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Ktrl+ Taxation Law Review Based on the Course Outline prepared by:

Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

INCOME TAX
Taxability according to source of income
GENERAL PRINCIPLES ON INCOME depends on whether the work or engagement
TAXATION has actually transpired within or without the
Philippines. Taxability does not depend on the
What is INCOME? place where the contract has been executed or
what currency has been earned, what is
Income is the gain derived from labor, capital, important is to determine where it was earned.
or both. Income is derived from compensation,
interest, dividend, or gains from sale of For purposes of income taxation, taxpayers are
properties. classified as individual or corporation.

Income and capital are not the same; income FOR INDIVIDUALS:
is the earnings while capital is an asset
devoted for production. Moreover, their tax is INCOME DERIVED INCOME DERIVED
rated differently. TYPE OF SOURCES FROM SOURCES FROM
INDIVIDUAL WITHIN THE WITHOUT THE
PHILIPPINES PHILIPPINES
GENERAL and SPECIFIC SITUS RULE (Sec. (R.C) INCOME BY INCOME BY
23; 42 NIRC) Resident- INDIVIDUAL INDIVIDUAL
Citizen (24A) IS TAXABLE IS TAXABLE
The classification of every taxpayer is (N-R.C) INCOME BY INCOME BY
according to their residency, length of physical Non- INDIVIDUAL INDIVIDUAL
Resident IS TAXABLE IS NOT
stay, and source of income.
Citizen (24A) TAXABLE
(OCW) (24A) INCOME BY INCOME BY
Taxability according to residency depends INDIVIDUAL INDIVIDUAL
on establishment of residency with respect to IS TAXABLE IS NOT
aliens (non-citizens) or on the length of TAXABLE
accumulated physical stay of an individual (R.A) INCOME BY INCOME BY
within or without the Philippines with respect Resident INDIVIDUAL INDIVIDUAL
to citizens. The term “most of the time during Alien (24A) IS TAXABLE IS NOT
TAXABLE
the taxable year” means the majority of days
(N-R.A-Eng) INCOME BY INCOME BY
per year. Since NIRC mentions year, (25A) INDIVIDUAL INDIVIDUAL
according to the Civil Code, taxable year shall IS TAXABLE IS NOT
be computed as 365 days, or 366 days during TAXABLE
leap years. Logically, the majority of days are (N-R.A- INCOME BY INCOME BY
should be computed as one-half plus one or N.Eng) INDIVIDUAL INDIVIDUAL
the computed half which is more than the (25B) IS TAXABLE IS NOT
lesser half. Thus, “most of the time during TAXABLE
the year” is either 183 days, or 184 days.
(N-R.A-Eng) Non-Resident Alien Engaged in
On the other hand, taxability according to trade or business or in the exercise of
length of physical stay defines whether a profession – One who stays in the Philippines
non-resident is engaged in business or not. most of the time during the taxable year.
A stay of more than 6 months (computed as 30
days per the Civil Code) or 181 days shall (N-R.A-N.Eng) Non-Resident Alien Not
classify the non-resident aliens to be engaged Engaged in trade or business or in the
in business whatever the purpose of their stay exercise of profession – vOne who stays out of
within the Philippines. the Philippines most of the time during the
taxable year.
1

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

The proof of intention to reside whether


abroad or within the Philippines shall be
submitted to the Commissioner, as the case
(R.A) Resident Alien – foreigners who comes may be. The burden of proof to rebut
to the Philippines for a definite purpose whose presumption of residency is on the one
stay needs to be extended causing them to claiming to be a non-resident. Reason is that
establish their residency in the Philippines exemption from taxation is resolved in favor of
whether temporary or permanent, but not a the taxing authority (government).
mere sojourner. Foreigners who do not
establish their residency are classified either FOR CORPORATIONS:
(N-R.A-Eng) or (N-R.A-N.Eng) depending on
the length of their stay within the Philippines. INCOME INCOME
TYPE OF DERIVED DERIVED
COPORATION SOURCES FROM SOURCES FROM
Distinction among aliens is only important on WITHIN THE WITHOUT THE
PHILIPPINES PHILIPPINES
double tax treaties. (D.C) INCOME BY INCOME BY
Domestic CORPO. IS CORPO. IS
(R.C) Resident-Citizen – One who is a Corporation TAXABLE TAXABLE
Filipino by birth or by naturalization. It includes (27)
dual citizens. Aliens on the other hand are (F.C-Eng) INCOME BY INCOME BY
those not citizens. Practice of profession is (28) CORPO. IS CORPO. IS
exclusive to citizens. Every citizen is presumed TAXABLE NOT
to be residents, but this presumption is TAXABLE
rebuttable by one who claims non-residency. (F.C-N.Eng) INCOME BY INCOME BY
(28) CORPO. IS CORPO. IS
(OCW) Overseas Contract Workers – Sec. TAXABLE NOT
23(C) states that Seaman shall be similarly TAXABLE
taxed as OCW provided that the vessel they
are rendering service for is engaged (D.C) Domestic Corporation – any
exclusively in international trade (dapat yung corporation is taxable except general
vessel, papuntang ibang bansa, hindi local!). professional partnerships and government
concessionaires. The reason is that taxes only
OCW/Seamen are not non-resident citizens
pass through the GPP, and the members are
because their employment abroad is only the one really taxable by exercise of their
contractual and is not for a permanent basis. profession. Remember also that they have the
option to avail the option of 8% tax (self-
* (N-R.C) Non-Resident Citizen – Sec. 22(E) employed individuals also have this kind of
defines the term 'non-resident citizen'. They option). Government Concessionaires are not
are Filipinos who established the fact of their taxed because they are for public purposes,
residency abroad; immigrants or who has except mining corporations because it is not
for public service.
employment abroad on a permanent basis;
whose physical presence is on abroad most of Foreign Corporations – the taxability of
time during the taxable year; foreign corporation is according to residency
but it depends whether or not it is engaged in
A citizen who has been previously considered business within the Philippines (See
as non-resident citizen and who arrives in the Corporation Law what determines “doing
Philippines at any time during the taxable year business”). There are various kinds of foreign
to reside permanently in the Philippines shall corporation aside from their classification
likewise be treated as a non-resident citizen based on residency and they are taxed
for that taxable year with respect to his income differently; for example, International Air
Carriers.
derived from sources abroad until the date of
his arrival.
2

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

TAX RATES: emoluments and honoraria, allowances,


commissions, fees, (including director's fees, if the
For (R.C) and (R.A), at __________ based on director is, at the same time, an employee of the
Sec. 24(a) and TRAIN LAW employer/corporation), bonuses, fringe benefits
(except those subject to the fringe benefits tax
For (N-R.A-Eng) & (N-R.A-N.Eng), at under Section 33 of the Tax Code), pensions,
___________ Based on Sec. 25(A) and Sec. retirement pay, and other income of a similar nature,
25(B), respectively. (wag sasama lahat ng constitute compensation income71 that are taxable
capital gains from capital asset) .. Kapag not and subject to withholding. (G.R. No. 213446)
engaged, other sources are taxable like labor
and royalties EXCEPT CAPITAL GAINS.
SORIANO CASE
*literary works are pegged at 10% only to Minimum wage earners as defined in Section
encouraged creation of books 22(HH) of this Code shall be exempt from the
payment of income tax on their taxable income:
Royalty Income – income derived from letting Provided, further, That the holiday pay, ovr.rtime
others use your intellectual property. This is pay, night shift differential pay and hazard pay
not a passive income because intellectual received by such minimum wage earners shall
creations involved work; thus, it is an active likewise be exempt from income tax.
income.
Time and again we have ruled that the judiciary
Passive incomes are income derived from does not settle policy issues. The Court can only
sources other than labor/work. Kumbaga, hindi declare what the law is and not what the law should
mo pinagpapaguran like stocks. be

There is what we call Final Income Tax which is DECLARE NULL and VOID the following provisions
rated differently than the regular income tax of Revenue Regulations No. 10-2008:
schedule. It has a final rate on its own regardless of
income derived from its sources. They are only
applicable in Capital Gains and Passive Income,
(i) Sections 1 and 3, insofar as they disqualify
and Other Income.
MWEs who earn purely compensation income from
the privilege of the MWE exemption in case they
Option to be Taxed at 8% Gross Sales or
receive bonuses and other compensation-related
Receipt – this applies to self employed individuals
benefits exceeding the statutory ceiling of ₱30,000;
and professionals. They have the option to be taxed
at 8% instead of being subjected to the schedule of
income tax in excess of PhP 250,000, provided that
their annual gross vattable sales or services do not (ii) Section 3 insofar as it provides for the prorated
exceed 3,000,000. In case of mix income application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008,
Compensation income is the income of the and for the period of applicability of the MWE
individual taxpayer arising from services rendered exemption to begin only on 6 July 2008.
pursuant to an employer-employee relationship.68
Under the NIRC of 1997, as amended, every form For Corporation, at…. Sec. 27-30
of compensation for services, whether paid in cash
or in kind, is generally subject to income tax and
consequently to withholding tax.69 The name
designated to the compensation income received by
an employee is immaterial.70 Thus, salaries, wages,
3

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

TAX RATES BREAK DOWN (as amended by 2. For Capital Gains from BEST or other
R.A. 10963 [Tax Reform for Acceleration and disposition of Real Properties classified as
Inclusion]): capital asset (Sec. 24[D]) –

Sec. 24 of the NIRC mentions that income tax Final Tax of 6% @ any amount of
shall be imposed on the taxable income other gross selling price or FMV, whichever
than the income subject to certain passive is higher
income and capital gains. Such income is best
to be labelled OTHER INCOME.
3. For Certain Passive Income enumerated
I. FOR (R.C) Resident Citizens below (Sec. 24[B]):
[w/in & w/o], (OCW) Overseas
Contract Worker, (R.A) Resident- a) For Cash and/or Property Dividends
Aliens, (N-R.C) Non-Resident from a domestic corporation or ROHQ
Citizens, (N-R.A-Eng) Non-Resident of multinational companies; and, for
Alien Engaged in Trade or Business Individual Share on Distributable
[all others w/in]: Net Income after Tax of a joint
account, association, taxable
partnership, or a taxable joint venture
or consortium –
A. FROM CERTAIN PASSIVE INCOME AND
CAPITAL GAINS (Sec. 24[B-D]) Final Tax of 10% @ any amount of
the declared Dividend or Distributable
Net Income
1. For Capital Gains from BEST of Shares of
Stocks of a Domestic Corp held as capital Final Tax of 20% @ any amount of
asset (Sec. 24[C] in relation to Sec. 127): the declared Dividend or Distributable
Net Income FOR (N-R.A-Eng)
 If not listed and traded in the local
stock exchange(Sec. 24[C] ) –
Non-Resident Alien Engaged
in Trade or Business ONLY
Final Tax of 5% @ 0-100,000 of NCG,
or 10% @ amount in excess thereof;
or, b) For Royalty from books, musical
composition & other literary works
Final Tax of 15% @ any amount of and –
NCG, starting January 2018.
Final Tax of 10% @ any amount of
royalties from books, literary works
 If LISTED and TRADED in the local and musical composition
stock exchange (Sec. 127 – this is
actually under OPT) –

Stock Transaction Tax of ½ (0.5) @ c) For Other Royalties (from other


1% of gross selling price, per NIRC; or, intellectual properties) –

Stock Transaction Tax of 6/10 (0.6) Final Tax of 20% @ any amount of
@ 1% of gross selling price, per royalties from other intellectual
TRAIN, starting January 2018 properties

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

d) Prizes & Other Winnings – Interest Income on Deposits


in Foreign Currency Deposit
Final Tax of 20% @ any amount of Units of a (N-R.C) Non-
prizes & winnings beyond 10,000 Resident Citizens AND (N-
thereof, PCSO and lotto Winnings R.A-[N].Eng) Non-Resident
EXEMPTED; or, Aliens Whether or Not
Engaged in Trade or
Final Tax of 20% @ any amount of Business are EXEMPTED
prizes & winnings beyond 10,000
from Income Tax
thereof, including PCSO and Lotto
winnings starting January 2018
Only “RESIDENTS”: (R.C)
*Note: Amount of Prizes within 0-
Resident Citizens [w/in &
10,000 is taxable as OTHER INCOME w/o], (OCW) Overseas
according to TAX SCHEDULE; Contract Worker, and (R.A)
Amount of Winnings within 0-10,000, Resident-Aliens are Taxable
whether from PCSO and lotto, is on their Interest Income on
EXEMPTED from Gross Income, Deposits in Foreign Currency
starting January 2018 (before, PCSO Deposit Units
and Lotto Winnings Exempted from
Gross Income)
g) On Interest Income from pre-
terminated Long-Term Deposits or
e) For Interest Income from Currency Investments –
Bank Deposits, Yield, or Monetary
Benefit from Deposit Substitutes, Trust Final Tax of 5% @ any amount for
Funds, etc. – those pre-terminated with remaining
4 years to less than 5 years
Final Tax of 20% @ any amount of before maturity; or,
interest income
Final Tax of 12% @ any amount for
those pre-terminated with remaining
3 years to less than 4 years
f) For Interest Income from Deposits in before maturity; or,
Foreign Currency Deposit Units under
the expanded Foreign Currency Final Tax of 20% @ any amount for
Deposit System (for resident those pre-terminated with remaining
individual taxpayers only) – 3 years before maturity

Final Tax of 7.5% @ any amount of


interest income; or, *Note: Long-Term Deposits or
Investments are those with a maturity
Final Tax of 15% @ any amount of date of 5 years or more. Interest
interest income, starting January 2018 Income for L-T.D/I is
EXEMPTED from Income Tax if not
pre-terminated, but no Exemption
accorded for N-R.A-N.Eng.

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

B. FROM INCOME OTHER THAN CAPITAL OR,


GAINS AND CERTAIN PASSIVE INCOME
(OTHER INCOME) (Sec. 24A) 8% @ excess of 250,000.00 at the option of
purely self-employed individuals and/or
5% @ 0-10,000 of other professionals [only] whose gross
income not over 10,000, sales/receipts and other non-operating income
500 + 10% @ excess of 10,000, of does not exceed the VAT threshold (of the
other income over 10,000-30,000, same excess on gross sales/receipts & other
2,500 + 15% @ excess of 30,000, of non-operating income)
other income over 30,000-70,000,
8,500 + 20% @ excess of 70,000, of Prizes (not winnings cos it is exempt!)
other income over 70,000-140,000, amounting to PhP 10,000.00 or less are
22,500 + 25% @ excess of 140,000 of subject to Income Tax Rate for Other Incomes.
other income over 140,000-250,000,
50,000 + 30% @ excess of 250,000, of
other income over 250,000-500,000,
125,000 + 32% @ excess of 500,000,
of other income over 500,000;

Note: Other Income of Minimum Wage


Earners is EXEMPTED.

STARTING JANUARY 2018,

0% @ 0-250,000 of other
income not over 250,000,
20% @ excess of 250,000,
of other income over 250,000-400,000,
30,000 + 25% @ excess of 400,000, of
other income over 400,000-800,000,
130,000 + 30% @ excess of 800,000, of
other income over 800,000-2,000,000,
490,000 + 32% @ excess of 2,000,000
of other income over 2,000,000-8,000,000,
2,410,000 + 35% @ excess of 8,000,000,
of other income over 8,000,000;

**Note: Tax shall be taken from Taxable


Income, not Gross Income

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

II. FOR (N-R.A-N.Eng) Non-Resident 3. For Certain Passive Income enumerated


Alien Not Engaged in Trade or below (Sec. 24[B]):
Business [w/in]:
All Certain Passive Income of
A. FROM CERTAIN PASSIVE INCOME AND a (N-R.A-N.Eng) Non-Resident
CAPITAL GAINS (Sec. 24[B-D]) Aliens Not Engaged in Trade
or Business are TAXED at
1. For Capital Gains from Sale of Shares of
25%FT
Stocks of a Domestic Corp held as capital
asset (Sec. 24[C] in relation to Sec. 127) –
o For Cash and/or Property Dividends
Capital Gains from Sale of from a domestic corporation or ROHQ
Shares of Stocks of a of multinational companies; and, for
Domestic Corp, held as Individual Share on Distributable
capital asset, of a (N-R.A- Net Income after Tax of a joint
N.Eng) Non-Resident Aliens account, association, taxable
Not Engaged in Trade or partnership, or a taxable joint venture
Business are TAXED THE or consortium – 25% FINAL TAX
SAME o For Royalty from books, musical
 If not listed and traded in the local composition & other literary works
stock exchange(Sec. 24[C] ) – and – 25% FINAL TAX
o For Other Royalties (from other
Final Tax of 5% @ 0-100,000 of NCG, intellectual properties) –
or 10% @ amount in excess thereof; 25% FINAL TAX
or,
o Prizes & Other Winnings –
Final Tax of 15% @ any amount of
25% FINAL TAX
NCG, starting January 2018.
o For Interest Income from Currency
 If LISTED and TRADED in the local Bank Deposits, Yield, or Monetary
stock exchange (Sec. 127 – this is Benefit from Deposit Substitutes, Trust
actually under OPT) – Funds, etc. – 25% FINAL TAX
o For Interest Income from Deposits in
Stock Transaction Tax of ½ (0.5) @ Foreign Currency Deposit Units under
1% of gross selling price, per NIRC; or, the expanded Foreign Currency
Stock Transaction Tax of 6/10 (0.6) Deposit System (for resident
@ 1% of gross selling price, per individual taxpayers only) –
TRAIN, starting January 2018 EXEMPTED from Income Tax
o On Interest Income from pre-
2. For Capital Gains from BEST or other
terminated Long-Term Deposits or
disposition of Real Properties classified as
Investments –
capital asset (Sec. 24[D]) –
25% FINAL TAX whether or
Capital Gains from BEST or
not pre-terminated
other disposition of Real
Properties, classified as
B. FROM INCOME OTHER THAN CAPITAL
capital asset, of a (N-R.A- GAINS AND CERTAIN PASSIVE INCOME
N.Eng) Non-Resident Aliens (OTHER INCOME) (Sec. 24A) –
Not Engaged in Trade or 25% TAKEN FROM GROSS INCOME,
Business are TAXED THE not from TAXABLE INCOME
SAME at 6% FT

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

VALUE ADDED TAX / OTHER PERCENTAGE


TAX:

12% VAT for services or imports of goods into


the Philippines; or,

3% OPT for services or imports of a non-VAT


taxpayer, or for services or imports which
gross annual sales or receipts do not exceed
PhP 1,500,000.

FRINGE BENEFITS TAX (for supervisory and


managerial employees only)

On benefits furnished by employers in cash or


in kind (not the same as supplements but akin
to facilities)

35% for Residents and Engaged

25% for Non-Resident Alien not engaged

Employer is withholding agent, unless


exempted by its charter (for government).

To avoid payment, FB must be necessary to


trade or business, or for the convenience, of
the employer (that it is a supplement).
Therefore, FB is one which is largely for the
benefit of the employee. If there is a
substantial likeness that the FB would inure to
the benefit of the employer, then it is not FB.

De Minimis Benefits (facilities and


supplements) are not compensation and not
subject to income tax. They are not computed
against “other benefits” which has a ceiling
amount of PhP 90,000.00 provided that
excesses thereon shall be included in the
computation.

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

Different treatment between (N-R.C) &


(OCW/Seaman) on INCOME TAX (BIR Ruling No.
034-2000 dated September 05, 2000):

Overseas Contract Worker - Section 23(C) provides


that an OCW is taxable only on income from
sources within the Philippines. Section 22(E)(3)
provides that an N-R.C is one who works and
derives income from abroad and whose physical
presence abroad is required of his employment
most of the time during the taxable year .

For purposes of exemption from payment of


income tax, a citizen must be:

1.) Source of Income is Foreign (See Situs


Rules)
2.) The tax payer must either be N-R.C or
OCW.
a. N-R.C – Filipino employees
abroad whose services are
rendered abroad for being
assigned for at least 183 days (or
184).
b. OCW – One who passed through
and has been registered with the
POEA for an Overseas
Employment Contract. The time
spent abroad is not material for
tax exemption purposes.

Income earnings from business activities or


properties within the Philippines are subject to
Income Tax.

However, Passive Income within the Philippines on


Interest Income from a Depository Bank under the
expanded foreign currency deposit system is
exempted from Income Tax; but, if the said bank
account is registered jointly with a resident of the
Philippines, only 50% of such interest income shall
be exempted.

Travel Tax and Airport-fee are also exempted upon


proof of entitlement issued by the POEA;
OFW/OCW Remittances are exempted from
Documentary Stamp Tax upon showing of OEC or
OWWA Certificate.

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

CORPORATE INCOME TAX international bidding is allowed under the Bilateral


Agreement entered into by and between the
when the Tax Code includes "partnerships" among Philippine Government and the foreign/international
the entities subject to the tax on corporations, it financing institution pursuant to the implementing
must refer to organizations which are not rules and regulations of Republic Act No. 4566,
necessarily partnerships in the technical sense otherwise known as Contractor’s License Law.
of the term, and that furthermore, said law defined Absent any one the aforesaid requirements, the
the term "corporation" as including partnerships joint venture or consortium formed for the purpose
no matter how created or organized, thereby of undertaking construction projects shall be
indicating that "a joint venture need not be considered as taxable corporations. In addition, the
undertaken in any of the standard forms, or in tax-exempt joint venture or consortium shall not
conformity with the usual requirements of the include those who are mere suppliers of goods,
law on partnerships, in order that one could be services or capital to a construction project
deemed constituted for purposes of the tax on (sub-contractors). Each member to a Joint
corporations"; that besides, said section 84 (b) Venture not taxable as a corporation shall be
provides that the term "corporation" includes "joint responsible in reporting and paying appropriate
accounts" (cuentas en participacion) and Income Taxes on their respective share to the joint
"associations", none of which has a legal ventures profit.
personality independent of that of its members. (GR
L-9692) All licensed local contractors are required to enrol to
the BIR’s eFPS at the Revenue District Office
A joint venture or consortium formed for the where they are registered as taxpayers. (REVENUE
purpose of undertaking construction projects, REGULATIONS NO. 10-2012)
which is not considered as corporation under
Section 22 of the National Internal Revenue Code CIR vs DELA SALLE
(NIRC), of 1997 as amended, should be:

a. for the undertaking of a construction


MR. GASCON: ... There are many schools which
project;
are genuinely non-profit and non-stock but which
b. should involve joining or pooling of
may have been taxed at the expense of students. In
resources by licensed local contracts;
the long run, these schools oftentimes have to
that is, licensed as general contractor by
increase tuition fees, which is detrimental to the
the Philippine Contractors Accreditation
interest of the students. So when we encourage
Board (PCAB) of the Department of Trade
non-stock, non-profit institutions be assuring them
and Industry (DTI);
of tax exemption, we also assure the students of
c. the local contractors are engaged in
lower tuition fees. That is the intent.
construction business; and
d. the Joint Venture itself must likewise be
duly licensed as such by the PCAB of the xxxx
DTI.
COMM. NOLLEDO: ... So I think, what is important
Joint ventures involving foreign contractors here is the philosophy behind the duty on the part of
may also be treated as a non-taxable corporation the State to educate the Filipino people that duty is
only if the member foreign contractor is covered being shouldered by private institutions. In order to
by a special license as contractor by the PCAB of provide incentive to private institutions to share with
the DTI, and the construction project is certified by the State the responsibility of educating the youth, I
the appropriate Tendering Agency (government think we should grant tax exemption.
office) that the project is a foreign
financed/internationally-funded project and that
10

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

WHAT COMPRISES GROSS INCOME; b) Gifts, Legacies, Devises, Inheritance


EXCLUSIONS received by the Donee, Legatee, Devisee,
or Heir except fruits earned by such
properties, as well as earnings from
Gross Income is the total income derived from the transfer & disposition of interest thereon;
following sources:
c) Compensation for Work Related
 Compensation which includes fees, Injuries or Sickness including damages
salaries, wages, commissions, and similar received by the employee;
items earned as payment in the
performance of service; d) Income Exempted under Treaty in which
the Philippines is a signatory;
 Income which are earned from the
performance of TRADE or BUSINESS or e) Retirement Benefits, Pensions,
in the performance of a PROFESSION; Gratuities received by beneficiaries under
R.A. 7641, or received by privately
 Gains earned in dealing properties (not employed employees under a “reasonable
included in the regular trade or business); private benefit plan” maintained by their
employer: Provided, that the retiree has
 Interests, Annuities, Dividends, GPP
been in the service with the same
Share;
employer for at least 10 years, and at least
 Royalties, Rents; 50 years of age; and, that this tax
exclusion may be availed only once.
 Prizes & Winnings;
“reasonable private benefit plan” are those
 Pensions (private pension plans?) savings made by an employer derived from
the income of his trade or business which
Remember that this is Gross Income and not
are saved exclusive for the purpose of
Taxable Income. You compute first the Gross
profit-sharing in favor of retirees.
Income & Taxable Income before you apply the tax
rates whether the specific item on the Gross Income It shall include separation pay received by
is taxable on the Regular Taxable Income Schedule an employee or his heirs as a
or on Final Tax. consequence of separation from service
due to causes beyond his control;
Exclusions from Gross Income are incomes
which shall not be part of the Gross Income. You do All citizens and aliens shall enjoy this
not include them in the computation nor deduct it exclusionary benefit for similar benefits
from the gross income; that would be fallacious received through existing laws whether
because exclusions are not allowable deductions. employed privately or publicly;

The following items are Exclusions from Gross Benefits received by the persons regarded
Income: as Veterans as administered by the U.S.
Veterans Administration;
a) Life Insurance Proceeds received by the
beneficiaries except interest paid thereon; Benefits received by SSS, GSIS
Return of Premiums Paid under life beneficiaries plus retirement gratuity
insurance, endowment, or annuity received by government employees.
contracts received by the insured;

11

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

1.) Investments earned by foreign


governments and foreign government
owned and controlled corporations;

2.) Investments earned from public utilities


and governmental services accruing to
the Philippine government and its political
subdivisions;

3.) Prizes & Awards in recognition of


religious, charitable, scientific, educational,
artistic, literary, or civic achievement no by
virtue of a contest or conditioned upon
future services; but, exclusion includes
prizes and awards granted in participation
with a local or international sports
competition.

4.) Other Employees Benefits including De


Minimis benefits, Christmas bonus, and
13th month pay which do not exceed PhP
90,000.00 received by private or public
employees.

5.) Union Dues & GSIS, SSS, Medicare and


Pag-ibig contributions;

6.) Gans from Sale of Bonds, Debentures


or Certificates of Indebtedness with a
maturity of more than five years; Gains
from redemption of shares of stock in a
Mutual Fund

12

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

ALLOWABLE DEDUCTIONS (Sec. 34) ITEMS ALLOWED TO BE “NETTED”


(DEDUCTED) FROM GROSS INCOME
Remarks: If you compare the enumeration
contained in Allowable Deductions with the A. Expenses
enumeration of Sec. 32 on items included
All above-enumerated taxpayers may deduct
Gross Income, you will find that they are
Ordinary and Necessary Trade, Business or
included within the latter. There are two
Professional Expenses from Gross Income. It
reasons for this: first, remember that with
includes all expenses paid/incurred directly for
respect to income tax, exemptions are the real
the development, management, operation, and
deductions because they are not part of
conduct of trade, business or exercise of a
taxable income; second, allowable deductions
profession.
are considered income, as opposed to
exemption, thus shall be subjected to Reasonable Allowance is allowed to be
Withholding Tax. deducted from the following specific items of
expenses:
TAXPAYERS who are allowed to deduct
from Gross Income:  Salaries/Wages/Compensation for
personal services of another;
Note: First and foremost, Employees are not
 On the grossed-up monetary value of
allowed to deduct from their gross income,
Fringe Benefit furnished to employees;
except on amounts spent in payment of Health
and/or Hospitalization Insurance; however,  Travel Expenses in pursuit of T/B/P;
starting January 2018, no more deductions of
such item on an employee’s gross income.  Rentals and Other Payments for
Lease of Property used for T/B/P;
 Resident Citizen  Entertainment, Amusement and
 Non-Resident Citizen Recreation Expenses directly
 Resident Alien connected to the development,
 Non-Resident Alien Individual management, and operation, or in
Engaged in Trade or furtherance of T/B/P at the current
Business within the ceiling of 0.50% of net sales
Philippines (but not w/ OSD) and/or 1% of net revenue;
 Members/Partners of a GPP
 Return of Capital such as Purchases
of Raw Materials forming part of
o Domestic Corporation
finished product or purchases of
o Proprietary Educational goods for RESALE, per revenue
Institutions regulations.
o Non-Profit Hospitals
o G-O-CC/A/I Note: any expense incurred for entertainment,
o (Regular) Resident Foreign amusement or recreation that is contrary to
Corporations L/M/PP/PO shall not be allowed as a
deduction; Bribes, Kickbacks and Other
Similar Payment to any government or private
corporation including GPP shall likewise be
disallowed as deduction.

13

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

Reasonable Allowance is allowed to be


deducted from the following additional
specific items of expenses of and for
Private Educational Institutions:

 Expenditures considered as Capital


Outlays of Depreciable Assets for
expansion of school facilities AS AN
ALTERNATIVE with Depreciation
Deduction

Interest Expense is allowed to be treated as


capital expenditure at the option of the
taxpayer as follows:

 Interest incurred to acquire property


used in T/B/P which TREATED as
capital expenditure

B. Interest Expense

All above-enumerated taxpayers may


deduct interest paid on indebtedness in
connection with T/B/P. Deductions thereon is
reasonably allowed at the maximum amount of
33% of the taxpayer’s interest income from
which are subject to Final Tax of 20% -
Interest Income from Currency Bank
Deposits, Yield, or Monetary Benefit from
Deposit Substitutes, Trust Funds, etc.

This includes:

 Interest incurred to acquire property


used in T/B/P which was not treated
as capital expenditure, at the option
of the taxpayer.

In OSD – Individuals are not required to


submit tax return on financial statements
comprising OSD; a GPP and its
members/partners may avail OSD only
once either as a partnership or as
individual partners.

BUT, records of gross sales / receipts


shall be kept in the business premises of
the taxpayer.

14

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

CAPITAL GAINS AND LOSSES (Dealings in b. Real estate held or being sold by real
Property) estate dealers;

“Gross Income means all income derived from Real estate dealer – Any person
whatever source, including, but not limited to, engaged in the business of buying
the following items – xxx xx xxx; (3) Gains and selling or exchanging real
derived from dealings in property; xxx xx properties on his own account as a
xxx.” principal and holding himself out as a
full or part-time dealer in real estate.
In the eye of Tax, there are two classifications
of “dealings in property”: sale and exchange Real estate developer – Any person
of Ordinary Assets, and sale and exchange engaged in the business of developing
of Capital Assets. The NIRC implicates tax real properties into subdivisions, or
upon them differently; it means that ordinary building houses on subdivided lots, or
assets shall be part of income taxable constructing residential or commercial
according to the Tax Schedule, while specific units, townhouses and other similar
capital assets are subject to Final Tax, but units for his own account and offering
those not specified are subject to the Tax them for sale or lease.
Schedule (losses are only deducted from
net capital gain, subject to net capital loss c. Securities /Stocks held or being sold
carry-over). by dealers in securities.

Any gain from the sale or exchange of property Dealers in Securities – All persons,
of a capital asset is not an ordinary income. who for their own account are
Conversely, any gain from the sale or engaged in the sale of stocks, bonds,
exchange of property treated or considered as exchanges, bullions, coined money,
ordinary income shall not be a capital gain. bank notes, promissory notes, or other
The same treatment applies in case of losses. securities as licensed by the SEC.
(Sec. 22[Z])
2. Property used in trade or business which
Property classification of an asset is important is subject to allowance for depreciation
because of the special tax rules or gains (property, plant and equipment; See Sec.
and losses from sales or exchanges of 34[F]);
capital assets which do not apply to gains
and losses from sale or exchanges of ordinary 3. (Land/Building, including improvements)
assets. Real property used in trade or business
by the taxpayer (including real property
Under the tax code, the following are held for rent, and those which have
ORDINARY ASSETS: been previously used, by the same
taxpayer, in trade or business);
1. Stock in trade of the taxpayer (not held as
capital asset) or other property of a kind Real estate lessor – Any person
which would properly be included in the engaged in the business of leasing
inventory of the taxpayer properly held by or renting real properties on his own
the taxpayer primarily for sale such as: account as a principal and holding
himself out as lessor of real
a. Merchandise inventory; properties being rented out or
offered for rent.

15

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

4. Real Properties sold to the government;  Shares or Properties held &


intended for investment purposes
5. Real Properties acquired by banks
through foreclosure sales (but it does not Shares held by such investor which become
mean that banks are habitually engaged in worthless makes the loss classified as capital.
real estate business). When securities become worthless, there is
strictly no sale or exchange but the law
Ordinary Assets are similarly taxed with deems the loss anyway to be "a loss from
income from performance of services and the sale or exchange of capital assets”. (See,
business. Basically, those properties held CBC vs CA, July 19, 2000)
primarily for sale, in the ordinary course of
trade or business, are ordinary assets. This treatment applies to retirement of
certificates of indebtedness with interest
Note: all real estate motherfuckers listed coupons or in registered form, short sales,
above are taxpayers engaged in real estate and options to buy or sell property where
business, exclusively. Individuals or no sale or exchange strictly exists. In
corporations whose primary engagement is these cases, the NIRC dispenses with the
such are taxable as such. Change of primary standard requirement of BEST (that a capital
business, nor non-operation of business, and gain must be BEST) the application of the
abandonment of property, shall not re- preferential status given to capital gains and
classify an ordinary asset to a capital asset, losses for taxation purposes.
except those ordinary assets used in
businesses other than real estate business Any loss sustained by a domestic or any trust
which have been idle for more than 2 years. company from sale of bonds, debentures,
Habituality of engagement is signified through notes, or certificate or other evidences of
HLURB or HUDCC registration, or through indebtedness issued by any corporation,
LGU or the BIR, or through evidence of including those issued by the government is
consummation of at least 6 taxable real estate considered as these are subject to final
sale transactions during the prior year. capital gains taxes.

CAPITAL ASSET is the totality of all assets Amounts received by an individual upon
including real properties, used in trade or retirement of bonds (even government
business, and other properties, whether or bonds), or other evidence of indebtedness
not related to trade or business, which are not issued by a corporation with interest coupons
classified as ordinary assets. or in registered form, even if considered as
Capital Gains from BEST of capital assets
Examples (counterpart of ordinary assets): are not taxable if maturity date is more
than 5 years.
 Stock and securities held by
taxpayers other than dealers in securities; Gains or Losses from Short Sales are
considered Capital Gains from BEST of
 Interest in partnership and joint capital assets, as well as those attributable to
venture; the failure to exercise privileges or
options to buy or sell property
 Goodwill;

 (Land/Building) Real property not


used in trade or business (i.e., residential
house and lot);
16

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

However, in pursuance of a merger, there is There is no net operating loss in capital gains
no gain or loss, whether ordinary or capital, BECAUSE THEY ARE, AGAIN, SUBJECT TO
on exchanges of property for stock among FINAL TAX. Besides, there is a net capital loss
the corporate parties to the merger; it applies allowable in the computation of net capital gain.
to individuals participating who, not
exceeding 4, as a result of such exchange, Net Capital Gain – Excess of the gains from
gains control of the merger. of capital assets over the losses from such
disposition;
Money and/or property received aside from
shares of stock are capital gains if not Net Capital Loss – Excess of the losses from
distributed in pursuance of the merger, and Barter, Exchange, Sale, Trade (BEST) or other
cannot be treated a capital loss (tangina may disposition of capital assets over the gains
shares ka na may property ka pa tapos loss?) from such disposition.

 Property used in trade or business Capital Losses shall be allowed only to the
which ARE NOT depreciable (kung meron extent of the gains from the disposition of
man, ang nakikita ko lang is land); capital assets, except that losses from
receipt of deposits and sale of evidence of
Gains and Losses from dealings in indebtedness, issued by other corporation
property are differences between the amount with interest coupons or in registered form,
of value received by the taxpayer over the incurred by banks and trust companies, shall
determined value of the property he has not be limited.
disposed of arising from sale, and/or
exchange of assets. Gains and losses may Evidence of indebtedness means an
be classified as capital gain (loss) or instrument of credit normally dealt with in
ordinary gain (loss). the usual lending operations of a financial
institution.
Capital gain – Gain from the sale, exchange,
or other disposition of capital asset If an “individual” taxpayer sustains a net
Ordinary gain – Gain realized from the sale or capital loss in a given taxable year, such loss
exchange of ordinary asset including gains shall be treated the same in the next
from performance of services and business. succeeding taxable year as a loss from the
BEST of capital assets for not more than 12
Capital loss – Loss from the sale, exchange, months as a short-term capital loss before
or other disposition of capital asset, deductible personal exemptions (meaning, the losses
only from capital gains. incurred in the prior year are also losses for
the entire current taxable year). This is
Ordinary loss – Loss incurred from the sale or called Net Capital Loss Carry-Over.
exchange of ordinary asset. (It also means the
excess of deductions over the gross
income of a taxpayer during a taxable year - Holding Period – Length of time the asset
net operating loss; why? Because allowable was held by the taxpayer. It covers the period
deductions are really not income, they are in from the date of acquisition to the date of sale
fact losses, expenses, indebtedness, etc. or exchange;
[those words are significantly NOT INCOME,
that is why they are deducted]).

17

Arellano University School of Law


Donada corner Menlo Street
Pasay City
Ktrl+ Taxation Law Review Based on the Course Outline prepared by:
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)

For “individual” taxpayers, the following The factors in making a determination of which
percentages of the gain or loss recognized upon the is neither decisive nor conclusive; each case
BEST of a capital asset shall be taken into account must in the last analysis rest upon its own
in computing net capital gain, net capital loss, and peculiar facts and circumstances.
net income.
A property initially classified as a capital asset
(1) 100% of the CG/CL if the capital asset has may thereafter be treated as an ordinary asset
been held for not more than twelve (12) if the activity was in furtherance of or in the
months from the date of acquisition to the course of the taxpayer's trade or business.
date of disposition; and, Thus, a sale of inherited real property usually
gives capital gain or loss even though the
(2) 50% of the CG/CL if the capital asset has property has to be subdivided or improved or
been held for more than twelve (12) both to make it sellable. However, if the
months from the date of acquisition to the inherited property is substantially improved or
date of disposition. very actively sold or both it may be treated as
held primarily for sale to customers in the
ordinary course of the heir's business.
Exceptions for imposing capital gains tax
(or ordinary tax of course, since this is Selling a land not in the condition from which it
considered a capital asset): was acquired, with extensive improvements
undertaken to enhance the value of the lots
Capital gains realized from the sale of and make them more attractive to prospective
principal residence by natural persons buyers, would make that property cease to be
which proceeds are fully utilized in a capital asset if the amount spent to improve
acquiring a new principal residence within it is double the original cost. It indicates that
18 calendar months from the date of the seller intends to sell the property for
disposition, the historical cost of which sold customers in the ordinary course of business.
carried over to the new principal residence
built; provided, that the BIR Commissioner In this sense, we can say that the word
shall be notified within 30 days from the date “ordinary course of business” connotes an
of disposition for the availment of this activity wherein one actively attracts others to
exemption. This tax exemption can only be enter into a transaction with the subject
availed once every 10 years. Full utilization is property.
a must, and the portion not utilized is not
exempted from capital gains tax (final tax of Selling for liquidation purpose is not
6%). determinative of trade. The manner of trade is
paramount. If the sale was carried on in a
business-like manner, then it was done in the
There is no rigid rule or fixed formula by which ordinary course of business. Consequently,
it can be determined with finality whether the preferred tax status for capital assets will
property sold by a taxpayer was held be lost, and the gains therefrom shall be
primarily for sale to customers in the ordinarily taxed (See Calasanz, et al. vs. CIR,
ordinary course of his trade or business October 8, 1986)
(ordinary assets) or whether it was sold as a
capital asset.

18

Arellano University School of Law


Donada corner Menlo Street
Pasay City

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