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MARJ MONCES
These notes are meant to be shared to all who may benefit from it, provided, that THE USER SHALL NOT IN ANY MANNER
WHATSOEVER DELETE, DIMINISH, OR OTHERWISE REFUSE TO GIVE CREDIT TO THE PEOPLE WHO MADE THIS. Whoever
does such ungrateful and dastardly acts shall most definitely suffer the consequences under the law of Karma and no
amount of prayer can save them from its effects. This was made available through the collective efforts of the following
UST bar examinees and friends:
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I.
II.
III.
IV.
V.
VI.
VII.
VIII.
Income Tax
Remedies (incl CTA)
General Principles
Estate Tax
Donors Tax
Local Tax
Real Property Tax
Tariff and Customs
2005
13
9
7
1
0
3
0
3
2004
5
7
9
1
1
1
0
1
2003
8
2
2
1
2
2
1
1
2002
5
17
1
0
1
1
2
0
2001
12
3
2
2
1
0
1
1
2000
7
8
7
2
1
0
0
2
1999
10
6
0
0
1
0
0
0
I. SALIENT
FEATURES
OF
OUR
PRESENT INCOME TAX SYSTEM:
A. Schedular System of Taxation and Global
System of Taxation
B. Income Tax Situs
C. Determinative Test of Whether Income is
Taxable Doctrine of Constructive
Receipt of Income
D. Basis of Taxable Income
E. Net Income Taxation
F. Gross Income Taxation
G. Pay as you file
H. Creditable Withholding Tax
I. Final Withholding Tax
J. Substituted Filing of Income Tax Return
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
IMPORTANT CHARACTERISTICS OR
FEATURES
i. Income is classified or categorized
Section 32A gives 11 categories of
income (actually 13)
Sec.32. Gross Income- (A). General
Definition- Except when otherwise
provided in this title, gross income
means all income derived from
whatever source, including (but not
limited to the following items:
1. Compensation for services in
whatever form paid, including
but not limited to fees, salaries,
wages,
commissions,
and
similar items;
2. Gross income derived from the
conduct of trade or business, or
the exercise of a profession;
3. Gains derived from dealings in
property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings;
10. Pensions; and
11. Partner's distributive share from
the income of the general
professional partnership
ii. It provides for different tax rules or
treatment.
1. How are dividend income,
royalties, prizes and winnings
taxed? Correlate with sec 24 and
25 where you will find the different
Fringe benefit
is subject to final tax under 33A.
The individual TP is not required
to report this as part of gross
income because the tax withheld
which is a final tax will serve or
constitute a final settlement on
the tax liability on that particular
income.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
iii.
Other income
subject to final tax royalties,
interest on bank deposits, prizes
and winnings.
It imposes different tax rates.
Sec 24 and 25 provide for
different tax rates which are
known as the progressive rates of
income tax.
B. INCOME
TAX
SITUS:
provision is Sec. 23)
(Relevant
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Issue:
SUMMARY:
KIND OF TAXPAYER
RC
NRC
Place
Within
RA
Residence
- They can claim personal and additional
exemptions and as well as deductions
Within
NRA
Place
- In certain cases, they are not allowed to
claim deductions
Within
DC
Nationality
RFC
Residence
Within
NRFC
Place
- they are not allowed to claim deductions
Within
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
This is cited in the case of Filipinas Synthetic Fiber Corp. vs CIR. The SC said that it is not the actual
receipt of income but the right to receive that determines when to include an amount as income in
the gross income. This is the most important pronouncement of the SC in this case which you should
remember. This is consistent with the Doctrine of Constructive receipt of income.
FILIPINAS SYNTHETIC FIBER vs. CA 316 SCRA 480, GRN 118498 October 12, 1999
Under the accrual basis method of accounting, income is reportable when all the events have occurred
that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable
accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to
include the amount in gross income whether the income is taxable.
In Title II, there are specific rules regarding Constructive Realized Cash or Property Dividends.
The Rule is provided in Rev. Reg. #2 Sec.53. It gives us 2 requisites:
1. The income or the amount must be credited to the account of the taxpayer or set apart or
set aside for the taxpayer; and
2. It must be unconditional; that is, not subject to any limitation or restriction. The right to
receive must not be subject to any contingent event
Examples:
a.) Dividend income perceived to be received from Domestic Corporation it is not required
that the stockholder must actually receive the dividends before the 10% tax must be
imposed. As long as it is set apart for the stockholder and the latter could demand the
same w/o any limitation, the 10% tax may be imposed to the corporation
b.) As cited in Rev. Reg #2, the Partner's Share in the Income of the Partnershipit is not
required that the share of such partner be actually received or distributed. As long as the
partner could demand the same w/o any limitation or restriction, such share is already
taxable.
Case: Limpian Investment vs. CIR (17 SCRA 703) --- What is the income considered as constructively
received here? it is the rentals deposited in court by the lessee as a result of the unjustified refusal of the
lessor to
accept the same. The rentals were consigned in court. The rentals deposited in court is
considered as
constructively received by the lessor because the lessor can withdraw the same
without any restriction. So, take note of this constructive receipt of income.
General Rule - the taxable income shall be computed upon the basis of the taxpayer's
annual accounting period ( fiscal year or calendar year, as the case maybe) x x x
if we try to analyze this, it uses the words basis, then taxable income, then computed. It shall be
computed on the basis of what? Answer: your taxable income shall be based on either of these
accounting periods: 1) fiscal year period or 2) calendar year period
1990 Bar: There was a Q. on the distinction between these 2 accounting periods. The importance of this
Q. is that
it tells us that there is a basis in the computation of taxable income. These terms are defined in Sec.22
P & Q.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Sec 22.
Definitions(P) The term taxable year means the calendar year, or the fiscal year ending during such
calendar year, upon which the net income is computed under this Title. x xx
(Q) the term fiscal year means an accounting period of twelve (12) months ending on the
last day of any month other than December.
You must know these terms because individual taxpayers can only adopt the calendar year period,
starting January 1 and as defined under Sec 22 Q, Fiscal Year Period is that accounting period of 12
months ending on any month other than December. Therefore, Fiscal Year period can only be
applied to Corporate TP. Corporate TP have the option either to adopt the calendar year period or
the fiscal year period.
Correlate with Sec.77B, you'll find therein that Corporate taxpayers have the option to adopt
calendar year period or fiscal year period. But in the case of individual taxpayers, there is no
choice but to adopt the calendar year period. So the taxable period will cover only from Jan.1 up
to Dec.31. You must master this so as to correlate with Sec. 229.
Under Sec. 229, and you are Familiar w/ this Doctrine-- the 2 year period for filing tax refund
shall commence to run from the filing of the final adjustment corporate tax return
(_________vs. CIR 205SCRA184). You ought to know whether the Corporation adopted the
fiscal or calendar period.
Theres no problem if the corp. has adopted the calendar period because it is April 15. What if it
adopted the fiscal year period? When can you apply this 2 year period? Sabe, the 2 year period
of filing the tax refund shall commence to run from the filing of the final adjustment corporate tax
return.
If the corporation has adopted the fiscal year period, then it is not April 15. Sec. 77B says
th
th
on the 15 day of the 4 month following the end of the taxable period. So if the fiscal year
th
ended on June 30, you count 4 months---July,August, September & October. On the 15
th
day of the 4 month following the end of the fiscal year period. So that would be on October
15 (2 yr. period starts from this date). So correlation
It is really very important to correlate because questions will be asked on the application of the 2
year period and the problem will state that the corporation has adopted the fiscal year period.
Take note of Sec. 77B, it is not April 15.
NIT- one generally adopted under the present tax code. Bases are Secs. 34 & 35
Under Sec. 34 (Deductions from Gross income), NIT allows deductions. It also grants
exemptions, basic and additional personal exemptions under Sec. 35.
Who are these individual taxpayers whose income shall be taxed at gross, and therefore the
method of taxation is GIT? NRA-NETB
The income of these individual taxpayers is taxed at Gross, therefore, the method or system
that apply
to them is GIT
Who are those individual taxpayers who cannot claim any deductions/exemptions? NRA-NETB
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Corporations covered by Sec. 28B (1,2,3,&4) are nonresident foreign corporations. So, corporate
taxpayers who cannot claim deductions are NRFC. The method of taxation applied to these
corporation is, no doubt, GIT.
Simply put, NIT is the Rule. GIT is the exception to the rule. Exception in the sense that it applies
only to these 2 kinds of taxpayer:
1. Individual -NRA-NETB; and
2. Corporate- Nonresident foreign corporation
1997 Bar:
Explain NIT
2000 Q#10Define Net or Taxable Income (the word 'taxation is not present here)
1983 BarExplain the meaning of GIT
1995 Q#1Define Gross income
the use of the word taxation' really matters
In 1995 Q#1- Define Gross income. 1 examinee answered: One where the tax is imposed at
gross. This is not really correct. This maybe partly correct if the Q. asked was that of 1983 Bar,
because if we speak of GIT, that is really the method or system
If the Q. is the Definition of Gross Income, then you really have to enumerate the items under
Sec. 32 A
GIT- is a method or system that allows no deduction; it grants no exemptions. In other words, the tax base
or the
basis of the tax rate is Gross Income
NIT- not the same with Net Income or taxable income. Sec. 31 ( one sentence provision) defines Net or
Taxable
Income. Do not confuse this with the concept of NIT because the word 'taxation'
connotes method or system.
Sec. 31-Taxable Income Defined- The term 'taxable income' means the pertinent items of gross
income
specified in the tax code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this code or other special laws
So what then is Net Income Taxation? How does it operate? ---NIT allows deductions and grant
exemptions. The basis of the tax rate is taxable/net income as defined under Sec.31
Probable Bar Q. here: What are the distinctions between GIT and NIT?
Answer:
1. As to the claim for deductions or exemptions: GIT-No exemption/deductions; NIT-allows
deductions and grants exemptions;
2. As to the basis of the tax rate: GIT-Gross income; NIT- Net/Taxable income;
3. As to the applicability under the tax code:
GIT applies to 2 taxpayers: 1) NRA-NETB(Sec.25 B,C,D,&E) and 2) NRFC (Sec.28
B(1,2,3,&4))
NIT applies to the following taxpayers: 1) RC; 2) NRC; 3) RA; 4) NRA-ETB; and
Corporate:1) DC; 2) RFC
Q.: Are you in favor for the adoption of GIT? Congress is proposing a change from NIT to GIT
this may be a bonus Q. but your answer or opinion must be based on tax. Point out
significant advantages. There's no such thing as perfect system because both have their
own disadvantages.
As regards NIT, it allows deductions and grants exemptions. Therefore the tax paid is less. I
think, we can develop advantages on this.
Try to recall these, as these are the characteristics or features of NIT:
1) To the taxpayers, they may consider this as fair, just and equitable system of taxation.
One or two sentence will suffice and you have to explain that. Favorable/fair in the sense
that taxpayers can claim those business connected expenses as deductions, and
taxpayers can also claim exemptions;
2) This brings us to the next advantage, as cited in Sec. 2 (State Policy) of RA 8424. this is
one of the underlying purposes of the amendments. It says that it provides for equitable
relief to a greater number of taxpayers in order to improve levels of disposable income
and increase economic activity.
o Equitable relief may refer to those allowable deductions under Sec.34 and personal
exemptions under Sec.35. The effect of this is that it will increase the levels of their
disposable income. If taxpayers can claim those business related expenses as
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
deductions, they may file their income tax return religiously and they may be
encouraged to engage in income producing activities. This is the amplification of the
provision under Sec. 2 of RA 8424 when it says increase economic activity. That will
be the effect of that grant of deductions and exemptions
3) We can also cite as an advantage, that NIT minimizes fraud. In what sense?
o Through this tax audit examination of the taxpayers' books of accounts. The
taxpayer can not just claim expenses not supported by receipts. BIR will check
whether these expenses are indeed business connected or not. This is what we
called counter checking. If you incurred expenses, make sure that it is supported
by receipts or is connected to business otherwise the BIR will disallow the same. So
it minimizes fraud in this context.
The result of this is that, if we have fair, just and equitable tax system, taxpayers will
religiously file their income tax returns and fraud will be minimized. This will generate more
revenues to the Govt which is really the objective of every system of taxation
Q: if you are against NIT (in effect, you are for the adoption of GIT) what must be your reasons
here?
Take note of the 2 salient features of GIT:
a) No deductions are allowed and no exemptions may be granted; and
b) The tax basis is the gross income. Have these in mind.
Reasons:
1) The complaint of showbiz people under the present system is that, according to them,
we have a complicated system because there are so many requirements that must be
complied with and they could not just determine their taxable income-services of CPAs
are still needed. But here in GIT, since no deductions are allowed, this will simplify our
income tax system. In what sense? You can easily compute your income tax due or
payable. Just multiply your Gross income by the tax rate and that is the Income tax due.
It dispenses with these several requirements on the claims for deductions. And this is
consistent with or in harmony with the sound fundamental principle of ADMINISTRATIVE
FEASIBILITY. GIT makes our system sound in the sense that it is capable of effective
enforcement or implementation.
2) So what would be the effect of this? If we have a simplified income tax system which
can be easily understood by common citizens, more will be religiously filing their income
tax returns because they can easily understand the system, they can easily file their tax
returns w/o the assistance of a CPA or tax experts.
3) The most important about GIT, as cited by the sponsor of the proposed Bill is that it
minimizes (we
cannot use the word eradicate because this is next to M I 3) it
minimizes graft and corruption.
How do we explain this? The evil of NIT, is that there's that abuse of discretion; margin of
discretion on
the part of the BIR examiner. They abuse it by collaborating with the
taxpayer and allow deductions not supported by receipts. This reduces the taxpayer's liability.
Because of this margin of discretion, there's that measure to the effect that this should not
be the source of graft and corruption. So, no more deductions and no more exemptions must
be allowed so that the BIR cannot make use of the same. Here, it can no longer be the
source of graft and corruption, so it minimizes the same.
The result of this GIT is that, it will generate more revenues to the Govt. which is really the
objective of every system of taxation.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
The disadvantage of GIT is that there's always tax evasion. In NIT, tax evasion may be brought
about by graft and corruption. In GIT, it is the employment of fraudulent methods, schemes or
devices to understate Gross income. Also, if you are a businessman who cannot claim those
business expenses as deductions, you may find this system as unfair. In what sense? Even
legitimate expenses cannot be classified as deductions.
Sec 24 A, you'll find 32% progressive rate in 2000. if we will formally adopt this GIT, do you think
this tax rate will be retained?
If this will be retained, that would make the system unjust. These tax rates are quite high up to
32%. but it allows deductions, so there's a balancing feature. But once we formally adopt GIT,
we cannot retain the same. We really have to reduce the rates to make this system just. In my
view, it must not exceed 10%. Eliminate deductions, no more Sec. 34, but we have to reduce the
rates.
In my view, it should be modified income tax system. I'm not really in favor of pure Net Income or
pure Gross income taxation. It should be modified income tax system.
2001 Q#4. This will test your knowledge about the filing of tax return by a corporation. I will modify:
How often does a Domestic Corporation file its Income Tax Return for income earned during a single
year. Explain the process. What must be the reason for such procedure? Answer: LIFEBLOOD
DOCTRINE---Hehehehehe
Refer to Secs. 75 and 76. Is it annually? No. How often, Once? No
o Sec. 75 explains the process. It says every corporation shall file in duplicate a quarterly
summary declaration of its gross income and deductions on a cumulative basis for the
preceding quarter or quarters, upon which the income tax, as provided in Title, shall be
levied, collected and paid. X X X
So, four times. The word used is Quarterly. All Domestic Corporation file their income tax
st
nd
th
quarterly. Quarterly, so 1 Quarter, 2 Quarter, 3rd Quarter and the final (4 ) quarter requires
the filing of Final Adjustment Return (Sec. 76)
What are the words that you should say in your answer aside from Quarterly? You should say in
your answer, that under Sec.75, it requires the Quarterly declaration of gross income and
th
deductions. As regards the 4 Quarter, it requires the filing of final adjustment tax return.
Now, what do you think is the reason for the procedure? LIFEBLOOD, (hehehehe) If we allow
the Corporation to file their income tax returns annually, what would be the effect? The effect is
that the Govt would run out of funds before it can collect. That's the reasonthe timeliness of
collection of corporate income tax...Medyo may Lifeblood pa rin
Answer should be: The reason for this procedure is to ensure timeliness of collection of
corporate income tax because (lifeblood na) taxes are the lifeblood of the Govt...hehehehe.
There should be no undue delay
What if it is an individual? How often does an individual taxpayer file his income tax return? 4X?
Hehehe
Only Once (Annually) (Sec. 56)
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
What is the reason why individual taxpayers are only required to file their ITR Annually?
LIFEBLOOD na naman,hehehe...iba na cguro to. If we allow them to file their ITR Quarterly, sa
tingin mo kaya the BIR can check compliance with such? Millions of individual taxpayers will be
filing their ITR quarterly. The reason here is to make our system capable of effective
implementation or enforcement consistent with the sound principle of Administrative Feasibility
medyo mahirap to. 1995 Bar- 5 Q. on these: Creditable Withholding tax system (CWTS) vs. Final
Withholding tax system (FWTS):
the common feature with these withholding systems is that there's a withholding agent
authorized by the Govt to deduct and withhold the tax
1) As to income subject of the system:
As regards CWTS, Sec. 78 enumerates those items subject to CWTS.
Classic example of this system is Compensation Income. The employer is the
withholding agent, the employee is the recipient of the income. Under this system, the
employer will deduct and withhold the tax on that compensation income. Remember that
the employee is required to include the income in his gross compensation income
On the other hand, classic examples of income subject to FWTS are dividends received from
Domestic Corp., Royalties, Prizes more than 10,000, Winnings, and Interest income on bond
deposit. If you are the recipient of these, you are no longer required to include these incomes
in your gross income.
The word 'final' connotes that the tax withheld will constitute as a final and full settlement
(FAFS for brevity) of the tax liability on that income.
2) As to whether or not the income should be reported as part of the gross income:
According to CWTS, since the income will not constitute as a FAFS of the tax liability on that
income, the recipient should report the said income in his gross income.
this is provided for in Rev. Reg. 2-98. it is said therein under Sec 2.54, that an income
subject to CWT must still be reported by the recipient as part of his gross income
On the other hand, the said Rev. Reg. 2-98 also provides that in the case of FWTS the
recipient may not report said income as part of his gross income because the tax withheld
will constitute as a FAFS of the tax liability
On the other hand, in FWTS, the tax withheld cannot be claimed as a tax credit. The Final
Tax Withheld will constitute as a FAFS on the tax liability on said particular income
For instance, the stockholder is not required to report as part of the gross income the
dividends received from a domestic corp. The reason is because the 10% tax withheld
on the amount will constitute as a FAFS of the tax liability on the dividend income
Fringe Benefit under Sec. 33 A is subject to Final Tax, therefore this is also governed by
FWTS. This is another example of income subject to FWT
2003 Bar: Who is legally obliged to pay Fringe Benefit Tax? This Q. is not about the
definition of FB but requires your knowledge about withholding tax. Rev. Reg. 398
Sec. 2(2) say that the employer is the one legally obliged to pay the tax
person legally obliged to pay the tax---is the one who in case of nonpayment may be
legally demanded to pay the tax. If the Final tax on FB will not be paid, the BIR will not
go after the employee but to the EmployER. This is the same in the case of interest on
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
bond deposit. In case of nonpayment, the BIR will not run after the stockholder but to
the corporation. The Corporation being the withholding agent is the one legally obliged
to pay the tax. The rule is that it is the withholding agent that is legally obliged to pay
the tax
4) As to the Filing of Tax Return:
In the case of CWTS, the compensation earner reports the income received as part of
his gross income. Necessarily , he has to file an ITR
Whereas if the only source of income is subject to Final tax, you need not file an ITR
These are the provisions on individual whose sole income is one that is subject to final tax (Sec. 51
A(2C)):
1. 25% final tax under Sec. 25 B-NRA-NETB
2. 15% final tax under Sec. 25 C, D, and E (Alien employed by Multinational Companies, offshore
banking unit and petroleum service contractor or sub contractor)
Bar Q: Why are NRA-NETB not required to file ITR? This can be answered by 1 sentence. It is
because their income is already taxed as a Final tax.
So as to the 2 Questions:
1) Who are these individual taxpayers who are not required to file ITR? NRA-NETB
2) Why are NRA-NETB not required to file ITR? Because they are subject to a final tax rate. Final
tax withheld will constitute as a FAFS of the tax liability
these are all Nonresident Foreign Corporations. Apply the Rule that they are not required to file
ITR because the tax withheld constitutes as a FAFS of the tax liability
Rev. Reg. 3-2002 (1,2,3,4). the effect of this system is that you are no longer required to file ITR.
Requirements for one to avail of this system:
1. You must be a compensation earner, meaning that your income is derived solely on
compensation. If you have other sources of income such as business, trade or profession, you
are still required to file an ITR;
2. You must have only 1 employer in the Philippines. So if you have 2 or more employers, you are
not allowed to avail of this system;
3. The tax withheld by the employer must be the same or equal to the tax due or payable after
applying the tax rate.
For example: tax due is 250,000. Make sure that the exact amount is withheld by the
employer. Otherwise, you will be required to file ITR.
4 The employer must file an information return (BIR Form 1704) showing therein the income tax
withheld on the compensation income.
Rev. Reg. 3-2002 declares that is tantamount to a substituted filing of ITR by the employees hence
they are no longer required to file ITR.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Then you are no longer required to file ITR. But if your compensation income is more than
60,000 even if you satisfy requirements 2 & 3, you are still required to file ITR
these rules have been modified by Rev. Reg. 3-2002. Under 3-2002, it imposes no limitation as
to the amount. What is important is that as long as the tax withheld is the same with the tax due,
irrespective of the amount, this new system applies.
is this not an impermissible encroachment on administrative prerogative because it is a mere
regulation? BIR has the power to promulgate regulations for the enforcement of rules as part of
its administrative functions. Nobody questioned this.
II.
This is precisely the title of Sec. 23 - General Principles of Income Taxation in the Philippines
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 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;
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
As regards Corporate Taxpayers: Q. on whether they can claim deductions cannot also be answered
by Sec. 23. We really need to refer to Sec. 27 & 28 which give us the tax rates and the tax base
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
they can only be taxed on their income derived from sources w/in; they cannot claim
deductions because tax base is Gross income; and the tax rate has been reduced to
15%
Q: Mr. Corpuz stayed in the Philippines for more than 180 days. How will his income be
taxed if he was employed by Regional Headquarters of Multinational Company? Would
your answer be the same as in the previous bar exam Question?
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
You have to change only the tax rate. As to the sources and tax base, the rules are
still the same
SUMMARY:
SOURCES OF INCOME
(Sec. 23)
TAX BASE
(Sec. 24 and 25)
TAX RATE
(Sec. 24 and 25)
RC
Progressive rate
5-32%
NRC
Within
(1 1 98)
Progressive rate
5-32%
RA
Within
(1 1 98)
Progressive rate
5-32%
NRA ETB
Within
Progressive rate
5-32%
NRA NETB
Within
Within
15 % FINAL TAX
Alien
Individual
Employed
by
Regional or Area HQ
and
Regional
Operating HQ of
Multinational Co.
par.C
2.
Alien
Individual
Employed
by
Offshore
Banking
Units. par D3.
Alien Ind Employed
by
Petroleum
Service Contractor
and Subcontractor
par E
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Just like NRA-NETB, there are also special kinds of Corporate taxpayers, and this is yet
to be asked in the Bar:
[B][2] Nonresident Cinematographic Film Owner, Lessor or Distributor-25% FT
[B][3] Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals4.5%FT
[B][4] Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment7.5% FT
1994 Bar: The Secretary of Finance upon the Recommendation of the CIR issued BIR
regulation using Gross Income as the tax base for Corporation doing business in the
Philippines. Q: Is this BIR Regulation valid?
It is not a valid BIR Regulation for the simple reason that it runs counter to the
provisions of the tax code. The SC, in one case held that the Requisites for the BIR
Regulations to be valid are as follows ( CRUP):
a. Consistent or in harmony with the provisions of the tax code or the law it seeks
to implement;
b. Reasonable;
c. Useful and Necessary; and
d. Published in the OG or in a newspaper of general circulation
You need not cite the name of the case. It is enough to use the following words: it has been
held that' or settled is the rule that, or it is jurisprudentially settled that .... BIR Regulation
is valid if it is in harmony or consistent with the provisions of the tax code. The BIR
Regulation in question contravenes the provision of the tax code that the tax base for the
corporation doing business in the Philippines is taxable income. It is a mere interpretative
Rule intended to carry out the provisions of the tax code. It cannot alter, supplant, or modify
the provisions of the tax code. The BIR Regulation in question therefore, constitutes an
impermissible encroachment on legislative prerogative.
SUMMARY:
GENERAL PRINCIPLES OF CORPORATE INCOME TAXATION
KINDS OF
CORPORATE TP
SOURCES OF
INCOME (Sec. 23)
TAX BASE
(Sec. 27 and 28)
TAX RATE
(Sec. 27 and 28)
DC
35%
RFC
Within
35%
NRFC NETB
Within
Within
25 % FINAL TAX
Special
NRFC NETB:
(Sec. 28B2,3, and 4)
1. Par. B2 Nonresident
Cinematographic
Film
Owner,
Lessor
or
Distributor.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2. Par. B3 Nonresident
Owner or Lessor of
Vessels Chartered by
Philippine Nationals.
3. Par. B4 Nonresident
Owner or Lessor of
Aircraft, Machineries and
Other Equipment.
Within
Within
SPECIFIC RULES:
NRA-ETB vs. NRA-NETB:
NRA ETB
NRA NETB
- not allowed
RFC vs NRFC:
RFC
NRFC
- not allowed
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
III.
GROSS INCOME:
Sec. 32 A must be memorized. There are 13 items here
Keywords:
Section 32A Except when otherwise provided, GI means all income derived from whatever source,
including but not limited to the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions and similar items;
2. Gross income derived from the conduct of trade or Business or the exercise of a
Profession; (two items here);
3. Gains from dealings in Property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings; (2 items also)
10. Pensions;
11. Partners distributive share from the net income of the general professional partnership;
1995 Q#1- Define Gross income for purposes of income tax? As modified in the next bar: State the
General Definition of Gross income
you can easily answer these questions by the keyword. But if you cannot recall all the
enumeration, then answer in paragraph form
Fringe Benefit is a form of compensation income. Under the old tax code, Fringe Benefit was taxed
as part of the Gross compensation income of the employEEs. But Sec. 33 modified or changed this
rule FB is now subject to Final Tax.
Sec. 35, provides the rule that personal and additional exemptions are deductible from the Gross
compensation income
1977 & 1978 Bar: Q was so basic: Define Compensation Income.
How do you answer this Q? Compensation for services in whatever form paid, including but not
limited to fees, salaries, wages, commissions, and similar items---this is not really the answer to
this Q.
the definition is found in Rev. Reg. 2-98. it defines compensation income in 1 sentence: All
remuneration for services rendered by an employee for his employer under an EE-ER
relationship
unless specifically excluded under the Tax Code
The meaning of this is that, there are really tax exempt or excluded gross compensation income
from gross income and you will find this in Sec. 32 B. This implies that not all compensation for
services rendered may be subjected to tax, there are those that are tax exempt and should be
excluded from gross income under Sec 32 B.
Example: in the case of services performed by an independent contractor, in the absence of
EE-ER relationship, (actually there's really no EE-ER relationship), the income received by
the independent contractor shall be recorded as trade or business income. Professional
income should not be included in the gross compensation income in the absence of EE-ER
relationship.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Keyword: AC-DC
Implications:
To the employer, it may be treated as an expense; and to the employee, as income
Q: As to assumption that the beneficiary is the heirs, family, executor or administrator of the
estate: Can the employer claim deductions?
Under Sec. 34 A (1) (a,1), the provisions say other forms of compensation for personal
services rendered. So this includes Life Insurance premiums paid by the employer under
ER-EE relationship. So, YES.
Is the amount taxable to the Employee?
Qualify: Bear in mind that there is a new rule --- Sec. 33 B (10). So:
1. It is taxable FB and therefore subject to Final tax if the insured employee is a
supervisor or managerial EE;
2. If the insured EE is a rank and file EE- that's the time to apply Sec. 32 A(1) when it
says in whatever form paid. So, that may include Life insurance premium. The
employee here must be rank and file
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
As to second the assumption that the employer is the beneficiary: Can the employer claim it as a
deductible expense?
No. Why? Because upon the death of the EE, the proceeds will go to the ER, being the
beneficiary. Shall we allow him to deduct the premiums paid? No because it is just a mere
return of capital. The Proceeds received by the ER is a mere return of capital (of the
proceeds paid by him). That's the reason why in Sec. 36 A (4), whether the EE is directly or
indirectly designated as beneficiary, Sec. 36 A(4) says, NONDEDUCTIBLE.
Is the amount taxable to the employee? This is not taxable to the employee for the simple
reason that his family will receive no benefit. His estate will receive no benefit. The proceeds
will go the employer. If there's no benefit received, there's nothing to tax. There's no basis
for imposing the same
EMPLOYER
EMPLOYEE
QUALIFY: if the employee is a:
Employer
Rank-and-File EE it is considered a
COMPENSATION INCOME and is therefore subject to
the progressive rate of 5-32%
2) As a Taxable Donation:
If no consideration was given; the obligation was simply condoned, renounced by
the creditor-employer; then that may amount to a taxable donation. There is a
donation in accordance with Art. 1270 of NCC: it says if it is gratuitous in character,
it shall be governed by the rules on donation. Also, under Rev. Reg. 2---- it says if
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
the cancellation or forgiveness was made w/o any consideration, that may amount to
donation
Effects:
1. If there's a donation, the creditor becomes the donor. The debtor becomes the
donee or the recipient of the liberality
2. The creditor-donor is subject to donor's tax
3. the debtor-donee is no longer subject to donee's or inheritance tax as the same
was abolished by PD 69 on Nov. 24,1972
4. It is not also subject to income tax because Sec 32 B(3) says that donations/gifts
shall be excluded from Gross income. So the debtor-donee is neither subject to
donee's or income tax
1997 Bar- An insolvent company has an outstanding obligation to its creditor for
100,000. Since the debtor could not pay its obligation, the creditor agreed to accept
through dacion en pago document, property valued at P30,000. Q1: What is the tax
effect on the discharge of the unpaid balance on the debtor-corporation? Explain.
The unpaid balance discharge here is 70,000; and the transaction referred to in
the Q is the condonation of the unpaid balance
The creditor, having received no consideration as regards the 70,000 unpaid
balance, is liable to pay donor's tax as the transaction gives rise to a donation.
The debtor becomes the donee, the recipient of the liberality. He is not subject
to donee's tax as donee's tax was abolished by PD 69. Neither is he subject to
income tax, as donation under Sec. 32 B (3) is excluded from Gross income
Q2: in so far as the creditor is concerned, tax-wise, how is it affected as a result of
that transaction?
The creditor becomes the donor--The one who canceled or renounced the
obligation without receiving any consideration. As donor, he is subject to donor's
tax
3) The other tax implication is declared by Rev. Reg. #2 Sec. 50., that may amount to
capital transactions. This may take the form of INDIRECT DISTRIBUTION of dividends
by a corporation. Hence, the creditor here must be a corporation and the debtor must
be a stockholder. That must be the situation.
Under Sec. 43 of the Corporation Code (Provision on declared dividends)- Dividends
that may be declared may be in the form of cash, property, stock, liquidated, script
and indirect dividends.
Indirect dividends may arise when a corporation condoned or canceled the
obligation of the stockholder.
This is a form of indirect dividends in the sense that it is made through the
cancellation or forgiveness of stockholder's obligations.
On the part of the stockholder, such amount condoned or canceled is a taxable
income subject to 10% FT.
On the part of the Corporation, this is considered as Interest on Capital.
Is this interest deductible? 1999 Bar #14- Q. on whether or not this Interest is
deductible or not?
De Leon is of the opinion that it depends upon the circumstances. He is of the
view that if the declaration of the dividends is dependent upon surplus profits,
there is no obligation to speak of, so it is not a deductible interest. On the other
hand, if the declaration is not dependent upon surplus profits, there is an
obligation to speak of, in this case, it is a deductible interest.
In our suggested answer in the 1999 Bar, we did not qualify our answer because
interest on preferred shares of stock is considered as interest on capital. In your
book, I did mention about this RMC 17-71, July 12, 1971, w/c enunciates the
rule that interest on capital, and that may include interest on preferred shares of
stock, is a non-deductible interest. So, we can apply this, that it may be treated
as interest on capital. And it is now an absolute rule that interest on capital is a
non deductible interest. So, the corporation cannot claim this as a deductible
interest. Since it partakes the nature of a dividend, though indirect, and since
dividend under the tax code if received by individual taxpayer is subject to 10%,
20% or 25% Final tax depending on the kind of the taxpayer receiving the same,
said indirect dividend is therefore subject to the same rate as if it is a dividend
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
SUMMARY:
TAX IMPLICATION OR CONSEQUENCE OR INCIDENCE OR EFFECT of CONDONATION
Rev. Reg. 2, Sec. 50 must be made in consideration for services rendered on
account of an E-E relationship.
ER is the creditor and the EE is the debtor.
COMPENSATION INCOME
Article 1270 of the NCC if the creditor condones the obligation of the debtor
without receiving any consideration. It is considered as a taxable donation because
only the creditors liberality is the consideration involved.
Q: Does it mean that the donor and the donee will be made to pay donors tax?
A: NO. PD 69 abolished donee's and inheritance tax which became effective on
Nov. 24, 1972.
TAXABLE DONATION
When the debtor is the corporation and the creditor becomes a stockholder in
exchange of the condonation of the debtors obligation
-considered as indirect dividends
The amount condoned is subject to 10% FINAL TAX if the corporation is a
DC.
CAPITAL TRANSACTION
The corporation (creditor) cannot claim the same as a deduction. When
corporations declare dividends, it can be considered as interest on
capital. Rev. Memo. Circ. 17-71, effective on July 12, 1971, provides
that interest on capital which includes stocks or dividends ARE NOT
deductible.
Favorite Bar Q: Convenience of the Employer Rule (Hernandez Doctrine) 1 SCRA 649
This is the justification that may be used in granting exemptions from income tax on certain
benefits that may be received under an ER-EE relationship
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
As far as rank and file EE are concerned this is the rule: Housing units covered by the
exemption are those situated within the business premises of the ER. RAMO 1-87
provides 2 Conditions which are not really found or covered by RR 3-98:
1. It must be situated w/in the business premises of the employer
2. this must be given as condition of employment
If you read Rev. Reg. 3-98, it imposes no conditions. These requisites are provided
only in
RAMO 1-87 and these requisites apply only to rank and file EE.
MEAL ALLOWANCE
Traditional rule is: As long as it is given within the business premises of the employer and it is
justified by the Convenience of the Employer, it is tax exempt.
New Rule: Rev. Reg. 10-2000 (Meal Allowance for Overtime Work)---- It says it is exempt
provided that the meal allowance for overtime work does not exceed 25% of the basic minimum
wage; and it applies only to managerial/ supervisory employee because this is not provided
under RAMO 1-87
Define Fringe Benefit (FB): Sec 33 has 3 paragraphs: Par A (Imposition of Tax Rates) is the
most difficult one (this is only proper for CPA Board exams). You will not be asked to compute
but you might be asked to enumerate those tax exempt FB
In Par. A, you must note that the tax base is the Grossed-up monetary value; the tax rate is
a FT (32, 25 or 15%). Multiply the 2, and the result would be the FB tax
Fringe Benefit
1) may be in cash or in kind; it may be goods, services or other benefits;
2) the giver/source must be the employer. So, the benefits are given under an ER-EE
relationship;
3) Recipient must be a managerial or supervisory employee
Q: Suppose the recipient is a rank and file employee?
There's an author who is in the view that the benefits received by the rank and file
employee is exempt from the income tax. Do not follow this!
Under Sec 33 C, it states the following FB are exempt from the tax imposed therein
(1,2,3, &4). And the tax imposed on taxable FB is a FT.
The correct interpretation of this is that FB given to rank and file employee are not
subject to FB Tax which is a Final tax but it does not mean that it is also exempt from the
income tax. That can still be taxed as part of the gross compensation income. The FB
should be reported as part of the Gross Compensation income.
Example: A managerial employee's basic salary is 75,000/month. He received housing
benefit the monetary value of which is 25,000/ month. How do we tax this 75,000
representing basic salary?
Do not be confused. It does not mean that all benefits/salaries received by the
managerial EE are subject to FT. Excluded from the imposition of FBT is the basic
salary of the managerial EE.
If you read Sec. 33B, it is not clear on this. But Rev. Reg 3-98 clarifies it. It says other
than basic salary. This is because basic salary is taxed as Compensation Income
subject to 5-32%. It is only the housing benefit that is subject to FBT.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Take note of this because the Q may be framed like this: are all salaries & wages
received by the managerial EE subject to FBT? No, you should exclude the basic salary
because it is subject to 5-32% progressive rates.
Taxable Fringe Benefits: Sec. 33B Means any good, service or other benefit
furnished or granted by an employer
in cash or in kind, given in addition to the basic salary
of an individual employee, EXCEPT rank-and-file, such as, but not limited to the following:
Keywords: HEV HIM HEEL
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel maid, yaya, driver etc.
5. Interest on loan at less than market rate (12% benchmark rate) to the extent of the
difference between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the employer for the employee
in social and athletic clubs or other similar organizations
7. Holiday and Vacation expenses
8. Expenses for foreign travel
9. Educational assistance to the EE or his dependents
10. Life or Health Insurance and other non-life insurance premiums or similar amounts
in excess of the law allows.
Item #5: The actual rate of interest must be less than the market rate. According to Rev.
Reg. 3-98, market rate refers to 12% benchmark rate
If the actual rate of interest is not less than 12%, or 12%, or more than 12%, then there's
no taxable FB
Example: Loan amounting to 300,000 granted to managerial employee. Situation that
may arise:
1) If the actual rate is 14 %----then it does not result to taxable interest benefit
2) Employer imposed 12%---- still it does not result to taxable interest benefit
3) 6%--- then it is taxable interest benefit
4) 0%--- also taxable interest benefit
Rationale: Rate is peg at 12%. So, it is possible that the employer will secure loan from
other sources and he may only be made to pay the legal interest rate. By lowering the
rate to less than 12%, there's that benefit that will accrue to the employee
RAMO 1-87
Sec 33 C
- 4 Not taxable FB
SEC. 33B
H1
TAXABLE FB
HOUSING
KEYWORD: M T B
E 2
EXPENSE
ACCOUNT
V3
VEHICLE
ANY KIND
H4
HOUSEHOLD
PERSONNEL
OF
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
IF the ACTUAL interest imposed is LESS THAN 12%, the same is taxable.
If it is exactly or more than 12%, it is tax exempt.
Ex.
INTEREST
LOAN
I5
ON
MEMBERSHIP
BENEFIT
H7
HOLIDAY AND
VACATION
EXPENSES
EXEMPT IF:
1. Required by the nature of the employers trade, business or exercise
of profession;
2. Paid or incurred in connection with the business conventions, mtgs or
seminars abroad;
EXPENSES FOR
FOREIGN
TRAVEL
E8
3.
4.
E9
LIFE or NONLIFE
INSURANCE
PREMIUMS
L 10
Sec. 33 C- Fringe Benefits Not Taxable1) Fringe benefits which are authorized and exempted from tax under special laws;
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 EE, whether granted under a collective bargaining
agreement or not; and
4) De minimis benefits
The recent regulation is Rev. Reg. 10-2000
These refer to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting HEALTH, GOOD WILL, CONTENTMENT
or EFFICIENCY of his employees.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
QUALIFY:
PRIVATE EMPLOYEES vacation leave exempt
up to 10 days; sick leave always taxable.
GOVERNMENT EMPLOYEES VL and SL are
always tax exempt regardless of the number of days.
RICE SUBSIDY
MEDICAL
BENEFIT
EMPLOYEES
GRANTED
TO
LAUNDRY ALLOWANCE
ON
death of a child
INCOME COVERED:
1.
BUSINESS INCOME:
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
P1,000,000.00
COST of INVESTMENT:
2. cost of sale
3. cost of goods
4. sales allowance
5. sales discount
P 530,000.00
P 470,000.00
BUSINESS includes: one, which entails time, effort and activity for purposes of LIVELIHOOD
and PROFIT
Q: Is income from illegal business taxable?
A: YES, it falls under the phrase income from whatever source section 32A
Q: Are expenses from illegal business deductible?
A: NO. By express provision of law, only legitimate expenses are deductible
Q: Suppose Corporation A gave P100,000.00 to a customs official to process their license.
Is the P100,000 taxable as income? May the corporation deduct the same as business
expense?
A: The P100,000.00 is taxable and should be included in the gross income of the
customs official since it is income from whatever source. However, the same is not
deductible since unlawful or illegitimate expenses are not deductible items from gross
income (sec. 34A)
You should know the provisions that amplify this. There are 2 Provisions:
1. Sec. 39-- in Sec. 39, there are 4 set of rules that will apply to Gain from dealings in property;
2. Sec. 40- in Sec. 40, are also 4 set of rules that will apply to Gain from dealings in property.
So, all in all there are 8 Rules that apply to Gains from Dealings in Property or property income
Favorite Bar Q: Sec 39A (1)- Ordinary Asset vs. Capital Asset
1998 Q#10: a) Distinguish Ordinary Gain from Capital Gain; b) What is ordinary income?
2003Q#6(b)- Distinguish Ordinary Asset from Capital Asset
Q. not yet asked: 1) What is Ordinary loss?; 2) Distinguish Ordinary Gain from Ordinary loss
S O U R:
1. Stock in trade such as inventoriable asset. These are really assets that remain in the
inventory of the taxpayer at the end of the taxable year. This includes raw materials, workin process and finished goods
2. Ordinary course of business or trade. So, property primarily held for sale to customers may
be ordinary if it is held in the ordinary course of business or trade
Example: A real estate dealer sold real properties. Such real properties, being held in
the ordinary course of trade or business is an ordinary asset. The gain derived from
such sale is treated as Ordinary income
3. Used in business- Property used in business subject to depreciation. These are really
depreciable
assets. If these assets are not used in trade or business, they are
capital assets, and therefore the
gains from such sale of assets are treated as
Capital income. Ex. Furniture & Fixture, Machineries &
Equipment- these are
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Ex.
USED in business
Q. Are all properties used in trade or business by the taxpayer considered as ordinary assets?
No. Not all properties used in trade or business are considered as ordinary asset because they
are only limited to SOUR. Assets which may be held in connection with the business but not
included in SOUR may be considered as Capital Asset
Examples:
1. Accounts Receivable- these are held by the taxpayer in connection with the
business. But since it is not included in the SOUR, the gain derived from sale of A/R
is considered as Capital Income
2. Investments in Stocks
3. Sale of Goodwill- Goodwill may be sold and the gain from the sale of goodwill is a
capital income
You will note that in the provision, the definition of Capital Asset includes properties whether or not
held by the taxpayer in connection with the trade or business. So, you cannot apply the business
test because these are really properties which are held in connection with the business of the
taxpayer and yet considered as capital asset. So capital assets cover not only properties not used
in trade or business. It may also include properties used or held by the taxpayer in connection with
his business. This is true in the case of A/R, Investment in stocks,& Goodwill
But the definition of Ordinary Asset may refer only to properties used in trade or business. So it is
safe to say that Ordinary assets are limited only to those used in connection with his trade or
business and capital assets may include all properties not used in trade or business including those
assets which may be used in trade or business
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
ORDINARY ASSET
Refers to and is limited to the following assets:
Stocks in trade or business, properties in
Ordinary course of business, those Used in
business and Real property used in trade or
business.
CAPITAL ASSET
includes property whether or not connected with
the trade or business of the TP other than Stocks in
trade or business, properties in Ordinary course of
business, those Used in business and Real
property used in trade or business.
CAPITAL GAIN
ORDINARY INCOME
ORDINARY LOSS
CAPITAL LOSS
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2 important cases:
TUASON vs LINGAT Jr. 58 SCRA 170
CALASANZ vs CIR 144 SCRA 664
these are the cases decided by the SC laying down the criteria /test on when Ordinary asset
may become Capital Asset and vice-versa
TUASON vs LINGAT Jr., 58 SCRA 170: In this case, the SC mentioned 7 circumstances that
may convert a Capital Asset to Ordinary Asset:
1. Area of the property
2. Whether the property or land is divided into lots
3. The improvements introduced must be valuable
4. Whether the lots are for sale
5. If for sale, if they are for sale on installments
6. If a broker was employed to manage or administer the sale
7. If the seller is engaged in the real estate business
All of these circumstances were present in this case. It turned out that the seller was really
in the real estate business; the property (78 h) was originally classified as Capital asset; it
was subdivided into lots; improved; sold in installment; and the seller derived substantial
income from such sale
Q: What is really the importance in knowing whether the asset is OA or a CA?
Bear in mind that capital transaction is accorded preferential tax treatment (i.e. reduced
tax rate). Under Sec. 39 B, this holding period rule which reduces the taxable capital
gains by 50% only applies to capital transactions. This is a form of tax avoidance. If you
sell a capital asset, try to recall this provision. Don't sell it w/in the 12 month period
because if the sale is w/in that 12 month period, the gain is 100% taxable. The tax
avoidance scheme is that you sell after the lapse of the said holding period because the
gain is taxable only up to 50%. You cannot apply this rule to sale of OA. This is what the
taxpayer is alleging in this case, that the asset is a CA so as to avail of the reduced tax
rate
OA Converted to CA:
Situation: A real estate dealer, business is buying and selling of real property. So, this is
considered as OA. When will this OA become CA? What happened?
The real estate dealer died. Upon the death, this property is transmitted to the heirs
under the law on Succession. The heirs now are in possession of the property.
Answer: It really depends upon the circumstances:
1) If the heirs will continue the business, these properties will remain as OA.
2) If the heirs will not continue the business, then these properties will now be
converted to CA, so that if the heirs sell these properties, the gain is
considered as Capital Gain
CALASANZ vs CIR, 144 SCRA 664: In this case, the SC cited the circumstance substantial or
extensive improvements. How do you improve a parcel of land? You subdivide it; construction
of concrete gutters (?); mapping; installation of lighting systems and drainage facilities. These
are substantial improvements according to the SC. The SC in this case mentioned that it may
become an Ordinary asset if the cost of the improvement is twice the cost of the property. In this
case, the cost of the property is 4, 742.66; the cost of the improvement is 170,028.60, more than
twice the cost of the property.
there is really no fixed rule or formula that will determine whether an OA will be converted to
CA or vice versa. Consider these circumstances. These are really the criteria or tests
3 Rules that apply only to Capital Transactions: (Sec. 39 B, C, D)
1. Holding Period Rule (HPR) (Sec. 39 B)
2. Capital loss limitation (CLL) (Sec. 39 C)
3. NELCO- Net Capital Loss Carry Over (Sec. 39 D)
2001 Bar- Q. on the Distinction between NELCO (Sec. 39 D) and NOLCO (Sec. 34 D(3))
NELCO- Net Capital Loss Carry Over
NOLCO- Net Operating Loss Carry Over
3 Notable Distinctions:
a. NELCO arises from capital transactions (meaning, involving capital assets);
NOLCO arises from
Ordinary transaction (may involved ordinary asset)
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2003 Bar- the rationale behind the prohibition that capital loss cannot be deducted from Ordinary
Gain
Answer: Under Sec. 34, there's a rule on matching cost against revenue. This principle states
that Only ordinary and necessary expenses (business connected expenses) are deductible from
Gross income or Ordinary income. These non-business connected expenses cannot be
considered as deductible items. Capital loss is non-business connected expenses as it arises
or can be sustained only from capital transactions. If we allow capital loss as a deduction from
ordinary income, it will violate this rule that only ordinary and necessary expenses are deductible
from Gross income as required by the Principle of Matching cost against revenues
SUMMARY:
CAPITAL TRANSACTIONS 3 special rules
Sec. 39 B, C and D
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
100% subject to tax if capital asset sold after being held by the TP for a period of
not more than 12 months.
RULE 1:
HOLDING PERIOD RULE
Sec. 39B
- applies only to INDIVIDUAL
TP
RULE 2:
CAPITAL LOSS LIMITATION
Sec. 39C
If the car was NOT held for more than 12 months the whole of
P100k is taxable.
RULE 3:
NET CAPITAL LOSS CARRY
OVER Sec. 39 D
GR:
P 50,000.00
P100,000.00
P50,000.00 may be carried over to the succeeding
taxable year BUT the loss must not be more
than the net income for the year it was
incurred.
XPN: NET CAPITAL LOSS CARRY OVER such loss (in an amount not in
excess of the net income of such year) shall be treated in the
succeeding taxable year as a LOSS from sale or exchange of capital
assets held for not more than 12 months.
NET CAPITAL LOSS CARRY OVER
(Sec. 39D)
Rules to be remembered:
1. it is settled that OL is deductible for OG
2. It is also allowed to deduct CL form CG (Sec. 39 C)
Justice Vitug asked this Q: Can you deduct OL from CG?
His opinion is that the tax code provides no prohibition. The prohibition only applies
to the deductibility of CL from OG, as the rule says CL is deductible only from CG.
But the tax code, Justice Vitug emphasized, provides no prohibition in deducting OL
from CG, therefore, it is allowed.
3. in the case of Capital Loss Limitation- it applies to both individual and corporate taxpayer,
except trust companies and banking institutions
4. NELCO- this only applies to individual taxpayers. Sec. 39 B says other than corporate
taxpayer. So, corporate taxpayers are not allowed to carry over Net capital losses.
The term Net Capital Loss is defined in Sec. 39A (3). It says it is the excess of Capital
Losses over Capital Gains. It means that Capital Loss is more than Capital Gain
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Example: CG - 150,000
CL - 200,000
It says there can only be Net Capital Loss if the CL is more than the CG. In this
case therefore, Net Capital Loss is 50,000. This is the one that may be carried
over as a deduction in the CG of the succeeding taxable year.
Net Capital Gain-- excess of the CG over the CL. Just the opposite of Net Capital Loss
The general Rule is that expenses must be paid and be claimed in the year the same is
paid or incurred. You cannot, as a rule, carry over an expense.
Exception: Sec. 34-- Net Operating Losses- these can be carried over as a
deduction from the GI in the next succeeding taxable year. Thus when we speak of
Capital Transactions, this is the Exception, Sec. 39 (D)--Net Capital Loss can be
carried over as a deduction from the CG in the succeeding taxable year
Sec. 24 D: X X X a final tax is hereby imposed upon capital gains presumed to have been
realized on the sale, exchange or disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of conditional sales X X X
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2.
3.
4.
5.
6.
Sec.24 D (2) that the same must involve Principal Residence (So, it only
applies to sale of principal residence). Principal residence may include
also the land which it is built as clarified in Rev. Reg. 30-99)
The trick of the problem is that: Suppose what was sold was not in
the nature of Principal Residence. Then this tax avoidance scheme
will not apply. It must be a sale of Principal Residence. We may
call it own principal residence; then
Observe the 30 day notice to the BIR. That means that w/in 30 days
from the date of sale, you should notify the BIR for their recognition of
this tax avoidance scheme. The date of sale as construed under Rev.
Reg. 17-2003 refers to the date when the deed of sale was notarized--It
is the date of the Notarization of the Deed of Sale;
Comply with the 18-month period. How do you comply with this?
Within 18 months from the date of sale, the construction or
purchase of this residence must be made. So, the construction of
new principal residence or the purchase of the new principal
residence must be made w/in 18 months from the date the sale was
notarized
There's another limitation, the 10 year period. This can be availed of
only once every 10 years.
Under this Rev. Reg., the 6% capital Gains Tax must be deposited
under an escrow account with the authorized agent bank.
You must be familiar with the term escrow because it is in the
Corporation Law---shares held in escrow.
Here, the purpose is to ensure compliance with the requisites.
Under this escrow agreement, there are certain limitations set by the
authorized revenue district officer to the effect that if the seller can
comply with these requisites, then the seller can ask for the
withdrawal of the same.
After the execution of escrow agreement, it is required under Reg.
17-2003 that the seller and the buyer should file joint tax return with
respect to this 6% Capital Gains Tax so as to comply with the filing
of the so called ITR of this 6% Capital Gains tax
there is another rule under RR 17-2003: within 30 days after the lapse of
th
the 18 month period, the seller should submit documents showing that
he has complied with these requisites. That he used the proceeds to
construct or purchase new principal residence. If there's no compliance
th
from the lapse of the 18 month period, RR 17-2003 says that the
seller is considered as a delinquent taxpayer as far as non-compliance
of this provision is concerned. And he can be charged with appropriate
penalty. This is cited in your book, and the 30 day period from the lapse
th
of 18 month period really applies to the submission of certain
documents showing compliance to this regulation.
So if this will be asked again, you should state these new requisites and the
execution of escrow agreement among the buyer, seller, RDO and authorized
agent bank.
So far, we have mentioned 3 tax avoidance scheme:
1. I mentioned that Sec. 39 B- the holding period rule- is really a tax avoidance
scheme because it reduces your taxable gain by 50%, and the permissible
method to reduce the same is to sell the Capital Asset after 12 months from
the date of purchase;
2. We also discussed Sec 40 C(2). What is that tax avoidance scheme or
legally permissible means?
The exchange of properties, shares of stocks or securities must be
made in accordance with the plan of Merger or Consolidation (M or C)
3. And this is the third. If you want to avoid the effect of the 6% Capital Gains
Tax, comply with the requisites laid down under Sec. 24 D(2)
D) Another distinction between Sec 24 D and Sec. 27 D(5) is when the buyer is the
Gov't , political subdivision of the state, agency, instrumentality or GOCC.
You will note that under Sec 24 D, the seller has the option. There's that option
granted by law for the seller (that is, individual taxpayers only) either to avail of
the 6% Capital Gains Tax or the progressive tax rate of 5-32% under Sec. 24A.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
It is unfortunate that the BIR has yet to issue a Regulation to this effect. In
applying the 6%, there's no doubt that the basis is either the SP or Zonal Value,
whichever is higher. The cost is nondeductible. If you apply Sec. 24A, you will
note that the tax rates are higher; and the very purpose here is for the seller to
avail of the reduced rate. So, is the cost deductible under Sec. 24 A?
If you read Sec. 24A which provides progressive rates, the tax base is
taxable income. So an opinion must be expressed that since the purpose
of the law is to make the seller to avail of the reduced tax rate, he must be
entitled to deduct the cost.
On the other hand, under Sec. 27D (5), there's no option given to Domestic
Corporation if the buyer is the Govt, political subdivision of the state, agency,
instrumentality or GOCC.
SUMMARY:
CAPITAL GAINS TAX 6% FINAL TAX
Applicability
Tax Base
Avoidance of 6% CGT
PRESUMED GAIN:
There is a term you should remember under Sec. 24 D & Sec. 27 D(5). The word there is
presumed gains. The CG Tax of 6% shall be imposed on the presumed gains.
2001 Q: A doctor by profession acquired a parcel of land in 1990 for 1 Million. He sold the same
in 2000 at 800,000. It would appear that he had incurred an actual loss in the amount of 200,000
because he received the SP amounting to 800,000 (the problem did not state the Zonal Value so,
we considered this as the basis) and he previously acquired it at 1 Million, so he incurred an
actual loss of 200,000. The doctor argued that he should not be made to pay the tax because he
derived no gain, in fact he incurred a loss. Is the contention of the doctor/seller tenable?
The problem may be answered by these provisions:
NO. Because the cost is a nondeductible item. If you are an ordinary citizen/taxpayer, you
will surely argue that how can I be made to pay the tax if I derived no gain and more so I
incurred a loss? Not all taxpayers are aware of this Sec.24 D which fixed the tax base at
GSP or Zonal value, whichever is higher. The cost is nondeductible. The contention of the
doctor is not tenable because the basis of the 6% CG tax is the amount received (the GSP
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
which is presumed in this problem to be higher than the Zonal Value), so the cost is
disregarded.
Q#1. Can a taxpayer-seller be made to pay tax even if he derived no gain, for instance:
GSP (higher than the Zonal Value) 800,000
Cost
800,000
Gain
- 0 Answer: Even if he derived no gain, since the basis is the higher between the GSP and
Zonal Value, he can be made to pay the 6% CG tax
Q#2: Is there a situation wherein a seller can be made to pay a tax even if he incurred a loss
from such transaction?
YES. He really incurred an actual loss of 200,000 but he is still required to pay the 6% CG
tax because the cost is not allowed to be deducted (Actual Bar Question in 2001)
Note under Sec. 24 D the meaning of other dispositions.
Sec. 24D says sale or
exchange (sale is defined in Art. 1458 NCC, and exchange or barter in Art.1638), and then,
other dispositions. If you read the subsequent provision, this covers also conditional sale
such as pacto de retro sale.
Q#3: Would your answer be the same if the seller is a Domestic Corporation?
Recall Sec 27 D(5)---that's the 6% CG tax. Sec. 28 A applies to RFC while Sec 28 B applies
to NRFC
So, there is really no provision mentioned about this 6% CG tax in Sec. 28 (A & B), as this
6% CGTax is a rule on corporate income tax that applies solely to Domestic Corporations
This is a capital transaction which is not covered by the rules w/c we discussed under Sec
39 (B, C, D)
Q: What are the capital transactions not covered by the Rules under Sec 39 B, C & D (Holding
period, Capital loss limitation & NELCO)
Answer:
1. Capital transaction involving the sale of Real Property (of course, this must be a Capital
Asset): this is subject to 6% CG Tax based on the higher between the GSP and the
Zonal Value. So, Sec. 39 ( B, C, D) does not apply to all capital transactions
2. Another can be found in 4 Sections (Secs 24, 25, 27, & 28): this means that this is a rule
that applicable to both individual and corporate taxpayer.
If you will be asked: Is there a common rule that can be applied to both individual
and
corporate taxpayer?
YES. It is a capital gain (which is really a capital transaction) derived from the
sale of shares of stock NOT listed and traded through local stock exchange. The
tax rates are 5% & 10%
Net CG not exceeding 100,000 - 5%
In excess of 100,000- 10%
Q: Suppose the shares of stocks are listed and traded through the local stock exchange, will
your answer be the same?
The examiner should not ask this Q because this is excluded from the coverage as this is
really a percentage tax. You can find in Title V Sec. 127: if the shares of stocks are listed
and traded through LSE, the tax applicable is not an income tax (that's why the examiner
should not ask this Q) but a percentage tax, of 1 % of the GSP. But you must still answer
the same even if the examiner inadvertently overlooks the coverage as we will recommend
that the Q be a bonus one.
Thus, these are the 2 capital transactions not covered by the Rules under Sec. 39 (B, C, & D)
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
3. Interest income on Bonds, Debentures and other certificate of indebtedness received by any of
these 3.
The first 3 you'll find in Sec. 32 B (7, a)
4. This has been the subject of amendment by RA 8424. It is an interest income on bond deposit
maintained under the expanded foreign currency deposit system. The rule has been changed.
Under the old tax code- irrespective of the recipient of this deposit---TAX EXEMPT
Under the present tax code (as amended by RA 8424) -- it is only tax exempt if the recipient
is a NONRESIDENT taxpayer whether individual or corporate. Thus, if the depositor (the
recipient of this deposit maintained under the expanded foreign currency deposit system) is
a resident taxpayer, it is subject to 7.5 % FT.
Under the old tax code, tax exempt; Now, 7.5%
5. Interest income from long term investment or deposit. You'll find the meaning of this under Sec
22 F. It is regulated by the BSP & the term is 5 yrs. or more. If less than 5 yrs this is subject to
the diminishing rates.
If we refer to Sec. 24 & 25, you'll find therein a provision exempting interest income from long-term
deposit from income tax. Is this found in Sec. 27 & 28?
Note that Secs. 24&25 apply to individual taxpayers while Secs. 27& 28 apply to corporate
taxpayers. There is really no similar provision that you'll find in 27 & 28. So, the exemption
therefore, applies only to individual taxpayers; it does not apply to corporate taxpayer
Hypothetical Q: a taxpayer derived income from a loan that he extended to a certain person. He
has also interest income from his bank deposit. Q#1. As regards his interest on loan, what is the tax
treatment?
Subject to regular income tax since it is not subject to exemption.
Q#2: As regards interest on bank deposit?
It is subject to Final Tax
The tax treatment here is that interest income from loans must be reported as part of his gross
income but the interest on bank deposit, since it is subject to FT, need not be reported as part of the
Gross income.
Regarding interest income on Gov't Securities, don't be misled. Under Sec. 32B, that item was
deleted. There is no item under 32 B regarding interest income on Gov't securities. That's why it is
not included in the exemptions. Interest income on Govt securities, effective Jan. 1, 1998, is already
taxable. This is no longer tax exempt as the item was deleted from the enumeration on the exclusion
from Gross income.
SUMMARY:
INTEREST
TAX EXEMPT
1.
2.
Foreign Governments
Financial Institutions controlled or financed
by FX govts, Regional or international FI
established by FX
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Fixed sum either in cash or property equivalent, to be paid at a definite period for the use or
enjoyment of a thing or a right.
SCOPE ALL rentals derived from lease of property, whether used in business or not, from real
estate or personal property; earnings from copyrights, trademarks, patents and natural resources
under lease.
Q: What is the difference in terms of tax treatment between Rent Income and Royalties
AS TO REPORTING
AS TO TAX RATE
RENT
ROYALTY
FINAL TAX
2002Q#3: This is a Q designed by the examiner to test the knowledge of the examinees regarding
the difference between Royalties & Compensation Income.
Q: UKV-UK entered into a licensing agreement with UKV-Phils. UKV-UK authorized UKV-Phils.
to distribute computer software in the Philippines. UKV-Phils., thereafter entered into a licensing
agreement with a bank in the Phils. In the contract, it was categorically stated that the licensing
agreement entered into by UKV-Phils and the bank did not involve the transfer of proprietary
rights over the assets. Thereafter, Royalty was paid by UKV-Phils. to UKV-UK. How do you treat
these payments made by the banks to UKV-Phils? Is it in the form of Royalty or compensation
for the services rendered?
The key here is, since it does not involve the transfer of proprietary rights when UKV-Phils.
Entered into a licensing agreement, and it rendered technical services to the bank, then that
partakes the nature of compensation for services rendered. It is therefore subject to regular
or normal tax. (if this is in the nature of royalty, it is subject to FT.) (Japs answer is different
from the suggested answer of the UPLC)
Modification: Is the payment be subjected to FT? If not, then why? (the words if not is a guide
that pag hindi subject to FT, what would then be the appropriate treatment?)
So, it should be treated as compensation for services rendered because it rendered
technical services to the bank although there's a licensing agreement, because it is
authorized by UKV-UK.
If there was really no transfer of proprietary rights, that may be treated as compensation for
services rendered, otherwise (that is, there was transfer of proprietary rights), that may be
treated as Royalty.
Value of permanent improvements made by the lessee on leased property that will
become the property of the lessor upon the expiration of the lease.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
There will be no computation. You will only be asked to state the methods which this
value of permanent improvement may be reported as additional rent income.
In legal ethics, if you will be asked to draft Long term contract of lease, you should
not forget, say it is for the period of 30 years, to incorporate the usual stipulation that
the lessee can introduce improvements on the premises and upon the expiration of
the LT contract of lease, the ownership of such improvements on the premises shall
be transferred to the lessor.
th
ADVANCE RENTALS:
- if there is material benefit to the lessor, it is taxable
1. Prepaid Rentals- taxable if so received under a claim of right and without restrictions as to its
use
2. Security deposit--- generally not taxable; it is only taxable if the lessee violates any provision
of the contract and lessor forfeits the deposit
3. Loan- not taxable
ITEM # 7: DIVIDEND INCOME:
There are 8 provisions under Title II that deal with Dividend Income:
1) Sec. 24 B (2)--- RC, NRC & RA are subject to 10% FT on dividends received from Domestic
Corporation effective year 2000;
2) Sec. 25 A (2) --- covers NRA-ETB. Tax is 20% FT on the dividends received from Domestic
Corporation;
3) Sec. 25 B--- NRA-NETB.
Tax is 25% FT on the dividends received from Domestic
Corporation;
4) Sec. 27 D(4)--- Dividend received by a Domestic Corporation from another Domestic
Corporation. It is tax exempt;
5) Sec. 28 A (7, d) --- 2005 Bar--- Recipient is RFC. Is that Taxable? No. it is tax exempt;
6) Sec. 28 B (5, b) --- received by NRFC. This is subject to 15% FT and this is subject to tax
credit system;
7) Sec. 42 A (2) --- the source is a FC. In the first 6 provisions, the source is DC;
Q: the giver is a FC, what is the tax treatment?
Answer: It is an income derived from sources w/in if:
a) the Gross Philippine Income of this FC in the last 3 preceding taxable years is at least
50% of its foreign income (income w/o). if it is less than 50%, that's not an income derived
from sources w/in, so not taxable;
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
SUMMARY:
RECIPIENT
BASIS
TAX TREATMENT
DC
RC
NRC
RA
Sec. 24B 2
DC
NRA ETB
Sec. 25A 2
DC
NRA NETB
Sec. 25B
DC
DC
Sec. 27D 4
Tax exempt
DC
RFC
Tax exempt
DC
NRFC
FC
STOCK DIVIDENDS
Individual or corporate TP
Sec. 42A 2
Sec. 73B
GENERALLY TAX
EXEMPT
Q: When you sell property how do you know whether you derive gain from such sale or exchange or
you incur losses from such sale or exchange of an asset or capital?
The Rules are basic, there's taxable gain if the amount received or realized is more than the cost
or adjusted basis.
Example: You sold your property; the selling price (that's the amount you received) is 500,000.
This 500,000 is not the taxable gain. You are allowed under Sec. 42B to deduct the cost or
adjusted basis. Say for example, you acquired it at 300,000. It is really the difference between
the Selling Price and the cost. So, the taxable gain is 200,000.
Is there an exception to this rule, that as a rule the cost is deductible from the amount received
or realized?
YES. It is clear in Sec. 24 B (1) that the basis of the tax rate of 6% Capital Gains tax is the
higher amount between the Gross Selling Price and the Zonal Value.
Thus if you will be asked: It is the general rule that cost or adjusted basis is deductible from the
Selling Price, is there an exception to this Rule? YES. What is that Sale? It is a sale of capital
asset, and that must be real property. It is a sale of capital asset classified as real property.
The general rule is, If there is a loss, that is, the amount received or realized is less than the cost
or adjusted basis, such loss is deductible. That means that, for example, the Selling Price (the
amount received or realized) is 300,000. This property was previously acquired for 400,000,
there's a loss of 100,000. As a rule this is deductible. Exception to this is Sec. 24B (1).
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
If the property is acquired under the above modes, we call that NO GAIN, NO LOSS
transaction
The last 2 modes are the technical ones.
You sold property for 500,000; property was previously acquired through purchase.
The basis therefore is the purchase price. Thus, if the Purchase price is 300,000,
deduct it from 500,000. The gain therefore, is 200,000
#2: the law says, it is the FMV of the property at the time of acquisition. What does that
mean?
In the law of succession, when the property was acquired through inheritance, the right
accrues upon the death of the decedent/testator. For purposes of determining the
amount refer to Sec. 88. How would you know the FMV of the property transmitted
through succession? Sec 88 says it depends upon the nature of property, whether real
or personal.
Correlate. The exam will not ask you to compute. Just remember: the basis is the FMV
at the time of death of the decedent that is the date of acquisition. If you sold property
acquired through inheritance, selling price is 500,000. What must be the cost or
adjusted basis?
To answer this, determine how you acquire this property which you sold for 500,000.
you acquired it through inheritance. And since Sec. 40 B(2) says the cost or the
adjusted basis is the FMV of the property. Then it is a matter of referring to the date
of property to determine the FMV. The schedule of FMV of the property is usually
supplied by the executor or administrator. So, if according to the Schedule of FMV of
property, the FMV at the time of death is 400,000 (date of death is very material).
The gain derived would be 100,000
#3: The tax Code provides all the possible mode of acquiring properties. It is possible that
the property was acquired through Donation. Say, the property was donated to you by your
friend. You are in dire of money so you subsequently sold the same for 500,000. How do
you know whether you derived a gain or incurred a loss?
The provision is quite long. It may be simplified as follows: a) it is the same basis in the
hands of the donor. In the case of inheritance above, it is the FMV of the property at the
time of death of the testator. Here, it is the same basis in the hands of the donor. What
you have to do is to inquire from the donor his basis in acquiring the property. It is
possible that the donor acquired it through purchase, so he can tell you the purchase
price.
the rule under this situation may change if it is acquired through inadequate or
insufficient consideration
Example: B acquired property through insufficient consideration from A. B sold said
property to C. SP=500,000. So the property was not acquired through purchase or
inheritance. It was acquired by the seller for inadequate or insufficient consideration
imaginable. It is below or way below the FMV of the property.
1986 Bar- many examinees complained to the SC that taxation was a killer subject
because several Questions involved computations. The example above was one of the
Q. If this will be asked again, I think you will only be asked about the legal provisions:
What may be the basis for the sale of the property acquired through insufficient or
inadequate consideration?
Answer: it is the amount paid by the transferee who now becomes, as far as the
present sale is concerned, the transferor.
Example: A had this property with a FMV of 500,000. He sold it to B for 200,000. it
was acquired by B for inadequate or insufficient consideration in money's worth.
Under ordinary transaction, A can sell that at a price not below the FMV but he sold
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
it a price way below the FMV, so it was sold for inadequate or insufficient
consideration. B therefore acquired the property valued at 500,000 for only 200,000
(this is the amount paid by B to A in acquiring the property). Subsequently, B
disposed the same to C. What then is the basis for the sale of the property?
It is the amount or consideration paid by the transferee (as far as the first
transaction is concerned--A to B), now the transferor (as far as the present
transaction is concerned which is the sale from B to C). Since B paid 200,000,
that is the amount or consideration as far as A is concerned. B is the transferee,
now the present transferor. So, deduct 200,000. the gain derived is 300,000.
1994 Q#4 -- Suppose the property was acquired through these exempt exchanges as
provided for in Sec. 40 C(2). What are the situations covered therein?
These are tax exempt exchanges of properties, shares of stocks or securities when
these are paid in accordance with the plan of merger or consolidation. According to
Sec. 40 C(2), All these exchanges made in accordance with the plan of M or C are
tax exempt. This is not a subject of subsequent sale. So if these properties, shares
of stocks or securities were acquired pursuant to the plan of M or C, the gain derived
from this exchange is tax exempt.
However, subsequently, these were sold.
As regards the subsequent sale, that is the one that is subject to tax.
Example: ABC Corp. entered into a contract of M or C with LMN corp. All those
exchanges of properties, shares of stocks, and securities are tax exempt. But the
subsequent disposition is already subject to tax. For instance these properties were
subsequently sold by the Corp for 500,000. Remember that this was acquired through
an exempt transaction. What would be the tax treatment?
Answer: Just take note of the legal provision under Sec. 40 C (5). It says' in the
same basis in the hands of the transferor. In UP law Center suggested answer the
basis is the original cost of the property or shares of stocks or securities, as the case
may be. The basis shall be the original or historical cost of the property, shares of
stock or securities when still in the hands of the transferor
SUMMARY OF THE RULES:
MODE OF ACQUISITION
PURCHASE
Ex.
INHERITANCE or SUCCESSION
DONATION
TRANSFER
CONSIDERATION
Purchase price
FOR
Selling price
Cost of acquisition
Property income
P500,000
P300,000
P200,000
Selling price
FMV
Property income
P600,000
P500,000
P100,000
INSUFFICIENT
PROPERTY
OR
SHARES
OF
STOCKS
ACQUIRED THROUGH THE SO CALLED TAX
EXEMPT TRANSACTIONS
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
These 3 transactions are exchanges purely in kind. Each of the transactions must be
made in accordance with the plan of M or C
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
TAXABLE GAIN DOES NOT ONLY ARISE FROM ORDINARY SALE, it is also derived from exchange of
property for stocks:
FMV of shares of stocks
Less: Cost of the Prop
Gain or Loss
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2. Trustee
3. Beneficiary
4. Fiduciary
4. Wash sale----one of the illegal trading devices
The reason why it is an illegal trading device is because there's really no
substantial change of beneficial ownership
Q: 1. What may be the subject of wash sale?
It may be shares of stocks, securities, including stock options
Q: 2. Who must be the seller of such shares of stocks, securities or stock
options?
It must not be a dealer in securities
Are there periods that must be observed?
YES. a) 30 days before the sale; and 2) 30 days after the sale. These 2
periods are really determinative of whether it is a wash sale or not
What must be that event that must transpire or occur 30 days before the sale or
30 days after the sale (this is the reason why this is called 61-day sale)?
The event that must transpire is the purchase or acquisition of identical or
substantially the same stock or securities
It is important to know whether it was a wash sale or not because if it was a
wash sale transaction, the gain is taxable and the loss is nondeductible (Sec. 38)
Q: What must be the reason for this?
The rationale behind this is that, this is a mere artificial loss and it is not
actually sustained. In actual transaction, the seller can recover his loss by
adding the amount of loss to the Selling Price involving the sale of stocks or
securities. The seller can recover this loss through the subsequent sale of
the same. In effect, the loss can be recovered. So there is really no loss
actually incurred or sustained as it is a mere artificial loss
CIR vs. ANSCOR: The requisites of redemption of stock dividends that may result to taxable
income according to this case are:
a. there must be a redemption or cancellation
b. it must be of shares of stock involving stock dividends
c. the cancellation must result in distribution of taxable dividend or income
Sec. 73 B second sentence thereof made mentioned of these 3 requisites -- at such time
and in such manner that may result in the distribution or cancellation of taxable dividend.
These are really the criteria or tests.
According to the tax courts of US, consider the following:
a. the real or business purpose that would justify redemption;
b. the redemption must be bonafide;
c. the lapse of time between the issuance and redemption;
d. the net effect of the redemption of the shares of stockholder
ANSCOR CASE: The 2 purposes raised by the taxpayer: a) legitimate business purpose;
and b) justification for the cancellation or redemption, were not considered by the SC. The
case made mention about the Filipinization(?) of the Corp. and citizenship(?); and the
reduction of foreign exchange transactions. These 2 were not a justification. The period of 23 years was not also considered. However, the net effect, the SC said, resulted in taxable
income. Here 108,000 shares ____(?) the original 25,247.50 shares____(?). It turned out
the corporation redeemed the original investment on the original 25,247.50 shares of stocks.
The SC modified the decision of the CA on the amount representing the taxable income.
In Corporation law, shares of stock may be classified as redeemable upon incorporation
but it must be expressly provided for in the Articles of Incorporation as redeemable. If this
will be redeemed by the Corporation, this is not the one referred in the exception. So, if the
source is the original subscription or the initial investment, Sec. 73 B will not apply because
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
it is still capital. But if the source is additional shares of stock, that is, stock dividends were
declared and these are in the nature of redeemable shares, then this is the one
contemplated by this Sec. 73 B.
The SC said, if these redeemable shares of stock are in the nature or formed part of the
original investment, the redemption is not covered by Sec. 73 B. the exception is not
applicable. It must be the shares of stock declared as stock dividends and were classified as
redeemable shares. The situation in this case is that the corporation declared stock
dividends classified as redeemable shares.
The rule regarding stock dividend is that it is tax exempt because there is just a transfer
from surplus to capital account. There is No realized gain or profit. In this case, a device
could really be availed of by the corporation. If this stock dividend declared would be
categorized as redeemable shares of stock, this would be the situation: under the Corp.
Code this may be redeemed in cash. Once this will be redeemed the stockholder will receive
cash. There is now a flow of wealth according to SC. This is the reason why stock dividends
declared in the nature of redeemable shares of stock is taxable.
In the language of the SC, it is really a constructive ploy or device to evade the effect of
taxation having in mind that the stock dividend is stock exempt but if it is classified as
redeemable shares of stock once redeemed from the corp., the stockholder will receive not
only receive cash but be also exempt from tax. There being a flow of wealth, stockholders
cannot allege that stock dividend is tax exempt. You cannot apply the principle here because
there is a flow of wealth. Here, there may arise a flow of wealth because the stockholder will
now receive cash.
The reason of the exceptions that you'll find in Sec. 77 B is that it is an income
constructively devised to avoid the effects of taxation. So, stock dividends, as a rule is tax
exempt. But once it is in the nature of redeemable shares of stock, there being a flow of
wealth as the stockholder may receive cash, then that's the time we can tax such stock
dividends
Disguised Dividends
In the case of, it is in this case that you'll find the language in the guise of stock dividends.
What does that mean? The board may declare dividends and treat the same as stock dividends,
name it as stock dividends in the books. But the BIR may examine the books.
In this case it was discovered that the stocks were declared not in accordance with the
Corporation Code. It was not declared out of the unrestricted retained earnings of the corp. It
was declared out of the Outstanding capital stock. So there was a violation of the basic
requirement under the Corp. Code that dividends, including stock dividends can only be declared
out of unrestricted retained earnings.
So as to evade the effects of taxation, stock dividend being tax exempt, the Corporation, in
connivance with the stockholders treated such as stock dividends. So it is a dividend in the guise
of stock dividends as to avoid the payment of tax. This is taxable of course. This is taxable as
there is no stock dividends legally declared under the Corporation Code
BACHRACH vs SEIFERT 87 Phil 483: The Q here is: Is the stock dividend received by the
usufructuary tax exempt or taxable?
This is taxable according to the SC, rejecting the opposite view that it is tax exempt. The SC
adopted the Pennsylvania Rule. The SC cited Art. 566 of the Civil Code. Under this Article the
usufructuary is entitled to the natural, industrial, and civil fruits of the thing in usufruct. The thing
in usufruct here is the shares of stock. As this is a thing in usufruct, the SC considered this an
exception to the rule and held that the stock dividends received by the usufructuary are subject
to tax. Stock dividend is a fruit of the thing in usufruct. It is a civil fruit, therefore, it is subject to
tax.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
there's a change, and it must be an increase in the interest, if this increase to 22%, it is
considered as an exception to the rule
In the items mentioned under Sec. 32 A ( we said that there are 13), the following are subject to FT:
1. Royalties;
2. Prizes--- take note of the clarification.
Prizes subject to FT must be more than 10,000. If the amount is 10,000 or less, the tax
treatment is that it is subject to 5-32%. It must be included in the Gross Income of the
taxpayer;
3. Winnings except lotto and sweepstakes;
4. Interest
this is subject to FT if this is an interest income on bank deposit. If it is an interest on
loan, then it is subject to regular tax;--reported as part of the gross income
5. Dividends are subject to FT under 2 cases:
a) When it is received by Individual taxpayers. We can simply say that when a dividend is
received by an individual taxpayer from a Domestic Corporation, it is subject to FT;
b) If the recipient is a NRFC. So, if it is received by a Domestic Corporation or a RFC, it is
not a FT;(exempt)
6. Share of a partner from the net income after tax of a business or taxable partnership. Try to
compare this to item 11 of Sec. 32 A. under Sec. 32A (11), the source is general
professional partnership.
Q: A is a partner in ABC Partnership, a business partnership. A received an income
amounting to 150,000 representing his share in the income of the partnership.
1. How do you tax the 150,000 income received by A from ABC partnership?
Answer: Since the source is a taxable partnership, this is subject to FT and
therefore the partner is not required to report this income as part of his gross
income
2. Would your answer be the same if ABC is a general professional partnership?
Answer: No. if it is received from a tax exempt partnership, Sec. 26 last
paragraph states that the professional partner shall report such share from the
professional partnership as part of his Gross income. So Sec. 32 A (11), as the
tax treatment in Sec. 26 will tell you, should be reported as part of the Gross
income of the professional partner. But in the case of a taxable partnership,
Sec.24 states that the share of a partner if it is received from a taxable
partnership (that is not a general professional partnership) shall be subject to
FT. And the rule provides that the recipient of the same is not required to report
that as part of his GI.
2001 Bar: If a cash dividend (or property) is received by a RC or RA, this is subject to FT (Sec
24, 10% FT). Q: What do you think is the reason why these dividends received by RC or RA are
subject to 10% FT and not by 5-32% progressive rate?
Answer: The reason is to ensure the collection of tax on these dividends. If we subject these
to 5-32%, which can only be done through the filing of ITR, there is no assurance that the
taxpayer will report these as part of his GI because he has also other sources of Income. It is
extremely difficult for the BIR to monitor compliance w/ this considering the number of
stockholders.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
By shifting the responsibility to remit the tax to the corporation, it is easy for the BIR to check
compliance because there are fewer withholding agents compared to the # of stockholders. By
subjecting this to FT the Govt. is assured of revenues in the earliest possible time because these
taxes are needed by the Govt to carry out its legitimate objectives-- LIFEBLOOD na naman--hehehehe..... this is really favored by the LIFEBLOOD DOCTRINE.
By the way, In the case of interest on deposits, it is the bank that is legally obliged to
withhold the tax
SUMMARY:
ROYALTIES
DEPENDS:
P10,000 or less it forms part of gross income subject to 532% progressive rate
PRIZES
WINNINGS
XPN: sweepstakes and lotto winnings (exempted)
NOTE:
IV.
DIVIDENDS GIVEN TO AN
INDIVIDUAL TP
SHARE OF A PARTNER
FROM THE NET INCOME
OF A TAXABLE
PARTNERSHIP
1.
2.
3.
4.
Sec 24B (2) and Sec. 25A (2) - JOINT PAT etc are tax
exempt
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
1. Exclusions---refers to the removal of otherwise taxable items from the reach of taxation (this is
the language of the US tax court as cited in the PLDT vs. Laguna case);
Exemptions--- refers to an immunity or privilege, freedom from charge or burden to which other
persons are subject to tax.
The court said, they are the same as to their effect or nature. That's why the old rule that would
apply to them is the principle of STRICTISSIMI JURIS. Exclusions and Exemptions must be
strictly construed against the taxpayer and liberally in favor of the Govt.
If that would not be asked, this would be the Q on this section-- What are the distinctions
between Exclusions from Gross Income (32 B) and allowable deductions from GI (Sec. 34)?
According to Sec. 61 of Rev. Reg. #2:
Exclusions from Gross income refer to a flow of wealth to the taxpayer which does
not form part of the GI because of the following reasons:
1) It is excluded by applicable laws;
2) Excluded by the tax code; or
3) Excluded by the Constitution.
On the other hand, allowable deductions refer to amounts, which the law allows to
be deducted from GI in order to arrive at taxable or net income
2. Another point of distinction is that Exclusions may pertain to the computation (this is material) for
purposes of determining GI, whereas allowable deductions is important for purposes of
determining net or taxable income and this must be deducted from GI to arrive at taxable
income. I repeat, exclusions may be material for purposes of determining GI because you have
to exclude it to arrive at GI.
3. Exclusions are something earned or received which do not form part of GI, while deductions are
something paid or incurred in earning GI.
Try to analyze the enumeration under Sec. 32 B. if you count, there may be 19 Exclusions from GI.
The Enumeration is not exclusive because there are other items not mentioned in 32 B but should be
excluded. For instance, in Sec. 24 & 25, there is that tax exempt interest income which we have
already cited and is not included in Sec. 32 B. This is Interest Income on Long term deposit. This is
not included in the exclusion under Sec. 32 B. You will find that in Secs. 24 & 25---if the term is 5
years or more, the interest income is tax exempt.
Keyword: L A G C I R M
1. Life insurance proceeds
2. Amount received as return of premium
3. Gifts, bequests, devises & legacies
4. Compensation for injuries or sickness
5. Interest exempt under tax treaty
6. Retirement benefits, pensions, gratuities, etc. ( favorite Bar Q)
7. Miscellaneous items
Under item 6, there are 6 exclusions ( a-f) and under items 7, there are 8 items there. So, 19
items all in all
Favorite Bar Q: Life insurance proceeds, Compensation for injuries or sickness, Retirement benefits,
pensions, gratuities, etc., and on item 7, just focus on 2 items (prizes and awards)
Correlate this with Sec. 85E because there are 2 Q on this in the previous bar exams.
Sec. 85 E--- refers to the Rule regarding Exclusions or inclusions from Gross Estate of Life
Insurance Proceeds.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Under assumption #2---some examinees answered that, since its a 3 person, that should
be subject to tax. That is not correct. The provision says any beneficiary. There is really no
profit or gain here.
This just represents indemnification) and the insured has the right to
designate the beneficiary. So it is always excluded from the GI of the recipient irrespective of
the beneficiary designated in the life insurance policy.
Sec. 32B. Gross IncomeExclusions.
(1) Life Insurance--- The proceeds of life insurance policies paid to the heirs, or
beneficiaries upon the death of the insured, whether in a single sum or other wise, but, if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income
Sec. 85. Gross Estate(E) Proceeds of Life Insurance--- To the extent of the amount received by the estate of the
deceased, his executor or administrator, as insurance under policies taken out by the
decedent upon his own life, irrespective of whether or not the insured retained the power
of revocation, or to the extent of the amount receivable by any beneficiary designated in
the policy of insurance, except when it is expressly stipulated that the designation of the
beneficiary is irrevocable.
RULES under Sec. 85 E:
A) Included and therefore subject to estate tax under 2 cases:
1. If the beneficiary designated in the life insurance policy is the heirs, estate,executor or
administrator of the estate. Whether the designation is revocable or irrevocable, always
included if the beneficiary is the estate, executor or administrator of the estate
2. If a third person (including the employer) is revocably designated as beneficiary. If a 3
person is designated as beneficiary, the rule says excluded from gross estate
rd
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
rd
If this 3 person is IRREVOCABLY designated, EXCLUDED from the Gross Estate and
therefore not subject to estate tax.
2. if it partakes of a nature of Group insurance policy
I mentioned about Sec. 11 of the Insurance Code. Under the Old Insurance Code,
the rule was that designation is irrevocable. However, the rule now is REVOCABLE,
unless that right is waived.
Under Sec. 11 if the Insurance Code there is only
Irrevocable designation of the beneficiary if the life insurance policy expressly so
provides'. If it is silent, then it is presumed that the designation is revocable. So in A#2, it
rd
shall be included in the Gross Estate subject to Estate tax. But if a 3 person is]
designated as beneficiary and the policy is silent, you may consider the designation
revocable.
RULES ON PREMIUMS:
In Life insurance, premiums are paid. We say the following tax implications: To the employee, it
may be a taxable income, and to the employer, that may be an expense.
1. Under the assumption that it is the heirs, estate, executor or administrator of the estate who
received the premium as beneficiary, it is TAXABLE to the employee. It is taxable to the
employee and the rules are:
a. Under 32 A, taxable as compensation income if the employee is a rank and file
employee;
b. Under 32 B (m), taxable as Fringe Benefit if the insured employee is a managerial or
supervisory employee
Q: Can it be claimed as an expense by the employer?
Yes. It is a deductible expense (32 A (1, a (i) ) as other forms of compensation for
personal services rendered
rd
2. Under the assumption that a 3 person was the one designated ( and this may include the
employer), it is NOT TAXABLE on the part of the employee there being no benefit accruing
to the family or heirs.
To the employer designated as beneficiary, the proceeds he received upon the death of the
EE just represent a mere return of capital. This being the case, the employer should not be
allowed to claim the life insurance premium paid as a deductible expense.
SUMMARY RULES ON LIFE INSURANCE POLICY:
Example: A life insurance was obtained by an employer for his EE. The estate of the EE was
designated as the beneficiary. During the lifetime of the EE, premiums were paid by the ER.
Q#1. Upon the death of the EE, the proceeds shall go to the beneficiary designated in the
Policy. Will that form part of the GI of the beneficiary?
Answer: No. For purposes of exclusion, since Sec. 32 B (1) make no distinction as
regards beneficiary, the proceeds of life insurance policy are always excluded from the
Gross income of any recipient or beneficiary of the same. It is excluded whether the
beneficiary is the employer or the heirs, estate, executor or administrator of the estate.
Q#2: Will that be included in the Gross Estate of the decedent-EE? Is that subject to Estate
Tax?
Answer: Qualify: Under Sec. 85 E: if the beneficiary is the heirs, estate, executor or
administrator of the estate, it should always be INCLUDED in the Gross Estate whether
the designation is revocable or irrevocable. This will form part of the Gross Estate.
rd
rd
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
HEIRS, EXECUTOR OR
ADMINISTRATOR
EMPLOYER
rd
considered a 3 person
QUALIFY:
IRREVOCABLE -- EXCLUDED
REVOCABLE INCLUDED
PREMIUMS PAID
MANAGERIAL or SUPERVISORY
employee (32 B (m)) taxable as
fringe benefits
RANK & FILE (32A) taxable as
compensation income
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
As far as the donee is concerned--1. Not subject to donee's tax as donee's tax was abolished by PD 69 (favorite # of
my good friend Prof. Sandoval... Prof. Portfolio).
2. This is not also subject to income tax because the same, according to Sec.32 B
(3) is excluded from Gross Income
Q: Tax implications of Donation Mortis Causa
As far as the testator is concerned--- subject to estate tax
As far as the donee (heirs of the decedent or beneficiary) --1. Not subject to donee's tax as donee's tax was abolished by PD 69
2. This is not also subject to income tax because the same, according to Sec.32 B
(3) is excluded from Gross Income
1994 Q#2b: Are donations inter vivos and mortis causa subject to Estate Tax?
Answer: It is donation mortis causa that is subject to Estate tax. Donations inter vivos are
subject to donor's tax.
SUMMARY:
GIVER
RECIPIENT
Donee is NOT subject to donees tax since
Donees tax has been abolished by PD 69
INTER VIVOS
In 2003 Q#5: Examinees were asked whether the following is subject to Income tax:
a. Hospitalization expenses
b. Cost of repair of damaged vehicle; and
c. Moral and Exemplary damages
Q: X, while driving home from his office, was seriously injured when his automobile was bumped
from behind by a bus driven by a reckless driver. As a result, he had to pay P200,000 to his
doctor and P10,000 to the hospital where he was confined for treatment. He filed a suit against
the bus driver and the bus company and was awarded and paid actual damages of 300,000 (for
his doctor and hospitalization bill), P 100,000 by way of moral damages for what he had to pay
his attorney for bringing the case to court. Which, if any of the awards are taxable as income to
X and which are not? Explain
a. Hospitalization expenses---this is tax exempt because this represents compensation for
injuries sustained ( this is the one covered by Sec. 32 B 94)
b. Cost of repair of damaged vehicle--- not taxable. There is really no income here. So,
compensation for the amount spent for the repair of the car is not subject to tax
c. Moral and Exemplary damages--- Prof. Domondon advanced the view that moral
damages and exemplary damages are taxable (he may have changed his view because
when we answered this in the UPLC, we unanimously suggested that moral and exemplary
damages are tax exempt.) He made mention about the definition of Gross Income under Sec.
32 A derived from whatever source. He pointed out that there are really no clear
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
exemptions from Gross income and there are really no clear exemptions from income under
Title II.
The Committee on taxation in UPLC always answers this Q as not subject to tax. Under the
NCC Art. 2197 (you must master this) & 2229 (Exemplary damages) you should know the
grounds for recovery of damages. There are 9 grounds under 2217 (you should memorize
this article):
1. mental anguish
2. serious anxiety
3. wounded feeling
4. besmirched reputation
5. physical suffering
6. social humiliation
7. moral shock
8. fright
9. similar injury
The enumeration is not really exclusive because there are other grounds in the subsequent
sections.
If we tax moral damages, you can just imagine the effect, taxing any of the 9 grounds for
which moral damages are awarded. There is really no gain or profit realized, how can we tax
that? We shall not tax that, otherwise, we are in effect taxing the grounds for which moral
damages may be awarded. The is the same as in the case of exemplary damages under
2229. Under 2229, there are 2 grounds mentioned there: 1) by way of example; and 2) as
deterrent for the commission of similar offense. If we tax that, we are in effect taxing the
grounds laid down under Art. 2229.
The correct answer is, and it is a unanimous decision of the members of the Committee in
Taxation of UPLC---- it should not be subject to tax.
Q: What about the award representing loss income or earnings or profit? He was hospitalized &
wasnt able to earn his 2 months salary amounting to, let us say P 30,000. This P 30,000 is
included in the judgment rendered by the court. Is this subject to tax or excluded from Gross
income?
Answer: What is clear here is that it is compensation for injuries or sickness that is not
taxable. There is an opinion expressed by 1 author that it should not be taxed because it is
the result of that injury or hospitalization. I mentioned this in my book (as revised, p. 17)
citing that opinion of tax experts of U.S. It is there in 1961 that the opinion is that this award
representing loss income or profit is the one taxable. So, all damages that may be included
in the judgment of the court are tax exempt EXCEPT that amount representing loss of
income. That is the one that is taxable.
You should try to distinguish Paragraph (a) from paragraph (b). Par (a) refers to tax exempt
retirement benefits, pensions, gratuities, etc. Par (b) is popularly known as separation pay.
Item (a) refers to that retirement benefits received from private firm, whether corporate or
individual. The Tax Code is strict on this, in that it provides 4 requisites for exemption or
exclusion. But if you try to refer to item (b), there is only 1 requisite for exemption, that is, if it is
received beyond the control of the employee or official.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
1996 Bar: An employee died and his surviving spouse received P 100,000 separation pay
benefits from the ER. Is this amount subject to tax?
Others answered this Q in this way: taxable because under Sec. 32 A Gross income means
all income from whatever source.
This Q. is covered by item #6 (Sec. 32 B 6 (b)). This is a tax exempt separation pay and
should be excluded from the Gross Income of the surviving spouse.
So dont always refer to Sec. 32 A derived from whatever source. Consider also Sec. 32 B.
Sec.32 A is modified by Sec. 32 B. Yes, it is derived from whatever source but there are
items that are excluded from Gross Income under 32 B and a retirement benefit is one of
them.
SUGGESTED ANSWER:
For category A employees, all the benefits received on account of their separation are not subject to
income tax, hence no withholding tax shall be imposed. The benefits received under the BIR approved
plan upon meeting the service requirement and age requirement are explicitly excluded from gross
income. The ex gratia payment also qualifies as an exclusion from Gross income being in the nature of
benefit received on account of separation due to causes beyond the employees control. (Sec. 32 B).
The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits
excluded from gross income.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
For category B employees, all the benefits received by them will also be exempt from income tax,
hence not subject to withholding tax. These are benefits received on account of separation due to
causes beyond the employees' control, which are specifically excluded from gross income (Sec. 32 N)
JAP's ANSWER:
Majority of the examinees qualify their answer based on age & length of service; others also
answered regarding the monetized unused sick leave credits. They mentioned about the 10 day rule
and answered that sick leave credits are taxable. That is not correct.
Answer: All of these benefits are not taxable. Why? They overlooked the second sentence due to
economic situation. This is considered as a cause beyond the control of the employee or official. So,
when the benefit or separation pay received from the employer is brought about by causes beyond the
control of the employee or official, that is tax exempt. Disregard the source.
So, don't just take note of the benefits stated in the problem. Remember also the rule on separation
pay, it must be one received on account of cause beyond the control of the employee or official.
Separation pay as a result of voluntary resignation----this is subject to tax as the cause is not beyond
the control of the employee or official.
In 1 Bar exam: A govt employee received benefits from GSIS. He deposited the amount
received & it earned interests. Q: Is the benefit representing GSIS benefit taxable?
No. It is tax exempt. But as regards interest on this benefit, that is the one that is subject to
tax. This is the same also with SSS benefits. If the amount received is deposited in a bank &
it earned interest, such interest is subject to 20% FT. So, do not apply in this case the rule
that accessory follows the principal because of the rule that exemptions must be strictly
construed against the taxpayer and liberally in favor of the government.
SUMMARY:
ITEMS INCLUDED
CONDITIONS or PARTICULARS
REQUISTES: keyword FORT
a. retiring official must be AT LEAST 50 years of age
b. approved or availed only ONCE
c. REASONABLE private benefit plan approved by the BIR
d. 10 years in service
SEPARATION PAY
a. Death
b. Sickness
c. Other Physical disability
d. For any cause beyond the control of the official or employee
cessation of business operation due to continued losses
--- dissolution of the corporation
--- other authorized causes under the labor code
--- compulsory retirement
--- terminal leave pay
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
BENEFITS FROM
SSS RA 8282
Tax exempt
GSIS RA 8291
Tax exempt
VL
SL
NOT taxable
NOT taxable
GOVERNMENT EMPLOYEES
RANK-and-FILE
RR 10 2000
TAX EXEMPT
TAX EXEMPT
Exempt up to 10 days
Unused taxable
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
As to Argument #2, as to the argument that the interest is tax exempt as it was an agent of
export-import bank of Japan, the SC said there was no clear and convincing evidence that
Mitsubishi was agent of export-import bank of Japan. Since Mitsubishi failed to prove that it is
entitled to such exemption, the interest income from the loan is subject to tax.
In the ruling of the SC, it made mention of this and it is now found in Sec. 32 B (7, a)--Mitsubishi
is not one of those tax exempt entities under the Tax Code. Under the Tax Code, interest income
on loan is tax exempt only if the recipient is a foreign government or financing institution controlled or
financed by foreign government, or regional or international financing institutions established by the
foreign government. Mitsubishi is not one of these financing institutions.
The possible modification is: Mitsubishi is designed as an agent of export-import bank of Japan.
In the problem, it is clear that there is a principal-agent relationship. So, they are considered one and
the same if that is the assumption in the problem. The interest income is tax exempt.
But in the actual case as ruled by the SC, Mitsubishi was never made as an agent of exportimport bank of Japan. The examiner is aware of that. The source is a tax-exempt entity. That is the
argument of Mitsubishi. That is immaterial because in the contract of loan, upon consummation of
the same, that money will become the exclusive money of the borrower. You have to check in the
problem if the creditor or the lender is not a financing institution controlled or financed by a foreign
govt, etc. If not, the interest on the loan is definitely subject to income tax.
This case was the favorite forecast of Prof. Jose Nolledo who died 2 years ago. In 1994, he
mentioned that this is a sure Q. in taxation. Again in 1995, he made a prediction that this case will be
asked. It was not asked, until he died!!! hehehehe. Hope this will be asked in honor of his memory,
hehehe. Mr. Examiner, its about time that you ask this case!!!!
1999 Bar: there was a Q regarding GOCC. Do government-owned and controlled corporations
form part of the Govt of the Phils (RP) or national govt?
It is believed that GOCC are within the contemplation of national govt. so that if the income
nd
is received by GOCC, since it is not covered by this (2 requirement), even if it is an income
derived from the exercise of essential Governmental functions, that may be subject to tax.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2000 Q#10: Jose Miranda, a young artist and a designer, received a prize of P100,000 for
winning in the on-the-spot- peace contest sponsored by a local Lions Club. Shall the reward be
included in the gross income of the recipient for tax purposes? Explain
Answer: Yes it is in recognition of his artistic achievement but since he performed an act
he qualified as a contestant-- we pointed out that in the absence of the 3 requisites, the
100,000 received must be subject to tax. Exemptions must be strictly construed against the
taxpayer.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
1996Q#10: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup
Boxing Council, a sports association duly accredited by the Philippine Boxing Association.
Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's
tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land refuse to pay. Decide
Answer: The prize will not constitute a taxable income to Onyoc, hence the BIR is not
correct in imposing the income tax. RA 7549 explicitly provides that All prizes and awards
granted to athletes in local and international sports tournaments and competitions held in the
Philippines or abroad and sanctioned by their respective national sports associations shall
be exempt from income tax.
Neither is the BIR correct in collecting the donor's tax from Ayala Corporation. The law is
clear when it categorically stated that the donor's tax of said prizes and awards shall be
exempt from the payment of the donor's tax.
But this Q may be asked also: How about the amount of the contributions, can that be claimed
as deductible contributions?
Under RA 7549, YES. (You must state the # of the law to impress the examiner... 75
grade you must obtain; 49avoid this, mortal sin!)
Under the Old Tax Code, the following items were EXCLUDED from Gross Income:
a) Informer's reward
Under the Present Tax Code (as amended by RA 8424 Sec. 282), this informer's reward
is now subject to 10% FT (effective Jan. 1, 1998);
b) Interest income on Govt. securities
This has been deleted from the enumeration under the Present Tax Code. This means
that it is now taxable
c) Interest income from bank deposit maintained under the Expanded Foreign Currency
Deposit System
Under the Old Tax Code, it made no distinctions, irrespective of the recipient or
depositor, tax exempt. Under the Present Tax Code, if it is received by Resident
Taxpayer it is now subject to 7.5% FT. It is exempt only if the recipient is a Nonresident
taxpayer (Individual or corporate)
REASON:
To lessen the burden of foreign loans inasmuch as the interest of these
loans are, by contractual arrangement, borne by domestic borrowers.
COVERS THE FF INCOME GIVEN BY (a-c): INTEREST INCOME
1. from bank
2. on loan granted
3. on certificate of indebtedness on banks issued in F/O
4. Dividend income received from DC stock investment income
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
b. recipient was selected without any action on his part to enter the contest
or proceeding
c. recipient is not required to render substantial future services as a
condition of receiving the prize
Under RA 7549, the venue is immaterial BUT the sports competition must be
sanctioned by the Philippine Sports Commission.
13
TH
TAX TREATMENT:
exempt from income tax
donor or contributor is exempt from donors tax under RA 7549
he may claim the same as a deduction in addition to those available
under Sec. 34H
Total exclusion shall not exceed P30,000
V.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
that under the law on Partnership, a partnership is formed or created or organized if these 2
requisites concur:
1. contribution to a common fund; and
2. Intention to divide profit among themselves.
In this case, they have the intention to divide the profits among themselves.
These persons,
according to the SC, formed a taxable unregistered business
GATCHALIAN vs. COLLECTOR: 15 persons made a contribution to a common fund to buy a
sweepstakes ticket and agreed to divide the winnings among themselves. The SC held that there
was a partnership formed.
REYES vs. COLLECTOR (1968 case): Father & son purchased a building and put up a business.
They agreed to divide the profit. Then an administrator was appointed. The SC said that there was a
partnership created. These father & son formed a taxable unregistered partnership.
OA VS. CIR (45 SCRA 74; Favorite Bar Q; 1972 case-asked 1997 bar): As a rule, co-ownership is
tax exempt because the co-owners formed the co-ownership not for profit but for common enjoyment.
One of the causes that give rise to co-ownership is inheritance. The heirs are considered co-owners
and in that stage, they cannot be considered as unregistered taxable partnership. Here in Oa, after
partition, the co-owners made a contribution to a common fund out of their inherited properties. They
allow one of them to administer the properties and the surviving spouse made use of these funds
and made investments in businesses that produced income. The SC said, this co-ownership was
converted into a taxable unregistered partnership because:
a) The heirs made a contribution to a common fund; and
b) There was an intention to divide the profits among themselves.
Co-ownership may be converted into unregistered taxable partnership once the heirs made a
contribution to a common fund with the intention to divide the profit among them. The SC held that
the circumstance of the case would reveal that there was an intention to divide the profits among
themselves because they authorize the surviving spouse to administer the property and make use of
these to invest in a profitable business.
Cases which are yet to be asked in the BAR:
OBILLOS, Sr. vs. CIR (139 SCRA 436) ---OBILLOS DOCTRINE - Obillos, Sr. entered into a contract
with Ortigas Corp. The agreement stipulates that the parcels of land be divided into residential
houses. But the children found the construction as expensive so they decided to sell the parcels of
land. The BIR claimed that they formed a Partnership No matter how it is created.
The SC said that there was no partnership created because it was just an isolated transaction.
From the very beginning, the children never intended to form a partnership. There was really no
intention to divide the profits among themselves.
PASCUAL vs. CIR (166 SCRA 506; 1988 case): The SC ruled that there was no taxable
unregistered partnership formed or organized. Pascual acquired 5 parcels of land. They sold these
parcels of land for a profit. The BIR claimed that there was a partnership formed. The SC ruled that
there was no partnership formed or organized. The SC cited Art. 1769 B of NCC, these are the tests
to determine the existence of a partnership---it says mere sharing of gross returns does not of itself
establish partnership. Here, they shared in the gross returns, not in the net profit. There was that
absence of intention to divide the profits among themselves.
These to my mind, are the probable bar Q's. Oa case was already asked but it may be asked again.
Obillos and Pascual are the most probable Q.
BIR Ruling 87-102 (April 8, 1987):
If the heirs who inherited a property, an apartment in this case, whereby rent income is derived
on such property, continue to engage in the business (rental) and with intent to divide the rentals
among themselves, then they shall be taxed as a taxable unregistered partnership
TAX EXEMPT:
Sec. 22 B- 3 tax exempt entities or associations:
1. General Professional Partnership;
2. Joint venture for the purpose of undertaking construction projects;
3. Joint consortium with the govt for the purpose of engaging in petroleum and other energy
operations
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2002 Q#6: XYZ Foundation is a non-stock, non-profit (NSNP) association duly organized for
religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lots
used for religious purposes and utilized the entire proceeds for the construction of a building to
house its free Day and Night Care Center for children of single parents. In order to subsidize the
expenses of the Day and Night Care Center and to support its religious, charitable and social
welfare projects, the Foundation leased the 300-square meter area of the second and third floors
of the building for use as a boarding house. The foundation also operates a canteen and a gift
shop within the premises, all the income from which is used actually, directly and exclusively for
the purposes for which the Foundation was organized.
A. Considering the constitutional provision granting tax exemption to Non-stock corporations
such as those formed exclusively for religious, charitable and social welfare purposes,
explain the meaning of the last paragraph of said Sec. 30 of the 1997 Tax Code which states
that income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal or from any of their activities conducted for profit regardless of
the disposition made of such income shall be subject to tax imposed under this Code
B. Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its
boarding house and the operation of its canteen and gift shop subject to tax? Explain
SUGGESTED ANSWER:
A. The exemption contemplated in the Constitution covers real estate tax on real properties
actually, directly and exclusively used for religious, charitable and social welfare purposes. It
does not cover exemption from the imposition of the income tax which is within the context of
Sec. 30 of the tax code.
As a rule, Non-stock, non-profit corporations organized for
religious, charitable and social welfare purposes are exempt from income tax on their
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
income derived by them as such. However, if these religious, charitable and social welfare
corporations derived income from their properties or any of their activities conducted for
profit, the income tax shall be imposed on said items of income irrespective of their
disposition (Sec. 30; YMCA vs. CIR)
COMMENT: Since this was asked already, the possible problem may be based on that case of
CIR vs. YMCA, which is a case wherein the SC construed the meaning of the last paragraph of
Sec. 30.
When it says NOTWITHSTANDING, it implies that these 11 tax exempt corporations are
not totally exempt from corporate income tax because their income derived from their properties
real or personal, regardless of the use of the same is subject to tax because their income
derived from activities conducted for profit irrespective of the use of the same is subject to tax.
They are not totally exempt form their corporate income tax because they can be taxed on their
income derived from the sale of their properties, real or personal. They can be taxed on their
income derived from the lease of their properties, real or personal. They can be taxed on the
interest income from bank deposit. With more reason, income derived from businesses. YMCA
falls under paragraph E, Non stock corporations, non stock associations, charitable, religious
and educational organizations.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
the rent income from real or personal property of any of these corporations under Sec.
30 is subject to tax; 4) as well as interest income from bank deposit is subject to 20 FT.
The SC said in this case that if YMCA derived income from deposits in the bank, that
interest income is subject to 20% FT. Can it argue that the interest income shall be used
to carry out its educational, religious and charitable purposes? No. It brings us to the last
argument:
4. That it being a religious educational charitable institution, the income (rent income) shall
be used in furtherance of its purpose. It is clear in the last paragraph of Sec. 30
regardless of the disposition made on such income. Disposition also means use. So,
even if this income (rent income or income derived from sale or exchange of real or
personal property or interest in bank deposits) shall be used in furtherance of non-profit
purposes, that is not an argument because the tax code categorically says regardless
of the disposition; irrespective of use, that income is subject to tax.
Q: What about NSNP educational institution, is this covered by the last paragraph of Sec. 30
(Par. H)?
There is Constitutional infirmity. Don't apply the last paragraph of Sec. 30. What should be
applied in so far as NSNP educational institution is concerned is Art. 14 Sec. 4(3) of the
Constitution. It says as long as the revenue (income) shall be ACTUALLY, DIRECTLY AND
EXCLUSIVELY used for educational purpose, EXEMPT. But here in Sec. 30, even if such
income is actually, directly and exclusively used for educational purpose, it is still subject to tax;
source of the income is immaterial
This Constitutional exemption must prevail over Sec. 30.
amended as not to apply to NSNP educational institution.
In par. E, it covers non-stock corporations. It includes charitable and religious institutions. YMCA falls
under this. It is a charitable and religious corporation based on its By-laws. So, the last par. of Sec.
30 squarely applies to it.
Q: Is the interest income received by YMCA subject to 20% FT? YES. It is a charitable and
religious institution but it is not considered a NSNP educational institution.
Educational Institutions are favorite Bar Q. You should know the Rules on these (Rules under Title II;
Exemptions from property taxation; tax treatment on donations that may be given to these
educational institutionsinter vivos or mortis causa)
Q#1. Are these educational institutions subject to income tax? (be guided by Sec. 30);
Answer: As regards Private educational institution--- Sec. 27 B imposes 10% preferential
corporate rate or 35% as amended effective July 1, 2005. The 10% preferential corporate
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
rate applies if the income from unrelated trade, business or activity is NOT MORE THAN
50% of its total income. It means that if it is more than 50% of its total income, apply the 35%
corporate rate.
As regards Gov't educational institution--- it is not subject to income tax (Sec. 30 (I)).
As regards NSNP educational institution--- Under Art. 14 Sec. 4 (3) of the Constitution, it is
exempt from income tax, property tax and customs duties. The constitutional exemption from
income tax is reiterated under Sec. 30 H.
Q: What is the importance of knowing whether it is a constitutional exemption or a statutory
exemption? If a law is passed by Congress withdrawing this exemption (Sec. 30 I), is that a
valid law?
YES. The power to grant an exemption carries with it the power to withdraw the same.
Would that be the same if the withdrawal pertains to NSNP educational institution?
That is UNCONSTITUTIONAL. The exemption is by virtue of a constitutional provision.
Yes, the power to grant an exemption carries with it the power to withdraw the same but
it cannot withdraw Sec. 30 H because it is just a reiteration of a Constitutional provision.
It is the Constitution that grants the exemption
Q#2. Are the properties of these educational institutions subject to property tax?
Answer: Under Art. VI Sec. 28 (3) of the Constitution it makes no distinction. Provided it is
actually, directly & exclusively used for educational purposes
LUNG CENTER OF THE PHILS vs. ROSAS (433 SCRA 119): The SC construed
exclusively to mean solely. This now abandons the principle of incidental facilities. Meaning,
those incidental facilities may no longer be covered by this Constitutional exemption
Q#3. Are donations inter vivos given to these educational institutions subject to donor's tax?
(Sec101 A (b))
Answer: Private educational institutions are not one of those mentioned under Sec. 101A(3).
What it mentioned there is Non-stock Corporation that may include NSNP educational
institution and Govt. educational institution formed or organized as non-profit educational
institution.
When this was asked in the bar exams, we suggested that the examinee should state these
requisites for the exemption from donor's tax:
a. the donee must be a NSNP educational institution;
b. the institution must be governed by the Board of Trustees;
c. the Trustees receive no compensation;
d. the donation shall be used or devoted to the accomplishment of purposes stated in
the Articles of Incorporation;
e. Not more than 30% of the amount shall be used for administrative purposes
If the Government educational institution and NSNP educational institution possess
these requisites/ characteristics, the donor is not subject to donor's tax with respect to
donation inter vivos given to these Government educational institution and NSNP
educational institution
Q#4. Is donation mortis causa made in favor of these educational institutions subject to Estate
tax? (Sec. 87 (d))
Answer: YES, under Sec. 87, the institutions covered are:
a. transfers made in favor of social welfare organization;
b. given to charitable institutions;
c. cultural institutions
So, Educational institution is not one of them. Since it does not cover educational
institution, by the principle of strictissimi juris, any donation mortis causa given to private
educational institution, government educational institution and NSNP educational institution
is subject to estate tax.
SUMMARY:
EDUCATIONAL
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
INSTITUTION
PRIVATE
INCOME TAX
PROPERTY TAX
10%
preferential
corporate rate if the
income from unrelated
business is not more
than 50% of the total
income; if more than
50%
then
normal
corporate rate of 35%;
DONOR'S TAX
ESTATE TAX
Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose
Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions
Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose
Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions
Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose
Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions
20% FT on income
from bank deposit
Exempt ;
GOVERNMENT
Exempt ;
Interest income on bank
depositExempt
provided ADE used for
educational purpose
-certification from bank
that the account exists
-certification
of
the
educational purpose
-there must be a project
for educational purpose
NSNP
GOVERNING PROVISIONS
MCIT
BPRT
15%
IAE
10% IAE
Sec. 29
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Q: How do you counter the argument that MCIT is unjust or inequitable? Even if the corporation
has no taxable income or incurred a net loss, yet it is still required to pay 2% MCIT? Are there
equitable provisions?
YES under Sec. 27 E (2).What are these equitable provisions?
1. Corporation that incurred a net loss has a tax benefit. The excess of that 2% of GI over
the actual corporate income tax may be carried over by way of tax credit---this excess of
2% MCIT over the normal corporate income tax may be credited against actual
corporate tax in the next 3 succeeding taxable years
Illustration:
2000
2001
2002
50,000
100,000
100,000
MCIT
200,000
50,000
60,000
200,000
100,000
100,000
100,000
50,000
-0-
50,000
200,000
2. Another equitable provision is that MCIT applies only after 4 years from the
commencement of the corporate business and not in the first year of operation. If you
st
apply this in the 1 year of corporate existence---the year of adjustment of corporation
that would be unjust. (Sec. 27 E). The law assumes that corporations are already
th
financially stable on its 4 yr. Of operation.
3. This may be suspended under equitable exceptional circumstances (Sec. 27 E (3)):
a. suspended in the sense that upon the cessation of this cause, MCIT shall
automatically be applied;
b. prolonged labor dispute experienced by the corporation.
Equity dictates MCIT must be suspended. This is clarified by RR 9-98. What
is meant by prolonged labor dispute that will justify the suspension of this
MCIT? This must be brought about by a labor strike and have lasted for
more than 6 months and it must result in the shutdown of the business
operations
c. force majeure
this is construed under RR 9-98 to include FILES (Flood, Insurgency,
Lightning, Earthquake, and Storm)
d. Financial business reverses/losses brought about by FERT (Fire, Embezzlement,
Robbery, Theft)
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Improperly Accumulated Earnings Tax of 10%: (new provisionhas yet to be asked in the Bar)
Q: Explain the rationale of this new corporate rule imposing what is known as IAET
Sec. 2, RR 2-2001Don't just try to memorize this. Understand the implication so that you
can easily recall the provision
Answer: In a domestic corp, if dividends are declared & distributed to stockholders, the
stockholders are subject to the 10% tax on these dividends. The source of these dividends is
earnings (Sec. 43 says unrestricted R/E). Let us say, the corporation Improperly
accumulates the corporate earnings. It withheld the declaration of dividends. The effect of
this is that the Govt was deprived of the right to impose tax on the dividends. Improperly
accumulated earnings means that the corporation is not justified under the circumstances.
Thus, according to RR 2-2201 Sec.2, it is imposed in the nature of a penalty to the
corporations for such improper accumulation of corporate earnings and as a deterrent to
avoidance of tax upon stockholders who are supposed to pay tax on that dividends. These
are the reasons for the imposition of IAET.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2. when the corporation is prohibited under any loan agreement with any FI or creditor,
whether local or foreign from declaring dividends w/o its/his consent, and such
consent has not yet been secured; or
3. when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is a need for special
reserve for probable contingencies;
4. to purchase land or building approved by the BOD
Note: there are 6 cases under RR 2-2001 but these 4 are the notable ones
Sec. 29. Imposition of improperly Accumulated Earnings tax-B (2) Exceptions-- the IAET as provided for under this Section shall not apply to:
a. Publicly held corporations;
b. Banks and other non-bank financial intermediaries; and
c. insurance companies
Since corporations covered are closely held corporations, not covered are the following:
Under Sec. 29--- 3 ( B-P-I):
1. Publicly held corporations;
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
In RR 2-2002, there are additional tax exempt corporations in addition to the 3 mentioned in
Sec. 29:
4. Taxable partnership
5. General professional partnership
6. Non-taxable joint ventures
7. Enterprises duly registered with the Philippine economic Zone Authority under RA
7916 and
8. Enterprises registered pursuant to the Bases Conversion and development act of
1992 under RA 7227.
These are the 8 corporations or entities which are not covered by the 10% tax on Improperly
accumulated earnings.
What was asked in the 2001 Bar is tax exempt or exempt corporations from MCIT. If this will be
the trend, the Q maybe corporations which are not subject to the 10% IAE (Sec. 29)
2 amendments were introduced by RA 8424. These amendments refer to the basis and the
enterprise not subject to 15% FT
Sec. 28 A Tax on Resident Foreign Corporations-5 Tax on Branch Profit Remittances-- Any profit remitted by a branch to its head office
shall be subject to a tax of 15% which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof EXCEPT
those activities which are registered with the Philippine Economic Zone Authority. xxx
Provided, that interests, dividends, xxx received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be treated as branch profits
unless the same are effectively connected with the conduct of its trade or business in the
Philippines
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
SUGGESTED ANSWER:
I will advise A Co. to withhold and remit the withholding tax on dividends. While the general
rule is that a foreign corporation is the same juridical entity as its branch office in the Phils, when,
however, the corporation transacts business in the Philippines directly and independently of its
branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax
similarly imposed on non-resident foreign corporation. The dividends attributable to the Home
Office would not qualify as dividends earned by a resident foreign corporation, which is exempt
from tax.
JAPS ANSWER:
Branch Profits are gains or profits which are effectively connected with the conduct of trade
or business in the Phils. That is exactly the last provision of Sec. 28A5. The case of Marubeni
Corp. involves a direct investment by the mother corporation (Marubeni Japan) in the Philippine
corporation. It received income from such direct investment. Marubeni Japan claimed that that
should form part of the branch profit subject to this 15% FT.
RULING: It should not form part of the branch profits because such investment has no
connection with the trade or business conducted in the Philippines.
With this ruling of the SC, we can now say that to be considered as effectively connected with
the trade or business in the Philippines, it must be one that is made by the branch office. If the
investment is directly made by the mother corporation, the income or profit derived therefrom
cannot be considered as branch profit subject to this 15% FT. Don't be misled if in the problem
the mother corporation invoked that under the principal-agent relationship theory, that may be
considered as branch profit or profit of the branch office. Principal-agent relationship was
rejected by the SC. You cannot apply that theory which dictates that the profit of the mother
corporation is considered as profit of the agent and vice versa. It is not applicable because
there is a clear provision under the Tax Code. This has not been amended. That is, it must be
effectively connected with the conduct of trade or business in the Philippines. It may be
considered as branch profit if that investment is made through the branch office.
Q: How do you know whether the investment is effectively connected with the conduct of
trade or business in the Philippines?
You can determine it by inquiring with the SEC because a RFC is required to register its
business with the SEC. There you can check the nature of the business of the RFC.
Q#3. Tax exempt branch profits--- profits earned or derived by firms or enterprise registered
under Philippine Economic Zone Authority. Under the old Tax Code, it was Export Processing
Zone authority. But now, it is under PEZA.
Q#1: NRFC received a dividend from a Domestic Corporation. So, the income subject matter of
that provision is dividend income. Is that taxable?
YES, that is taxable.
If it is taxable, is it subject to corporate FT or regular corporate rate?
The tax rate is in the nature of a FT (It is mentioned in Sec. 28B5b, and it made
mentioned of Sec. 57Athis is the rule on Final Withholding tax---there are 26 items in
Sec. 57A and this is one of them). This means that this 15% corporate income tax is a
FT. Since it is a FT, the source (w/c is the domestic corporation) is considered as the
withholding agent of the Govt. And applying the Rule under RR 2-98, as w/holding agent,
it is the one legally obliged to pay the tax.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Q#2. Why is it that the corporate rate has been reduced to 15%? The SC in the case of Proctor
& Gamble Phils said that the purpose of the tax code is to attract/encourage foreign investment.
If we reduce the tax rate from 35% to 15%, is there a tax saved or spared?
YES. As described by the SC, this is known as the Tax Sparing Credit. So, this implies that
there is a tax saved.
Try to analyze, 35% would have been the applicable corporate income tax but Sec. 28B5b
reduced it to 15%. so, the tax saved percentage wise, is 20%.
Q#3. What is the condition for the imposition of this 15% reduced corporate rate?
A condition sine qua non to the imposition of reduced corporate rate is that the foreign Govt,
in the language of Sec. 28B5b shall allow tax credit on taxes deemed paid in the
Philippines by this foreign corporation.
Q#4. When it say shall allow tax credit on taxes deemed paid in the Philippines What does that
mean? Will these corporations obliged to present clear & convincing proof of the amount
actually granted as tax Credit?
This now brings us to the 2 cases decided by the SC on the same date (April 15, 1988):
1. Procter & Gamble Philis. vs. CIR (160 Scra 560)
2. Wander Phils. vs. CIR (160 SCRA 573)
These 2 cases were decided on the same date but were in conflict with each other. (the
jurisprudence has yet to be asked in the BAR)
nd
In the Procter case, according to Justice Paras of the 2 Division, there should be proof of
rd
the amount actually granted as tax credit. However, in the Wander case decided by the 3
division of the SC, did not make any ruling to that effect. It can be inferred from the
WANDER case that proof as to the actual amount granted as a tax credit need not be
necessary.
Prevailing Doctrine laid down in the MR of the Procter case (204 SCRA 377):
On Dec. 02,1991, acting on the MR filed by Procter & Gamble, SC En Banc ruled that
the Tax Code does not require actual grant. It says Shall allow, it did not say Actual
grant. The SC is absolutely correct in its ruling that since the Tax Code does not require
actual grant, proof of the amount granted as tax credit by the foreign Govt is enough.
According to the SC, this is an old provision, except for the tax base. This provision is the
same as the old tax code. And there is really no BIR Ruling requiring actual grant.
So, the prevailing view is No proof of the actual amount granted as tax credit. What is
only required is to prove that the foreign Govt allows such tax credit.
Q: How do you prove if the foreign Govt allows tax credit?
Refer to the Revenue Code of the foreign Govt. In fact, in the Procter case, there is a
provision in the U.S Revenue Code allowing tax credit to these American corporations.
Twice asked in the Bar: Whether or not the withholding agent (subsidiary corp., in this case
Procter Phils.) has the legal personality to file written claim for refund.
nd
In the Procter case, the 2 division of the SC said It is the mother corporation that has
a legal personality to file the written claim for refund because the mother corporation is
the one considered as the taxpayer. Since withholding agent is not considered as
taxpayer, it has no legal personality to file a claim for refund
rd
But in the Wander case, the 3 division said Withholding agent has the legal personality
to file a written claim for refund.
This issue was also resolved by the SC en banc in the MR of the Procter case on Dec. 2,
1991. The SC en banc ruled that the withholding agent is not only an agent of the Govt.;
it also an agent of the taxpayer. Since it is an agent of the taxpayer, it is technically
considered as a taxpayer. As such, it has legal personality to file a written claim for
refund. (The SC cited the case of Phil. Life Insurance vs. CIR 1 SCRA 15). It is an
agent of the Govt for the collection of taxes and it is an agent of the taxpayer for the
filing and payment of income tax.
SUMMARY:
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Doctrine #1. Sources of income --- it reiterates the settled rule that the sources of income are PA-S (Property, Activity and Service). Recall the technical definition? Income is a gain derived
from CAPITAL, LABOR or BOTH labor and capital (Fisher vs. Trinidad (?). In BOAC case, it
just changed the terms: from capital to property; labor to services; but activity is added. This
nd
now brings us to the 2 doctrine
Doctrine #2. When can you say that an income is derived from sources within? It is also in this
case that the SC enunciated the rule that: An income is considered as income WITHIN when
the source of such income is undertaken within the Philippines. In the BOAC case, what is the
determinative test of that income considered within? It is an income derived from sources within
when the source of the same is made or conducted or undertaken in the Philippines. So, it is
considered income WITHIN if: the property from which the income is derived is situated in the
Philippines; or the activity from which such income is derived is undertaken in the Philippines; or
if the service is perform\med within the Philippines. Thats the meaning of that.
Doctrine #3. State-Partnership Theory - The Philippines has the right to tax the same because
it enjoys the protection of the Philippine Govt. It can be taxed if the particular subject of taxation
enjoys the protection of the Philippine Govt. If that subject of taxation does not enjoy the
protection of the Phil. Govt (Theory of Protection reiterated in the BOAC case), we cannot tax
that. So, in the BOAC case, the SC said that an income derived from the sale of transport
documents (airline tickets) can be taxed because such activity enjoys the protection of the Phil.
Govt. This now brings us to the tax situs of sale transport document.
In BOAC case, the tax situs is the place of sale or place of payment. This has been changed
or modified by Sec. 28 A (3). The composition of Gross Phil. Billings or the determinative test of
those revenues that would constitute Gross Philippine Billings has been changed by RA 8424.
Under the BOAC case, it is the place of sale or payment
NEW DOCTRINE: Now, it is the origin of passengers, baggage, cargoes and the like.
This in effect changed the tax situs under Sec. 42A (6)it speaks of sale of personal
property and this may include sale of transport document or intangible personal property. In
Sec. 42 A (6), the tax situs is the place of sale. This is modified by Sec. 28 A (3), that is, if the
subject of sale is a transport document, then consider the origin of the passengers, baggage or
cargoes. As amended by RA 8424, Gross Philippine Billings may now consist of revenue that
may be derived from the transport of passengers, cargoes and the like, irrespective of the place
of sale or payment.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
RR 15-2000 now declares that off-line international airlines cannot be taxed on the income
derived from the sale of transport documents where the passengers and cargoes do not
originate from the Phils.
1994Q#15: An off line international airline sold transport documents (airline tickets) in the Phils
to his clients and officers. Can this off line international airline be taxed from income derived from
the sale of transport documents?
Under the BOAC case, YES because while it is true that it rendered no service; no property
in the Philippines from which income may be derived; there was that ACTIVITY. There was
such activity undertaken in the Philippines. The SC said that the activity refers to the sale of
transport document. Since these transport documents are sold in the Philippines, payment
is made in the Philippines, the flow of wealth therefore, occurred within the Philippines.
The rule now has been changed. We can no longer tax this. The origin of the passengers,
baggage or cargoes must be here in the Philippines.
VI.
The TP must point to some specific provisions of the statute authorizing the deduction and he must
be able to prove that he is entitled to the deduction authorized or allowed.
If a TP fails to deduct certain expenses for the taxable year, he cannot deduct them from the income
of the next year or any succeeding year.
The following are not allowed to claim deductions their tax base is GROSS INCOME:
a. NRA NETB
b. NRFC
ALLOWABLE DEDUCTIONS
Section 34
ALLOWABLE DEDUCTIONS
PERSONAL EXEMPTIONS
As to nature
As to purpose
As to amount
As to kinds of
deductions or
exemptions
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Q: A non-resident foreigner was doing business here in the Philippines. He is married and has 2
minor children.
Check if the country of the foreigner allows basic personal exemption to the citizens of the Phils.
If no personal exemptions is granted by his govt, we cannot grant him any personal exemption.
But if his govt allows basic personal exemption to Filipino citizens, we can grant him basic
personal exemption but the amount must not exceed our maximum basic personal exemption.
Example: his country allows 25k basic personal exemption to married Filipinos. Then he is also
entitled to 25k basic personal exemption here in the Phils. If his country allows 40k as basic
personal exemption to married Filipinos in his country, he is only entitled to a basic personal
exemption of 32k as the amount is the maximum basic personal exemption granted by our
country to a married person.
the foreigner cannot claim additional exemption as regards his 2 minor children as the rule on
reciprocity applies only to basic personal exemptions
CLASSIFICATIONS OF DEDUCTIONS
ITEMIZED
As to proof
As to
claimant
OPTIONAL STANDARD
Q: Suppose your friend asks you about these 2 deductions, would you advise him to avail of
itemized deductions or OSD of 10%?
Answer: It depends upon the circumstances of the case. If your friend has receipts or
documents which may substantiate all the expenses, it's better to avail of the itemized
deduction because he can claim more deductions. On the other hand, if he has no receipts
to substantiate the expenses incurred, he should avail of the 10% OSD.
No proof or
receipts are required to avail of the 10% OSD.
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
must be reasonable
must not be contrary to law, public morals or public policy
What is the provision under the Tax Code which enunciates the Tax Benefit Rule? This applies to
two provisions under Sec. 34, paragraphs C and E. There is that common provision on income tax
benefit.
Paragraph C provides: shall be included in the gross income in the year of receipt to the extent of
the income tax benefit of said deduction. So, this refers to tax refund.
Paragraph E deals with recovery of bad debts. The provision says: shall be included in the gross
income in the year of recovery to the extent of the tax benefit of said deduction
Tax Refund:
shall be included in the GI in the year of receipt to the extent of the income tax benefit of said
deduction---it talks about deduction, so it means that what is involved is a deductible tax. This must
be a deductible tax and must be actually claimed as deductions. That is precisely the tax benefit---it
is one that may reduce the taxable income. Stated otherwise, that may only reduce the taxable
income if it is a deductible tax
150,000
(50,000)
100,000
In 2004, the Local business tax of 50,000 was recovered through a refund because it turned out that
the taxpayer is tax exempt. This 50,000 tax refund is subject to tax because applying the tax benefit
rule, it was claimed as deduction and therefore it reduces taxable income by 50,000. It reduced your
taxable income by 50,000.
However, if the taxpayer receives no tax benefit, the recovery of such tax refund may not result to
taxable income. Example is when the tax refunded is a non-deductible tax. If a tax refunded is a
non-deductible tax, it is not subject tot income tax in the year of recovery because it did not result in
a tax benefit as it did not reduce the the taxable income of the taxpayer for the simple reason that it
is not a deductible item.
So you ought to know what are non-deductible taxes because if the tax refunded is a non-deductible
tax, common sense will tell you it never reduced the taxable income in the preceding year. There is
no tax benefit, so there is nothing to tax. In short, it is not taxable
TAXES:
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
These taxes if refunded, will not result in a taxable gain because the taxpayer received no tax benefit
Deductible Taxes:
1. VAT;
2. Percentage Taxes;
3. Excise Taxes;
4. Documentary stamp taxes;
5. Local business taxes
Take Note: Only Local taxes are included in the coverage of the exam!!!
DEDUCTIBLE TAXES
E Excise tax
I Income tax
D Donors tax
P Percentage Tax
E Estate tax
Same principle as that of refund applies---- to the extent of the income tax benefit of said deduction.
It presupposes that the bad debt was claimed as a deduction; that it was actually claimed as a
deduction.
150,000
(50,000)
100,000
In 2004, this 50,000 was recovered by the creditor. Will this result in taxable gain?
Applying the Tax benefit rule, yes, because such taxpayer received tax benefit. By claiming the
50,000 as deduction from the net income, it reduced the taxable income by 50,000. it follows
that if such amount was not claimed as a deduction, it will never result in a taxable income.
Suppose:
Net loss
(150,000)
BDWO
(50,000)
Total Net loss (200,000)
The 50,000 was subsequently recovered in 2004. Is that subject to tax?
That is not taxable because the taxpayer received no tax benefit since it was never claimed
as a deduction. According to RR 5-99, the recovery of bad debts written off is a mere return
of capital. The reason is simple: it was never claimed as deduction because the taxpayer
has no net income in the preceding taxable year. There is nothing to reduce.
2000 Q#8: a) What is meant by the tax benefit rule? b) Give an illustration of the application of the
tax benefit rule.
SUGGESTED ANSWER:
a) TAX BENEFIT RULE states that the taxpayer is obliged to declare as taxable income
subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit
enjoyed by the taxpayer when the bad debts were written off and claimed as a deduction from
income.
It also applies to taxes previously deducted from gross income but which were
subsequently refunded or credited. The taxpayer is also required to report as taxable income
the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer
enjoyed when such taxes were previously claimed as deduction from income
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
b) X Company has a business connected receivable amounting to 100,000 from Y who was
declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not
able to pay, prompting X company to write-off the entire liability. During the year of write-off, the
entire amount was claimed as a deduction for income tax purposes reducing the taxable net
income of X company to only P1M .
Three years later, Y voluntarily paid his obligation
previously written-off to X company. In the year of recovery, the entire amount constitutes part
of the gross income of X company because it was able to get full tax benefit three years earlier.
JAPS ANSWER:
Citing 2 cases, tax benefit rule applies to:
1. Tax Refund. It is subject to tax if the tax refunded is a deductible tax;
2. Recovery of bad debts written off. It is subject to tax if the amount recovered was claimed
as a deduction from gross income in the preceding year
2005Q#2: Are the following taxable:
a) Tax refund
b) Recovery of bad debts
BUSINESS EXPENSE:
Considered as ordinary or necessary expenses. They are directly attributable to the development,
management, operation and/or conduct of the trade or business of the TP or in the exercise of his
profession
The enumeration of ordinary and necessary expenses under Sec. 34 A is not complete. Other
reasonable business expenses are:
Compensation for personal services rendered---ex. Life insurance premium paid by the
employer
Traveling expenses meal and lodging
Representation
Entertainment
Advertising or promotional expenses
Rent
Repairs and maintenance must be ordinary or incidental
Promotional Expenses:
CIR vs. ALGUE (158 SCRA 9):
Q: Is the P125,000 promotional expenses considered reasonable?
The word reasonable is a question of fact. It is a relative term and will depend upon the
circumstances of the case and the nature of the business of the taxpayer. According to
the SC, the 125,000 promotional expense is reasonable under the circumstances. It is
reasonable because the experimental project involves millions of pesos. P125,000 is
unreasonable if your business is a mere sari-sari store.
ESSO STANDARD DOCTRINE:
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
The doctrine enunciated here is that an expense is deductible if it is paid or incurred in the
production of income. It is not deductible if it is paid or incurred after the production of income or
disposition of income.
The case is about whether the margin fee paid to the Central Bank is a deductible expense. The
SC said that it is not deductible because this was paid or incurred not in the production of
income. It was paid or incurred after the disposition of income.
INTEREST EXPENSE:
Amount of compensation paid for the use of money or forbearance from such use. They are
deductible under the following conditions:
There must be a valid and subsisting indebtedness
It must be an interest bearing obligation see art. 1956
Obligation incurred or paid in connection with the business or trade or the exercise of ones
profession
Must be proven or substantiated by receipts or documents
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
Under Sec. 34 E; RR 5-99 (as amended by RR 25-2002) and PRC vs. CIR (256 SCRA 57), these
are the requisites for the valid deduction of bad debts written off:
1. there must be an existing, valid and enforceable obligation;
2. this must be connected with the business, trade or exercise of profession by the taxpayer;
3. this must not arise from transactions between related taxpayers under Sec. 36 B:
Between FAMILY MEMBERS
Between an INDIVIDUAL and a CORPORATION, more than 50% of the OCS is
owned by such individual
EXCEPT IN LIQUIDATION
Between 2 corporations
same exception as the foregoing
Between GRANTOR and FIDUCIARY of any trust
Between the FIDUCIARY OF A TRUST and A FIDUCIARY OF ANOTHER TRUST if
the same
person is a GRANTOR with respect to each trust
Between a FIDUCIARY of a trust and a BENEFICIARY of such trust
4. it must be charged or written off from the books of the taxpayer;
Under RR 5-99, there must be an actual charged off or written off of such amount; mere
recording will not suffice. The implication is that: only those taxpayers who have books
of accounts can claim these particular expenses as deductions;
5. It must be ascertained to be worthless and uncollectible as of the end of the taxable year;
6. PRC vs. CIR-- it must be uncollectible in the near future (not just at the end of the taxable
year; there must be no slim chance of collecting the same)
Tests or factors that are determinative of worthlessness of a debt or obligation (p. 119-120 of the
book)--- based on American Jurisprudence:
1. Consider whether the obligation has already prescribed (Application of Statute of Limitation-once it is already prescribed, it is already an exercise in futility);
2. The amount should also be considered. It may be collected but if the cost of collecting the
same is more than the amount to be collected, it is impractical to collect such amount;
3. Injury that may be sustained by the debtor. For example, na hospital ang debtor, wala ng
panggastos; wag mo na lang singilin; maawa ka naman);
4. Deathe of the debtor leaving no property (galang natin ang patay);
5. Bankruptcy/ insolvency of the debtor;
6. Insufficiency of collateral;
7. Destruction of documentary evidence or receipts which will prove the payment---if there's no
evidence to prove that the debtor incurred obligation
8. Under RR as amended by 25-2002:
a. The CIR is authorized to waive that required evidence regarding the determination of
worthlessness of an account. It made mentioned of the financial incapacity or
condition of the debtor;
b. It also mentioned the insufficiency of collateral;
c. Referral of debtor/defendant lawyer (?) ( the lawyer must execute an afffidavit to the
effect that filing of the case in court would be unsuccessful (di ko maintindihan
sinsasabi ni japs dito)
Coming soon: F4; Shrek3 (now showing na as of the time of the printing of this notes); Harry PotterOrder of the Phoenix plus the last book (July 21,2007)-2 characters will die; Pirates at worlds end;
transformer the movie
EXEMPTIONS:
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
2 Paragraph: If the taxpayer dies during the taxable year, his estate may still claim
the personal and additional exemptions for himself and his dependent(s) as if he
died at the close of such year
rd
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne
NRA-ETB--- Sec. 35 D requires the reciprocity rule. The foreign Govt. of the NRA-ETB must also
grant exemption to Filipino citizen doing business therein. If no exemption is granted, we cannot
grant exemption to this NRA-ETB. That rule in reciprocity applies only to basic personal exemption.
So even if the foreign govt grants additional personal exemption to citizens doing business therein,
we cannot grant additional personal exemption because it is clear in Sec 35 C basic personal
exemption, that means additional personal exemptions are excluded.
Q: Who can claim the additional personal exemption of P8K in the case of married individuals?
The additional exemption for dependents shall be claimed by only one of the spouses in the
nd
case of married individuals. (2 par. Sec. 35 B). The husband shall be the proper claimant for
st
qualified dependent children (last par. Sec 2.79 (I) (1) (b), and the 1 sentence Sec. 2.79.1 A 5
of RR 2-98)
Instances when the wife shall claim full additional exemptions for qualified dependent children:
1. Husband is unemployed
husband is a member of this group---PALAMUNIN
2. The husbands waives his right to claim the exemptions of children (waiver should be for
all children)
husband is a member of RAMBO--- Report Again kay Misis Bawat Oras (Alcantara
is a member of this)
or a member of BBB--- Bantay Bata Brigade
3. Husband is a non-resident citizen deriving income from foreign sources
-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne