee benefit received by a managerial or supervisory
2. Managerial Employee
19
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
20
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
1. If it’s in MONEY or if the FB paid by the employer to MV = 50% of the AV (Annual Value)
the employee then the monetary value is THE
AMOUNT GIVEN OR THE MONEY PAID. To get AV:
Kung pila ang kwarta na gihatag. It’s either the Annual Value = 5% (FMV or ZV)
employer will give you money or the employer
will pay for whatever expenses that the employee
would incur. What is the annual value? 5% of the FMV (Fair
Market Value) or the ZV (Zonal Value) of the
2. If it’s other than money (thing), the trick here is you property whichever is higher
see whether there is a chance of transfer of ownership.
3. Employer purchases a real property/housing for the
employees use
A. If there is a transfer of ownership: The monetary value
would be the FAIR MARKET VALUE OF THE PROPERTY
MV = 50% of the AV
Ex: Ihatag nako ni sa imoha ning laptop and it
yours already. To get AV:
B. If there is no transfer of ownership: Meaning it’s just an AV = 5% of the Acquisition Cost exclusive of
assignment, then normally it just the DEPRECIATION interest
VALUE OF THE PROPERTY
Now there are specific properties to which the law imposes MV = Acquisition Cost (AC) or the Zonal Value of
specific monetary values for that kind of property. the property, whichever is higher
Maraming situation yan, it’s provided in the Revenue
Regulations and other laws – example is housing privileges,
expense account, motor vehicles, interest of loan. Is it still *So notice that there is a pattern, if there is a
fringe benefit if employer loans to the employee at low transfer of ownership, its either the FMV or AC of
interest or even no interest at all – it’s still a fringe benefit. the property. But if there is no transfer of
Because usually if you loan from other persons, there will ownership, or it’s just an assignment, it’s just 50%
really be interest to be paid. of the annual value.
21
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
EXPENSE ACCOUNT
It is when the employer spends for the employee. Example 6. Fleet of motor vehicles leased by the employer
groceries, the employer gives you a certain amount for
groceries in a month. This refers to the personal expenses
incurred by the employee but paid for by the employer. MV = 50% of the rental payments
22
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(1) Reasonable business expenses for foreign There is a training bond or is a tie-up
business travel - for foreign business meeting or provision.
foreign business conventions. 2. Those which are given to the dependents of the
o If you notice the definition of fringe employee it is exempt from FBT under the following
benefit those which are necessary to the requirement:
business of the employer. They are not a. provided for through a competitive scheme under
subject to FBT. the company’s scholarship program
(2) Inland travel expenses,
o EXCEPT lodging cost, amounting to an
average USD 300 or less per day. Don’t
ask why, it is in the revenue regulations. NON-TAXABLE FRINGE BENEFITS
(3) The cost of economy or business class airplane What are those FBs which are not subject to FBTs?
fares.
o What about first class tickets- the non- Section 33 NIRC
taxable amount is 70% of the first class Section 33. Special Treatment of Fringe Benefit.-
air fare. XXX
(C) Fringe Benefits Not Taxable. - The following fringe
Take note that before these expenses be exempted benefits are not taxable under this Section:
from FBT it must be substantiated or the (1) Fringe benefits which are authorized and
substantiation rule must be followed. There must be exempted from tax under special laws;
documentary requirements supporting the expenses (2) Contributions of the employer for the benefit
and the nature of those expenses which are necessary of the employee to retirement, insurance and
or related to the business of the employer. hospitalization benefit plans;
(3) Benefits given to the rank and file employees,
2. Taxable foreign travel expenses subject to FBT: whether granted under a collective bargaining
Foreign travel expenses which are not agreement or not; and
supported by documentary exhibits – no (4) De minimis benefits as defined in the rules and
brochures, no receipts presented to the BIR regulations to be promulgated by the
30% of the first-class airfare Secretary of Finance, upon recommendation
Traveling expenses of the family paid for by of the Commissioner.
the employer – that is taxable because that
is not related to business From 2016 TSN: Benefits given to Rank-and-File
Foreign travel expenses not related to EEs, whether granted under a CBA or not is exempt
business meetings or conventions from FBT because they are part of GI.
23
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
From 2016 and 2017 TSN list: 2. If you notice in the listing in the RRs, there are ceilings
1. Monetized unused vacation leave credits of like uniform allowance. This second principle is as long
employees not exceeding ten (10) days during the as the amount is WITHIN THE CEILING, the amount of
year; (RR No. 5-2011) DMB is EXCLUDED from taxation not even subject to
FBT. Even if you give all the fringe benefits basta nasa
2. Monetized value of vacation and sick leave credits loob siya ng ceiling, it is still a tax benefit on the part of
paid to government officials and employees; (RR No. the employee. Always excluded from income taxation
5-2011) so long as it does not exceed the ceiling.
3. Medical cash allowance to dependents of employees, What if it will exceed the ceiling? For example, 1,500 for
not exceeding P750 per employee per semester or rice allowance. But the employer gives 2,500. So, if the
P125 per month; (RR No. 5-2011) amount EXCEEDS THE CEILING, the excess amount shall
form part of the 90,000 ceiling or non-taxable 13th month
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per pay and other benefits.
month amounting to not more than P1,500; (RR No. o BEFORE ang 90,000 is only 82, 000.
5-2011) o But RIGHT NOW because of the TRAIN LAW it is
already pegged at 90,000.
5. Uniform and Clothing allowance not exceeding P5,000 So pag sinabi natin na 13th month pay and
per annum; (RR No. 8-2012) other benefits to the extent of 90,000 it is
excluded from your taxable compensation
6. Actual medical assistance, e.g. medical allowance to income.
cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, What if my 13th month is 100,000 tapos nag sobra pa ang
and routine consultations, not exceeding P10,000.00 DMB ko. What is the consequence? If the 90,000 has
per annum; (RR No. 5-2011) already been consumed that is the only time that the DMB
will form part of the gross income.
7. Laundry allowance not exceeding P300 per month; (RR
No. 5-2011) DMBs given to managerial employees are EXEMPT from
FBT. Tax exemption under DMBs is not only for the benefit
8. Employees achievement awards, e.g., for length of of rank and file employees but also applicable to
service or safety achievement, which must be in the managerial.
form of a tangible personal property other than cash
or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under
an established written plan which does not
discriminate in favor of highly paid employees; (RR CASE:
No. 5-2011)
24
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
CONFEDERATION FOR UNITY AND RECOGNITION AND issues to be resolved in this case? Sabi ng Supreme
ADVANCEMENT OF GOVERNMENT EMPLOYEES V. CIR Court, we are not a triar of facts. Although sometimes,
(GR NO 213446, JULY 3, 2018) the Supreme Court, in some cases and in some
circumstances, reviews the facts of the case because
Facts: blah blah blah. But sadly in this case, the Supreme Court
The main story here is that there is a Revenue opted not to discuss anything kasi baka nahirapan sila
Memorandum Order issued by the BIR which listed the kasi tax.
specific benefits, the legislative benefits and judiciary
benefits, which are subjected to withholding income tax.
Basically, these benefits are compensation income, thus, Anyway, what are the factual issues to be resolved here?
subjected to withholding income tax. 1. The nature of the fringe benefits given. Why is it
Withholding income tax is the advance payment of necessary to identify the nature of the fringe benefits
taxes being withheld by the employer which is to be paid given? Because there are some fringe benefits which
to the BIR. Now, the problem is this: the petitioner here are exempt from fringe benefit tax and even exempt
have been saying that because of the Memorandum from compensation income. If you read the codal
Order, this is unconstitutional or ultra vires because
provision under Section 33 of NIRC, there are at least
there are new taxes that are imposed by the BIR; and
2:
then, these are supposed to be fringed benefits or de
minimis benefits which are not subject to tax. That is i. Those are required by the very nature of the
how simple the case is. business or necessary to the business of the
employer; and
Issue: Whether or not the Revenue Memorandum ii. Those granted for the convenience of the
Order is unconstitutional? employer.
Issue related to income tax: Whether the Revenue So, you must able to prove that so that the fringe
Memorandum Order is ultra vires in so far as of its benefits, received by the employees, which falls under
Section 3 and Section 4 subject to taxes the non-taxable the exemptions will be exempted from any FBT or any
benefits, allowances and bonuses received by the income tax for that matter. To prove it, sabi ng
employee among others. Supreme Court , is proper documentation. As
borrowed from the wordings of the Supreme Court
So, the Supreme Court is being asked to determine that said “This, however, requires proper
whether these allowances are subject to income tax, and, documentation.
therefore subject to withholding tax. What is the
Supreme Court ruling with respect to this aspect? Without any documentary proof that the payment
ultimately redounded to the benefit of the employer,
Held: If you have read the case, the Supreme Court did the same shall be considered as a taxable benefit to
not give definite ruling to the legislative and judiciary the employee, and hence subject to withholding
benefits. Walang pronouncement ang Supreme Court. taxes.” So the rule is based on the taxability of the
The Supreme Court took the easy way out. Sabi niya, the compensation income, particularly the fringe benefits.
Supreme Court is not the trier of facts in determination
whether the fringe benefits received by the employee is What are the other factual issues you need to consider?
a factual matter. So, it is not enough you just put names.
Usual kasi niyan sa BIR, the usual idea is that okay you 2. The recipients of the fringe benefits. We have to
just put names, depende pala yan sa classification of the identify the recipients because there are different
income, you must classify the income and you manage it qualifications.
in such a way that it falls under the tax-exempt
compensation income. If the recipient is a managerial or supervisory
So, it will form as tax savings in the part of the employee the fringe benefit received, unless exempt
employees. But this time with regards to fringe benefits, from taxation, will be subjected to fringe benefit tax.
there are several factors that you have to consider and We all know that if the FB are subject to FBT, it is no
must be proved to the BIR especially if the fringe benefit longer part of the compensation income subject to the
is exempt from taxation. If you go back to our previous regular income tax; and, consequently it will not
discussion, dib a before sa general principles when it subject to any withholding income tax.
comes to tax exemptions, strict construction of tax
exemption against the taxpayer and in favor of the 3. Whether it the benefit is a De Minimis Benefit.
employee. The question here is, what are the factual
25
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
What I need you to consider is that what if the considered part of compensation income; thus, exempt
employee would say that it is a de minimis benefits? from withholding tax on compensation. Instead, these
fringe benefits are subject to a fringe benefit tax equivalent
The same way the employee must have to prove that to 32% of the grossed-up monetary value of the benefit,
it is really a de minimis benefit. which the employer is legally required to pay. On the other
hand, fringe benefits given to rank and file employees, while
On top of that, it is not enough that it is of small value, exempt from fringe benefit tax, form part of compensation
it should be included in the listing found in the income taxable under the regular income tax rates provided
Revenue Regulations as I said the last time. If it is not in Section 24(A)(2) of the NIRC, of 1997, as amended; and
in the list, even it is small in amount, will not be consequently, subject to withholding tax on compensation.
considered a de minimis benefits. It will form part of Furthermore, fringe benefits of relatively small value
your compensation income subject to regular income furnished by the employer to his employees (both
tax. managerial/supervisory and rank and file) as a means of
promoting health, goodwill, contentment, or efficiency,
From the case ruling: otherwise known as de minimis benefits, that are exempt
Determination of existence of fringe benefits is a question from both income tax on compensation and fringe benefit
of fact. tax; hence, not subject to withholding tax, are limited and
exclusive only to those enumerated under RR No. 3-98, as
Petitioners, nonetheless, insist that the allowances, amended. All other benefits given by the employer which
bonuses and benefits enumerated in Section III of the are not included in the said list, although of relatively small
assailed RMO are, in fact, fringe and de minimis benefits value, shall not be considered as de minimis benefits; hence,
exempt from withholding tax on compensation. The Court shall be subject to income tax as well as withholding tax on
cannot, however, rule on this issue as it is essentially a compensation income, for rank and file employees, or
question of fact that cannot be determined in this petition fringe benefits tax for managerial and supervisory
questioning the constitutionality of the RMO. employees, as the case may be.
To be sure, settled is the rule that exemptions from tax are Based on the foregoing, it is clear that to completely
construed strictissimij juris against the taxpayer and determine the merits of petitioners' claimed exemption
liberally in favor of the taxing authority. One who claims tax from withholding tax on compensation, under Section 33 of
exemption must point to a specific provision of law the NIRC of 1997, there is a need to confirm several factual
conferring, in clear and plain terms, exemption from the issues. As such, petitioners cannot but first resort to the
common burden and prove, through substantial evidence, proper courts and administrative agencies which are better
that it is, in fact, covered by the exemption so claimed. 85 equipped for said task.
The determination, therefore, of the merits of petitioners'
claim for tax exemption would necessarily require the All told, the Court finds Sections III and IV of the assailed
resolution of both legal and factual issues, which this Court, RMO valid.
not being a trier of facts, has no jurisdiction to do; more so,
in a petition filed at first instance. The NIRC of 1997, as amended, is clear that all forms of
compensation income received by the employee from his
Among the factual issues that need to be resolved, at the employer are presumed taxable and subject to withholding
first instance, is the nature of the fringe benefits granted to taxes. The Government of the Philippines, its agencies,
employees. The NIRC of 1997, as amended, does not instrumentalities, and political subdivisions, as an
impose income tax, and consequently a withholding tax, on employer, is required by law to withhold and remit to the
payments to employees which are either (a) required by the BIR the appropriate taxes due thereon. Any claims of
nature of, or necessary to, the business of the employer; or exemption from withholding taxes by an employee, as in
( b) for the convenience or advantage of the employer. This, the case of petitioners, must be brought and resolved in the
however, requires proper documentation. Without any appropriate administrative and judicial proceeding, with
documentary proof that the payment ultimately redounded the employee having the burden to prove the factual and
to the benefit of the employer, the same shall be legal bases thereof.
considered as a taxable benefit to the employee, and hence
subject to withholding taxes.
26
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
MINIMUM WAGE EARNER (MWE) It is still the same, so long as I am MWE, I will still
be tax exempt from income taxation.
Who is a Minimum Wage Earner?
Section 22(HH), NIRC Minimum wage earner – That is the case of:
refers to a worker in the private sector paid the
statutory minimum wage, or to an employee in SORIANO VS SEC. OF FINANCE
the public sector with compensation income of not GR. 184450, Jan 24,2017.
more than the statutory minimum wage in the
nonagricultural sector where he/she is assigned. It all started because there was this revenue regulation
that was issued subjecting the minimum wage earners to
We all now what the Statutory Minimum wage is; withholding income tax if they have two or more
employers or they have their own businesses aside from
Section 22 (GG) Statutory Minimum Wage – refers to being employed at a minimum wage. So the Supreme
the rate fixed by the Regional Tripartite Wage and Court said what is being exempted by law is the
Productivity Board (RTWPB) as defines by the Bureau Statutory Minimum Wage so long as the employee is a
of Labor and Employment Statistics (BLES) of the MWE, that minimum wage will be exempt from income
Department of Labor and Employment (DOLE) taxation. But it does not mean that Minimum Wage
Earner is already exempt from income tax of course:
What is the tax implication of the taxpayer is a Minimum on the excess of the 13th month pay;
Wage Earner or MWE? if there are other compensation being received
They are tax exempt. by that employee; or
That minimum wage earners xxx shall be that employee is engaged in other type of
exempt from the payment of income tax on business and he also earns income.
their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential
pay and hazard pay received by such minimum Those income will be subjected to income taxation, so in
wage earners shall likewise be exempt from MWE what is being exempted is the most basic
income tax. (Section 24(A) last paragraph, NIRC) compensation an employee receives - the amount
afforded to the lowest paid employees by the mandate
Under the law 13th month pay and other benefits is tax of law R.A. 9504 is explicit as to the coverage of the
exempt up to 90,000, it is excluded from gross income. exemption: the wages that are not in excess of the
minimum wage as determined by the wage boards,
First scenario: I am a minimum wage earner but then I including the corresponding holiday, overtime, night
am so good at my job pagdating ng 13th month pay I differential In a way, the legislature grants to these
have received other bonuses lumagpas ako ng 90,000. lowest paid employees additional income by no longer
What is the tax implication on my income? demanding from them a contribution for the operations
Going from the definition of Section 22(HH) it of government. This is the essence of R.A. 9504 as a
does not matter if the MWE exceeds the 90,000 social legislation. The government, by way of the tax
threshold the law does not say, so do not qualify. exemption, affords increased purchasing power to this
So long as he is a MWE, he will still be exempt from sector of the working class.
income taxation.
JAIME N. SORIANO VS SECRETARY OF FINANCE
Second scenario: I am a minimum wage earner in the En Banc, GR No. 184450, Jan. 24,2017
morning I also sell hotdogs at the Ateneo Cafeteria and
I am a waiter at Knight’s Table. ISSUE: Whether Sections 1 and 3 of RR 10-2008 are
What is the tax implication on my income? consistent with the law in declaring that an MWE who
If you read the definition Section 22(HH), it receives other benefits in excess of the statutory limit
really does not matter if you are employed under 2 of P30,000 is no longer entitled to the exemption
employees. So okay lang, so long as I am a provided by R.A. 9504, is consistent with the law.
minimum wage earner.
RULING:
Third Scenario: I am still a minimum wage earner plus Given the foregoing, the treatment of bonuses and
I sell hotdogs and have a mini sari-sari store at home. other benefits that an employee receives from the
What is the tax implication on my income? employer in excess of the P30,000 ceiling cannot but be
the same as the prevailing treatment prior to R.A. 9504
27
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Definition: Business income is income received by a Q: What do you mean by gains here - gains from
taxpayer who is engaged in business it is part of your gross dealings in properties?
income. A: This refers to the income derived from the sale,
exchange, or barter of assets which results in a gain.
So what is the gross income in business income?
EXCHANGE OF ASSETS
There are two general types of business: this normally means that there is a TRANSFER of
1. You are engaged in the selling or manufacturing of property from one person to another for a good
goods, items or materials consideration
so you take up from this discussion that to make a
Gross Income = Gross Sales (Nabaligya nimo tanan)
property’s receipt through donation or succession
(less) sales discounts
(less) sales allowances technically speaking pag sinabi nating it is a property
(less) sales returns from donation or property from succession, you refer
Net Sales to it as a TRANSFER, it is not an exchange.
(less) Cost of Sales (this is your
manufacturing cost of the goods, your TWO TYPES OF GAINS:
“capital.”) 1. Ordinary Gain
Gross Income (in accounting, it is these are gains you derived from the sale
essentially the same as of ORDINARY ASSETS
gross profit)
Taxability – ordinary assets are part of
your GI.
Ordinary gains always form part of your
GI
2. You sell services
Gross Income = Gross Receipts
2. Capital Gain
(less) discounts
it is from the sale, exchange, or barter of
(less) allowances
(less) returns (some books provide for CAPITAL ASSETS
returns Taxability– some rules that must be
Net followed:
(less) cost of services (Composed of GR: it will form part of your GI - subject to
salaries and regular tax,
XPN:
28
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(1) if it is excluded by law or 2. Property held by the taxpayer primarily for sale
(2) If it is subject to final tax to customers in the ordinary course of his trade
or business, or
So what are these two creatures?
pretty much the same, still part of the
Q: How would you define ordinary assets?
A: For us to know what ordinary assets are all about let us inventory
look at the meaning of capital assets under 3. Property used in the trade or business, of a
character which is subject to the allowance for
SECTION 39, NIRC. depreciation provided in Subsection (F) of
SEC. 39. Capital Gains and Losses. - Section 34; or
meaning DEPRECIABLE ASSETS
(A) Definitions. - As used in this Title - you have a car that you use in your
business then that is a depreciable asset
(1) Capital Assets. - The term 'capital assets' – the longer the time that you hold the
means property held by the taxpayer (whether or property the lesser it got because the
not connected with his trade or business), BUT
value becomes lower overtime
DOES NOT INCLUDE
4. Real property used in trade or business of the
taxpayer
stock in trade of the taxpayer or other
property of a kind which would properly that is very easy to understand
be included in the inventory of the
taxpayer if on hand at the close of the So pag sinabi nating ordinary assets sabi natin this is already
taxable year or connected with your business.
property held by the taxpayer primarily
for sale to customers in the ordinary Situation: I own a piece of property nagpatukod ko ug balay
course of his trade or business, or diha (built a house) or a structure which I use in carwash
property used in the trade or business, of business. I own the land. I own the building. I bought
a character which is subject to the machineries etc there drums etc. I also have a small
allowance for depreciation provided in multicab which I mainly use to buy the soap and other
Subsection (F) of Section 34; or things I use for my business. At the end of the year I decided
real property used in trade or business of na ayoko na mag car wash kay kapoy. I decided to sell
the taxpayer. everything.
29
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
GR: we go back to our basic premise part of the means that you avail of the services of a local
GROSS INCOME. stock dealer or broker.
XPNs:
1. when EXCLUDED by law This is subject to a Stock Transaction Tax which is
a final tax. So whatever gains here will no longer
2. subject to a FINAL TAX in which case
form part of the gross income.
we have the CAPITAL GAINS TAX
What is the tax rate?
Just because it is a capital gain, It doesn’t mean that it is Under NIRC – ½ of 1%
already excluded from the gross income since it will be
Under TRAIN Law – 6/10 of 1%
subject to final tax. No! You still have to classify further.
What is the tax base?
For purposes of our discussion in capital gains taxation,
Gross Selling Price or Gross Value in Money
there are
3 types of properties being sold or traded:
1. STOCKS – this refers to domestic stocks i.e. SMC,
2. The stocks are not traded or listed.
MegaWorld, Aboitiz or stocks from other To put it short, to illustrate this, it’s the direct
domestic corporations family corporations stock selling of the stocks.
pa rin naman yan
2. REAL PROPERTIES If a person sells his stock portfolio to another
3. OTHERS – not a domestic stock, what is being person through direct selling and they will
execute a deed of sale, this will be:
traded is not a domestic stock and not also a real
Subject to Capital Gains Tax which is a final
property so others sya
tax and whatever gain will no longer form part
of the gross income.
Let’s discuss this one by one.
What is the tax rate?
STOCKS
Under old rule – 5% 10% rule
What are the rules you have to follow for you to determine
The first 100,000 – 5%
that income tax implication on exchange barter or exchange
Any excess on the 100,000 – 10%
or sale of domestic stocks
Under TRAIN Law – pegged at 15%
First you have to identify the type of person dealing with
the stocks:
1. Dealers, Stock Dealers
What is the tax base?
If the stocks are sold by dealer of securities..
The net capital gains
securities or stock dealers and stocks are part of
their inventory, it’s an ORDINARY GAIN.. its
Illustration:
business is selling stocks and securities. That’s
I sold my San Miguel stock portfolio.
why this is an ordinary gain and this is part of the
Selling price – P500,000
GROSS INCOME of the dealer
Buying price – P200,000
Selling expense (includes the Documentary Stamp Tax) –
2. Non-dealers
P20,000
What if the dealer sells stocks which are not part
of the inventory or stock sold by NON DEALERS.
(1) Through a local stock exchange
Pag sinabi nating dealers na hindi e-inventory
capital assets siya.
6/10 of 1% based on the Gross Selling Price
There are two possibilities: (P500,000)
1. The stocks are sold through a local stock Sir Percy’s Formula:
exchange;
STT – 500,000 x 6 / 10 x 1% = 3,000
When you trade your stocks at a local stock
exchange, it means listed siya ng corporation. It
30
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(2) Through direct selling (1) Inah Bautista del Rosario 00:00-12:00
Under TRAIN Law – 15% of net capital gains
Recap: We are talking about dealings with properties and
Net capital gains = Selling price – buying price how it is related to capital gains taxation. We have defined
and selling expense the types of properties involved: stocks, real properties and
others.
500,000 With respect to stocks: we identify first whether
– (200,000 + 20,000) domestic stocks are sold by dealers or non-dealers. By
dealers, it is ordinary gain. If it is not sold by dealers, or
280,000 even if sold by dealers, but they are not part of the
inventory of such dealer, the sale will be subjected to
CGT – 280,000 x 15% = 42,000 capital gains tax or stock transaction tax. This depends
on where the taxpayer sold the stocks.
100,000 x 5% = 5,000
REAL PROPERTIES
180,000 x 10% = 18,000
For real properties, what governs is Section 24(D)(1).
CGT – 5,000 + 18,000 = 23,000
SEC. 24. Income Tax Rates. –
31
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
classified as capital assets within the Philippines. The What are the transactions included here?
property necessarily has to be in the Philippines. (1) Sale
(2) Barter
What is the tax treatment if the real property is located (3) Exchange
abroad? If it is situated abroad, even if it is classified as a Example: A exchanged his land for B’s land. A and
capital asset, the proceeds from the sale, barter or B will pay their respective CGTs.
exchange will form part of the GI – depending also on the
taxpayer involved. (i.e. If the taxpayer is a nonresident PACTO DE RETRO SALES
citizen, his income is taxable only when derived in the It is a sale with a buyback provision. When the property is
Philippines) sold, there is a right to redemption in favor of the seller. This
is also covered by capital gains taxation. The seller de retro
How will you define a real property? will be liable for the CGT.
For Individuals – Real properties as defined in the NCC.
For corporations – Real properties subject to CGT are only What if the property is redeemed? If I will buy back the
lands and buildings. property, that is no longer subject to CGT. This is pursuant
to BIR Ruling.
NATURE OF CAPITAL GAINS TAX
Capital Gains Tax is a final tax. Thus, any income subject to If you read this portion of the text:
CGT is excluded from the gross income. other disposition of real property located in the
Philippines, classified as capital assets, including
What is the tax rate? 6% pacto de retro sales and other forms of conditional
What is the tax base? You have to consider the ff, sales, by individuals, including estates and trusts:
whichever is higher: There is no qualification – as to whether it is the pacto de
(1) selling price retro sale itself or the exercise of the right to redeem. With
(2) zonal value - valuation of real property as respect to this BIR Ruling, since the act of redeeming the
provided by the BIR property is an exercise of the right of redemption under the
(3) assessment value contract, it is no longer a taxable sale. You can also argue
that prior to the redemption, there has been no complete
What is being taxed by the government is not the actual transfer of property.
gain nor the right to transact but the presumed gain. Even
if the taxpayer has sold its property at a loss, it doesn’t really REDEMPTION OF LEVIED / FORECLOSED PROPERTY
matter. The law says that everytime you sell real properties How about the redemption in a mortgage? When a
considered as capital assets within the Philippines, the sale property is sold in a public auction because it is foreclosed
is subject to tax because of the presumed gain. or pursuant to an execution of a judgement, that is
supposed to be a taxable transaction – there is a sale. But
Who is liable for the Capital Gains Tax? then, when someone exercises the right to redeem the
NIRC clearly provides that it is the seller who is liable for property, it is no longer a taxable transaction. Because prior
CGT. to the expiration of the redemption period, what the buyer
has is merely an inchoate right over the property subject of
If the buyer will shoulder the CGT, it becomes part of the the pacto de retro sale.
consideration. This is based on our premise that CGT is a
direct tax. It is the seller who Is liable for it. PROPERTY SOLD TO THE GOVERNMENT &
EXPROPRIATION
Problem: RA 10752 was passed otherwise known as “The “Provided, That the tax liability, if any, on gains from
Right of Way Act.” It provides that it is the government sales or other dispositions of real property to the
which should pay the CGT on behalf of the seller / owner. government or any of its political subdivisions or
This law “destroys” the nature of the CGT as a final tax. The agencies or to government-owned or controlled
corporations shall be determined either under Section
Congress may later on amend the law to provide that the 24 (A) or under this Subsection, at the option of the
buyer may shoulder the CGT depending on their agreement. taxpayer”
But for now, just take note that the CGT will be paid by the
seller. If the buyer shoulders the CGT, this is supposed to be In other words, if the property is sold in favor of the
added to the entire consideration. Government, the taxpayer has the option to:
(1) Subject the proceeds to Capital Gains Taxation
(2) Subject the ordinary gains form part of his Gross
Income which is subject to regular income tax
32
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
This is also applicable to expropriation because there is still “the dwelling house, including the land on which it is
a transfer of property even if it is a forced sale. situated, where the husband and wife or an unmarried
individual, whether or not qualified as head of family,
SALE OF REAL PROPERTY EXEMPT FROM CAPITAL GAINS and members of his family reside. Actual occupancy of
TAXATION such principal residence shall not be considered
(1) Sale of real property located abroad interrupted or abandoned by reason of the individual’s
(2) Sale of principal residence under Section 24(2), temporary absence therefrom due to travel or studies or
NIRC work abroad or such other similar circumstances. Such
principal residence must be characterized by
(3) Jessalyn Puerin 24:01- 35:00
permanency in that it must be the dwelling house in
which, whenever absent, the said individual intends to
SEC. 24. Income Tax Rates. – return.”
(D) Capital Gains from Sale of Real Property. -
(2) Exception. - The provisions of paragraph (1) of this
What if the property owned by the individual is just
Subsection to the contrary notwithstanding, capital
the house? This is allowed. Like the case I’m handling
gains presumed to have been realized from the sale
now – the house is owned by my client, while the lot
or disposition of their principal residence by natural
is owned by his mother. My client however got into a
persons, the proceeds of which is fully utilized in
fight with his 9 other siblings.
acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date
o The status of the individual is immaterial – as long
of sale or disposition, shall be exempt from the
as the taxpayer has a principal residence. If he
capital gains tax imposed under this Subsection:
decides to sell it in certain conditions, he can be
Provided, That the historical cost or adjusted basis of
exempt from CGT.
the real property sold or disposed shall be carried
o When we say residence, we adopt the term as
over to the new principal residence built or acquired:
defined by the election laws: Residency is the trace
Provided, further, That the Commissioner shall have
of a home (?) characterized by a permanency
been duly notified by the taxpayer within thirty (30)
obtained by an individual, whenever absent
days from the date of sale or disposition through a
intends to return.
prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further,
Let’s simplify Sec. 24(D).
That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, That if
The law is that when you say real property, even if it is a
there is no full utilization of the proceeds of sale or
principal residence, it is still subject to CGT (Capital Gains
disposition, the portion of the gain presumed to have
Tax).
been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the
Always follow the codal for tax exemptions.
gross selling price or fair market value at the time of
sale, whichever is higher, shall be multiplied by a
REQUIREMENTS FOR THE SALE OF PRINCIPAL
fraction which the unutilized amount bears to the
RESIDENCE TO BE EXEMPTED FROM CGT:
gross selling price in order to determine the taxable
1. The taxpayer must be an individual.
portion and the tax prescribed under paragraph (1)
2. The sale or disposition is that of the principal
of this Subsection shall be imposed thereon.”
residence of the taxpayer.
3. The proceeds of the sale must be fully utilized to
purchase or construct another principal residence.
Situation: The taxpayer has a principal residence. He sells it
4. The taxpayer must purchase or construct another
for a purpose of acquiring or constructing a new principal
principal residence within 18 months from the
residence.
date of sale or disposition.
5. The historical cost or adjusted basis of the real
PRINCIPAL RESIDENCE DEFINED
property sold or disposed is carried over to the
The term refers to the dwelling house including the
new principal residence built or acquired;
lot on which the dwelling house is situated where the
6. CIR must be informed within 30 days from the date
individual resides.
of sale or disposition through a prescribed return
of his intention to avail of the tax exemption
SEC. 2(2) of Revenue Regulations (RR) No. 13-99, as herein mentioned.
amended by RR No. 14-00 defines “principal residence” 7. This tax exemption may be availed of only once in
as: every 10 years.
33
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
34
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
the money loaned plus interest already earned. That is exempt), derived from sources within the Philippines:
a passive income. Provided, however, That interest income received by an
individual taxpayer (except a nonresident individual) from
Compared to your active income, you have to do a depository bank under the expanded foreign currency
something about it for you to earn. Like for example, deposit system shall be subject to a final income tax at the
magtudlo ko kaninyo para makadawat ko ug swedo sa rate of fifteen percent (15%) of such interest income:
Ateneo. That is an active income. Provided, further, That interest income from long-term
deposit or investment in the form of savings, common or
Second, interest income may either be: individual trust funds, deposit substitutes, investment
1. Part of your business income; or management accounts and other investments evidenced
2. Part of your other income- meaning hindi mo siya by certificates in such form prescribed by the Bangko
business. Ano example niyan? Magpautang ako sa Sentral ng Pilipinas (BSP) shall be exempt from the tax
barkada ko tapos bayaran lang niya with interest imposed under this Subsection: Provided, finally, That
kasi kailangan niya ng pera. Meron ako classmates should the holder of the certificate pre-terminate the
dati gapautang ng money for payment of tuition deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be
fees. May mga kaibigan naman na pautang mo
deducted and withheld by the depository bank from the
pero hindi ka na bayaran, sa ngalan na amigo mo.
proceeds of the long-term deposit or investment
Ganun daw ang true friends eh, “pautang bai” certificate based on the remaining maturity thereof:
HAHAHA.
(4) Marrie Allexa Campaner 35:01 - 44:56 Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Third, it is also entirely possible that this interest income Less than three (3) years - 20%
will be subject to Final Tax.
***those highlighted are the amendments by TRAIN
Just because passive income siya, it’s automatically
LAW.
subject to final tax. You have to classify, or determine
the nature of that income before you will be able to
Section 27 (D)(1) - Corporations
determine what the tax consequence of that income
is. (D) Rates of Tax on Certain Passive Incomes. -
GR: interest income is part of the Gross Income. (1) Interest from Deposits and Yield or any other
XPN: Monetary Benefit from Deposit Substitutes and from
1. When excluded by law; Trust Funds and Similar Arrangements, and Royalties. - A
2. When subject to final tax. final tax at the rate of twenty percent (20%) is hereby
What are those interest income subject to final tax? It’s imposed upon the amount of interest on currency bank
found in Section 24 (B)(1) and Section 27(D)(1). deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar
Section 24 (B)(1) - Individuals arrangements received by domestic corporations, and
(B) Rate of Tax on Certain Passive Income: - royalties, derived from sources within the Philippines:
Provided, however, That interest income derived by a
domestic corporation from a depository bank under the
(1) Interests, Royalties, Prizes, and Other Winnings. -
expanded foreign currency deposit system shall be
subject to a final income tax at the rate of fifteen percent
A final tax at the rate of twenty percent (20%) is hereby (15%) of such interest income.
imposed upon the amount of interest from any currency
bank deposit and yield or any other monetary benefit Let’s simplify (INTEREST INCOME SUBJECT TO FINAL TAXES):
from deposit substitutes and from trust funds and similar
arrangements; royalties, except on books, as well as other (1) Those subject to 20% Final Tax
literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except From currency bank deposits
prizes amounting to Ten thousand pesos (P10,000) or less
Yield or any other monetary benefit from deposit
which shall be subject to tax under Subsection (A) of
substitutes and from trust funds and similar
Section 24; and other winnings (except winnings
arrangements
amounting to Ten thousand pesos (P10,000) or less from
Philippine Charity Sweepstakes and Lotto which shall be
35
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
What if I am engaged in the business of lending Four (4) years to less than five (5) years - 5%;
and I earn interest, will it be subject to 20% final Three (3) years to less than (4) years - 12%;
tax? Does it come from bank deposits? Does it and
yield from deposit substitutes? (be familiar Less than three (3) years - 20%
with the definition of “deposit substitutes” in
the NIRC). IT’S PART OF THE GROSS INCOME.
3. Interest earned by members of Cooperatives.
What if I have a bank deposit in Singapore what Case in point is Dumaguete Cathedral vs CIR
is the tax consequence of any interest income I (G.R. 182722, Jan. 22,2010)
will earn there? NOTE that 20% final taxes
apply only on domestic bank deposits. So it’s Dumaguete Cathedral vs CIR
part of the gross income. (G.R. 182722, Jan. 22,2010
36
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
deposits nor deposit substitutes, Let’s say a building, what happens with that
Section 24(B)(1) and Section building? Is it the property of the landowner or is
27(D)(1), therefore, do not apply to it an income on the part of the lessor? In the lease
members of cooperatives and to contract, there can be a stipulation that by the
deposits of primaries with end of the term, the building and other
federations, respectively. structures, which cannot be removed, or anything
placed there as part of improvements will not be
removed by the person renting the property. If
Sept 11 (43:04)
(1) Joh Madum 00:00-11:00 that’s the case, that is what we called as leasehold
improvements. Even though in the meantime the
The last thing we discussed last time is about interest. We lot owner cannot own yet the property but later
discussed about the rules on interest. As a general rule it’s he will earn such property. Such improvements
part of gross income, exception if it is subject to final tax or will form part of your rent.
is exempted by law. We also learned about interests which
is subject to 20% final tax, those are interest income coming Two ways of recognizing gross income involving leasehold
from domestic bank deposit and etc.. Then we also have the improvements
7.5 % final tax rate. You also have tax exempt, common of 1. Outright method - the value of the property
which are the cooperatives. Take note, when it comes to introduced or the fair market value of the
NRANETB and Non-resident foreign corporation, they are acquisition cost of the property introduced in that
subject to a different final tax rate. land will form part of the gross income of the
property owner. Income is recognized at the time
Q: What are the changes introduced by the TRAIN law with the building was completed.
respect to interest? E.g. after the construction of the building you already
A: There is not much changes, except for the final tax under owned it, then the building will recognize as
EFCDS, before it is 7.5% now it is 15%. Just take note of automatically an income for that year. Paghuman
that. Everything in Interest income is the same including patukod sa building imoha na ang building then
the long term deposit. automatically ang income. (excerpt from the 2016 TSN)
37
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
including the VAT portion of gross sales or (2) Cash and/or Property Dividends from a
receipt will form part of his GI. Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund
Company or Regional Operating Headquarter
Tax Rentals or Multinational Company, or Share in
Distributable Net Income of a Partnership
PROBLEM: (Except a General Professional Partnership),
Joint Account, Joint Venture Taxable as a
Suppose, in the beginning of the year 2018, I entered into Corporation or Association, Interests,
a lease contract for 1 year. Ano ginawa ko? Kasi ayaw kong Royalties, Prizes, and Other Winnings.— x x x
palagi ako sinisingil kasi sumasakit ang ulo ko, so I paid my royalties (in any form x x x shall be subject to
I year rent. That 1 year rent will cover July 1, 2018 until June an income tax of twenty percent (20%) on the
30, 2019. How am I supposed to account the rent income total amount thereof: Provided, however, that
then? royalties on books as well as other literary
works, and royalties on musical compositions
A: Normally, under the Revenue regulation, it’s kinda weird, shall be subject to a final tax of ten percent
because it does not really matter if the taxpayer bonded (10%) on the total amount thereof: x x x
cash form or in the accrual basis as long as there is already
a rent, or a money is received as rent, regardless of
accounting method, the taxpayer should recognize as part
of his gross income. Automatic sya even if the taxpayer got SEC. 27. Rates of Income Tax on Domestic Corporations.
to earned it later (Future rent). —
(D) Rates of Tax on Certain Passive Incomes.—
(1) Interest from Deposits and Yield or any other
(2) Dianne Marie Isidor 11:01-23:00 Monetary Benefit from Deposit Substitutes and
from Trust Funds and Similar Arrangements, and
What if the taxpayer employs the accrual method? Royalties. — A final tax at the rate of 20% is
hereby imposed upon the amount of interest on
Weird mn gud yang accrual because..basta I will not discuss currency bank deposit and yield or any other
that anymore. Basta just think about it :( monetary benefit from deposit substitutes and
from trust funds and similar arrangements
When it comes to rent income, regardless of the accounting received by domestic corporations, and
method of the taxpayer: royalties,derived from sources within the
Philippines: Provided, however, That interest
You receive the money as rent, that will already form part income derived by a domestic corporation from a
of the income even if the rent pertains to future rent. depositary bank under the expanded foreign
currency deposit system shall be subject to a final
income tax at the rate of 15% of such interest
ROYALTIES income.
38
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
shall be subject to a final income tax at the (2) If it’s a passive royalty, normally it’s subject to a
rate of twenty percent (20%) of such FINAL TAX.
interest: Provided, however, That interest
income derived by a resident foreign
corporation from a depository bank under Of course you have to look at the source of the royalty
the expanded foreign currency deposit income.
system shall be subject to a final income
tax at the rate of seven and one-half Please take NOTE That when you talk about PASSIVE
percent (7 1/2%) of such interest income. INCOME subject to Final Tax, we are talking about
DOMESTICALLY EARNED PASSIVE INCOME.
What do you mean by ROYALTY?
ROYALTIES mean payments of any kind received as a How do we distinguish both?
consideration for the use of or the right to use of any
copyright or literary, artistic or scientific work including Situation: So, supposing that you want an app, kunwari
cinematographic films, TV broadcast, any patent, foodpanda, example, we have grab, we have uber and
trademark etc. now we have hirna. Anyway, you want an app similar to
foodpanda, so you commission a computer geek to make
So to put it simply, royalties are monies received by the that app. So that computer geek makes that app for you
taxpayer for using his intellectual property rights. and then submitted the app for your approval and then
eventually when it’s all set and done, now you have the
Tax Treatment app. You let the computer geek run the app.
General Rule: The royalty income is part of your gross
income. So what do you pay the computer geek?
2 TYPES OF ROYALTIES (1) You pay for him royalties for making the app
Under our income tax laws, what are the two types of (ACTIVE ROYALTY)
Royalties? (2) You also pay him the royalty for the use of the app
because at the end of the day, it is stipulated in
(1) ACTIVE ROYALTY - is that which the taxpayer has the contract that it is the computer geek who will
to do some amount of work in order for him to own all the rights over that app that you
earn that royalty income. requested from him. (PASSIVE ROYALTY)
(2) PASSIVE ROYALTY - is somehow similar to the ft So the money that you have paid to that
(final tax). computer geek for making the app is actually
ACTIVE ROYALTY.
You already own the intellectual property right, you will just
sit down, you allow others to use for compensation, that’s But if you talk about royatlies, the computer geek will
passive income (or royalty?). just manage etc. Usually maghanap lang yan sya ng
crash reports and for the improvements.
Question: Which of the two royalties is subject to Final Tax?
For the use of the app, that is already your
If you read the heading or first line in tax code. Anong PASSIVE ROYALTY.
nakalagay jan? Final taxes di ba on PASSIVE INCOME?
So, on the part of the computer geek, how is he
So, what is subjected to the NIRC for the final tax is just the supposed to…..what’s the tax on the royalty he incur?
PASSIVE INCOME.
Active Royalty is part of his gross income.
This would mean that it is the PASSIVE ROYALTIES. Passive Royalty is subject to 20 % final tax, final
withholding tax to be withheld by the taxpayer.
SERVICE FEE
SUMMARY: What about the service fees paid for the maintenance of
that app?
So, again what’s the principle here:
Still it’s part of the gross income, no longer royalty.
(1) If what is involved is the active royalty, it’s part of
the GI (Gross Income), Remember:
39
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
When you talk about royakty, Passive Royalty it’s only for corporate assets. It will be distributed to the remaining
the use of the Intellectual Property Right. stockholders. You call that as the Liquidating Dividends.
TYPES OF DIVIDENDS
CORPORATION
1. CASH DIVIDENDS- most common of all.
Dividend income received by a domestic corporation,
or a resident foreign corporation from another
The corporation will earn a profit then a portion of it will
domestic corporation: TAX EXEMPT.
be distributed to the stockholders and it will be
This is what you call as “Inter-corporate dividends”
ditsributed through cash.
because a corporation is distributing dividends and the
recipient of those dividends are other corporations.
2. PROPERTY DIVIDENDS
It’s possible also that what will be distributed are
Dividend income from a foreign corporation and
properties . So instead na kwartahay na lang, so what the
received by a domestic corporation: (situation: foreign
corporation will give you are the products of the
corporation distributes dividends and the recipient is a
company which either you can sell or you can use.
domestic corporation) Part of GROSS INCOME.
3. STOCK DIVIDENDS
Dividend income from a foreign corporation and
received by a resident foreign corporation: TAX
The Corporation may also distribute its own stocks to its
EXEMPT. Resident foreign corporations are taxable only
stockholders as dividends. You call them as Stock
on the income earned within the Philippines.
DIvidends.
If it’s coming from a foreign corporation, it is as if these
dividends are coming from the source.
4. LIQUIDATING DIVIDENDS
If the corporation has already stop operating and
decides to dissolve and liquidate it properties or
40
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
What is the condition so that these dividends will be GENERAL RULE: Dividend income is part of gross income.
subject to 15% final tax? EXCEPTION: Unless the law so provides for another tax
When the TAX SPARING RULE applies. treatment. To qualify for the exception, ask two (2) questions:
41
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Foreign Resident Citizens and Part of Domestic prizes earned by a taxpayer is subject to
Corporation Domestic Corporations Gross 20% final tax.
(Note: Only Resident Income Exception to final tax rule: If the value or the
Citizens and Domestic amount of the prize 10K or below.
Corporations are taxable Tax Consequence? It will form part of the gross
on their income within income of the taxpayer.
and without. Other
taxpayers are taxable What about yung napanalunan ni Miss Universe Pia
only on income within). Wurtzbach? What is the tax consequence?
It’s part of the gross income. It is from outside source.
WINNINGS
(4) Nikki Tan 34:01-43:04
GR: Part of gross income.
XPN: When winnings are subject to final tax.
PRIZES AND WINNINGS Domestic winnings are subject to 20% final tax.
Exception to final tax rule: Winnings from PCSO
Prizes are different from winnings. Remember that these Sweepstakes or Lotto, but ONLY IF the winnings
rules on prizes and winnings are applicable to do not exceed 10K.
INDIVIDUALS ONLY. If the prize or the winning is Tax Consequence? Tax exempt.
earned by the corporation, there is no specific provision
in the NIRC that is why you go back to the general rule, *Prior to the TRAIN Law: The rule is if it is from
it is part of the gross income unless excluded by law. the PCSO Sweepstakes and Lotto, the entire
amount is exempt.
PRIZE is a reward because you joined in a contest and
because of your efforts.
With respect to prizes, they are subject to 20% final
WINNINGS, you won because of chance. tax. Who may avail of these exclusions?
What are the rules that we have to remember in prizes
Section 32 (B)(7)(c) Prizes and awards made primarily
and winnings?
in recognition of religious, charitable, scientific,
GR: It is part of gross income
educational, artistic, literary, or civic achievement but
XPN: It is not part of gross income when:
only if:
(1) excluded by law or
1. The recipient was selected without any action
(2) subject to final tax.
on his part to enter the contest or proceeding;
and
Sec. 24 (B) (1)
2. The recipient is not required to render
(B) Rate of Tax on Certain Passive Income: - substantial future services as a condition to
receiving the prize or award.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final
tax at the rate of twenty percent (20%) is hereby d. Prizes and Awards in Sports Competition – All prizes
imposed upon the amount of interest from any and awards granted to athletes in local and
currency bank deposit and yield or any other monetary international sports competitions and tournaments
benefit from deposit substitutes and from trust funds whether held in the Philippines or abroad and
and similar arrangements; royalties, except on books, as sanctioned by their national sports associations.
well as other literary works and musical compositions,
which shall be imposed a final tax of ten percent (10%); There are two things here:
prizes (except prizes amounting to Ten thousand pesos a) Prizes because of religious, charitable, etc.
(P10,000) or less which shall be subject to tax under b) Prizes in Sports Competition Prizes because of
Subsection (A) of Section 24; and other winnings religious, charitable, etc.
(except Philippine Charity Sweepstakes and Lotto
winnings), derived from sources within the Philippines: (a) Prizes because of religious, charitable, etc.
What are the requirements?
PRIZES a. Purpose – it must be for religious, charitable,
GR: Part of gross income. scientific, educational, artistic, literary, or civic
XPN: When prizes are subject to final tax: achievement;
42
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
b. The recipient was selected without any action EXCEPTION: Unless the law so provides for another tax
on his part to enter the contest or proceeding; treatment. To qualify for the exception, ask two (2) questions:
c. The recipient is not required to render
substantial future services as a condition to 1st question: Is the type of winning involved taxable?
receiving the prize or award.
Type of Winning Taxable?
An example for this is the Datu Bago Award PCSO and Lotto Winnings NO
and the Ramon Magsaysay Award. In here Other winnings May be
they are only nominated and they win a taxable
plaque and I think may cash. depending
on the next
questions
(b) Prizes and awards in sports competition.
The key word here is sanctioned by the national
2nd question: What’s the source of the prize?
sport association. Right now, it is the Philippine
Olympics Committee.
Source Tax Treatment
Outside the Philippines Part of Gross Income
FROM THE 2016 TSN: (Ruyeras) Within the Philippines Subject to 20% Final Tax
*Transcriber’s Summarization:
PRIZES
GENERAL RULE: Prizes are part of gross income. PENSIONS, ANNUITIES AND PROCEEDS OF LIFE
EXCEPTION: Unless the law so provides for another tax INSURANCE
treatment. To qualify for the exception, ask three (3) questions:
GR: it is part of the gross income.
1st question: Is the type of prize involved taxable?
Type of Prize Taxable? From the 2016 TSN of Dean Quibod
Prize received from Sports NO
Competition sanctioned by the PENSION – in the event you retire, you receive pensions.
Philippine Sports Committee These pensios include retirement pay and separation pay.
Prizes for religious, charitable, NO They are taxable, as a rule, because they are payment for
artistic, etc. Achievements services rendered. They will be excluded only when they
where the two (2) requisites comply with the requirements for purposes of exclusion.
under the law are complied with
Other prizes May be ANNUITIES – Like interest income, this pertains to periodic
taxable payment. There is a fund set up, and that fund earns or
depending generates income in the form of annuities. This is taxable
on the next income in the hands of the beneficiary.
questions
Definition:
2nd question: What’s the source of the prize?
Art. 2021, CC. The aleatory contract of life annuity binds
Source Tax Treatment the debtor to pay an annual pension or income during
Outside the Philippines Part of Gross Income the life of one or more determinate persons in
Within the Philippines Depends on the Next consideration of a capital consisting of money or other
Question property, whose ownership is transferred to him at once
with the burden of the income. (1802a)
3rd question: What is the amount?
Section 32(B)(1), NIRC
Amount Tax Treatment Life Insurance. - The proceeds of life insurance policies
More than P10,000 Subject to 20% Final Tax paid to the heirs or beneficiaries upon the death of the
P10,000 or less Part of Gross Income insured, whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement to
WINNINGS pay interest thereon, the interest payments shall be
included in gross income.
GENERAL RULE: Winnings are part of gross income.
43
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
*Transcriber’s Summarization:
GENERAL PROFESSIONAL PARTNERSHIP (GPP)
DISTRIBUTION OF PARTNERSHIP PROFITS
Please take note that a General Professional Partnership
(GPPs) is a tax-exempt entity. So meaning the income What kind of Tax Treatment Tax Treatment
generated by these professional partnerships are exempt partnership? as to as to Partners
from income tax. But it doesn’t mean that the Partnership
practitioners or the professionals composing the GPPs
are exempt from tax. So syempre partners sila, there GPPs Exempt from Amount received
will be a distribution of income kase yun naman ang Income Tax as distribution of
purpose ng partnership, the GPP is exempt from income profits part of
tax but the partners composing it are not exempt. So gross income
that’s why the distribution of income given to the GCPs Treat it as a corporation. Distribution
partners are part of the partner’s respective gross of profits to partners subject to final
income. tax.
SEC. 26, NIRC Tax Liability of Members of General 1. Forgiveness of Indebtedness – it depends on
Professional Partnerships. – the situation,if there is no consideration at all
A general professional partnership as such meaning out of love so it is a donation, of
shall not be subject to the income tax imposed under this course, it’s not part of Gross Income anymore.
Chapter. It’s a gift. So therefore, it will be subjected to
Persons engaging in business as partners in a a Donor’s Tax. But if it is in consideration of
general professional partnership shall be liable for services, in that instance, it will already form
income tax only in their separate and individual part of your gross income.
capacities.
2. Recovery of Debts Written-Off – for example
For purposes of computing the distributive uncollectible may utang na di pa nabayaran
share of the partners, the net income of the partnership tapos na bankrupt. Then nanalo sya sa lotto
shall be computed in the same manner as a corporation. so he will be able to pay you again. What is
Each partner shall report as gross income his distributive the rule? It will form part of your gross income
share, actually or constructively received, in the net but will be subject to the TAX BENEFIT RULE.
income of the partnership. Recovery of Debts previously charged-off is
taxable to the extent of the income tax
benefit. This is pretty much the same with tax
refund or tax credit.
FROM 2016 TSN: (Ruyeras)
3. Tax Refund or Tax Credit – It is part of your
gross income but only to the extent of the
income tax benefit derived therefrom.
44
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Sept 13, 2018 - 46:14 Basically, all taxpayers may avail of exclusions –
(1) Lexi Singanon 00:00-12:00
individuals, corporations, estates or trusts. The list of
exclusions is found in Sec. 32(B) of the NIRC.
Do not forget the basic concepts that I taught you.
Is the list exclusive?
GR: It’s part of the Gross Income.
NO. We have already discussed a few items excluded
from the gross income, such as income earned by non-
Exceptions:
residents and non-citizens outside of the Philippines
1. It is excluded;
and those subject to final tax.
2. Subject to final taxes.
So now let’s go to the specific items under exclusions.
EXCLUSIONS
LIFE INSURANCE
(B) Exclusions from Gross Income. - The following items
What do you understand by exclusions? How is it different
shall not be included in gross income and shall be
from exemptions and deductions?
exempt from taxation under this Title:
When you say Exclusion in the context of the income
(1) Life Insurance. - The proceeds of life insurance
taxation, these refer to items of income, such as property
policies paid to the heirs or beneficiaries upon
or money received or earned but are not taxable as income
the death of the insured, whether in a single
by reason of law or treaty.
sum or otherwise, but if such amounts are held
by the insurer under an agreement to pay
Meaning, when you talk about exclusion, in a normal sense,
interest thereon, the interest payments shall
it’s supposed to be part of the gross income. But by reason
be included in gross income.
of a specific provision of law or treaty, it is exempt, you do
not consider it in computing your gross income.
xxx
Exclusions are different from deductions.
What is LIFE INSURANCE?
While the effects are the same because normally exclusions
Life Insurance is the insurance on human life, appertaining
would reduce your gross income and ultimately it would
thereto or connected therewith. Anything that has to do
reduce your income tax.
with human life. However, this is a misnomer because when
you talk about life insurance, normally, it refers to someone
Technically the same with deductions. It reduces your
who will die, it refers to death.
income, and also it reduces your net taxable income and
ultimately your income tax.
Diba? If you have life insurance, you can only collect the
benefits upon the death of the person insured. But there’s
The effects are the same but they are two different animals.
also this one type of insurance, to which, it doesn’t need
that someone will die, which is Annuity.
EXCLUSION DEDUCTION
Exclusion refers to Deductions refer to losses
Please take note that when we talk about exclusions, this
something which is or business expense;
has something to do with tax exemption already. Please
received by the taxpayer;
take note of the requisites because one of the requisites say
Exclusions would have Deductions are not
that it is already part of the gross income. Why? Because tax
been included in the gross included in the income; in
exemptions including exclusions are strictly construed
income, were it not for the fact, they are a subtraction
against the taxpayer and in favor of the government.
specific provision of law or from the income because
treaty excluding it from they are expenses;
WHAT ARE THE REQUISITES FOR EXCLUSION UNDER THIS
the gross income;
SECTION?
1. The proceeds are from life insurance;
Since deduction is an expense, it is something that is paid or 2. The proceeds are paid to the heirs or the
given away by the taxpayer which ultimately reduces the beneficiaries;
net worth of that taxpayer. 3. The proceeds are paid upon the death of the
insurer.
Who may avail of Exclusions?
45
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Why is it that the proceeds of life insurance policies are 3. It is paid either during the term or at the maturity
excluded from the gross income? of the term mentioned in the contract or upon
Because if you come to think about it, if you receive surrender of the contract.
proceeds out of life insurance, it’s not a form of income
but it’s more of a form of an indemnity. The surrender of the contract of life insurance or
anything that entails insurance is when the
Some life insurance have irrevocability clause. For example, insurer cancels the insurance policy. Upon
I am the insured and then I have a beneficiary. What if ayaw surrender, the cash surrender value is returned to
ko na siya? I want to disinherit this person, I want to take the insurer.
him out of my insurance policy. So I will revoke.
(2) Inah Bautista del Rosario 12:01-24:00
Does it matter when it comes to income taxation?
It doesn’t really matter. Regardless of the revocability, Let’s simplify the rules:
or the existence of irrevocability clause under the life
insurance, it doesn’t really matter, as long as the DEAD OR ALIVE RULE
beneficiary received proceeds from the life insurance, I call this the “Dead or Alive Rule.” Atty. Donalvo coined this
it will still be considered as an exclusion. term, so please don’t use this in the exam. Nonetheless,
please be guided by it.
When will it matter?
It matters only in estate taxation.
DEAD OR ALIVE RULE
Please also take note of the last clause in the provision: IF THE The beneficiary or his heirs will receive
INSURED something. The amount they receive is
“but if such amounts are held by the insurer under an IS DEAD excluded from the gross income.
agreement to pay interest thereon, the interest payments
shall be included in gross income.” If it refers to:
IF THE (a) Excess of Excluded from the Gross
If there is something apart from the insurance proceeds, INSURED Premiums income
there is interest involved, then the interests (because they IS ALIVE (b) Interest
are already a return on capital) are considered as taxable. (c) Return of It is part of the Gross
Premiums Income
RETURN OF PREMIUM
(2) Amount Received by Insured as Return of
Premium. - The amount received by the GIFTS, BEQUESTS AND DEVISES
insured, as a return of premiums paid by him
under life insurance, endowment, or annuity Sec. 32. Gross Income. —
contracts, either during the term or at the (2) Exclusions from Gross Income. — The following
maturity of the term mentioned in the items shall not be included in gross income and
contract or upon surrender of the contract. shall be exempt from taxation under this Title:
xxx
xxx (3) Gifts, Bequests, and Devices. — The value of
property acquired by gift, bequest, devise, or
descent: Provided, however, That income from
This is especially true when you talk of Annuity contracts. such property, as well as gift, bequest, devise
Return of Premium are excluded from the Gross Income -- or descent of income from any property, in
not just because it is specifically stated to be excluded in the cases of transfers of divided interest, shall be
NIRC -- but because it’s not income. It’s actually a return of included in gross income.
capital.
The rule is simple.
WHAT ARE THE REQUIREMENTS FOR EXCLUSION?
1. The amounts received are return of premiums GR: If someone receives property by reason of donation
paid by the taxpayer to the insurance company; or succession, the same is excluded from gross
2. It is by virtue of a life insurance, endowment or income.
annuity contract; XPN: When it pertains to income derived from the
property donated or received under succession, it is
part of the gross income.
46
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Sec. 32. Gross Income. — How about the salaries I was not able to receive for a
(B) Exclusions from Gross Income. — The following month? That is loss profits. That is not excluded from
items shall not be included in gross income and shall the gross income.
be exempt from taxation under this Title:
xxx How about exemplary damages? Remember that it is
(4) Compensation for Injuries or Sickness. — awarded merely to ‘set an example.’ Is that an award
amounts received, through Accident or Health on account of such injuries or sickness?
Insurance or under Workmen's Compensation 2 SCHOOLS OF THOUGHT:
Acts, as compensation for personal injuries or (1) Exemplary Damages is part of the gross income
sickness, plus the amounts of any damages because it is not by reason of injuries or sickness.
received, whether by suit or agreement, on It is imposed by way of example or correction for
account of such injuries or sickness. the public good. It is not about compensating a
person for injuries.
(2) Exemplary Damages is excluded from the gross
ITEMS CONSIDERED UNDER THIS SECTION: income because the law merely says “Damages.”
1. Amounts received through Health or Accident If the law does not distinguish, we should not
Insurance as compensation for personal injuries or distinguish.
sickness Atty Donalvo suggests that we go with the
2nd school of thought = Exemplary damages
To get the amount involved in a life insurance, the is excluded from the gross income.
insured has to die. Annuities are given every year 2018 BIR Ruling: Compensatory damages,
survived by the insured. This is not so in a health or actual damages, exemplary damages,
accident insurance. The insurance company will give attorney’s fees and the costs of suit are
something to the insured when he meets an accident excluded from gross income. But damages
or when he gets sick. which results to loss of earning capacity are
not excluded from tax. This is by virtue of
The amount received by virtue of a health or accident Section 32(B), NIRC.
insurance is excluded from the gross income.
What if the parties agree to the payment of moral
2. Amounts received through the Workman’s damages, what is its taxability? This is excluded.
Compensation Act as compensation for personal
(3) Sushmita Shane Castro 24:01 - 35:00
injuries or sickness
INCOME UNDER TREATY
I think this refers to persons engaged in hazardous Sec. 32. Gross Income. —
occupations. If you receive something by virtue of (B) Exclusions from Gross Income. — The following
WCA, aside from the health insurance, it is still items shall not be included in gross income and
excluded from the gross income. shall be exempt from taxation under this Title:
(5) Income Exempt under Treaty. — Income of
3. Damages received whether by suit or agreement, on any kind, to the extent required by any treaty
account of such injuries or sickness. obligation binding upon the Government of
the Philippines.
Just remember MENTAL.
47
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(3) Exclusions from Gross Income. — The following administered by the United States Veterans
items shall not be included in gross income and Administration
shall be exempt from taxation under this Title:
xxx (e) Benefits received from or enjoyed under the
Social Security System in accordance with
(6) Retirement Benefits, Pensions, Gratuities, the provisions of Republic Act No. 8282.
etc.—
(a) Retirement benefits received under RA 7641 (f) Benefits received from the GSIS under
and those received by officials and Republic Act No. 8291, including retirement
employees of private firms, whether gratuity received by government officials
individual or corporate, in accordance with a and employees.
reasonable private benefit plan maintained
by the employer: Provided, That the retiring What are the benefits referred here under NIRC?
official or employee has been in the service 1. Retirement benefits under RA 7641- these are the
of the same employer for at least ten (10) retirement benefits under the Labor Code
years and is not less than fifty (50) years of 2. Employer maintain reasonable private retirement
age at the time of his retirement: Provided, benefit plan. This is the retirement benefit under
further, That the benefits granted under this the Tax Code
subparagraph shall be availed of by an
official or employee only once. For purposes UNDER THE LABOR CODE
of this Subsection, the term 'reasonable Requirements:
private benefit plan' means a pension, 1. There is no agreement as to the employees
gratuity, stock bonus or profit-sharing plan retirement benefit;
maintained by an employer for the benefit 2. The retiring employee must have served at least
of some or all of his officials or employees, five (5) years with the employer;
wherein contributions are made by such 3. The retiring employee is not less than sixty (60)
employer for the officials or employees, or years old;
both, for the purpose of distributing to such 4. It must be availed of by the employee only once.
officials and employees the earnings and (NOTE: this requirement was not mentioned by Sir
principal of the fund thus accumulated, and in our discussion but this was included as
wherein its is provided in said plan that at no requirement in the 2016 TSN)
time shall any part of the corpus or income
of the fund be used for, or be diverted to, UNDER THE TAX CODE
any purpose other than for the exclusive Requirements: 2 broad requirements
benefit of the said officials and employees. 1. There must be a qualified funding source- we
don’t have any problem with the qualified funding
(b) Any amount received by an official or source kasi nga we have a reasonable private
employee or by his heirs from the employer benefit plan that is approved by the BIR.
as a consequence of separation of such
Kailangan approval sa BIR.
official or employee from the service of the
employer because of death sickness or other
2. There must be a qualified employee to avail of the
physical disability or for any cause beyond
the control of the said official or employee. exclusion:
(c) The provisions of any existing law to the a. Service requirement- 10 years
contrary notwithstanding, social security b. Age- 50 years old
benefits, retirement gratuities, pensions and c. It must be availed of only once
other similar benefits received by resident
or nonresident citizens of the Philippines or I have an issue on that: Retirement benefits received under
aliens who come to reside permanently in Republic Act No. 7641 and those received by officials and
the Philippines from foreign government employees of private firms, whether individual or corporate,
agencies and other institutions, private or in accordance with a reasonable private benefit plan
public. maintained by the employer.
(d) Payments of benefits due or to become due WHAT IF THE EMPLOYEE RETIRED UNDER THE LABOR
to any person residing in the Philippines CODE? Hindi niya nakumpleto ang 10 year period. Diba ang
under the laws of the United States sabi 5 years lang pwede na siya mag retire and magkuha ng
48
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
retirement benefit. How will you treat that retirement the separation is VOLUNTARY meaning nag resign siya tapos
benefit then na natanggap niya? I am an employee there is nakatanggap siya ng separation pay that’s part of the GI.
no private retirement benefit plan set up for by the But if it’s INVOLUNTARY gipahawa siya because mag closure
employer or company and then I resigned and I received etc. it is already excluded. Separation pay is excluded.
something because the Labor Code is mandatory. But I was Let’s talk about some issues.
able to complete 5 years or 6 years of service lang. Can I a. What if the employee receives a separation pay
avail of the tax exemption for the retirement benefit? because of illegal termination? He was wrongfully
1. Some books would say, if you follow retirement terminated from employment so binigyan siya ng
under the Labor Code, nag retire ka that separation pay. (Diba normal man yan ang uso
retirement benefit or you should be able to kasi ngayon separation pay in lieu of
benefit from the tax exemption from the reinstatement. But it does not automatically
retirement pay you have received. But take a look follow for there must be a reason why the
at the requirement of the law. employee cannot be reinstated anymore. Ang
2. Sabi naman ng ibang books, even if you have gasgas na reason jan strained relations.) Taxable
received retirement benefit under the Labor or not? Is it voluntary on the part of the employee
Code, you must be able to comply these- service who was illegally terminated? Voluntary or
requirement- 10 years; age- 50 years old; must be involuntary?
availed of only once.
ANS of Sir: I think it’s INVOLUNTARY.
So which is which? I WILL STILL ASK DEAN ABOUT IT. But I
am inclined to say that this requirements must be complied b. What if I filed a case for illegal termination and
with. The reason for that is the strict construction of tax
then we settled. And then there is a separation
exemption. We are talking tax exemption.
pay. Voluntary or involuntary?
SEPARATION PAY ANS of Sir: I inclined to believe that it is still
INVOLUNTARY.
But if you are on the BIR side pwede mo i-argue
(b) Any amount received by an official or employee or by na VOLUNTARY kasi nag agree kayo and it has
his heirs from the employer as a consequence of never been determined whether or not there is
separation of such official or employee from the illegal dismissal, that is if you are on the BIR side.
service of the employer because of death sickness or c. What if you are legally terminated? By some
other physical disability or for any cause beyond the chance nangawat naka tapos gipapahawa ka, and
control of the said official or employee.
then nakadawat pa gyud ka ug separation pay?
Separation is somewhat similar with retirement pay. ANS of Sir: If the termination is for a just cause
Retirement pay is more specific because the reason you got then it is considered as VOLUNTARY on the
separated from your employer is because of your age- you employee’s part. So taxable.
are too old to work.
What is the rule on Separation Pay? It is the same with (3) Nikki Tan 35:01 - 46:14
Retirement Pay.
GR: Separation Pay is compensation income it forms part of What about if nagsuicide kasi nagatrabaho habanb naga-
the gross income- gross taxable income. law school? Is it voluntary or involuntary? Is the separation
XPN: Separation pay is excluded from gross income when: part of gross income?
1. Employee receives his separation pay from the For me the reason there is death, it’s not about
employer voluntary or involuntary.
2. The reasons for separation:
Other exclusions under this provision:
1) death, sickness, or other physical
Benefits given by the United States Veterans
disability or for any cause beyond the
Administration;
control of the said official or employee
Benefits received from Social Security System;
What’s the most important there is the last phrase: beyond Benefits received from the GSIS.
the control of the said official or employee. It means that
taxability of the separation pay depends upon the
voluntariness of separation on the part of the employee- if MISCELLANEOUS ITEMS
49
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
(b) Income Derived by the Government or its Political Second exception, religious, charitable, artistic, etc. – this is
Subdivisions. - Income derived from any public in Section 32(6)(c).
utility or from the exercise of any essential What are the requirements for these prizes to be excluded
governmental function accruing to the Government from your gross income?
of the Philippines or to any political subdivision a. Purpose – it is because of your religious,
thereof. charitable, artistic, etc. achievement;
b. You must be selected without any action on your
This is also related to the inherent limitations of part;
taxation. Pag gobyerno ang naga kita, general rule is it c. You must not be required to render substantial
is not taxable. The government need not tax itself. future service.
But there is an issue regarding PAGCOR. There is a Third Exception, sports competition The keyword here is,
recent Supreme Court case, PAGCOR vs. CIR G.R. No. it must be sanctioned by the National Sports
215427 (December 10, 2014): Organization. Under the current Revenue Regulations, it
is the Philippine Sports Commission through its Philippine
PAGCOR vs. CIR G.R. No. 215427 (December 10, 2014) Olympics Committee. It does not matter if it is held
The new rule now is this: within the Philippines or abroad or if it is sponsored by a
The income of PAGCOR from its gambling domestic or international sponsor. What is important is that
operations is subject to 5% franchise tax; it is sanctioned by the Philippine Sports Commission. That’s
The income of PAGCOR which is not related to its why, pag mga professional like Manny Pacquiao, it is no
gambling operations is subject to the normal longer tax exempt. Kase professional na.
corporate income tax.
50
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
51
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Note: Sir went back to explain Sec. 24(A) as amended by the the Philippines including overseas contract
TRAIN Law. This part explains the graduated tax rates and workers referred to in Subsection (C) of
8% preferential tax rates which is an option for Purely Self- Section 23 hereof; and
employed Individuals and/or Professionals and Mixed (c) On the taxable income defined in Section 31 of
Income Earners. this Code, other than income subject to tax
under Subsections (B), (C), and (D) of this
Section, derived for each taxable year from all
sources within the Philippines by an individual
INCOME TAX RATES FOR INDIVIDUALS alien who is a resident of the Philippines.
That is a reiteration of the general principles of taxation vis-
There are minimal changes introduced by the TRAIN law. à-vis the individuals – particularly, the resident citizens,
For income tax rates you have Sections 24 and 25. nonresident citizens and resident aliens.
Sec. 24 – Income tax rates for citizens and resident
aliens individuals GRADUATED INCOME TAX RATES FOR INDIVIDUALS
Sec. 25 – Income tax rates for nonresident alien SEC. 24.
individuals (2) Rates of Tax on Taxable Income of Individuals. – The
tax shall be computed in accordance with and at the
You should also take into consideration: rates established in the following schedule:
(1) Income Subject to Final Taxes
(2) General Principles of Taxation (a) Rates of Tax on Taxable Income of Individuals. —
The tax shall be computed in accordance with and
at the rates established in the following schedule:
Must look into :
(1) income of not
(2) type of taxpayer – because the classification is Tax Schedule Effective January 1, 2018 until December
also important 31, 2022:
(3) General principles of taxation -- the citizenship
and the residency of the taxpayer and the source
of the income Not over P250,000 0%
Take note when it comes to individuals : Only Over P250,000 but not over P400,000 20% of the
RC are taxable on their income globally within excess over
and without the Philippines. The rest of the P250,000
taxpayers are taxable only on their income
within the Philippines Over P400,000 but not over P800,000 P30,000 +25% of
the excess over
Let’s go now to income tax rates: P400,000
SEC. 24. Income Tax Rates. – Over P800,000 but not over P2M P130,000 + 30%
(A) Rates of Income Tax on Individual Citizen [whether of the excess
resident or non-resident] and Individual Resident over P800,000
Alien of the Philippines. –
(1) An income tax is hereby imposed: Over P2M, but not over P8M P490,000 + 32%
(a) On the taxable income defined in Section 31 of of the excess
this Code, other than income subject to tax over P2M
under Subsections (B), (C), and (D) of this
Section, derived for each taxable year from all Over P8M P2,410,000
sources within and without the Philippines by +35% of the
every individual citizen of the Philippines Excess over P8M
residing therein;
(b) On the taxable income defined in Section 31 of
this Code, other than income to tax under
Subsections (B), (C), and (D) of this Section, Tax Schedule Effective January 1, 2023 and onwards:
derived for each taxable year from all sources
within the Philippines by an individual citizen Not over P250,000 0%
of the Philippines who is residing outside of
52
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Over P250,000 but not over P400,000 15% of the P10,000 only – except when you are a minimum wage
excess over earner.
P250,000
Apart from being a minimum wage earner, and even if you
Over P400,000 but not over P800,000 P22,500 +20% are not one, if your income will not exceed P250,000, you
of the excess are exempt from income tax already.
over P400,000
Over P800,000 but not over P2M P102,500+25% HOW TO USE THE TABLE:
of the excess Problem:
over P800,000 Income for entire year: P600,000
Expenses: P100,000
Over P2M but not over P8M P402,500+ 30%
of the excess Net taxable income: P500,000
over P2M
1) FIRST: To determine which bracket the income
Over P8M P2,202,500+ belongs
35% of the
excess over P8M It belongs to “Over P400,000 but not over
P800,000”
What is the tax base for this? Tax: P30,000 +25% of the excess of P400,000
For the o this means that if you fall under this
o regular graduated income tax rates or bracket, you have to pay a fixed amount
o regular income tax or of P30,000 plus the excess of P400,000
o graduated income tax rates on individuals
the tax base would be your NET TAXABLE INCOME. 2) SECOND: Compute for the excess of P400,000
53
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Over 70,000 but not over P8,500 + 20% of the (1) compute their income taxes separately based on
P140,000 excess over P70,000 their total taxable income – each individual is still a
Over 140,000 but not P22,500 +25% of the separate distinct taxpayer
over P250,000 excess over P140,000 (2) they are required to file an ITR to include the
Over 250,000 but not P50,000 +30% of the income of both spouses (Sec. 51(D))
over P500,000 excess over P250,000
Over P500,000 P125,000 +32% of the What if they don’t know to whom an income belongs? For
excess over P500,000 taxation purposes, it is supposed to divided equally.
Total P135,000
MARRIED INDIVIDUALS Compensation
Income
SEC. 24. (cont)
For married individuals, the husband and wife, Less:
subject to the provision of Section 51(D) hereof, shall Mandatory
compute separately their individual income tax based contributions 50,000
on their respective total taxable income: Provided, That Non-taxable
if any income cannot be definitely attributed to or benefits 11,000 16,000
identified as income exclusively earned or realized by Taxable Income P119,000
either of the spouses, the same shall be divided equally
between the spouses for the purpose of determining b. The following year, Mr. CSO earned, aside from
their respective taxable income. his basic wage, additional pay of P140,000
This is the same as the old law. which consists of the OT pay P80,000, NSD
P30,000, hazard pay P15,000 and holiday pay of
MARRIED INDIVIDUALS ARE REQUIRED TO: P15,000. He has the same benefits and
contributions as above.
54
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
55
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
the 3%
This goes both ways – from graduated to 8% and 8% to percentage tax.
graduated. The taxpayer’s choice is irrevocable for that
tax period in which his choice was made. Problem: Taxpayer is purely self-employed.
Gross Income P600,000
The 3M VAT threshold is good for a single year. Business Expenses P50,000
What if in the middle of the year the taxpayer reaches If that taxpayer went to you for advice, what advice would
the P3M threshold in gross sales? If the taxpayer you give?
reaches the P3M mark, he required to register as a VAT You answer like this: The tax consequence depends on
taxpayer. He will be taken out of the 8% application. As his choice of tax scheme. A purely self-employed
a result, he will automatically be subjected to the individual has 2 choices:
graduated income tax rates under the NIRC. (1) Regular graduated income tax
(2) 8% tax – Then you lay down the requirements.
Sir, you said that the taxpayer has to pay the
percentage quarterly. What happens to the Compute for the income tax for each scheme.
percentage tax already paid? Whatever payments the
taxpayer has made under the 8% scheme may be TRAIN LAW REGULAR GRADUATED INCOME TAX
availed of as a tax credit. Again, tax credits is a direct First get the Net Taxable Income which is
deduction of the tax liabilities. P600,000 – P50,000 = P650,000.
DIFFERENCE BETWEEN THE REGULAR GRADUATED Second, get the tax depending on the bracket.
INCOME TAX SCHEME AND THE 8% GROSS SALES, GROSS - Over 400,000 but not over 800,000
RECEIPTS TAX - P30,000 + 25% of the excess over
GRADUATED 8% P400,000
(1) Tax Base Uses the gross
Uses the net sales and gross Get excess: 550,000 – 400,000 = 50,000
taxable income receipts and
as tax base non-operating Get 25% of excess: 50,000 x 25% = 12,500
income as tax
base. Add 20% of excess to fixed amount:
(2) Tax rates Self-explanatory Self-explanatory P30,000 + 12,500 = P42,500
(3) Availment of Can claim No allowable
allowable allowable deductions are Remember that the taxpayer still has to pay
deductions deductions. allowed because percentage tax of 3%.
Meaning, their they are taxed at
gross income gross Gross Income x 3%
can be reduced = 600,000 x 3%
by their business = P 18,000
expenses
(4) Nature Percentage is a Will no longer Total Tax Impact = P42,500 + 18,00 = 60,500
business tax pay the 3%
8% TAX
Examples of PT:
(1) VAT The 8% includes RA 10963 provides that the 8% is on the gross sales or
(2) Percentage the 3%. (no need gross receipts and other non-operating income in
(3) Excise taxes to add 3%) excess of P250,000.
56
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
57
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
services. Since her career flourished, her total gross What if the taxpayer is employed and at the same time has
receipts amounted to P4,250,000 for taxable year 2018. his own business? Like employed as a teacher and have a
Her recorded cost of service and operating expenses grocery as a side business.
were P2,150,000 and P1M.
Let’s read Sec. 24(A)(1)(c)
Her income tax liability will be computed as follows:
Gross Receipts (from P4,250,000 MIXED INCOME EARNER
architectural and engineering Sec. 24(A)(1)
services)
Less: Cost of Service 2,150,000 (c) Rate of Tax for Mixed Income Earners. – Taxpayers
Gross Income P2,100,000 earning both compensation income and income from
Less: Operating Expenses 1,000,000 business or practice of profession shall be subject to
Taxable Income P1,100,000 the following taxes:
58
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
REQUIREMENTS:
(1) The gross sales or gross receipts will not Income tax Bracket: Over 800k but not over P2M
exceed the VAT threshold of P3M
(2) The taxpayer is a non-VAT-registered Compute for excess:
taxpayer 1,400,000 – 800,000 = 600,000
(3) The taxpayer has indicated in his ITR that 600,000 x 30% = 180,000
he will be availing of the 8% gross sales INCOME TAX = P310,000
or gross receipts tax.
Please take note that the P310,000 here
3) If the gross receipts or the gross sales and other non- still does not include the percentage tax.
operating income exceeds the vAT threshold, the You still have to compute for the
taxpayer will automatically be subjected to the percentage tax. We did not compute
graduated income tax rates for individuals. since we are only concerned with the
income tax.
4) This is related to the compensation income. If you
noticed, the P250,000 is taken in consideration in What if the taxpayer opted to be taxed 8% gross
computing the 8%. But when it comes to mixed income sales, gross receipts?
earners, the P250,00 tax exemption will apply only to
the compensation income – That is if the taxpayer opts Compensation Income
to be taxed 8% for his business or professional income. P1,000,000
Do we subtract P250,000?
When the taxpayer opts to go with the 8%. No, because it is already covered in the tax table.
Since this the compensation income is subjected to the
graduated rates, the P250,000 tax exemption, will only Excess:
pertain to the compensation income. = 1,000,000 – 800,000
= 200,000 x 30%
Since the P250,000 is already incorporated in the = 60,000
graduated rates for compensation income, whatever
business income I receive, it can no longer benefit from Business Income
the P250,000 exemption. If I’m going to simplify this: = 8% x GS
if the taxpayer opted to be taxed at 8% for = 8% x 1,000,000
his business income and the taxpayer is a = 80,000
mixed income earner, the P250,000 tax
exemption will apply solely to the Total Tax for Mixed Earner
compensation income. = 80,000 + 190,000
= 270,000
Illustration:
A taxpayer is considered as a mixed income If we go with the 8% option, will the tax due be always
earner. He has a business and is employed by a smaller than that if we go with the graduated rates?
corporation. Not necessarily. If your business expense is bigger, the tax
Gross Sales P1,000,000 due will necessarily be bigger.
Cost of Sales P500,000
Business Expenses P100,000 This is one way of tax avoidance. If a taxpayer’s business
Compensation P1,000,000 expenses are bigger, he should opt for the graduated rates.
You have to substantiate all your expenses. But if you don’t
What if the taxpayer opted to be taxed at the have any receipts, then you opt for the 8%. Under the 8%
graduated rates? scheme, you will be taxed gross.
Business Income P1,000,000 What if I am operating at a loss, and under the 8% scheme?
Cost of Sales (500,000) You are still made to pay the 8% because the tax base is the
Gross Income 500,000 gross. Wala kang deductions.
Business Expenses (100,000)
Net Business Income P400,000 Inserted illustration in RR 8-2018
Compensation Income P1,000,000
Net Taxable Income P1,400,000
59
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
His tax due for 2018 shall be computed as follows if he Total Income Tax Due (Compensation and Business) =
is did not opt for the 8% income tax based on gross P200,000
sales/receipts and other non-operating income:
The option of 8% income rate is applicable only to
Total compensation income P1,500,000 taxpayer’s income from business, and the same is in
Less: lieu of the income tax under the graduated income
Non-taxable 13th mo. and other
60
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
tax rates and the percentage tax under Section 116 We have already discussed the rest of the taxes on other
of the Tax Code, as amended. individuals. Passive income and final taxes lang yan.
The amount of P250,000 which is allowed as
deduction under the law for taxpayers earning solely
from self-employed/practice of profession, is not NRAETB
applicable for mixed income earner under the 8%
income tax rate option. Sec. 25. Tax on Nonresident Alien Individual. –
The P250,000 mentioned above is already (A) Nonresident Alien Engaged in Trade or Business
incorporated in the first tier of the graduated income Within the Philippines. –
tax rates applicable to compensation income. The (1) In General.—A nonresident alien individual
excess of the P250,000 over the actual taxable engaged in trade or business in the Philippines
compensation income is not creditable against the shall be subject to an income tax in the same
taxable income from business/ practice of profession manner as an individual citizen and a resident
under the 8% income tax rate option. alien individual, on taxable income received
from all sources within the Philippines. A
nonresident alien individual who shall come to
the Philippines and stay therein for an
Illustration 2: Mr. WBV, an officer of AMBS International aggregate period of more than one hundred
Corp., earned in 2018 an annual compensation of eighty (180) days during any calendar year
P1,200,000, inclusive of 13th month and other benefits in shall be deemed a 'nonresident alien doing
the amount of P120,000. Aside from employment business in the Philippines'. Section 22 (G) of
income, he owns a farm, with gross sales of P3,500,000. this Code notwithstanding.
His cost of sales and operating expenses are P1M and
P600,000, respectively, and with non-operating income NRAETB are taxed like Resident Citizens and Resident
of P100,000. Aliens.
His tax due for 2018 shall be computed as follows: Nonresident Alien Individual – one who shall come to the
Total compensation income P 1,200,000 Philippines and stay therein for an aggregate period of more
Less: than one hundred eighty (180) days during any calendar
Non-taxable 13th month pay year shall be deemed a 'nonresident alien doing business in
and benefits (max) 90,000 the Philippines'.
Taxable Compensation Income P 1,110,000
Add: Taxable Income from Business – Same lang ang tax scheme. Yung 8% magaapply din sa kanila
Gross Sales 3,500, 000
Less: Cost of Sales 1,000,000
Gross Income 2,500,000 SEC. 25. Tax on Nonresident Alien Individual
Less: Operating Expenses 600,000 (A)
Net Income from Operation 1,900,000 (2) Cash and/or Property Dividends from a Domestic
Add: Non-operating income 100,000 2,000,000 Corporation or Joint Stock Company, or Insurance or
Total Taxable Income P 3,110,000 Mutual Fund Company or Regional Operating
Headquarter or Multinational Company, or Share in
Tax Due: the Distributable Net Income of a Partnership
On P2M P 490,000 (Except a General Professional Partnership), Joint
On excess (3,110,000 – 2M) x 32% 355,200 Account, Joint Venture Taxable as a Corporation or
Total Income tax due P 845,200 Association., Interests, Royalties, Prizes, and Other
Winnings. - Cash and/or property dividends from a
The taxpayer has no option to tavail of the 8% domestic corporation, or from a joint stock company,
income tax rate on his income from business since or from an insurance or mutual fund company or
his gross sales exceeds the VAT threshold. However, from a regional operating headquarter of
he is still not subject to business tax since the nature multinational company, or the share of a nonresident
of his business transactions is VAT exempt. alien individual in the distributable net income after
tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of
Read RR 8-2018 a nonresident alien individual in the net income after
tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a
61
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
member or a co-venturer; interests; royalties (in any What type of tax is that? Final tax of 20% based on their
form); and prizes (except prizes amounting to Ten gross income from cinematographic lease, distributorship
thousand pesos (P10,000) or less which shall be etc.
subject to tax under Subsection (B)(1) of Section 24)
and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to NRANETB
an income tax of twenty percent (20%) on the total
amount thereof: Provided, however, that royalties The tax treatment for NRANETB is
on books as well as other literary works, and royalties 25% at gross for their gross income earned within the
on musical compositions shall be subject to a final tax Philippines except two:
of ten percent (10%) on the total amount thereof: (1) Capital gains tax for sale of real property
Provided, further, That cinematographic films and situated in the Philippines
similar works shall be subject to the tax provided (2) Capital gains for sale of domestic shares
under Section 28 of this Code: Provided,
furthermore, That interest income from long-term When you talk about the capital gains for the domestic
deposit or investment in the form of savings, shares and also transfers of capital assets classified as real
common or individual trust funds, deposit property situated in the Philippines, the capital gains tax
substitutes, investment management accounts and applies.
other investments evidenced by certificates in such
form prescribed by the Bangko Sentral ng Pilipinas The rest of the income of the NRANETB is subject to the 25%
(BSP) shall be exempt from the tax imposed under of the Final Withholding Tax.
this Subsection: Provided, finally, that should the
holder of the certificate pre-terminate the deposit or 8% does not apply here.
investment before the fifth (5th) year, a final tax shall
be imposed on the entire income and shall be You also have the rules on special aliens. You need to just
deducted and withheld by the depository bank from read them.
the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof: Sec. 25 (F) = vetoed
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%;
and Sept 20
Less than three (3) years - 20%. Review on Individual Income: We have 3 kinds:
compensation, business, other; and those that are subject
to regular and those subject to final tax. In regular tax, the
individual has tax options whether to be taxed at the
Passive Income NRAETB. graduated rates or 8% provided that the individuals meet
Same with the Resident Citizens the conditions mentioned. If the conditions are not met,
then the taxpayer will be subjected to the regular income
What is different? (highlighted portion) tax rates.
“Provided, further, That cinematographic films and similar
works shall be subject to the tax provided under Section 28 CORPORATIONS
of this Code:”
Under Section 28: Income tax code defines corporations “loosely” because it
SEC. 28. includes joint ventures, and even partnerships. Take note
(B) Tax on Nonresident Foreign Corporation. – that under the Tax Code there are 2 kinds of partnerships:
xxx 1. General Professional Partnership (GPP)
(2) Nonresident Cinematographic Film Owner, 2. General Co-partnership (GCP)
Lessor, or Distributor. – A cinematographic film
owner, lessor, or distributor shall pay a tax of GCPs are considered as corporations per se. That is why the
twenty-five percent (25%) of its gross income from income distributions of GCPs is considered as dividends.
all sources within the Philippines.
When GCP distributes their net income to the
So, same application except for these kinds of businesses – partners, that distribution will be subject to 10%
those which are lessors, owners, and distributors of withholding tax.
cinematographic films.
62
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
How about GPPS? GPPs are tax exempt entities. They are deemed to have been earned and spent equally for each
not considered as corporations. month of the period.
There is Sec. 26. The corporate income tax rate shall be applied on the
amount computed by multiplying the number of months
Sec. 26. Tax liability of Members of General covered by the new rate within the fiscal year by the
Professional Partnerships. – A general professional taxable income of the corporation for the period, divided
partnership as such shall not be subject to the income by twelve.
tax imposed under this Chapter. Persons engaging in
business as partners in a general professional Provided, further, That the President, upon the
partnership shall be liable for income tax only in their recommendation of the Secretary of Finance, may
separate and individual capacities. effective January 1, 2000, allow corporations the option
to be taxed at fifteen percent (15%) of gross income as
For purposes of computing the distributive share of the defined herein, after the following conditions have been
partners, the net income of the partnership shall be satisfied:
computed in the same manner as a corporation. A tax effort ratio of 20% of Gross National Product;
A ratio of 40% of income tax collection of total tax
Each partner shall report as gross income his distributive revenues;
share, actually or constructively received, in the net A VAT tax effort of 4% of GNP; and
income of the partnership. A 0.9% ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
“Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only The option to be taxed based on gross income shall be
in their separate and individual capacities.” available only to firms whose ratio of cost of sales to
This concept is also applicable to JV which are not gross sales or receipts from all sources does not exceed
considered as corporations: fifty-five percent (55%).
1) JVs undertaking construction projects and
2) JVs engaging in petroleum, coal, geothermal and The election of the gross income tax option by the
other energy operations pursuant to an operating corporation shall be irrevocable for three (3) consecutive
consortium agreement under a service contract taxable years during which the corporation is qualified
with the Government. under the scheme.
You will notice that the discussions are fast when we talk For purposes of this Section, the term 'gross income'
about the income of a corporation because essentially the derived from business shall be equivalent to gross sales
income tax (except for a few) consequence of an income less sales returns, discounts and allowances and cost of
earned by a corporation is similar with the individuals: all of goods sold. 'Cost of goods sold' shall include all business
those are taken from Section 27 and 28. expenses directly incurred to produce the merchandise
to bring them to their present location and use.
Sec. 27. Rates of Income Tax on Domestic Corporations.
— For a trading or merchandising concern, ‘cost of goods
(A) In General. — Except as otherwise provided in this sols’ shall include the invoice cost of the goods sold, plus
Code, an income tax of thirty-five percent (35%) is import duties, freight in transporting the goods to the
hereby imposed upon the taxable income derived during place where the goods are actually sold, including
each taxable year from all sources within and without insurance while the goods are in transit.
the Philippines by every corporation, as defined in
Section 22(B) of this Code and taxable under this Title as For a manufacturing concern, ‘cost of goods
a corporation, organized in, or existing under the laws of manufactured and sold ‘ shall include all costs of
the Philippines: Provided, That effective January 1, 2009, production of finished goods, such as raw materials
the rate of income tax shall be thirty percent (30%). used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to
In the case of corporations adopting the fiscal-year bring the raw materials to the factory or warehouse.
accounting period, the taxable income shall be
computed without regard to the specific date when In the case of taxpayers engaged in the sale of service,
specific sales, purchases and other transactions occur. ‘gross income’ means gross receipts less sales, returns,
Their income and expenses for the fiscal year shall be allowances and discounts.
63
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
64
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
65
TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
were not part of the inventory. None of deposit system shall be exempt from all taxes, except net
themwere stocks in trade. Based on the definition income from such transactions as may be specified by
of capital assets under Section 39 of the National the Secretary of Finance, upon recommendation by the
Internal Revenue Code of 1997, they are capital Monetary Board to be subject to the regular income tax
assets. payable by banks: Provided, however, That interest
(2) The machineries and equipment cannot be income from foreign currency loans granted by such
classified as capital assets. CIR vs. Fortune depository banks under said expanded system to
Tobacco — The rule in the interpretation of tax residents other than offshore banking units in the
laws is that a statute will not be construed as Philippines or other depository banks under the
imposing a tax unless it does so clearly, expressly, expanded system, shall be subject to a final tax at the
and unambiguously. A tax cannot be imposed rate of ten percent (10%).
without clear and express words for that purpose.
Accordingly, the general rule of requiring Any income of nonresidents, whether individuals or
adherence to the letter in construing statutes corporations, from transactions with depository banks
applies with peculiar strictness to tax laws and the under the expanded system shall be exempt from
provisions of a taxing act are not to be extended income tax.
by implication. In answering the question of who This separate provision on EFCDS pertains to the banks. We
is subject to tax statutes, it is basic that in case of are talking about the income derived by the depositary
doubt, such statutes are to be construed most bank under the EFCDS are exempt from all taxes, except of
strongly against the government and in favor of the net income. But when you talk about other
the subjects or citizens because burdens are not corporations, particularly not banks, they will be covered by
to be imposed nor presumed to be imposed the 15% income tax.
beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning Intercorporate Dividends
of the tax laws. Sec. 27. Rates of Income Tax on Domestic Corporations.
(3) Capital gains of individuals and corporations from —
the sale of real properties are taxed differently. (D) Rates of Tax on Certain Passive Incomes.—
Individuals are taxed on capital gains from sale of (4) Intercorporate Dividends. — Dividends received by a
all real properties located in the Philippines and domestic corporation from another domestic
classfiied as capital assets. corporation shall not be subject to tax.
(4) The only presumed gain from the sale of SMI’s Remember that this refers to domestic dividends only.
land and/or building may be subjected to the 6% Intercorporate dividends = from domestic to domestic, they
CGT. The income from the sale of petitioner’s are tax exempt.
machineries and equipment is subject to the
provisions on normal corporate income tax. Aside from the tax rates, the difference between individuals
and corporations when it comes to income tax rates,
Since petitioner had not started its operations, it was corporations have to compute for 3 types of regular taxes
also not subject to the minimum corporate income tax a. The regular corporate income tax of 30%
of 2% on gross income. Therefore, petitioner is not liable b. Minimum corporate income tax (MCIT)
for any income tax. (Sir only mentioned 2)
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
the Philippines. Doing business refers to acts that Let’s discuss the examples one by one:
imply a continuity of commercial dealings in a period
casual or occasional but so systematic and regular as INTERNATIONAL CARRIERS
to the continuity and permanence of activity for Sec. 28. Rates of Income Tax on Foreign Corporations.
profits. —
(A)Tax on Resident Foreign Corporations.—
In other words, it operates as a going concern with a xxx
view of profit. 2) International Carrier. — An international
carrier doing business in the Philippines shall
Tax consequence: pay a tax of 2 1/2% on its “Gross Philippine
GR: 30% RCIT Billings’ as defined hereunder:
E: Unless the RFC is under a special tax rate.
(a) International Air Carrier. — ‘Gross
Sec. 28. Rates of Income Tax on Foreign Philippine Billings’ refers to the amount
Corporations. — of gross revenue derived from
(A)Tax on Resident Foreign Corporations.— • carriage of persons,
(1) In General. - Except as otherwise provided in • excess baggage,
this Code, a corporation organized, • cargo, and
authorized, or existing under the laws of any • mail originating from the
foreign country, engaged in trade or business Philippines
within the Philippines, shall be subject to an in a continuous and uninterrupted
income tax equivalent to thirty-five percent flight, irrespective of the place of sale
(35%) of the taxable income derived in the or issue and the place of payment of
preceding taxable year from all sources within the ticket or passage document:
the Philippines: Provided, That effective
January 1, 2009, the rate of income tax shall be Provided,
thirty percent (30%). ✓ That tickets revalidated, exchanged
and/or indorsed to another
international airline form part of
(3) RFCs subject to the regular income tax are also subject the Gross Philippine Billings
to the MCIT. Conversely, RFCs subject to special tax ✓ if the passenger boards a plane in a
rates are not subject to MCIT. port or point in the Philippines:
Examples:
1) International carriers Provided, further, That for a flight which
(2) Off-shore Banking Units originates from the Philippines, but
(3) Regional Operating Headquarters transshipment of passenger takes place
(4) Those under RA 7916, 7927 PEZA law / Bases at any part outside the Philippines on
conversion development tax another airline,
• only the aliquot portion of the cost
Sec. 28. Rates of Income Tax on Foreign of the ticket corresponding to the
Corporations. — leg flown from the Philippines to
(A)Tax on Resident Foreign Corporations.— the point of transshipment shall
xxx form part of Gross Philippine
1) A minimum corporate income tax of two Billings.
percent (2%) of gross income, as
prescribed under Section 27 (E) of this (b) International Shipping. — ‘Gross
Code, shall be imposed, under the same Philippine Billings’ means gross revenue
conditions, on a resident foreign whether for
corporation taxable under paragraph (1) • passenger,
of this Subsection. • cargo or
• mail
originating from the Philippines up to
final destination, regardless of the place
of sale or payments of the passage or
freight documents.
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TAXATION I- 2nd exam
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Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
Provided, That international carriers doing business in 3. in a continuous and uninterrupted flight,
the Philippines may avail of a preferential rate or 4. irrespective of the place of sale or issue and the
exemption from the tax herein imposed on their gross place of payment of the ticket or passage
revenue derived from the carriage of persons and their document.
excess baggage on the basis of an applicable tax treaty
or international agreement to which the Philippines is a
signatory or on the basis of reciprocity such that an What if there is an exchange of tickets?
international carrier, whose home country grants For instance, if a ticket from US air line carrier was
income tax exemption to Philippine carriers, shall exchanged with that from a Middle Eastern air line carrier,
likewise be exempt from the tax imposed under this the portion of the income will be part of the GPB only in
provision. the passenger ports of trade in the point of the Philippine
that goes abroad. Again, the emphasis is on “originating in
What is Gross Philippine Billings tax? the Philippines”
- Nature: income tax
- Special rates given to international common carriers Transshipment
covered by this provision To go to South Africa from the Philippines, the passenger
has to go to Saudi Arabia first and must ride a plane to
KINDS OF INTERNATIONAL AIR CARRIERS Africa.
(1) International Air Carrier
(2) International Shipping Carrier Philippines → Saudi Arabia → Africa
For a flight which originates from the Philippines but
transshipment of passenger takes place outside of the
KINDS OF INTERNATIONAL AIR CARRIER Philippines on another airline, only a portion of the cost of
Online Carriers: the ticket corresponding to the leg flown from the
Offline Carriers: Philippines to the point of transshipment shall form part of
To distinguish the 2: look at the landing rights Gross Philippine Billings.
– whether or not the airline has the authority
or the right to land here in the Philippines. So the GPB will only include the first trip that which comes
from the Philippines.
If they don’t have landing rights here in the
Philippines, how do they earn income? In their The GPB is extensively discussed in the South African
ticketing offices. Offline air carriers are subject to Airways case.
the regular income tax.
South African Airways vs. CIR
What is the tax treatment of the income earned
by offline carriers? Off-line air carriers are subject Facts: South African Airways is an international air
to the Regular Corporate Income Tax. They are carrier which does not have any landing rights in the
perceived to be a RFC. Philippines. It has a general sales agent here, Aerotel
Limited Corporation (Aerotel.) Aerotel sells passage
What is the tax treatment of the income earned documents for compensation or commission for
by online carriers? When it comes to the online petitioners off-line flights for the carriage of passengers
air carriers or those which have landing rights and cargo between ports or points outside the territorial
here in the Philippines, these are the ones who jurisdiction of the Philippines. Petitioner is not
are subject to the GPB (Gross Philippines Billings) registered with the Securities and Exchange Commission
tax. as a corporation, branch office, or partnership. It is not
licensed to do business in the Philippines.
Definition of GPB/ Gross Philippine Billings
Sec 28(A)(3)(a) – South African Airways filed with the BIR a claim for
1. Amount of gross revenue derived from carriage of refund of P1,727,766.38 erroneously paid on GPB for the
persons, excess baggage, cargo, and mail taxable year of 2000. Such claim was unheeded. Thus,
2. originating from the Philippines on April 14, 2003, petitioner filed a Petition for Review
Mail originating from the Philippines – the with the CTA for the refund of the abovementioned
flights come here to the Philippines and it amount.
goes abroad.
CTA: SAA is a RFC engaged in trade and business in the
Philippines. It is not liable to pay GPB under Sec.
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TAXATION I- 2nd exam
FROM THE LECTURES OF ATTY. DONALVO 2018
Balgoa, Campaner, Castro, del Rosario, Isidor, Madum, Olamit, Puerin, Singanon, Tan, Viola
28(A)(3)(a) of NIRC. It is liable however for 32% on its exception. As such, petitioner must fall
income derived from the sales of passage documents in under the general rule. This principle is
the Philippines. embodied in the Latin maxim, exception
firmat regulam in casibus non
CTA En Banc denied the petition. exceptis, which means, a thing not being
excepted must be regarded as coming within
Held: the purview of the general rule.
Whether SAA is liable for 32 % income tax. (c) If an international air carrier maintains
SAA IS LIABLE FOR 32% INCOME TAX. SAA failed to flights to and from the Philippines, it shall be
substantiate its claim that it is exempted from the 32% taxed at the rate of 2 ½% of its GPB, while
income tax. Since an action for a tax refund partakes of international air carriers that do not have
the nature of an exemption, which cannot be allowed flights to and from the Philippines but
unless granted in the most explicit and categorical nonetheless earn income from other
language, it is strictly construed against the claimant activities in the country will be taxed at the
who must discharge such burden convincingly. rate of 32% of such income.
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TAXATION I- 2nd exam
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