Present Income Tax System

REVIEWER- TAXATION CLASS of ATTY.
IBANEZ
CHARMAGNE FERRER
PRESENT SYSTEM
i.
INCOME
TAX
iii.
INDIVIDUAL INCOME TAXATION a. SCHEDULAR TAX TREATMENT (keyword: IRR) i. Classifies income ii. Provides different tax rules iii. Imposes different tax rates b. NET INCOME TAXATION COVERS: i. RC ii. NRC iii. RA iv. NRA-engaged in trade or business in the Phil. c. GROSS INCOME TAXATION COVERS: i. NRA-not engaged in trade or business in the Phil. d. INCOME TAX SITUS i. Residence- RC, RA ii. Place-NRA, NRC iii. Citizenship-RC e. INDIVIDUAL TAXPAYERS WHO ARE COMPENSATION EARNERS EXCEPT: NRA-not engaged in trade/business in the Phil. are entitled to Personal Exemptions.
COMMON FEATURES a. Pay as you file system i. Individuals-upon filing of their ITR ii. Corporations- upon filing of their quarterly corporate ITR and final adjustment corp. returns. CREDITABLE W/HOLDNG TAX SYSTEM a. Withholding agent (source)withholds the tax and remits the same to the BIR b. Tax withheld- creditable against IT due. FINAL WITHHOLDING TAX SYSTEM a. Withholding agent (source)withholds the tax and remits the same to the BIR b. Tax withheld- final settlement of the tax liability on the income covered.
iv.
v.
GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHIL. ( SEC.23)

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
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ii.
CORPORATE INCOME TAXATION a. GLOBAL TAX TREATMENT: (keyword: xI-RR) i. Notgenerally classifies income ii. generally provides different tax rules iii. generally imposes different tax rates b. Net income taxations covers: i. Domestic Corporations ii. Resident Foreign Corporations c. Gross Income Taxation covers: i. Non-resident foreign corporation d. Income tax situs i. Residence Resident Foreign Corporation ii. Place- non-Resident Foreign Corporation iii. Nationality-Domestic Corporation
REVIEWER- TAXATION CLASS of ATTY. IBANEZ
CHARMAGNE FERRER
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Income Capital
[1] Those who are citizens of the Philippines at the time of the adoption of this Constitution; [2] Those whose fathers or mothers are citizens of the Philippines; [3] Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and [4] Those who are naturalized in accordance with law. 2. Non-resident Citizen
Classification Taxpayers
of
i.
A non-resident citizen means, a Filipino citizen: who establishes to the satisfaction of the Commissioner the fact of their physical presence abroad with a definite intention to reside therein; who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; who works and derives abroad and whose thereat requires him to present abroad most during the taxable year; income from employment be physically of the time
a. Individuals 1) citizens 1.1 resident citizens (RC) 1.2 non-resident citizens (NRC) 2) aliens 2.1 resident aliens (RA) 2.2 non-resident aliens (NRA) 2.2.1 engaged in trade or business within the Philippines. (NRAETB) 2.2.2 Not engaged in trade or business within the Philippines (NRANETB) b. Corporations 1) Domestic (DC) 2) Foreign 2.1 resident foreign corporation (RFC) 2.2 non-resident foreign corporation (NRFC) c. Estates d. Trusts e. Partnerships
ii.
iii.
iv.
who is previously considered as a nonresident and who arrives in the Philippines at any time during the taxable year to reside thereat permanently shall be considered nonresident for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. [Sec.22 (E)]
v.
INDIVIDUALS
Situs of Taxation (Who are taxable?) 1. Resident Citizen (Art. 4 Consti) RESIDENT a citizen is deemed as a resident of the Philippines unless he qualifies as a nonresident under Sec. 22E of the NIRC; -taxable for income derived from all sources based on taxable (i.e., net) income Section 1. The following are citizens of the Philippines:
NOTES: An OVERSEAS CONTRACT WORKER is taxable only on income from sources within the Philippines. (Sec. 23 (c)) NOTE FURTHER: A seaman who is a Filipino citizen and who receives compensation for services rendered abroad as member of the complement of a vessel engaged exclusively in international trade is treated as an overseas contract worker. Length of stay is indicative of intention. A citizen of the Philippines
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CHARMAGNE FERRER
who shall have stayed outside the Philippines for 183 days or more by the end of the year is a non-resident citizen. His presence abroad, however, need not be continuous. [RR1-79] 3. Resident alien - means an individual whose residence is within the Philippines and who is not a citizen thereof. [Sec.22 (F)] RESIDENT residence is within the Philippines and who is not a citizen thereof. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for income tax purposes. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. taxable for income derived within the Philippines based on taxable (i.e., net) income NON-RESIDENT residence is NOT in the Philippines and who is not a citizen thereof. 4. Non-resident alien engaged in trade or business within the Philippines. (Key: NRAETB) A non-resident alien means an individual whose residence is not within the Philippines and who is not a citizen thereof. [Sec.22 (G)] The term trade or business includes the performance of the functions of a public office. [Sec. 22 (S)] The term trade, business or profession shall not include performance of services by the taxpayer as an employee. [Sec. 22 (CC)] A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a nonresident alien doing business in the Philippines Section 22(G) notwithstanding [Sec. 25(A)(1)] 5. Non-resident aliens not engaged in trade or business within the Philippiness. (Key: NRANETB) Note: ONLY RESIDENT CITIZENS are taxable for income derived from sources within and without the Philippines. All other individual income taxpayers are taxable only for income derived from sources within the Philippines. Note: An overseas contract worker (OCW) is taxable only on income
derived from sources within the Philippines. [Sec. 23 (B)(C)] Note: A seaman is considered as an OCW provided the following requirements are met: 1. receives compensation for services rendered abroad as a member of the complement of a vessel; and 2. such vessel is engaged exclusively international trade. NOTES: What makes an alien a resident or nonresident alien is his intention with regard to the length and nature of his stay. Thus: a. One who comes to the Philippines for a definite purpose which in its very nature may be promptly accomplished is not a resident citizen. b. One who comes to the Philippines for a definite purpose which in its very nature would require an extended stay, and to that end, makes his home temporarily in the Philippines, becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (Sec. 5, RR 2) Length of stay is indicative of intention. An alien who shall have stayed in the Philippines for more than one year by the end of the taxable year is a resident alien. NOTE FURTHER: An alien who shall come to the Philippines and stay for an aggregate period of more than one hundred eighty days during a calendar year shall be considered a non-resident alien in business, or in the practice of profession, in the Philippines. [Sec. 25(A)(1)] Thus, if an alien stays in the Philippines for 180 days or less during the calendar year, he shall be deemed a non-resident alien not doing business in the Philippines, regardless of whether he owns 1. Stock in trade of the taxpayer, or other property of a kind which would properly be included in an inventory of a taxpayer if on hand at the end of the taxable year (example: Raw Materials Inventory, Work in Process Inventory, Office Supplies Inventory) 2. Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (example: Merchandise Inventory) 3. Property used in the trade or business which is subject to the allowance for depreciation (example: Office Equipment)
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actually engages in trade or business therein. (Mamalateo) CORPORATIONS Jurisdiction to Taxation (who are taxable?) 1. Domestic Corporation created or organized in the Philippines. or under its law [Sec. 22(C)] 2. Resident Foreign Corporation engaged in trade or business within the Philippines [Sec. 22(H)] 3. Non-resident Foreign Corporation not engaged in trade or business within the Philippines [Sec. 22(I)] Corporation Includes: 1. Partnerships, no matter how created or organized; 2. Joint-stock companies; 3. Joint accounts (cuentas en participacion) 4. Associations; or 5. Insurance companies [Sec. 22 (B)]. Excludes: 1. General professional partnerships; 2. Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government; 3. Co-ownership. Corporations exempt from income taxation (for income realized as such) under RA 8424 1. Those enumerated under Sec. 30. Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income. 2. With respect to GOCCs, the general rule is that these corporations are taxable as any other corporation except: a. GSIS b. SSS c. PHIC d. PCSO [Sec. 27 (C)] NOTE: Sec. 27 (c) of the NIRC amended by RA 9337, therefore, PAGCOR is not included in the GOCCC exception and subject to tax. 3. Regional or Area Headquarters under Sec.22 (DD) NOTE: Regional operating headquarters (ROH) under Sec. 22(EE) shall pay a tax of 10% of their taxable income.
Note: ONLY DOMESTIC CORPORATIONS are taxable for income derived from sources within and without the Philippines. All other corporate income taxpayers are taxable only for income derived from sources within the Philippines.
INCOME AND INCOME TAXATION

I. INCOME DEFINED, WHEN TAXABLE:
CASES: 1. 2. 3. 4. 5. 6. MADRIGAL V RAFFERTY HOWDEN V CIR FISHER V TRINIDAD EISNER V MACUMBER CONWI V CTA VICTORIAS MILLING V PPA
Income all wealth which flows to the taxpayer other than a mere return of capital It is an amount of money coming to a person/corporation within a specified time, whether as payment for services, interest or profit from investment. Unless otherwise specified, it means cash or its equivalent. Income can also be thought of as a flow of the fruits of one's labor. (Conwi v. Court of Tax Appeals) Income includes earnings, lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as their disposition. REQUISITES FOR INCOME TO BE TAXABLE: 1) There must be a gain or addition to net worth 2) The gain must be realized or received, actually or constructively; recipient must have complete dominion 3) The gain must not be excluded by law or treaty from taxation Note: Not recognized as income - when funds were merely entrusted/held money in trust (with obligation to return) to taxpayer because taxpayer acquires no control and does not receive economic benefit from it. Proceeds of embezzlement/swindling are income because embezzler/swindler already has complete dominion over them and can use such for his economic benefit. Increase in the value of property is not recognized as income; this only
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constitutes an unrealized increase which becomes taxable income only upon disposition and realization of gains. Same situation for stocks and stock dividends. Deposit with no interest does not produce income for the depositary; there is no flow of wealth. In a debt/loan situation it is important to determine whether there was an original intention to pay/consensual recognition of an obligation to repay. If yes, then the liability that results just offsets the increase in assets of the taxpayer borrower; therefore, no increase in net worth and no income derived from the debt/loan. If no (as in the case of a swindler/estafa), the proceeds will be considered as income and therefore taxable in the hands of the borrower swindler. Income can be realized actually and constructively. Assignment of Income Doctrine Ex: A is entitled to his salary of P10m but assigns it to B for unknown reasons. In this case, both A and B realize income. A constructively received income (because he was able to assign thus has complete control/dominion over it) and B actually received it. The income is taxable in the hands of both A and B. Doctrine of Constructive Receipt Ex: A was informed that his check dated December 16 is already available and he can get it anytime. A did not get the check until January 30. In this case, A constructively received income in December and is taxable in that taxable period. Not recognized as income if proceeds are merely a return of capital. Ex. Creditor lends debtor x amount. Debtor repays x amount plus y interest. Creditor does not have income on x amount as this is merely return on capital; he has income only with respect to the amount of y interest.
II. PHILIPPINE INCOME TAX LAW a. HISTORICAL BACKGROUND b. ACT OF US CONGRESS OF OCT 3, 1913, GIVEN RETROACTICE APPLICATION ON MARCH 1, 1913 c. COMMONWEALTH ACT NO. 466 (1939) d. LATEST AMENDMENT: a. RA 8424 1997 NIRC b. RA 9243 DST c. RA 9337 INCOME AND VAT III. CRITERIA IN IMPOSING PHILPPINE INCOME TAX A. Citizenship Principle A citizen of the Philippines is subject to Philippine income tax (a.) on his worldwide income, if he resides in the Philippines, or (b.) only on his income from sources within the Philippines, if he qualifies as nonresident citizen. B. Residence Principle resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines. C. Source Principle An alien is subject to Philippine income tax because he derives income from sources within the Philippines. Thus, a nonresident alien is liable to pay Philippine income tax on his income from sources within the Philippines such as dividend, interest, rent, or royalty, despite the fact that he has not set foot in the Philippines. IV. TYPES OF PHILIPPINE INCOME TAX A. B. C. D. E. GRADUATED I.T. ON INDIV NORMAL CORP I.T. ON CORP MCIT ON CORP SPECIAL I.T. ON CERTAIN CORP CGT ON SALE OR EXHANGE OF SHARES OF STOCK OF DOMESTIC CORP CLASSIFIED AS CAPITAL ASSET
CHARMAGNE FERRER
F. CGT ON SALE OR EXHANGE OF SHARES OF STOCK OF REAL PROP CLASSIFEID AS CAPITAL ASSET G. FINAL W/HOLDING TAX ON CERTAIN PASSIVE NVESTMENT INCOME PAID TO RESIDENTS H. FINAL W/HOLDING TAX ON INCOME PAYMENTS MADET NON- RSIDENTS I. FRINGE BENEFIT TAX ON FRINGE BENEFITS OF SUPERVISORY OR MANAGERIAL EMPLOYEES J. BRANCH PROFIT REMITTANCE TAX K. TAX ON IAE OF CORP.
CASES: 1. PAPER INDUSTRIES V CIR 2. WESTERN MINDORO CORP V CIR
C. RECEIPTS- BROADER IN SCOPE, MAY CONSTITUTE CAPITAL AS WELL AS INCOME. D. REVENUE-ALL FUNDS OR INCOME DERIVED BY GVERNMENT WHETHER FROM TAX OR OTHER SOURCES. E. TAXABLE INCOME Income Tax tax on all yearly profits arising from property, possessions, trade or business, or as a tax on a persons income, emoluments, profits and the like (61 CJS 1559) tax on income, whether gross or net. (27 Am. Jur. 308) Purpose(s) of Income Tax: Fiscal/NonFiscal(ROM) raise revenue to defray the expenses of the government; offset regressive sales and consumption taxes; and together with estate tax, mitigate the evils arising from the inequalities of wealth by a progressive scheme of taxation which places the burden on those best able to pay.
CASE: 1. CIR V PAL
V. INCOME, DISTINGUSHED
CAPITAL,
REVENUE,
RECEIPTS
A. INCOME-FLOW, SERVICE OF WEALTH, FRUIT. INCOME CONNOTES GAIN DERIVED FROM LABOR, CAPITAL OR PROPERTY, EXCLUDING NON-INCOME ITEMS SUCH AS THE CAPITAL INVESTMENT, COGS OR THOSE EXCLUDED BY LAW FROM INCOME TAXATION. Income all wealth which flows into the taxpayer other than as a mere return of capital. B. CAPITAL-FUND, WEALTH, TREE Capital resource of person which can be used in producing goods and services. Capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. The Supreme Court of Georgia expresses the thought in the following figurative language: "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or gains." (Madrigal v. Rafferty) Increase in Property Value A mere increase in the value of property is NOT INCOME, but merely unrealized increase in capital. The increase in the value of property is also known as appraisal surplus or revaluation increment.
VI. SOURCES OF INCOME A. PROPERTY (CAPITAL) B. LABOR(SERVICES) C. SALE/EXCHANGE OF CAPITAL ASSET AND ACTIVITY
CASE: 1. COM. V BOAC
D. INCOME DERIVED FROM OTHER SOURCES: a. TREASURE FOUND OR PUNITIVE DAMAGES REPRESENTING PROFIT LOST b. AMOUNT RECEIVED BY MISTAKE
CASES: 1. JAVIER V CA 2. NORTH AMERICAN V BURNET
c. CANCELLATION OF TAXPAYERS INDEBTEDNESS d. PAYMENT OF USURIOUS INTEREST e. TAX REFUND f. BAD DEBT RECOVERY
CHARMAGNE FERRER
treaty from taxation. IX. DOCTRINE ON DETERMINATION OF TAXABLE INCOME A. CLAIM OF RIGHT DOCTRINE
CASE: 1. RUTKIN V US
B. SEVERANCE TEST THEORY
CASE: EISNER V MACEMBER
C. CONTROL TEST
VII. INCOME TAX A. NATURE B. FUNCTIONS C. BASIS- PARTNERSHIP THEORY

CASE: 2. COM. V LEDNICKY
CASE: 1. HELVERING V HORT 2. CIR V JULIANE 3. CIR V BOAC
Tests on Taxability of Income 1. Flow of Wealth Test The determining factor for the imposition of income tax is whether any gain was derived from the transaction. 2. Realization Test - unless the income is deemed "realized," there is no taxable income. 3. Economic-Benefit Principle - flow of wealth realized is taxable only to the extent that the taxpayer is economically benefited. IX. GROSS INCOME A. GENERAL STATUTORY DEFINITION (SEC. 32 NIRC) I. GENERAL STATUTORY DEFINITION All income derived from whatever source, including (but not limited to the following items) (GRIP CARD GPP) 1) Gross income derived from the conduct of trade or business or the exercise of a profession
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VIII. REQUISITES FOR INCOME TO BE TAXABLE 1. There must be a gain or profit. 2. The gain must be realized or received. Doctrine of Constructive Receipt or Income Ex: A was informed that his check dated December 16 is already available and he can get it anytime. A did not get the check until January 30. In this case, A constructively received income in December and is taxable in that taxable period. Not recognized as income if proceeds are merely a return of capital. Ex. Creditor lends debtor x amount. Debtor repays x amount plus y interest. Creditor does not have income on x amount as this is merely return on capital; he has income only with respect to the amount of y interest. 3. The gain must not be excluded by law or
CHARMAGNE FERRER
2) Rent Income 3) Interest Income 4) Prizes & winnings 5) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions & similar items 6) Annuities 7) Royalties 8) Dividend Income 9) Gains derived from dealings in property 10) Pensions 11) Partners distributive share from the net income of the GPP (distributive share from ordinary partnerships is taxable as dividends; in this case, the ordinary partnership has already been subject to ordinary corporate income tax) all income derived from whatever source embraces all income not expressly exempted within the class of taxable income under the law, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains, and whether derived from legal or illegal sources, such as: 1. Gains arising from expropriation of property which constitute income from dealings in property; 2. Income derived from illegal sources, such as gambling, theft, embezzlement, and smuggling; 3. Compensation for damages if it represents payment for loss of expected profits; 4. Bad debts previously charged-off but afterwards recovered; 5. Contest awards and prizes for commercial or non-commercial contests; and 6. Taxes previously deducted as an expense and subsequently refunded. II. BROAD DEFINITION The term gross income whenever used without qualification, is comprehensive, as defined above, and is different from the limited meaning of gross income for purposes of minimum corporate income tax or the gross income tax of corporations. SEE BOOK- DIMAAMPAO Gross Income- Gross income means all income derived from whatever source Supplementary Discussion on Some Items Included in Gross Income: 1. Compensation Income a. income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] It includes:
1. Salaries and wages 2. Commissions 3. Tips 4. Allowances 5. Bonuses 6. Fringe Benefits of rank and file EEs b. It does NOT include remuneration paid: For agricultural labor paid entirely in products of the farm where the labor is performed, or For domestic service in a private home, or For casual labor not in the course of the employer's trade or business, or For services by a citizen or resident of the Philippines for a foreign govt or an intl organization. [Sec. 78(A)] Withholding Tax on Compensation Income The income recipient (i.e., EE) is the person liable to pay the tax income, yet to improve the collection of compensation income of EEs, the State requires the ER to withhold the tax upon payment of the compensation income. It does not include income excluded or exempted by law. Fringe Benefits of Rank and File EEs Basic Rule: Convenience of the ER Rule If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employees work or position, the value of that privilege need not be included as compensation. 2. Gains Derived From Dealings In Property Dealings in property such as sales or exchanges may result in gain or loss. The kind of property involved (i.e., whether the property is a capital asset or an ordinary asset) determines the tax implication and income tax treatment, as follows:
CHARMAGNE FERRER
5. Property (other than capital asset) acquired for less than an adequate consideration in moneys worth a) the amount paid by the transferee for the property; or b) the transferors adjusted basis at the time of the transfer whichever is greater 6. Property acquired in a transaction where gain or loss not recognized The basis shall be the same as it would have been in the hands of the transferor increased by the amount of gain recognized by the transferor on the transfer. 3. Interest Income e.g., Interest income from government securities such as Treasury Bills 4. Rental Income Actual rent itself included in gross income (taxable) Payments by lessee of obligations of lessor to third persons considered as additional rent income of the lessor, and therefore included in gross income (taxable). Advance Rentals Receipt of advance rentals by the lessor may or may not constitute taxable income to him depending on the true nature of the so-called advance rentals. In computing the gain or loss from the sale or other disposition of property, the BASIS shall be as follows: 1. Property acquired by purchase its cost, i.e., the purchase price plus expenses of acquisition. 2. Property which should be included in the inventory its latest inventory value [RR-2 sec 136] 3. Property acquired by devise, bequest or inheritance its fair market price or value as of the date of acquisition 4. Property acquired by gift or donation the same as if it would be in the hands of the donor or at last preceding owner by whom it was not acquired by gift, EXCEPT that if such basis is greater than the FMV of the property at the time of the gift then, for the purpose of determining loss, the basis shall be such FMV If the advance rental is in the nature of prepaid rent (for the lessee), received by the lessor under a claim of right and without restriction as to use, the entire amount is taxable income of the lessor in the year received. If the amount received is in the nature of a security deposit for the faithful compliance by the lessee of the terms of the contract, there is no income to the lessor unless the conditions which make the security deposit the property of the lessor occur (i.e., the lessee violates the terms of the lease agreement)
5. Dividends Any dividend which is not exempt from income tax, or which is not subject to final tax, is taxable dividend included in the computation of the taxable income (gross income) in the income tax return at the end of the year. NOTE: Liquidating Dividend distribution of all the property of a corporation. It is strictly not dividend
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CHARMAGNE FERRER
income, but rather a sale of shares of stock resulting in capital gain or loss. 6. Annuities income derived from a capital amount paid to an insurance company. 7. Pensions paid for past employment services rendered. 8. Cancellation of debt The cancellation or forgiveness of indebtedness may have any of three possible consequences: 1. It may amount to payment of income. If, for example, an individual performs services to or for a creditor, who, in consideration thereof, cancels the debt, income in that amount is realized by the debtor as compensation for personal services. 2. It may amount to a gift. If a creditor wishes merely to benefit the debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a gift to the debtor and need not be included in the latters report of income. 3. It may amount to a capital transaction. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of a payment of dividend. 9. Prizes and Awards Contest prizes and awards received are generally taxable. Such payment constitutes gain derived from labor. The EXCEPTIONS are as follows: Prizes and awards received in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievements are EXCLUSIONS from gross income if: a. The recipient was selected without any action on his part to enter a contest or proceedings; and b. The recipient is not required to render substantial future services as a condition to receiving the prize or award. Prizes and awards granted to athletes in local and intl sports competitions and tournaments held in the Philippines and abroad and sanctioned by their national associations shall be EXEMPT from income tax.
Compensatory damages, as constituting returns of capital, are not taxable. Thus, amounts received as moral damages for personal actions (such as alienation of affection, libel, slander or breach of promise to marry) are not taxable. Recovered damages representing recoveries of lost profits are taxable, just as profits are taxable in the regular course of business. Thus, damages recovered in patent infringement suits are taxable. 11. Bad Debt Recovery Tax Benefit Rule Bad debts claimed as a deduction in the preceding year(s) but subsequently recovered shall be included as part of the taxpayers gross income in the year of such recovery to the extent of the income tax benefit of said deduction. There is an income tax benefit when the deduction of the bad debt in the prior year resulted in lesser income and hence tax savings for the company. (Sec. 4, RR 5- 99) ILLUSTRATION:
10. Damage recovery

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CHARMAGNE FERRER
corruption and tax evasion-exercise of discretion to allow or disallow deductions is dispensed with E. DISADVANTAGES OF GROSS INCOME TAXATION 1 no deduction and exemptions are allowed
in he form of deductios, exmptions, and tax credits F. DISADVANTAGE S OF NET INCOME TAXATION 1 vulnerable to corruption on acount of the margin of discretion in the grant of deductions confusing and complex process 2 of filing ITR difficulty/costly 3 to administer
III. FORMULAS USED FOR DETERMINATION OF: a. GROSS INCOME = ALL INCOME LESS EXCLUSIONS b. NET OR TAXABLE INCOME= GROSS INCOME LESS ALLOWABLE DEDUCTIONS c. TAXABLE COMPENSATION INCOME= GROSS COMPENSATION INCOME LESS PERSONAL AND ADDITIONAL EXEMPTIONS (INDIVIDUAL TAXPAPERS) d. INCOME TAX DUE= TAXABLE OR NET INCOME MUTIPLIED BY INCOME TAX RATE e. INCOME TAX PAYABLE=INCOME TAX DUE LESS CREDITABLE WITHHOLDING TAXATION IV. GROSS INCOME TAXATION AND NET INCOME TAXATION DISTINGUISHED: A. GROSS INCOME TAXATION allows no 1 deductions grants no 2 exemptions tax base is gross 3 income C. ADVANTAGES OF GROSS INCOME TAXATION simplifies the IT 1 system does away with wastage of manpower and 2 supples 3 substantial reduction in B. NET INCOME TAXATION deductions are 1 allowed 2 exemptions tax base is net 3 income D. ADVANTAGES OF NET INCOME TAXATION fair and just due to the grant of 1 deductions tax audit 2 minimizes fraud 3 provides equitable reliefs
susceptible of fraud in the absence of 2 general audit taxpayers lose 3 internet to earn more thereby lessening their purchasing capacity
X. EXCLUSIONS FROM GROSS INCOME (SEC. 32B NIRC) I. REASONS FOR EXCLUSION: A. THEY REPRESENT RETURN OF CAPITAL OR ARE NOT INCOME, GAIN OR PROFIT; B. THEY ARE SUBJECT TO ANOTHER KIND OF IR TAX; OR C. THEY ARE INCOME, GAIN OR PROFIT THAT ARE EXPRESSLY EXEMPT FROM INCOME TAX UNDER THE CONSTITUTION, TAX TREATY, TAX CODE OR A GENERAL OR SPECIAL LAW. 1. UNDER THE CONSTITUTION Art. XIV Sec. 4(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. 2. UNDER A TAX TREATY Business profits of a foreign corporation organized under the laws of a treaty country from sources
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within the Philippines are not subject to Philippine IT, unless such profits are attributable to a permanent establishment of the foreign corporation created or deemed created in the Philippines. 3. UNDER TAX CODE [SEC. 32(B)-EXCLUSIONS FROM GROSS INCOME; SEC. 30-EXEMPT CORP.; AND SEC. 60 (B)EXEMPTION OF EMPLOYESTRUSTS. 4. UNDER SPECIAL LAWS a) RA 6657 (Comprehensive Agrarian Reform Package Law- gain arising from the transfer of agricultural property covered by the law shall be exempt from CGT.) b) RA 6975 (National Power Corp.)interest on bonds paid by NPC to foreign bondholders in US dollars and other foreign currencies, regardless of whether or not a tax treaty exists between the Philippines and such other country c) RA 7103 (Iron and Steel Industry Act) interest income from pesodenominated loans with maturity of 5 years or more and interest income from foreign currency loans extended by domestic banks to the Steel Corporation of the Philippines is exempt from IT and withholding tax. d) RA 7279 (URBAN DEV. HOUSING ACT OF 1992)- NHA is exempt from all kind of fees and charges, whether local or national such as income and realty taxes, which the private sector participating in socialized housing shall be exempt from: 1. Project-related corporate or individual IT on income directly realized from the development and/or improvement or socialized housing sites, slum areas, resettlement areas, and/or construction and sale of socialized housing units to qualified beneficiaries as approved by the HLURB or LGU concerned. 2. CGT on sale of raw lands for use in socialized housing projects. e) RA 7459 (Inventors and Inventions Incentives Act of 1991)- prizes that winning inventors will receive from the nationwide contest for the most Innovative new and Renewable Energy Systems are exempt from taxes during the first 10 years reckoned from the date of the first sale f the invented products, provided that such sale does not exceed P200,000 during any 12 months period. f) RA 7653 (New Central Bank Act, as amended by RA 8761) BSP is
exempt from all national, provincial, municipal and city taxes. g) RA 7916 (PEZA LAW) PEZA registered enterprise are given IT holidays of 6 or 4 years from date of commercial operation depending on whether their operations are considered pioneer or non-pioneer. h) RA 9178 (Brgy. Miccro Business Enterprises Act of 2002) BMBE shall be exempt from IT for income arising from the operation of the enterprises.
CASE: 1. PLDT V CITY OF BACOLOD 2. PLDT VS LAGUNA 3. SMART V DAVAO
II. ITEMS EXCLUDED FROM GROSS INCOME UNDER SEC. 23, NIRC
1. Proceeds of Life insurance received in a single sum or installment are not taxable. Exception: interest payments if such amount is held by the insurer under an agreement to pay interest theron. o Proceeds of life insurance policies paid to the heirs/beneficiaries upon the death of the insured o If such amounts are held by the insurer under an agreement to pay interest, the interest payments shall be included in the GI o Insured must die to avail of total exemption. If he survives, there/s only partial exemption to the extent that the proceeds constitute return of capital (total amount of premiums paid). General rule: The proceeds of life insurance policies paid to heirs or beneficiaries upon the death of the insured
Reason: Insurance is a contract of indemnity; hence, the proceeds should be treated as indemnity and not as gain or income Exception: If such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. 2. Amount received by insured as return of premium (other than amounts paid by reason of the death of the insured and interest payments on such amounts) under a life
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insurance endowment or annuity contracts, either during the term or at maturity of the contract. Cash Surrender Value- of the policy is also NON-taxable. Return of Premium- means a repayment of a party or the whole of the premiums paid. o Under life insurance, endowment, or annuity contracts, received either during the term or at the maturity of the terms or upon surrender of the contract.
proceeds cannot qualify as a gift. Most critical consideration is the givers intention or motive. Can be a gift if given on account of filial relationship. General rule: The value of property acquired by gift, bequest, devise, or descent.
Reason: These transactions are subject to transfer taxes estate or donors taxes. Exception: Income from such property, as well as gift, bequest, devise or descent of income from any property, in cases of transfers of divided interest, shall be included in gross income. 4. Compensation for injuries or sickness- Received through Accident/Health Insurance or Workmens Compensation Act, as compensation for personal injuries/sickness + amount of damages received on account of such injuries/sickness o Damages will be exempt only if they arise together with personal injury; however, if damages only amount to return of capital, it is exempt (Ex. Damages from car accident exempt only if claim includes compensation for personal injury. If no personal injury, damages for car wreckage will only be exempt to the extent of the amount of the actual damage return of capital) o Must be physical injury, not injury to rights. The amounts received as compensation for personal injuries or sickness, plus the amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness. 5. Income exempt under treaty a) Income derived by the US Consular Officials in the Phil. In connection with such consular service (US-PI Consular Convention). b) Income exempt under tax treaty with foreign countries
CASE: NDC vs. COM. (note: under 1997 NIRC, exemption of interest on govt. securities is no longer provided.
General rule: The amount received by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract
Reason: This is a return of capital and not income. Exception: If the amounts received by the insured (when added to the amounts already received before the taxable year under such contract) exceed the aggregate premiums or considerations paid (whether or not paid during the taxable year), then the excess shall be included in gross income. (source unknown) 3. Gifts, bequests and devises value of property acquired by gift, bequest, devise or descent (Sec. 64, RR 2) but not the income from such property. Also, if the amount received is on account of services rendered, whether constituting a demandable debt or not, or the use or opportunity to use of capital, the receipt is income.
CASE: 1. PIROVANO V. COM.
But, income from such property shall be included in GI Must be characterized by disinterested generosity and pure liberality Difficult to establish gift situations if there is an Er-Ee relationship (A bonus/assistance as recognition of service rendered is not exempt) If given under a) constraining force of any moral or legal duty or b) from the incentive of c) an anticipated benefit of an economic nature or where it is a return for services rendered,
To the extent required by any treaty obligation binding upon the Phil govt.
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Income of any kind, to the extent required by any treaty obligation binding upon the Government of the Philippines. 6. Retirement benefits, pensions, gratuities, etc. 1. RA 7641, RA 4917 and Sec. 60 (B) of the tax code, subject to the ff. requisites: a. Reasonable private plan maintained by the employer duly approved by the BIR for the exclusive benefit of the members employees. b. Retiring official or employee has rendered at least 10 years of services; c. Retiring official or employee is at least 50 years of age at the time of retirement; and d. The benefit of exclusion is availed of only once.
CASES: 1. CIR vs. GCL RETIREMENT 2. INTERCONTINENTAL AMARILLA VS.
2. Separation benefits due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee. a. TERMINAL LEAVE PAYamount received by way of commutation of the employees accumulated Leave credits as a result of his separation. It is not considered compensation or services and is excluded from gross income considering that is paid when the employer has already severed his connection with his employee who is no longer working.
CASE: 1 COM VS CASTANEDA
3. SS benefits, retirement gratuities received by resident or non-resident citizens from foreign government agencies and other private or public institutions. 4. Benefits received from US Administration (RA 360) by residing in the Philippines. Veterans veterans
of working (Ex. Does not include STD) o Benefits from separation due to retrenchment come under exemption (no choice/option; but if the Ee avails of an optional early retirement plan, he cannot reason that he was separated for reasons beyond his control, therefore, he cannot claim exemption of the benefits on this ground but he can claim under other grounds such as RPBP or RA 7641. c) Benefits received from a foreign government by resident of nonresident citizens or aliens who reside permanently in the Philippines d) Veterans benefits e) Benefits under SSS f) Benefits received from GSIS 2 Options under paragraph (a), Section 32(B)(6) g) RA 7641 o Conditions: (i) at least 60 years old; (ii) 5 years of service at time of retirement o Availed if there is no reasonable private benefit plan (benefits under this option is less) o Limted exemption: month salary for every year of service. In RPBP, all is excludable. h) Reasonable Private Benefit Plan o Conditions: (i) at least 50 yrs old; (ii) in the service of same employer for at least 10 years at time of retirement o Must be approved by BIR o A pension, gratuity, stock bonus or profit sharing plan maintained by an ER for the benefit of some or all of his officials/employees, wherein contributions are made by such ER for the officials/employees, or both, for the purpose of distributing to such officials & employees the earnings & principal of the fund thus accumulated; & provided in the plan that no part of the income shall be used for/be diverted to any purpose other than for the
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5. Benefits received from SSS per RA 8282 6. Benefits received from the GSIS under RA 8291 including retirement gratuity. DISCUSSIONS: a) RA 7641 b) Amount received as a consequence of separation for any cause beyond control (death, sickness or other physical disability) o Sickness must be job threatening must render taxpayer incapable
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exclusive benefit of the said officials & employees Service must be continuous. You can avail of the benefits only once (once youve availed of RPBP, you cannot avail of another RPBP); but you can avail of exemption under another ground o Ex. A government employee can claim exemption for retirement benefits received from the GSIS even after availing of RPBP taxpayer can claim RPBP after qualifying as a private employee then under GSIS proceeds exemption after qualifying as a government employee o Ex. Employee can claim exemption under RPBP then later claim on the ground that the amount he received is a consequence of his separation in a subsequent job for any cause beyond his control Terminal Leave Pay: amount paid for the commutation of leave credits o Excludable only for government employees (this exemption does not find support in NIRC but is backed by
for the purpose of distributing to such employees the earnings and principal of the fund thus accumulated and wherein it is provided in the plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees. b. Any amount received by an employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death sickness other physical disability or for any cause beyond the control of the employee (i.e., the separation of the employee must be involuntary and not initiated by him) c. The social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines from foreign government agencies and other institutions d. Payments of benefits due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration e. Benefits received from or enjoyed under the Social Security System f. Benefits received from the GSIS, including retirement gratuity received by government officials and employees CASE LAW: BIR Ruling 125-98: The phrase "shall not have availed of the privilege under a retirement benefit plan of the same or another employer" found in Sec. 32 (B) (6) (a) of the Tax Code means that the retiring official or employee must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan. BIR Ruling 143-98: The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase "for any cause
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RETIREMENT Benefits, Pensions, Gratuities, etc.a. Retirement benefits received under RA 7641 and those received by officials and employees of private firms in accordance with a reasonable private benefit plan maintained by the employer. REQUISITES: a. The retiring employee has been in the service of the same employer for at least 10 years. b. The retiring employee is not less than 50 years of age at the time of his retirement c. The benefits shall be availed of by an employee only once. d. That there be a reasonable private benefit plan as defined below. A 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his employees wherein contributions are made by such employer for the employees
CHARMAGNE FERRER
beyond the control of the said official or employee" found in Sec. 32(B). 7. Miscellaneous items (a) Income derived by foreign government (from investments in Philippines in loans, stocks, bonds or other domestic securities) Refers only to passive income. If the foreign government engages in trade, income is taxable.
CASE: 1. COM VS. MITSUBISHI METAL RP
Total exclusion shall not > P30,000 (f) GSIS, SSS, Medicare, Pag-ibig contributions & union dues of individuals (g) Gains form the sale of bonds, debentures or other certificates of indebtedness with a maturity of more than 5 years (h) Gains from redemption of shares in mutual fund BIR Ruling #125-98 The phrase shall not have availed of the privilege under a retirement benefit plan of the same or another ER found in Sec. 32 (B) (6) (a) of the Tax Code means that the retiring official or EE must not have previously received retirement benefits from the same or another employer who has a qualified retirement benefit plan. BIR Ruling #143-98 The terminal leave pay of government employees whose employment is coterminous is exempt since it falls within the meaning of the phrase for any cause beyond the control of the said official or EE found in Sec. 32(B) of the CTRP. 8. income derived by foreign government Income derived from (1) investments in the Philippines in domestic securities (loans, stocks, bonds, etc.) or from (2) interest on deposits in banks in the Philippines by i. foreign governments ii. financing institutions owned, controlled, or enjoying refinancing from foreign governments, and iii. international or regional financial institutions established by foreign governments. 9. income derived by the government or its political subdivision Income derived from any public utility or from the exercise of any essential governmental function accruing to the Government of the Philippines or to any political subdivision thereof. 10. prizes and awards in sport competition All prizes and awards granted to athletes (1) in local and international sports competitions and (2) sanctioned by their national sports associations.
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(b) Income derived by govt./its political subdivisions (from public utility or exercise essential governmental function) Key: Income should accrue to government; if the income is retained by the public utility, it is not exempt look at charter of political subdivision/GOCC to determine whether its income accrues to the government or not. (c) prizes, awards in sports competition sanctioned by national sports associations whether held in Philippines or abroad Contemplates a particular competition, not a cumulative achievement (Ex. Sportsman of the year award does not qualify for exemption) (d) Prizes & awards under ff. conditions: 1. received in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if: 2. recipient was selected without any action on his part 3. recipient not required to render substantial future services as a condition of receiving the prize/award Example: Nobel prize award Construed strictly, take note of 7 categories. It does not include athletic achievement. Contemplates a rational selection process; cannot just be randomly selected. (e) 13th month pay & other benefits (i.e. productivity incentives & Christmas bonus)
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11. prizes and awards which met the conditions set in the Tax Code Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: i. recipient was selected without any action on his part to enter the contest or proceeding and ii. recipient is not required to render substantial future services as a condition to receiving the prize or award 12. 13th month pay and other benefits
indebtedness with a maturity of more than 5 years. e. gain from redemption of shares in mutual fund Gains realized by the investor upon redemption of shares of stock in a mutual fund company
X. INDIVIDUAL INCOME TAXATION I. Classification of Individual Taxpayers
Other benefits cover productivity, ncentives and Christmas bonus; Total exclusion shall not notexceed P30,000.00 Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000), in excess of this amount is subject for taxation 13th Month Pay and Other Benefits Gross benefits received by employees of public and private entities provided that the total exclusion shall not exceed P30,000 which shall cover: i. Benefits received by government employees under RA 6686 ii. Benefits received by employees pursuant to PD 851 (13th Month Pay Decree) iii. Benefits received by employees not covered by PD 851 as amended by Memorandum Order No. 28 and iv. Other benefits such as productivity incentives and Christmas bonus What happens if the benefits exceed P30,000? The amount in excess of P30,000 will be considered as compensation income. GSIS, SSS, Medicare and other contributions GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals gain from the sale of bonds, debentures or other certificate of indebtedness Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of
Section 1. The following are citizens of the Philippines: [1] Those who are citizens of the Philippines at the time of the adoption of this Constitution; [2] Those whose fathers or mothers are citizens of the Philippines; [3] Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and [4] Those who are naturalized in accordance with law.
[1] Immigrant [2] Employee on a more or less permanent basis [3] Contract workers whose contracts of employment are renewed from time to time within or during the taxable year.
[1] Not a mere transient or sojourner [2] Maintains residence in the Philippines [3] Actual physical residence in the Philippines [4] His temporary stay 9with intention to return) is on an extended stay [5] Resides for more than 1 year [6] Losses his residency if he stays outside the Philippines for a continuous period exceeding 3 months as of and including December 31
[1] Non-resident alien engaged in trade or business in the Philippines-comes and stays in the Philippines for an aggregate period of more than 180 days during the calendar year (Sec. 25[A] [1], NIRC)
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[2] Engaged in Trade or Business includes the performance services within the Philippines. [3] Foreign technician of a job contract for 1 year.
5. Bonuses 6. Fringe Benefits of rank and file EEs It does NOT include remuneration paid: For agricultural labor paid entirely in products of the farm where the labor is performed, or For domestic service in a private home, or For casual labor not in the course of the employer's trade or business, or For services by a citizen or resident of the Philippines for a foreign govt or an intl organization. [Sec. 78(A)] 5. SPECIAL RULES ON FRINGE BENEFITS [Sec. 33 of the NIRC] A. DEFINITION" Fringe Benefit Tax is a final income tax on the employee which shall be withheld and paid by the employer on a quarterly basis. Fringe Benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee except rank and file employees (The fringe benefit covered by Sec 33 refers to those enjoyed by managerial and supervisory employees.) Fringe benefit means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) such as, but not limited to the ff: 1) housing 2) expense account 3) vehicle of any kind 4) household personnel (such as maid, driver & others) 5) interest on loan at less than market rate to the extent of the difference between the market rate & actual rate granted 6) membership fees, dues & other expenses borne by the employer for the employee in social & athletic clubs or other similar organizations 7) expenses for foreign travel 8) holiday & vacation expenses 9) educational assistance to the employee or his dependents 10) life or health insurance & other non-life insurance premiums or similar amounts in excess of what the law allows
His income is taxed at 25% final tax based on gross or entire income. He is taxed at 15% if employed by the following: [1] Regional or area headquarters or multinational corporations; [2] Offshore banking units established in the Philippines; [3] Petroleum service contractors or sub-contractors. II. Categories of Income 1. COMPENSATION INCOME 1. DEFINITION- income arising from an ER-EE relationship. It means all remuneration for services performed by an EE for his ER, including the cash value of all remuneration paid in any medium other than cash. [Sec. 78(A)] 2. ELEMENTS OF EMPLOYER-EMPLOYEE RELATIONSHIP Selection Payment of wages Power of Dismissal Control
CASE: BROTHERHOOD VS ZAMORA
3. REQUISITES FOR TAXABILITY
1) There must be a gain or addition to net worth 2) The gain must be realized or received, actually or constructively; recipient must have complete dominion 3) The gain must not be excluded by law or treaty from taxation 4. FORMS OF COMPENSATION AND TAX BASIS
It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances
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Persons liable The EMPLOYER (as a withholding agent), whether individual, professional partnership or a corporation, regardless of whether the corporation is taxable or not, or the government and its instrumentalities Tax rate: 32% (from January 1, 2000 onwards) of the Grossed up Monetary Value (GMV) of fringe benefits. In the case of aliens, the tax rates to be applied on fringe benefit shall be as follows: 1. NRANEBT 25% 2. Aliens employed by regional HO 15 % 3. Aliens employed by OBU 15% 4. Aliens employed by Petroleum Service 5. Contractors and Subcontractors GMV of the fringe benefit represents 1. the whole amount of income realized by the employee which includes the net amount of money or net monetary value of property which has been received; plus 2. the amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for and in behalf of the employee. GMV of the fringe benefit shall be determined by dividing the monetary value of the fringe benefit by the Grossed up divisor. The Grossed up divisor is the difference between 100% and the applicable rates.
Special Cases: For fringe benefits received by nonresident alien not engaged in trade of business (NRANETB), the tax rate is 25% of the grossed-up monetary value (GMV). The GMV is determined by dividing the actual monetary value of the fringe benefit by 75% [100% - 25%]. For fringe benefits received by alien individuals and Filipino citizens employed by regional or area headquarters, regional operating headquarters, offshore banking units (OBUs), or Foreign Service contractor, the tax rate is 15% of the grossed-up monetary value (GMV). The GMV is determined by dividing the actual monetary value of the fringe benefit by 85% [100% - 15%].
What is the tax implication if the employer gives fringe benefits to rank-and-file employees? Fringe benefits given to a rank andfile employee are treated as part of his compensation income subject to income tax and withholding tax on compensation income. Payor of Fringe Benefit Tax (FBT) the employer [but the law allows the employer to deduct such tax as a business expense, in determining his taxable income] B. NATURE OF FBT Final tax imposed on the grossed-up monetary value of fringe benefit furnished/granted to the EE by the ER, whether an individual or corp. (payable by the employer) Effective 34% 1/1/98
1/1/99 33% 1/1/00 Tax Rate and Tax Base [Generally] 32% of the grossed-up monetary value (GMV) GMV represents the whole amount of income realized by the employee. How GMV is determined GMV is determined by dividing the actual monetary value of the fringe benefit by 68% [100% - tax rate of 32%]. For example, the actual monetary value of the fringe benefit is P1,000. The GMV is equal to P1,470.59 [P1,000 / 0.68]. The fringe benefit tax, therefore, is P470.59 [P1470.59 x 32%]. 32%
Fringe benefit is an income of the employee subject to Fringe Benefit Tax but is payable by the Employer. Employer can deduct FBT from its taxable income. Fringe benefits are only for corporate officers/management. For rank and file, it is called an allowance. Allowances (benefits to rank and file) are not subject to FBT. C. PURPOSE OF FBT
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E. BENEFITS SUBJECT OF FBT [EXAMPLE] D. MANAGERIAL, SUPERVISOR, RANK AND FILE EMPLOYEES DEFINED Managerial employee One who is vested with the powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employees Those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinely or clerical in nature but requires the use of independent judgment. Rank and File Employees All employees not falling within any of the above definitions are considered rank-and-file employees. shall mean all employees who are holding neither managerial nor supervisory position as defined in the Labor Code In the case of rank and file employees, fringe benefits other than those excluded from gross income under the Tax Code and other special laws, are taxable under the individual normal tax rate. Deductibility to the Taxable income of the EMPLOYER General Rule: The amount of taxable fringe benefit and the fringe benefits tax shall constitute allowable deductions from gross income of the employer. Exception: If the basis for computation of the fringe benefits tax is the depreciation value, the zonal value or the fair market value, only the actual fringe benefits tax paid shall constitute a deductible expense for the employer. The value of the fringe benefit shall not be deductible and shall be presumed to have been tacked on or actually claimed as depreciation expense by the employer. Provided, however, that if the aforesaid zonal value or fair market value of the said property is greater than its cost subject to depreciation, the excess amount shall be allowed as a deduction from the employer's gross income as fringe benefit expense. (Sec. 2.33[D], Rev. Reg. No. 3-98) Such as, but not limited to the ff: 1) housing 2) expense account 3) vehicle of any kind 4) household personnel (such as maid, driver & others) 5) interest on loan at less than market rate to the extent of the difference between the market rate & actual rate granted 6) membership fees, dues & other expenses borne by the employer for the employee in social & athletic clubs or other similar organizations 7) expenses for foreign travel 8) holiday & vacation expenses 9) educational assistance to the employee or his dependents 10) life or health insurance & other non-life insurance premiums or similar amounts in excess of what the law allows F. BENEFITS NOT SUBJECT OF FBT [EXAMPLE]
A. Fringe benefits not considered as gross income 1. if it is required or necessary to the business of employer 2. if it is for the convenience or advantage of employer B. Fringe Benefit that is not taxable under Sec. 32 (B) Exclusions from Gross Income C. Fringe benefits not taxable under Sec. 33 Fringe Benefit Tax: Fringe Benefits which are not taxable [Sec. 33 of the NIRC, consolidated with Sec. 2.33(C) of RR 03-98] [RED CNC] 1) Fringe benefits which are authorized and EXEMPTED from tax under special laws, such as the 13th month Pay and Other Benefits with the ceiling of P30, 000. 2) CONTRIBUTIONS of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans 3) Benefits given to the RANK AND FILE employees, whether granted under a collective bargaining agreement or not 4) DE MINIMIS benefits- benefits which are relatively small in value offered by the employer as a means of promoting goodwill,
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contentment, efficiency of Employees 5) If the grant of fringe benefits to the employee is required by the nature of, or NECESSARY to the trade, business, or profession of the employer 6) If the grant of fringe benefits is for the CONVENIENCE of the employer [Convenience of the Employer Rule] G. BENEFITS CONSIDERED NECESSARY TO THE BUSINESS OF THE EMPLOYER, OR ARE GRANTED FOR THE CONVENIENCE OF THE EMPLOYER [EXAMPLES]
H. CONVENIENCE OF THE EMPLOYER RULE If meals, living quarters, and other facilities and privileges are furnished to an employee for the convenience of the employer, and incidental to the requirement of the employees work or position, the value of that privilege need not be included as compensation. When a fringe benefit is given solely for the convenience of the employer, the fringe benefit is exempt from FBT because the employee does not recognize income from the benefit. Ex. Expenditure on housing of engineer within factory premises is not subject to FBT General Rule: If housing is located outside, it is subject to FBT. Exception: If the nature of the Ers business is hazardous to health of Ee, housing can be located outside the factory without being subject to FBT. Ex. If employee is given housing allowance in cash, this will constitute compensation of the employee (income from whatever source). However, if it qualifies as a Fringe Benefit, then it will be subject to FBT and the burden is shifted to Er (Tax on Ee, Burden on Er) I. DE MINIMIS DEFINED: [EXAMPLES] De minimis benefits means those which are of relatively small value are offered by the employer as a means of promoting health, goodwill, contentment, or efficiency of his employees, such as the following: (CLAMMP RUST)
a. Monetized unused vacation leave credits of private employees not exceeding 10 days during the year and monetized value of leave credits paid to government officials and employees; b. Medical cash allowance to dependents of employees not exceeding P750 per semester or P125 per month i. BIR Ruling 019-02: To be considered de minimis medical allowance, the following conditions must concur: ii. The amount given to the EE shall be for his own medical expense; iii. The amount actually given and actually spent shall not exceed P10, 000 in any given calendar year; iv. The EE must fully substantiate with or in his name the medical allowance to be granted. c. Rice subsidy of P1,000 or 1 sack of 50 kg rice amounting to not more than P1,000 (P 350 per month) d. Uniform and clothing allowance not exceeding P3,000 per year e. Actual yearly medical benefits not exceeding P10,000 f. Laundry allowance of P300 per month g. Employee achievement awards, for length of service or safety achievement in the form of 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; h. Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum i. Company picnics and sports tournaments in the Philippines and are participated exclusively by employees; j. Flowers, fruits, books or similar items given to employees under special circumstances on account of illness, marriage, birth of a baby, etc k. Daily meal allowance of overtime work not exceeding 25% of basic minimum wage Tax implication of de minimis benefits:
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EXEMPTED from tax. However, should the amount of the benefits given be in EXCESS of the ceilings prescribed, the following rules apply: o If given to managerial / supervisory employees The amount in excess of the ceiling prescribed is taxable as a fringe benefit (i.e., there will be a 32% tax imposed on the grossed-up monetary value of the residual amount). o If given to rank-and-file employees The amount in excess of the ceiling prescribed is taxable as salary or compensation income.
Examples of Convenience of the Employer Rule: 1. The value of the meals given to the employee is not taxable, if the employer provides the meals for a substantial noncompensatory business purpose (generally, when employee is required to be on duty during the meal period). 2. Lodging is not taxable if the employee must accept the lodging on the employers business premises as a condition of his employment. 6. DOCTRINE OF CASH EQUIVALENT
BIR Ruling 023-02: Meal and food allowance, although not for overtime work, is considered de minimis if it does not exceed 25% of the basic wage. The rules and regulations on de minimis benefits do not allow aggregation of the amounts set for each type of benefit. BIR Ruling 034-02 (Aug 16, 2002): Representation and Transportation Allowance (RATA) and Personnel Economic Relief Allowance (PERA) are not subject to Income Tax and Withholding Tax. Additional Compensation Allowance (ACA) is part of other benefits under Sec. 32(b)(7)(e) of the Tax Code of 1997 which are excluded from gross compensation income provided the total amount of such benefits does not exceed P30,000. It is also not subject to withholding tax pending its formal integration into basic pay.
CASES:
1. COM VS SMITH 2. COM VS LE BUE
7. ALLOWABLE DEDUCTIONS FROM GROSS COMPENSATION INCOME A. BASIC PERSONAL EXEMPTION [RA 9504] Republic Act No. 9504 AN ACT AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT NO. 8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE OF 1997 Salient points of Republic Act No. 9504 Those minimum wage earners shall be exempt from the payment of income tax on their taxable income: Provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. One of the highlights of RA 9504 is the increase in tax exemption, how much is the new annual personal and additional tax exemption as compared to the exemptions in the old tax exemption law?
Example of Benefits Necessary to the Trade/ Business of the Employer: BIR Ruling 013- 02: Outstation Allowance given by the Philippine Gaming Management Corporation to its managerial and supervisory employees (who will be away from the office site for at least 8 hours to visit the lotto franchise holders for repair and/or inspection of equipment) intended to cover meals and trip related expenses is clearly required by the nature of or necessary to the trade or business of the employer and hence, not subject to the fringe benefits tax. It is also not subject to withholding tax.
NEW Personal Exemption
OLD
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CHARMAGNE FERRER
Single Head of the Family Married Additional Exemption For every Qualified Dependent
50,000.00 50,000.00 50,000.00
20,000.00 25,000.00 32,000.00
not more than 21 years old, unmarried and not gainfully employed OR regardless of age, is incapable of self-support because of mental or physical defect NOTE: Only children may be considered dependent for purposes of additional exemptions. Married Individuals Additional exemptions are claimed by only one spouse. Generally, the spouse who is the gross compensation earner is the claimant of the additional exemptions. Where the husband and wife are both compensation income earners, the husband is the proper claimant of the additional exemptions EXCEPT if there is an express waiver by the husband in favor of his wife, as embodied in the withholding exemption certificate. When the spouses have business and/or professional income only, either may claim the additional exemptions at the end of the year. The wife claims the additional exemptions in the following instances: i. husband has no income ii. husband works abroad iii. Legally separated spouses Additional exemptions can be claimed by the spouse with custody of the child or children (but the total amount for the spouses shall not exceed the maximum of four). [Sec 35(B), NIRC] 1. BASIS OF PERSONAL EXEMPTIONS
25,000.00
8,000.00
A. BASIC PERSONAL EXEMPTION (RA 9504, JUNE 17, 2008) There shall be allowed a basic personal exemption amounting to Fifty thousand pesos (P50, 000) for each individual taxpayer. "In the case of married individual where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.
1. CIR VS BAIER-NICKEL 2. PANSACOLA VS CIR
CASES:
II.
ADDITIONAL EXEMPTION FR QUALIFIED DEPENDENT CHILD P25,000.00 BUT NOT LIMITED IN EXESS OF FOUR
"Additional Exemption for Dependents. There shall be allowed an additional exemption of Twenty-five thousand pesos (25,000) for each dependent not exceeding four (4). "The additional exemption for dependents shall be claimed by only one of the spouses in the case of married individuals. "In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of selfsupport because of mental or physical defect.
PERSONAL EXEMPTIONS- are arbitrary amounts allowed by law to be deducted from income to cover personal, living, or family expenses of the taxpayer. These deductions are allowed on the theory that the minimum requirements of subsistence of a taxpayer should be free from tax.
CASE: MADRIGAL VS RAFFERTY
Who is a dependent for purposes of additional exemptions? A legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer:
II. TAXPAYERS ENTITLED TO PERSONAL EXEMPTIONS Who may claim personal exemptions? Citizens (whether resident or nonresident) and resident aliens are
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CHARMAGNE FERRER
allowed to avail of basic personal and additional exemptions. Nonresident aliens engaged in trade or business are entitled to basic personal exemptions only by way of reciprocity, but not to additional exemptions. [Sec. 35, NIRC] Limit of BPE Allowed to NRAETB: An amount equal to the exemptions allowed by the non-resident aliens country to Filipino citizens not residing therein but deriving income therefrom, but not to exceed the amount fixed by NIRC.[In other words, whichever is LOWER] III. CONDITIONS FOR THE GRANT OF BASIC PERSONAL EXEMPTION TO NRA ENGAGED IN TRADE/BUSINESS IN THE PHIL.
1. any resident citizen of the Philippines 2. at least sixty 60 years old, including those who have retired from both government offices and private enterprises, and 3. has an income of not more than sixty thousand pesos per annum subject to the review of the National Economic Development Authority(NEDA) every three years. NRAETB may deduct personal exemption (but NOT additional exemption), but only to the extent allowed by his country to Filipinos not residing therein, and shall not exceed the aforementioned amounts. NRANETB cannot claim any personal or additional exemption. Dependent = legitimate/illegitimate/legally adopted child chiefly dependent upon & living with the taxpayer if such dependent is not > 21 years old, unmarried & not gainfully employed OR if such dependent regardless of age is incapable of self-support because of mental/physical defect i. For married individuals, claimed by only 1 of the spouses ii. For legally separated spouses, claimed only by the spouse who has custody of the children; may be claimed by both as long as they have custody of the children but total amount claimed by both shall not exceed the maximum allowed An illegitimate child is within the meaning of a recognized natural child. Under the provision on additional exemption for dependents, illegitimate children are specifically included under the term dependents.
IV. HEAD OF THE FAMILY, DEFINED Head of the Family 1. Unmarried or legally separated person with a. one or both parents, or b. one or more brothers or sisters, or c. one or more legitimate, recognized natural or legally adopted children living with and dependent upon the taxpayer for their chief support; and 2. Such dependent must be living with AND dependent upon him for chief support 3. Where such brother / sister or children are a. not more than 21 years of age, b. unmarried and c. not gainfully employed, or d. where such dependents regardless of age, are incapable of self support because of mental or physical defect. Note: Senior Citizen Law (RA 7434 as amended by 9257) provides in section 4 that senior citizens shall be treated as dependents provided for in the NIRC, as amended and as such, individual taxpayers caring for them, be they be relatives or not shall be accorded the privileges granted by the Code insofar as having dependents are concerned. Senior Citizen is:
A senior citizen, whether relative or not, living with the taxpayer or not, can be classified as a dependent to make a taxpayer a head of a family not exceeding 4 (RA 7432) In case of married individuals, where only 1 of the spouses is deriving gross income, only such spouse shall be allowed additional exemption. Chief support means more than one half of the requirements for support. Parents, brothers, and sisters, who are qualified dependents may entitle the taxpayer to the personal exemption of P25,000 as head of the family but not to the additional exemption of P8,000. (obsolete?) Note:
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CHARMAGNE FERRER
Personal and additional exemptions are available only to business income and compensation income earners. Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions subject to reciprocity: b) country from which he is a citizen has an income tax law; and c) the income tax law of his country allows personal exemption to citizens of the Philippines not residing therein but deriving income therefrom and not to exceed the amount allowed in NIRC. d) the personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is LOWER. V. WHO ARE QUALIFIED DEPENDENTS? 1) PARENTS 2) BROTHERS AND SISTERS-FULL OR HALF-BLOOD 3) CHILDREN-LEGITIMAE, RECOGNIZED ILLEGITIMATE, & LEGALLY ADOPTED 4) SENIOR CITIZAN 5) BENEFACTOR Qualified dependent children legitimate, recognized natural, illegitimate and legally adopted The proper claimant of the additional exemption would be the husband, being the head of the family except under the following cases: 1) husband is unemployed 2) husband is working abroad like an OFW or a seaman 3) husband explicitly waived his right of the exemption in favor of his wife in the withholding exemption certificate. VI. LIVING WITH, MEANING
situations where taxpayer is away from home on business, or dependent is away at school more than one-half of the requirements for support. Hence, if two children contribute equal amounts to the support of a parent, neither of them qualify as head of the family. VIII. RULES ON CHANGE OS STATUS (SEC.35[C]), NIRC Change of Status [Sec 35(C), NIRC] 1. If taxpayer marries during taxable year, taxpayer may claim the corresponding BPE in full for such year (i.e., no need to prorate the exemption). 2. If taxpayer should have additional dependent(s) during taxable year, taxpayer may claim corresponding AE in full for such year. 3. If taxpayer dies during taxable year, his estate may still claim BPE and AE for himself and his dependent(s) as if he died at the close of such year. 4. If during the taxable year a) spouse dies or b) any of the dependents dies or marries, turns 21 years old or becomes gainfully employed, taxpayer may still claim same exemptions as if the spouse or any of the dependents died, or married, turned 21 years old or became gainfully employed at the close of such year. i. The death of the taxpayer during the taxable year shall not affect the amount of personal and additional exemptions his estate can claim, as if he died at the end of such year ii. If the taxpayer got married or should have additional dependent (child born within the year) during the taxable year, he may claim the corresponding personal exemptions in full for such year iii. If the spouse should die or any of the dependents become twenty one years of age, or become gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if he/she died, or became twenty one years old or became gainfully employed at the close of such year. NOTE: Individuals not entitled to personal and additional exemptions: o Non-resident alien NOT engaged in trade or business
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VII. CHIEF SUPPORT, DEFINED Chief support principal or main support given regularly such that withdrawal will result in destitute life for dependent; includes
CHARMAGNE FERRER
o Alien individual employed by Regional or Area Headquarters of Multinational Companies o Alien Individual employed by Offshore Banking Units o Alien Individual employed by Pertroleum Service Contractor and Subcontractor TIP: When it comes to change of status, the status beneficial to the taxpayer is used for purposes of claiming deductions as long as the taxpayer achieved such status at any time during the taxable period. III. PPHI- PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE, REQUISITES
An amount of premium on health and/or hospitalization paid by an individual taxpayer (head of family or married), for himself and members of his family during the taxable year. REQUISITES FOR DEDUCTIBILITY: a. Insurance must have actually been taken; b. The amount of premium deductible from gross income does not exceed P2400 per family or P200 per month during the taxable year; c. That said family had a gross income of not more than P250,000 for the taxable year; In case of married individuals, only the spouse claiming additional exemption shall be entitled to this deduction. Who may Avail of this deduction: 1) Individual taxpayers earning purely compensation income during the year. 2) Individual taxpayers earning business income or in practice of his profession whether availing of itemized or optional standard deductions during the year.
MERCHANDISING, FARMING AND OTHERS a. SELF-EMPLOYED- DEFINED b. SELF-EMPLOYED 2. INCOME DERIVED BY PROFESSIONALS FROM THE PRACTICE OF PROFESSION a. PROFESSIONALS-DEFINED b. GROSS INCME OF FARMERS 3. PASSIVE INVESTMENT INCOME DEFINED a. INTEREST INCOME INTEREST shall refer to the payment for the use or forbearance or detention of money, regardless of the name it is called or denominated. It includes the amount paid for the borrower's use of, money during the term of the loan, as well as for his detention of money after the due date for its repayment. i. DEFINITION ii. EXAMPLES Interest Income e.g., Interest income from government securities such as Treasury Bills b. RENTAL INCOME i. DEIFINITION ii. SCOPE, EXAMPLES iii. TAXABILIT OF ADVANCE BENEFITS Rental Income Actual rent itself included in gross income (taxable) Payments by lessee of obligations of lessor to third persons considered as additional rent income of the lessor, and therefore included in gross income (taxable). Advance Rentals Receipt of advance rentals by the lessor may or may not constitute taxable income to him depending on the true nature of the so-called advance rentals. If the advance rental is in the nature of prepaid rent (for the lessee), received by the lessor under a claim of right and without restriction as to use, the entire amount is taxable income of the lessor in the year received. If the amount received is in the nature of a security deposit for the faithful compliance by the lessee of the terms of the contract, there is no income to the lessor unless the conditions which make the security deposit the property of the lessor occur (i.e., the lessee violates the terms of the lease agreement)
B. BUSINESS, TRADE, PROFESSIONAL INCOME 1. INCOME COVERED: 1. INCOME DERIVED BY SELFEMLOYED FROM TRADE OR BUSINESS (TRADING, MANUFACTURING,
c. DIVIDEND INCOME i. DEFINITION

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CHARMAGNE FERRER
ii. KINDS 1. COMMON 2. PREFERRED 3. SCRIP 4. INDIRECT 5. LIQUIDATING Dividends Any dividend which is not exempt from income tax, or which is not subject to final tax, is taxable dividend included in the computation of the taxable income (gross income) in the income tax return at the end of the year. NOTE: Liquidating Dividend distribution of all the property of a corporation. It is strictly not dividend income, but rather a sale of shares of stock resulting in capital gain or loss. KINDS OF DIVIDENDS 1) Cash and Property Dividends Individual Taxpayer a. From Domestic Corporations 10% (Sec. 24A) 20% (Sec. 25A2) 25% on gross income (Sec. 25B) b. From Foreign Corporations 5-32% (Sec. 24, 25A1) 25% on gross income (Sec. 25B) Corporate Taxpayer a. Foreign to Domestic Corp. 32%(Sec. 32A) b. Domestic to Domestic Corp. Exempt; intercorporate dividends (Sec. 27D) c. Domestic to Foreign Corp. Exempt (Sec. 28 [A] 7d) 15% subject to the condition stated in Sec. 28 [B] 5. Otherwise, it shall be taxed at 32%. (See Commissioner vs. Procter and Gamble, GR No. 66838, December 2, 1991) 2) Stock Dividends General rule: Not subject to tax because it does not constitute income; it represents transfer of surplus to capital account. (Sec. 73B, 1997 NIRC) Exceptions: 1. Sec. 73B, 1997 NIRC a. there is redemption or cancellation b. the transaction involves stock dividends, c. and the time and manner of the transaction makes it essentially equivalent to a distribution of taxable
dividends. (see Commissioner vs. Court of Appeals, Court of Tax Appeals & ANSCOR, GR No. 108576, Jan. 30, 1999) 2. the recipient is other than the shareholder (Bachrach vs. Seifert, GR No. L-2659, October 12, 1950) 3. change in the stockholders equity results by virtue of the stock dividend issuance. 3) Liquidating Dividends When a corporation distributes all of its assets in complete liquidation or dissolution, the gain realized or loss sustained by the stockholder, whether individual or corporation, is taxable income or deductible loss, as the case may be. (Sec. 73A) A liquidating dividend is not a dividend income. The transaction is considered a sale or exchange of property between the corporation and the stockholder. d. ROYALTY e. PRIZES AND WINNINGS a. PRIZES AMOUNTNG TO MORE THAN P10,000.00 b. WINNINGS EXCEPT SWEEPSTAKES AND LOTTO f. PARTNERS SHARE FROM THE NET INCOME AFTER TAX OF BUSINESS PARTNERSHIP, JOINT ACCOUNT, JOINT VENTURE OR CONSORTUM IV. 1) OTHER SOURCES OF INCOME CG FROM SALE OF SHARES OF STOCK a. IF NOT LISTED AND TRADED THROUGH STOCK EXCHANGE i. NET GAIN NOT OVER P100K=5% ii. AMT IN EXCESS OF 100K=10% b. IF LISTED AND TRADED THROUGH LOCAL STOCK EXCHANGE- OF 1% GROSS SELLING PRICE. THE TAX IS IN THE NATURE OF PERCENTAGE TAX NOT A INCOME TAX. IF LISTED AND TRADED THROUGH LOCAL EXHANGE- OF 1% OF GROSS SELLING PRICE. THA TAX IS IN THE NATURE OF PERCENTAGE TAX NOT AN INCOME TAX ILLEGAL GAINS- GAMBLING, BETTING, LOTTERIES, EXTORTION OR FRAUD RECOVERY OF DAMAGES- TAXALE IF REPRESENTS LOST PROFIT/INCOME BAD DEBT RECOVERY- TAXABE IF IT RESULTS IN THE REDUCTION OF THE TAXAYERS TAX LIABILITY IN THE PREVIOUS YEAR. THE TAX BENEFIT
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2)
3) 4) 5)
CHARMAGNE FERRER
RULE OR THE DOCTRINE OF EQUITABLE BENEFIT APPLIES IN THIS CASE a. IT MUST BE CLAIMED AS A DEDUCTION FROM THE GROSS INCOME IN THE PRECEDING YEAR b. THE REDUCTION RESULTS IN A TAX BENEFIT 6) TAX REFUND- TAXABLE IF IT RESULTS IN THE REDUCTION OF THE TAXPAYERS LIABILITY IN THE PRECEDING YEAR. THIS MEANS THAT THE TAX REFUNDED MUST BE PREVIOUSLY CLAIMED AS DEDUCTION FROM GROSS INCOME. TAX BENEFIT RULE LIKEWISE APPLIES. ANNUAL WITHHOLDING TAX TABLE If Taxable Income is: Not Ove r 10, 1 000 Ove r 10, 2 000 Ove r 30, 3 000 Ove r 70, 4 000 Ove r 140 ,00 5 0 Ove r 250 ,00 6 0 Ove r 500 ,00 7 0 but not ove r but not ove r but not ove r but not ove r but not ove r Tax Due is:
Step 1: Determine your total Gross Income Step 2: Compute for the Taxable Income Step 3: Compute for the Tax Due Note: Make sure that items prior to this are reviewed and understood Given 1: A single employee with an annual gross income of P160, 000, how much is the annual tax due Items Notes Gross Income Less: Personal & Additional Exemption 160,00 0
50,000 Over 70,000 but not over 140,000 = 110,00 8,500 20% of the 0 excess over 70,000 16500 8500+ .20(110,00070,000)
Taxable Income Tax Due
= 30 ,0 00 = 70 ,0 00 = 14 0, 00 0 = 25 0, 00 0 = 50 0, 00 0 =
5% 10% of the excess over 10,000 15% of the excess over 30,000
50 0 + 2, 50 0 +
8, 50 0 +
20% of the excess over 70,000
22 ,5 00 +
50 ,0 00 + 12 5, 00 0 +
Given 2: Married employee with 3 children all under the age of 21, with a spouse that is currently not working on that taxable year. With a monthly salary of P46, 000 and received a 13th month pay of worth P 46,000. At the same time earned a total of P20, 000 on interest bearing account. How much is the annual tax due?
Sample Tax Computation:

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CHARMAGNE FERRER
NOTE: Sec. 27 (c) of the NIRC amended by RA 9337, therefore, PAGCOR is not included in the GOCCC exception and subject to tax. 3. Regional or Area Headquarters under Sec. 22 (DD) NOTE: Regional operating headquarters (ROH) under Sec. 22(EE) shall pay a tax of 10% of their taxable income. Note: ONLY DOMESTIC CORPORATIONS are taxable for income derived from sources within and without the Philippines. All other corporate income taxpayers are taxable only for income derived from sources within the Philippines. CHAPTER XII CORPORATE INCOME TAXATION General Types: 1) Domestic Corporation is created or organized in the Philippines or under its laws 2) Foreign Corporation is organized and existing under the laws of a foreign country (a) Resident foreign corporation foreign corp. engaged in trade or business within the Philippines (b) Nonresident foreign corporation foreign corp. not engaged in trade or business within the Philippines I. DOMESTIC CORPORATIONS A. In general On taxable income from all sources within and without the Philippines o 32% (2000-2005) o 35% (2006-2008) o 30% (2009 ONWARDS) A. CONSIDERED AS CORP. UNDER NIRC 1. PARTNERSHIP, DEFINED. NO MATTER HOW CREATED OR ORGANIZED General Rule: Partnerships, no matter how created, are subject to corporate income tax. General co-partnerships (GCP) are partnerships which are by law assimilated to be within the context of, and so legally contemplated as, corporations. The partnership itself is subject to corporate taxation. The individual partners are considered stockholders and, therefore, profits distributed to them by the partnership are taxable as dividends. Exception: o General Professional Partnerships (GPPs) as such are not subject to income tax. GPP means:
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I. CORPORATION AS DEFINED IN NIRC
A corporation shall include partnerships, no matter how created or organized. Joint stock companies, joint accounts, associations, and insurance companies But does not include, for the purpose of imposing ordinary 35% corporate income tax: o general professional partnerships o joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal & other energy operations pursuant to an operating or consortium agreement under a service contract with the government. Corporations exempt from income taxation (for income realized as such) under RA 8424 1. Those enumerated under Sec. 30. Exempt corporations are subject to income tax on their income from any of their properties, real or personal, or from any other activities conducted for profit, regardless of the disposition made of such income. 2. With respect to GOCCs, the general rule is that these corporations are taxable as any other corporation except: a. GSIS b. SSS c. PHIC d. PCSO [Sec. 27 (C)]
CHARMAGNE FERRER
1. a partnership formed by persons for the sole purpose of exercising their common profession; and 2. no part of the income of which is derived from engaging in any trade or business [Sec. 22(B)]. GPPs, however, are required to file returns of their income for the purpose of furnishing information as to the share in the net income of the partnership which the partners shall include in their individual returns Members of the GPP are liable for income tax only in their separate and individual capacity. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
2. 3. 4. 5.
JOINT STOCK COMPANIES JOINT ACCOUNTS ASSOCIATIONS, OR INSURANCE COMPANIES
CASE: AFISCO INSURANCE VS. COM
B. EXCEPTIONS 1. JOINT CONSTRUCTION VENTURE 2. GPP 3. JV FOR ENGAGING IN PETROLEUM, COAL, GEOTHERMAL CHAPTER XIII CORPORATE INCOME TAXATION
I. CORPORATION (DEFINED IN NIRC) a. PARTNERSHIS NO MATTER HOW CREATED OR ORGANIZED, JOINT STOCK COMPANIES, JOINT ACCOUNTS, ASOCIATIONS OR INSURANCE COMPANIES.
CASE: 1. AFISCO INSURANCE VS. COM.
Kinds of Partnerships 1) General Professional Partnerships Established solely for purpose of exercising common profession and not part of income derived from engaging in trade or business. As an entity, it is not subject to income tax. Partners are liable for income tax on their distributive share (computed by dividing net income of GPP). Each partner shall report his distributive share as part of his gross income. 2) Taxable/Business/Ordinary Partnership All other partnerships no matter how created or organized. Includes unregistered joint ventures and business partnerships. Taxable as an entity o ordinary corporate income tax. Joint ventures are not taxable as corporations when its purpose if o a) undertaking construction projects; b) engaged in petroleum, coal and other energy operation under a service contract with the government. Partners are considered stockholders; therefore, their distributive share is taxed as dividends.
b. NOT INCLUDED IN NIRC DEFINITION OF A CORP. ARE JOINT CONSTRUCTION VENTURE, GPP, JOINT VENTURE FOR ENGAGING IN PETROLEUM, COAL, GEOTHERMAL AND OTHER ENERGY OPERATIONS PURSUANT TO A CONSORTION AGREEMENT WITH THE AGREEMENT II. UNREGISTERED OR REGISTERED PARTNERSHIP- TAXABLE AS COPRORATION PROVIDED THE FF. REQUISITE CONCUR: a) Agreement, oral or written to contribute money, property, or industry to a common fund b) Intention to divide the profits
CASES: 1. EVANGELISTA VS. COM 2. RALLOS VS RALLOS 3. ONA VS COM 4. PASCUAL VS COM 5. OBILLOS SR VS COM
III. JOINT ACCOUNTS OR JV FORMED FOR PROFITS: JOINT EMERGENCY OPERATIONSNB:PP.37 A.
JOINT EMERGENCY OPERATIONS (NO LEGAL PERSONALITY)
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CHARMAGNE FERRER
NB:PP.37
B. JOINT STOCK COMPANIES
NB:PP.38-39
B. RESIDENT FOREIGN CORPORATIONS
CASES: BROKI VS AMERICAN EXPRESS CO.
IV. MAJOR GROUPS OF CORPORATIONS FOR INCOME TAX PURPOSES

NB:PP.37
A. DOMESTIC CORPORATIONS
1. SOURCE OF INCOME: WITHIN THE PHIL. 2. TAX BASE: TAXABLE INCOME 3. TAX RATE: 35% EFFECTIVE JULY 1, 2005; 30% EFFECTIVE JAN. 1, 2009 PER RA 9337 4. SPECIAL RESIDENT FOREIGN CORP. a. INTERNATIONAL CARRIERS i. SOURCE=WITHIN THE PHIL. ii. TAX BASE= GROSS PHIL. BILLINGS iii. TAX RATE= 10% 1. CASES: a. CIR VS TOKYO b. CIR VS. MARUBENI b. OFFSHORE NAKING UNIT c. FOREIGN CURRENCY DEPOSIT UNIT d. DEFINITION OF TERMS
I. SOURCE OF INCOME: W/ OR W/OUT PHIL.

CASES: 1. NV REEDERIF V CIR 2. CIR VS SC JOHNSON & SONS 3. CIR VS PROCTER & CAMBLE
NB. DEFINITION OF TERMS PP. 39-40

CASES: 1. FAR EAST VS NANKAI KOGYO 2. GROSS PHILIPPINE BILLINGS DEFINED
2. TAXBASE: TAXABLE INCOME
NB:PP.40
C. NON-RES. FOREIGN CORP.
3. TAX RATE: 35% EFFECTIVE JAN. 1, 2009 PER RA 9337
4. SPECIAL DOMESTIC CORPORATIONS:

NB:PP.38 A. PRIVATE EDUCATIONAL INSTITUTION I. SOURCE OF INCOME: W/ THE PHIL 2 . TAX BASE: GROSS INCOME
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CHARMAGNE FERRER
D. MCIT see pp. 40-43
G. TAX EXEMPT CORP. UNDER SEC 30 NIRC
CASE: 1. MANILA BANKING VS CIR 2. CIR VS PAL 3. MANILA BANKING VS CIR
E. IAET = 10% (SEC. 29, NIRC; RR 2-2001) pp. 43-45
1. LABOR, AGRICULTURAL OR HORTICUTURAL ORG NOT ORG PRINCIPALLY FOR PROFIT 2. MUTUAL SAVINGS BANKS AND COOPERATIVE BANKS a. REQUISITES i. ________________________________ ________________________________ ii. ________________________________ ________________________________ iii. ________________________________ ________________________________ 3. FRATERNAL BENEFICIARY SOCIETY, ORDER OR ASSOC. a. REQUISITES i. ________________________________ ________________________________ ii. ________________________________ ________________________________ iii. ________________________________ ________________________________ CASE: COM. VS RODWAY 4. CEMENTERY COMPANIES a. REQUISITES i. ________________________________ ________________________________ ii. ________________________________ ________________________________ 1. _________________________ _________________________ 2. _________________________ _________________________ 5. RELIGIOUS, CHARITABLE, SCIENTIFIC, ATHLETIC OR CULTURAL CORP. a. REQUISITES i. ________________________________ ________________________________ ii. ________________________________ ________________________________ 6. BUSINESS CHAMBER OF COMMERCE, BOARD OF TRADE a. REQUISITES i. ________________________________ ________________________________ ________________________________ ii. ________________________________ ________________________________ ________________________________ iii. ________________________________ ________________________________ ________________________________ iv. ________________________________ ________________________________ ________________________________ 32 7. CIVIC LEAGUE a. REQUISITES
F. OTHER CORPORATE TAX RATES

1. COMMON TAX RATES
2. DOMESTIC CORP.
3. RESIDENT FOREIGN CORP. CASE: 1. COM VS MARUBENI 2. BANK OF AMERICA VS CA 4. NON-RESIDENT FOREIGN CORP.
CASE: 1. COM VS PROCTOR & GAMBLE
CHARMAGNE FERRER
Definition: Items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. The basic principle governing deductions from gross income apply to all taxpayers. Because deductions are strictly construed against the taxpayer, one seeking a deduction must point to some specific provisions of the statute in which that deduction is authorized & must be able to prove that he is entitled to the deduction which the law allows. Adequate records should be kept to support the deductions. The deduction claimed must have been subjected to withholding tax, if required. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are to be strictly construed, then it follows that deductions must be STRICTLY construed. He must be able to prove that he is entitled to the deduction authorized or allowed. (Atlas Consolidated Mining & Devt. Corp. vs. CIR, January 12, 1981) WHO MAY AVAIL OF THE DEDUCTIONS? H. TAX EXEMPT GOVT. OWNED AND CONTROLLED CORP. (GOCC) (SEC. 27[c] NIRC AS AMENDED BY RA 9337) 1. 2. 3. 4. GSIS SSS PHIC PCSO 1) Individuals (a) citizen (b) resident alien (c) non-resident alien doing business in the Philippines (d) member of GPP 2) Corporations (a) domestic corp. (b) resident foreign corp. (c) proprietary educational institutions & hospitals (d) GOCCs WHO CANNOT AVAIL OF DEDUCTIONS FROM GROSS INCOME: 1. Citizens and resident aliens whose income is purely compensation income (except for premium payments on health and/or hospitalization insurance); 2. Non-resident aliens not engaged in trade or business in the Philippines; and 3. Non-resident foreign corporation THE FOLLOWING ARE THE ALLOWABLE DEDUCTIONS FROM GROSS INCOME BASED ON CLASSES OF TAXPAYER:
I. TAX-EXEMPT CORP. UNDER SPECIAL LAWS 1. COOPERATIVES ARE EXEMPTED FROM TAXES SUBJ TO CERTIN CONDITIONS UNDER RA 6938; RMC 48-91 2. FOUNDATION CREATED FOR SCIENTIFI ADVANCEMENT IS EXEMPT FROM TAX UNDER SEC. 24 OF RA 2067 ALLOWABLE DEDUCTIONS FROM GROSS INCOME DEDUCTION-
33
CHARMAGNE FERRER
1. Individuals with gross income from employee employer relationship only (gross income only): Premium payments on health and/or hospital insurance (if requisites are complied with) Personal exemptions and additional exemptions
construed, then it follows that deductions must also be strictly construed.
A. CONSTRUED STRICTLY AGAINST THE TAXPAYER

CASE: 1. ATLAS CONSOLIDATED MINING CO. VS CIR 2. WESTERN MINOKO CORP. VS. CIR 3. COM. OF CUSTOMS VS PHIL. ACETYLENE CO. 4. COM. VS. ARNOLDUS CARPENTRY SHOP 5. BPI VS TRINIDAD
2. Individuals with gross income from business or practice of profession: Optional Standard Deduction (OSD) OR Itemized deductions Optional Standard Deductions 10% of the gross income. May be availed only by individuals (except nonresident aliens) who are not purely compensation income earners. This is in lieu of the itemized deductions. Premium payments on health and/or hospital insurance (if requisites are complied with) Personal and additional exemptions
B. COHAN RULE PRINCIPLE (RMC-23-2000) THERE IS NO SHOWING THAT EXPENSES WERE INCURRED BUT CANNOT BE ASCERTAINED DUE TO ABSENCE OF DOCUMENARY EVIDENCE (RMC-23-2000) C. DEDUCTIONS EXCLUSIONS AS DISTINGUED FROM
3. Corporations Itemized Deductions
4. Estates and Trusts Section 62 of the NIRC
I. BASIC PRINCIPLES Basic Principles governing Deductions 1. The taxpayer seeking a deduction must point to some specific provisions of the statute authorizing the deduction; and 2. He must be able to prove that he is entitled to the deduction authorized or allowed. (Atlas Consolidated Mining & Dev. Corp. vs. Comm.) 3. Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as deduction only if it is shown that the tax required to be deducted and withheld there from has been paid to the BIR. (Sec. 34[K]) Note: Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are to be strictly
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D. DEDUCTIONS AS DISTINGUISED PERSONAL EXEMPTIONS
FROM
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E. DEDUCTIONS AS DISTINGUISHED FROM TAX CREDIT

CASE: 1. CIR VS . BICOLANDIA DRUG CORP.
That the final tax imposed under Section 33 hereof has been paid; (ii) A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession; (iii) A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor; (iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction. (b) Substantiation Requirements. - No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (c) Bribes, Kickbacks and Other Similar Payments. - No deduction from gross
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II. KINDS OF ALLOWABLE DEDUCTIONS A. ITEMIZED DEDUCTONS IN SEC. 34 [A] TO [5] AND [M], NIRC CHAPTER VII NIRC ALLOWABLE DEDUCTIONS SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under subsection (M) hereof, in computing taxable income subject to income tax under Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the following deductions from gross income;
(A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses.(a) In General. - There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: (i) A reasonable allowance for salaries, wages, and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee: Provided,
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income shall be allowed under Subsection (A) hereof for any payment made, directly or indirectly, to an official or employee of the national government, or to an official or employee of any local government unit, or to an official or employee of a governmentowned or -controlled corporation, or to an official or employee or representative of a foreign government, or to a private corporation, general professional partnership, or a similar entity, if the payment constitutes a bribe or kickback. (2) Expenses Allowable to Private Educational Institutions. - In addition to the expenses allowable as deductions under this Chapter, a private educational institution, referred to under Section 27 (B) of this Code, may at its option elect either: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation thereof under Subsection (F) hereof. (B) Interest.(1) In General. - The amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayer's profession, trade or business shall be allowed as deduction from gross income: Provided, however, That the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax: Forty-one percent (41%) beginning January 1, 1998; Thirty-nine percent (39%) beginning January 1, 1999; and Thirty-eight percent (38%) beginning January 1, 2000; (2) Exceptions. - No deduction shall be allowed in respect of interest under the succeeding subparagraphs: (a) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed a a deduction in the year the indebtedness is paid: Provided, further, That if the indebtedness is payable in periodic amortizations, the amount of interest which
corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year; (b) If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Section 36 (B); or (c)If the indebtedness is incurred to finance petroleum exploration. (3) Optional Treatment of Interest Expense. At the option of the taxpayer, interest incurred to acquire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. (C) Taxes.(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, shall be allowed as deduction, except (a) The income tax provided for under this Title; (b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credits for taxes of foreign countries); (c) Estate and donor's taxes; and (d) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction. (2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within the Philippines. (3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with:
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(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country; and (b) Partnerships and Estates. - In the case of any such individual who is a member of a general professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such partnership or trust is reported for taxation under this Title. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this paragraph. (4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year. (5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties
satisfactory to and to be approved by the Commissioner in such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require. (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following: (a) The total amount of income derived from sources without the Philippines; (b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such amount to be determined under rules and regulations prescribed by the Secretary of Finance; and (c) All other information necessary for the verification and computation of such credits. (D) Losses. (1) In General.- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions: (a) If incurred business; in trade, profession or
(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.
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The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, however, That the time limit to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss. (c) No loss shall be allowed as a deduction under this Subsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. (2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines, when such losses are not compensated for by insurance or other forms of indemnity. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss; and (3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection: Provided, further, That a net
operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over gross income of the business in a taxable year. Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4) years. (4) Capital Losses. (a) Limitation. - Loss from sales or Exchanges of capital assets shall be allowed only to the extent provided in Section 39. (b) Securities Becoming Worthless. - If securities as defined in Section 22 (T) become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. (5) Losses From Wash Sales of Stock or Securities. - Losses from "wash sales" of stock or securities as provided in Section 38. (6) Wagering Losses. - Losses from wagering transactions shall b allowed only to the extent of the gains from such transactions.
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(7) Abandonment Losses. (a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner. (b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein, shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.
(F) Depreciation. (1) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustees in accordance with the pertinent provisions of the instrument creating the trust, or in the absence of such provisions, on the basis of the trust income allowable to each. (2) Use of Certain Methods and Rates. - The term "reasonable allowance" as used in the preceding paragraph shall include, but not limited to, an allowance computed in accordance with rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, under any of the following methods: (a) The straight-line method;
(E) Bad Debts. (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. (2) Securities Becoming Worthless. - If securities, as defined in Section 22 (T), are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets.
(b) Declining-balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in Subsection (F) (1); (c) The sum-of-the-years-digit method; and (d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner. (3) Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner, the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be binding on both the taxpayer and the national Government in the absence of facts and circumstances not taken into consideration during the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modification. Any change in
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the agreed rate and useful life of the depreciable property as specified in the agreement shall not be effective for taxable years prior to the taxable year in which notice in writing by certified mail or registered mail is served by the party initiating such change to the other party to the agreement: Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for any depreciable and claimed the depreciation expenses as deduction from his gross income, without any written objection on the part of the Commissioner or his duly authorized representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset shall be considered binding for purposes of this Subsection. (4) Depreciation of Properties Used in Petroleum Operations. - An allowance for depreciation in respect of all properties directly related to production of petroleum initially placed in service in a taxable year shall be allowed under the straight-line or declining-balance method of depreciation at the option of the service contractor. However, if the service contractor initially elects the declining-balance method, it may at any subsequent date, shift to the straightline method. The useful life of properties used in or related to production of petroleum shall be ten (10) years of such shorter life as may be permitted by the Commissioner. Properties not used directly in the production of petroleum shall be depreciated under the straight-line method on the basis of an estimated useful life of five (5) years. (5) Depreciation of Properties Used in Mining Operations. - an allowance for depreciation in respect of all properties used in mining operations other than petroleum operations, shall be computed as follows: (a) At the normal rate of depreciation if the expected life is ten (10) years or less; or (b) Depreciated over any number of years between five (5) years and the expected life if the latter is more than ten (10) years, and the depreciation thereon allowed as
deduction from taxable income: Provided, That the contractor notifies the Commissioner at the beginning of the depreciation period which depreciation rate allowed by this Section will be used. (6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business or Resident Foreign Corporations. - In the case of a nonresident alien individual engaged in trade or business or resident foreign corporation, a reasonable allowance for the deterioration of Property arising out of its use or employment or its non-use in the business trade or profession shall be permitted only when such property is located in the Philippines. (G) Depletion of Oil and Gas Wells and Mines. (1) In General. - In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method shall be granted under rules and regulations to be prescribed by the Secretary of finance, upon recommendation of the Commissioner. Provided, That when the allowance for depletion shall equal the capital invested no further allowance shall be granted: Provided, further, That after production in commercial quantities has commenced, certain intangible exploration and development drilling costs: (a) shall be deductible in the year incurred if such expenditures are incurred for non-producing wells and/or mines, or (b) shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and/or mines in the same contract area. "Intangible costs in petroleum operations" refers to any cost incurred in petroleum operations which in itself has no salvage value and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum: Provided, That said costs shall not pertain to the acquisition or improvement of property of a character subject to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this Subsection.
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Any intangible exploration, drilling and development expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adjusted cost basis for the purpose of computing allowable cost depletion. (2) Election to Deduct Exploration and Development Expenditures. - In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and development expenditures accumulated as cost or adjusted basis for cost depletion as of date of prospecting, as well as exploration and development expenditures paid or incurred during the taxable year: Provided, That the amount deductible for exploration and development expenditures shall not exceed twenty-five percent (25%) of the net income from mining operations computed without the benefit of any tax incentives under existing laws. The actual exploration and development expenditures minus twenty-five percent (25%) of the net income from mining shall be carried forward to the succeeding years until fully deducted. The election by the taxpayer to deduct the exploration and development expenditures is irrevocable and shall be binding in succeeding taxable years. "Net income from mining operations", as used in this Subsection, shall mean gross income from operations less "allowable deductions" which are necessary or related to mining operations. "Allowable deductions" shall include mining, milling and marketing expenses, and depreciation of properties directly used in the mining operations. This paragraph shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation. In no case shall this paragraph apply with respect to amounts paid or incurred for the exploration and development of oil and gas. The term "exploration expenditures" means expenditures paid or incurred for the purpose of ascertaining the existence, location, extent or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine or deposit.
The term "development expenditures" means expenditures paid or incurred during the development stage of the mine or other natural deposits. The development stage of a mine or other natural deposit shall begin at the time when deposits of ore or other minerals are shown to exist in sufficient commercial quantity and quality and shall end upon commencement of actual commercial extraction. (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien individual or Foreign Corporation. - In the case of a nonresident alien individual engaged in trade or business in the Philippines or a resident foreign corporation, allowance for depletion of oil and gas wells or mines under paragraph (1) of this Subsection shall be authorized only in respect to oil and gas wells or mines located within the Philippines. (H) Charitable and Other Contributions. (1) In General. - Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations, in accordance with rules and regulations promulgated by the Secretary of finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full. Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full; (a) Donations to the Government. Donations to the Government of the Philippines or to any of its agencies or
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political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA), In consultation with appropriate government agencies, including its regional development councils and private philantrophic persons and institutions: Provided, That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations. - Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; (c) Donations to Accredited Nongovernment Organizations. - The term "nongovernment organization" means a non profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, characterbuilding and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform
with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the even of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term "utilization" means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited nongovernment organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation. - The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions. - Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
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(I) Research and Development.(1) In General. - a taxpayer may treat research or development expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. (2) Amortization of Certain Research and Development Expenditures. - At the election of the taxpayer and in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, the following research and development expenditures may be treated as deferred expenses: (a) Paid or incurred by the taxpayer in connection with his trade, business or profession; (b) Not treated as expenses under paragraph 91) hereof; and (c) Chargeable to capital account but not chargeable to property of a character which is subject to depreciation or depletion. In computing taxable income, such deferred expenses shall be allowed as deduction ratably distributed over a period of not less than sixty (60) months as may be elected by the taxpayer (beginning with the month in which the taxpayer first realizes benefits from such expenditures). The election provided by paragraph (2) hereof may be made for any taxable year beginning after the effectivity of this Code, but only if made not later than the time prescribed by law for filing the return for such taxable year. The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless with the approval of the Commissioner, a change to a different method is authorized with respect to a part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year for which the taxpayer makes the election.
(3) Limitations on Deduction. Subsection shall not apply to:
This
(a) Any expenditure for the acquisition or improvement of land, or for the improvement of property to be used in connection with research and development of a character which is subject to depreciation and depletion; and (b) Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, including oil or gas. (J) Pension Trusts. - An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under Subsection (A) (1) of this Section ) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowed as a deduction, and (2) is apportioned in equal parts over a period of ten (10) consecutive years beginning with the year in which the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. - Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having
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availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
B. OSD IN SEC. 34 (L) NIRC (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent (10%) of his gross income. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross income during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. Notwithstanding the provision of the preceding Subsections, The Secretary of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections (A) to (J) of this Section: Provided, That for purposes of determining such ceilings or limitations, the Secretary of Finance shall consider the following factors: (1) adequacy of the prescribed limits on the actual expenditure requirements of each particular industry; and (2) effects of inflation on expenditure levels: Provided, further, That no ceilings shall further be imposed on items of expense already subject to ceilings under present law.
C. SPECIAL DEDUCTIONS IN SEC 37 AND 38, NIRC AND IN SPECIAL LAWS LIKE BOI LAW [E.O.226] 1. SEC. 37. Special Provisions Regarding Income and Deductions of Insurance Companies, Whether Domestic or Foreign. (A) Special Deduction Allowed to Insurance Companies. - In the case of insurance companies, whether domestic or foreign doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release. (B) Mutual Insurance Companies. - In the case of mutual fire and mutual employers' liability and mutual workmen's compensation and mutual casualty insurance companies requiring their members to make premium deposits to provide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as
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taxable income all income received by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reserves. (C) Mutual Marine Insurance Companies. Mutual marine insurance companies shall include in their return of gross income, gross premiums collected and received by them less amounts paid to policyholders on account of premiums previously paid by them and interest paid upon those amounts between the ascertainment and payment thereof. (D) Assessment Insurance Companies.Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the Government of the Philippines pursuant to law, as additions to guarantee or reserve funds. 2. SEC. 38. Losses from Wash Sales of Stock or Securities. (A) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty (30) days before the date of such sale or disposition and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or by exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contact or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under Section 34 unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. (B) If the amount of stock or securities acquired (or covered by the contract or option to acquire) is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. (C) If the amount of stock or securities acquired (or covered by the contract or option to acquire which) resulted in the nondeductibility of the loss, shall be determined under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner.
3. EXECUTIVE ORDER NO. 226 July 16, 1987 THE OMNIBUS INVESTMENTS CODE OF 1987 III. KINDS OF ITEMIZED DEDUCTIONS
A. BUSINESS EXPENSE 1. Requisites of Business Expense to be deductible 1) ordinary and necessary; 2) paid or incurred w/in the taxable year; 3) paid or incurred in carrying on a trade or business; 4) Substantiated with official receipts or other adequate records. 5) if subject to withholding taxes proof of payment to the BIR must be shown. 6) must be reasonable under the circumstances.
CASES: 1. ATLAS VS. MINING 2. WELCH VS HELVERING 3. COLLECTOR VS PHIL EDUC CO. 4. HOSPITAL DE SAN JUAN DE DIOS VS DIOS 5. ESSO STANDARD EASTERN VS CIR 6. BASILAN VS CIR 7. CIR VS GEN FOODS
B. Kinds of Business Expense 1) Compensation for personal services i. Requisites for deductibility ii. Examples 2) Travelling expenses (Sec.65&66, RR2) i. Requisites for deductibility 3) Representation and entertainment expenses i. Requisites for deductibility 4) Advertising and promotional expenses i. Requisites for deductibility 5) Rent expense (RR 8-9, Oct 15, 1990) 6) Cost of materials and supplies 7) Repairs
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B. INTEREST EXPENSES
Requisites for deductibility
E. LOSSES
CASES: 1. KEUNZE VS CIR 2. PICOP VS CA
C. TAXES
1. EXCEPTION 2. REQUISITES FOR DEDUCTIBILITY CASES: 1. MARCELO VS COLLECTOR 2. CITY OF LUMBER VS DOMINGO
3. PHIL SUGAR VS COLLECTOR 4. PLARIDEL VS COLLECTOR *5. CIR VS PRISCILLA **6. COM VS ASTURIAS **7. PHIL SUGAR VS POSADAS **8. CU UNJEING SONS VS BTA
F. BAD DEBTS
CASES: 1. GUTIERREZ V COLLECTOR 2. COM V AMERICAN RUBBER 3. CEBER PORTLAND VS COLLECTOR
D. TAX CREDIT
CASES: 1. COLLECTOR VS GOODRICH

2. FERNANDEZ V COLLECTOR 3. PRC VS COM 4. PHILEX MINING VS CIR
G. DEPRECATION
46 CASES: 1. BASILAN ESTATES INC
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H. DEPLETION
IV. OSD-OPTIONAL STANDARD DEDUCTION
V. SPECIAL DEDUCTIONS ALLOWED INSURANCE OMPANIES
I. CHARITABLE AND OTHER CONTRIBUTION
VI. ITEMS NOT DEDUCTIBLE J. RESEARCH AND DEVELOPMENT EXPENDITURES
K. EMPLOYERS CONTRIBUTION TO PENSION TRUST
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DEDUCTIBLE INTEREST EXPENSE
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ESTATE AND TRUST
II. TRUSTS
1. ESTATE
III. COMPUTATION OF TAX ON ESTATE AND TRUSTS
CAPITAL TRANSACTIONS
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57

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REVIEWER- TAXATION CLASS of ATTY.

GENERAL PRINCIPLES OF INCOME TAXATION IN THE PHIL. ( SEC.23)

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INCOME AND INCOME TAXATION

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B. SEVERANCE TEST THEORY

CASE: EISNER V MACEMBER

VII. INCOME TAX A. NATURE B. FUNCTIONS C. BASIS- PARTNERSHIP THEORY

CASE: 1. HELVERING V HORT 2. CIR V JULIANE 3. CIR V BOAC

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10. Damage recovery

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X. INDIVIDUAL INCOME TAXATION I. Classification of Individual Taxpayers

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CASE: BROTHERHOOD VS ZAMORA

3. REQUISITES FOR TAXABILITY

It includes: 1. Salaries and wages 2. Commissions 3. Tips 4. Allowances

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1. COM VS SMITH 2. COM VS LE BUE

NEW Personal Exemption

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50,000.00 50,000.00 50,000.00

20,000.00 25,000.00 32,000.00

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c. DIVIDEND INCOME i. DEFINITION

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Taxable Income Tax Due

20% of the excess over 70,000

25% of the excess over 140,000

30% of the excess over 250,000

32% of the excess over 500,000

Sample Tax Computation:

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I. CORPORATION AS DEFINED IN NIRC

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JOINT STOCK COMPANIES JOINT ACCOUNTS ASSOCIATIONS, OR INSURANCE COMPANIES

CASE: AFISCO INSURANCE VS. COM

III. JOINT ACCOUNTS OR JV FORMED FOR PROFITS: JOINT EMERGENCY OPERATIONSNB:PP.37 A.

JOINT EMERGENCY OPERATIONS (NO LEGAL PERSONALITY)

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B. JOINT STOCK COMPANIES

B. RESIDENT FOREIGN CORPORATIONS

CASES: BROKI VS AMERICAN EXPRESS CO.

IV. MAJOR GROUPS OF CORPORATIONS FOR INCOME TAX PURPOSES

I. SOURCE OF INCOME: W/ OR W/OUT PHIL.