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TAXATION
REVIEWER
Mariano Marcos State
University- College of Law
2011
Prepared by:
Kristelle Joy Ann Quibuyen
Dandy Cruz
Moera Joy Galing-Luna
Rizza Joy Santos-Vallestero
Myrel Tajon
May Encarnina Gaoiran
INCOME TAXATION
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INCOME TAXATION
insurance. Tax is computed on gross income in Capital gains tax on sale of real property
case of individuals. (Note difference in gross classified as a capital asset by a person who is
income in indiv. And gross income perse). not a real estate dealer or developer; if it is
Requisites: classified as ordinary asset subject to ordinary
b.1 it must arise from personal services under income tax
and employer employee relationship Tax on passive investment income, such as
b.2 It is in the nature of income to the recipient interest, dividend and royalty
employee Fringe benefits tax
Example: Directors fee deemed by law as Branch profit remittance tax on Philippine
compensation income ; branches of foreign corporations
Non- compensation income any other income Tax on improperly accumulated earnings tax of
that is not derived from personal services or not corporations
related to an employer- employee relationship Final withholding taxes on certain income from
and is subject to tax on net income basis. sources within the Philippines payable to
It includes: Capital gain gains from dealings resident or non resident persons
in capital assets;
Business income gains from selling Capital denotes original investment or fund
merchandise used in order to generate earnings which is
Professional income fees derived called income
from engaging in an endeavor requiring Example: Amount of money deposited is
special training as professional 100,000 for 5 years. Interest rate is 12% per
annum. How much is capital? How much is
Note: in corporations, both compensation and non income per year?
compensation are subjectto tax in the basis of net Car bought for 100,000 in year 2008 was sold for
income since gross tax scheme is limited to 100,000 in year 2010. Depreciation rate is 5%
compensation arising from personal and not per annum. How much is capital? How much is
corporater services. income in year 2010?
Differences Between income and capital
Non taxable income those excluded by law or Madrigal Vs Rafferty 38 Phil 414
th
treaty from taxation. Ex: 13 month pay
Income tax tax on all yearly profits arising from Income Capital
property, professions, trades or offices or as a All wealth other Fund or property existing at
tax on a persons income, emoluments, profits than mere an instant of time, which can
and the like. It is also a direct tax on actual or return of capital be used in producing goods
presumed income of a taxpayer or services
received,accrued or realized during the taxable Flow of wealth Fund or property
year. Service of Wealth
wealth
Income is Return of capital is not
Types of income tax:
subject to tax subject to tax
Personal income tax on individuals
Regular corporate income tax on corporations Revenue Distinguished from income:
Minimum corporate income tax on corporations Revenue pertains to all funds accruing to the
Capital gains tax on sale of shares of stocks of treasury of the government derived from tax,
domestic corporation by a person who is not a donation, grants and any other source.
dealer in securities
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INCOME TAXATION
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INCOME TAXATION
(deductions were already subracted). (Applic to Subtract (-) personal and additional
phil from Jan 1, 1982 to Dec 31, 1985) exemption (does not apply in case of
The Recipient of the income files separate corporations) =10,000
regular income tax return or capital gains tax Difference is Net taxable income = 80,000
return except for passive income subject to final 80,000 is subjected to graduated
witholding tax. tax rates to arrive at tax due
Reason for the exception: It is the c. Semi-schedular or semi Global tax system
witholding agent who is responsible for filing Under this system, compensation income,
the witholding tax return and payment of business or professional income, capital gain
income tax to the BIR on such passive income of and passive income not subject to FWIT (final
the investor. withholding income tax) and other income are
Example: added together to arrive at the gross income.
a) Sale of real property subjected to flat Obtain net taxable income by subtracting from
income tax rates: the gross income the sum of allowable
Lot classified as capital asset sold deductions from business or professional incom,
at 500,000 with fair market value of 300,000. capital gain, passive income not subject to FWIT
Tax base is either consideration in the case of corporations and personal and
from sale or FMV whichever is higher additional exemption in case of individuals and
Formula: Capital gains tax = Taxbase x 6% subject such taxable income to one set of
Solution: CGT = 500,000 x 6% graduated tax rates (individual) or normal
Ans: 30,000 corporate income tax rate (corporation)
b) Sale of stocks subjected to graduated tax
rates (Sample only) Note: Passive investment income subject to FWIT,
Taxbase: value of stocks sold Captal gains from sale or transfer of stocks of a
>100,000 (10%) >200,000 (20% excess) domestic corp and real properties classified as
capital assets remain subject to different sets of
b. Global System The taxpayer is required to tax rates and covered by differect tax returns.
lump up all items of income earned during a Case: Sison Vs Ancheta GR No. L-59431, Jult 25
taxable period and pay a single set of income tax 1984
rates on these different items of income. d. Schedular Rates of Taxes Vs Schedular System
Net taxable income is subject to the graduated Schedular rates of taxes rates of taxes that
income tax rates in case of individuals and to applies to each category of income.
corporate income tax rates in case of
corporations. It does not matter whether the 2. The Philippine Income Tax System as a Semi Global
income received by the taxpayer is classified as or Mixed System - Effective jan 1, 1986, Executive
compensation income, business professional order No. 37 adopted the semi-global or semi-
income, passive investment income, capital gain schedular tax system by reducing the graduated
or other income. All items of gross income as rates on business and professional income from 60%
well as deductions and personal and additional to 35% and by increasing the preferential tax rates
exemptions are reported in ONE income tax on capital gains and passive investment incomes. RA
return to be filed at least annually and the 8424 (1998) retained the semiglobal or
applicable tax rate is applied on the tax base. semischedular tax system by introducing some
(applic to phil up to dec 1981) structural and administrative reforms and by
Example: reducing the tax rates on corporations by 1% every
Gross income = 100,000 year from 35% to 32%. The same tax system was
Subtract (-) allowable deductions = 10,000 maintained under RA 9337 in 2005 but corporate tax
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INCOME TAXATION
rate was increased to 35% and reduced to 30% in Jan At graduated income tax rate of 5% to 32%,
1, 2009. white his passive investment incomes shall
3. Features of Income tax law: generally be subject to 20% final tax
a. Direct tax burden is borne by income recipient Not Engaged in Trade or Business in the Philippines
upon whom the tax is imposed If the aggregate period of his stay in the
b. Progressive tax tax base increases as tax rate Philippines does not exceed 180 days during
increases any calendar year
c. Comprehensive tax situs- by adopting His compensation income, business or
nationality, residence and source principle professional income, capital gain, passive
d. Philippines has retained more schedular than investment income, and other income from
global features with respect to individual sources within the Philippines is taxed at
taxpayers but has maintained a more global the flat rate of 25%
treatment on corporations Capital gains from sale or exchange of
e. American origin great weight should be given shares of stocks in a domestic corporation
to the construction placed upon a revenue law and from real property located in the
whose meaning is doubtful by the department Philippines shall be subject to capital gains
charged with its execution tax or stock transaction tax, as the case may
be.
CRITERIA IN IMPOSING PHILIPPINE INCOME TAXES
3. Citizenship
1. Place where income was earned or the source
A citizen of the Philippines is subject to Philippine income tax:
An alien is subject to Philippine income tax because
Resident citizen on his worldwide income from
he derives income from sources within the
within and without the Philippines
Philippines. Thus, a non-resident alien is liable to pay
Nonresident citizen only on his sources within the
Philippine income tax on his income from sources
Philippines
within the Philippines, such as dividend, interest,
Types of nonresident citizen
rent, or royalty, despite the fact that he has not set
1. Immigrants
foot in the Philippines.
2. Employees of a foreign entity on a
2. Residency
permanent basis
Resident Alien
3. Overseas contract workers
An alien was subject to Philippine income tax on his
(1) and (2) are treated as nonresidents
worldwide income because of his residence in the
citizens from the time they depart from the
Philippines. This principle is however discarded in
Philippines
R.A. 8424 (1998) in view of the complexity in tax
(3) must be physically present abroad most
administration it brings. Thus, a resident alien is now
of the time (at least 183 days) to qualify
liable to pay Philippine income tax only on his
as nonresident citizens. His presence
income from sources within the Philippines and is
abroad is however need not be continuous.
exempt from tax on his income from sources outside
the Philippines.
THE INCOME TAXPAYERS AND THE GENERAL PRINCIPLES OF
Nonresident Alien
THEIR TAXABILITY (Tax Situs for Income Tax Purposes)
Engaged in Trade or Business in the Philippines
1. Section 23 of the NIRC
If the aggregate period of his stay in the
2. Individual Taxpayers (Section 24-26)
Philippines is more than 180 days during
3. Corporations (Section 27-30 R.A. 9337)
any calendar year
4. Estates and Trusts (Section 60-66)
Taxed on his income from sources within
5. Definition of Terms Under Section 22
the Philippines
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SOURCES OF INCOME (Section 42) 3. Dividends: Residence of the corporation paying dividend
1. Services: Place of performance of the service Dividends received from a domestic corporation or
If the service is performed in the Philippines, the from a foreign corporation are treated as income
income is treated as from sources within the from sources within the Philippines, unless less than
Philippines 50% of the gross income of the foreign corporation
It includes compensation for labor or personal for the three-year period preceding the declaration
services performed within the Philippines, regardless of such dividends was derived from sources within
of the residence of the payor, of the place in which the Philippines, in which case, only the amount
the contract for service was made, or of the place of which bears the same ratio to such dividends as the
payment gross income of the corporation for such period
Compensation is either in cash or in kind derived from sources within the Philippines bears to
its gross income from all sources shall be treated as
Example: income from sources within the Philippines.
Juliane a non-resident alien appointed as a commission
agent by a domestic corporation with a sales commission of 4. Rents and Royalties: Location of the property or interest
10% all sales actually concluded and collected through her in such property
efforts. The local company withheld the amount of P107,000
If the property or interest is located or used in the
from her sales commission and remitted the same to the
BIR. She filed a claim for refund alleging that her sales Philippines, the gain or income is treated as income
commission is not taxable because the same was a from sources within the Philippines
compensation for her services rendered in Germany and
therefore considered as income from sources outside the 5. Sale of property
Philippines. Is her contention correct ? a. Real Property: Location of real property
If the real property sold is located within the
SUGGESTED ANSWER: Yes. The important factor which
Philippines, the gain is considered as income from
determines the source of income of personal services is not
the residence of the payor, or the place where the contract the Philippines
for service is entered into, or the place of payment, but the b. Personal Property
place where the serviceswere actually performed. Since the Personal property produced (in whole or in part) by
activity of securing the sales were in Germany, thenthe the taxpayer within the Philippines and sold without
income did not originate from sources from within the the Philippines, or produced without and sold within
Philippines.(Commissioner of Internal Revenue v. Baier-Nickel,
Any gain, profit or income shall be treated
G. R. No. 153793,
August 29, 2006) as derived partly from sources within and
NOTE AND COMMENTS: In the above case, the SupremeCourt partly from sources without the Philippines
reiterated the rule that source of income relates to the Purchase of personal property within and its sale
property, activity or service that produced the income. With without the Philippines, or purchase of personal
respect to rendition of labor or personal service, it is the property without and its sale within the Philippines
place where the labor or service was performed that Any gain, profit or income shall be treated
determines the source of the income.
as derived entirely from sources within the
2. Interest Income: Residence of the debtor country in which sold. Accordingly, if the
If the obligor or debtor (corporation or otherwise) is goods are shipped in a foreign port under
a resident of the Philippines, the interest income is Free-on-Board (FOB) shipping point
treated as income from within the Philippines. It arrangement, title to the good is
does not matter whether the loan agreement is transferred at the foreign port and any gain
signed in the Philippines or abroad or the loan from the sale of such goods to a Philippine
proceeds will be used in a project inside or outside importer shall be treated as income from
the country sources outside the Philippines.
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DETERMINATION OF GROSS INCOME AND THE The proceeds of life insurance policies paid
RULES OF INCLUSION AND EXCLUSION FROM to the heirs or beneficiaries upon the death of
the insured, whether in a single sum or
GROSS INCOME
otherwise, but if such amounts are held by the
insurer under an agreement to pay interest
A. THE CONCEPT OF GROSS INCOME thereon, the interest payments shall be included
in gross income.
a. Gross income definition
Sec 32. General definition: Except when
otherwise provided in this title (II), gross income (2) Amount Received by Insured as Return of
means all income derived from whatever source Premium.
including but not limited to the following items: The amount received by the insured, as a
a. Compensation for services in whatever return of premiums paid by him under life
form paid including but not limited to fees, insurance, endowment, or annuity contracts,
salaries, wages, commissions and other either during the term or at the maturity of the
similar items term mentioned in the contract or upon
b. Conduct of trade or business or the exercise
surrender of the contract.
of a profession
c. Gains derived from the dealings in property
d. Interests (3) Gifts, Bequests, and Devises.
e. Rents The value of property acquired by gift,
f. Royalties bequest, devise, or descent:
g. Dividends Provided, however, That income from such
h. Annuities property, as well as gift, bequest, devise or
i. Prizes and winnings descent of income from any property, in cases
j. Pensions
of transfers of divided interest, shall be included
k. Partners distributive share from the net
income of the general professional in gross income.
partnership
b. Gross sales- total sales for a period before discounts, (4) Compensation for Injuries or Sickness.
returns and freight expenses have been deducted. - amounts received, through Accident or
Health Insurance or under Workmen's
B. THE GENERAL RULES ON INCLUSION AND EXCLUSION OF Compensation Acts, as compensation for
INCOME OF ITEMS (Section 31, 32A and 32B) personal injuries or sickness, plus the amounts
of any damages received, whether by suit or
Sec 31. Taxable income defined agreement, on account of such injuries or
Gross Income sickness.
Less -Deductions allowed by law
-Personal exemptions (5) Income Exempt under Treaty.
Income of any kind, to the extent required
Taxable income by any treaty obligation binding upon the
Government of the Philippines.
Exclusions Sec 32 B.
Exclusions from Gross Income. - The following items (6) Retirement Benefits, Pensions, Gratuities, etc.-
shall not be included in gross income and shall be (a) Retirement benefits received under
exempt from taxation under this title: (code: MARC Republic Act No. 7641
GIL) and those received by officials and
(1) Life Insurance. employees of private firms,
- whether individual or corporate,
in accordance with a reasonable
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However, this is not the correct definition. -this is the justification that may be used in granting
Rev. Reg. 2-98 defines compensation income all exemptions from income tax on certain benefits that
remuneration for services rendered by an employee may be received under an ER-EE relationship.
for his employer under an ER-EE relationship, unless -examples: food and lodging benefit by a household
specifically excluded under the tax code. maid, driver, etc.
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f. Membership fees, dues and other expenses 2. Contributions of the employer for the benefit of
borne by the employer for the employee in social and the employee to retirement, insurance and
athletics clubs or other similar organizations hospitalization benefit plans
g. Holiday and vacation expenses 3. Benefits given to the rand and file EE whether
h. Expenses for foreign travel granted under a collective baragaining
Exempt if: agreement or not.
1. Required by the nature of the 4. De minimis benefits
employers trade, business, or Recent regulation is Rev Reg 10-
exercise of profession 2000
2. Paid or incurred in connection with These refer to facilities or
the business conventions, privileges furnished or offered by
meetings or seminars abroad
an employer to his employee that
3. All expenses are substantiated by
receipts or records are relatively small value and are
4. There must be an official offered or furnished by the
communication coming from the employer merely as a means of
business associates abroad promoting health, goodwill,
5. Allowance exempt only up to contentment or efficiency of his
300.00 dollars. employees.
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General professional partnerships are partnerships Non-Resident Alien Engaged in Trade or Business
formed by persons for the sole purpose of exercising
their common profession, no part of the income of A non-resident alien engaged in trade or business
which is derived from engaging in any trade or shall be subject to the same income tax rates as a
business, [Sec. 22 (b), NIRC]. citizen and a resident alien.
Persons engaging in business as partners in a general Exception: Cash and/or property dividends received
professional partnership shall be liable for income by a non-resident alien Individual shall be subject to
tax only in their separate and individual capacities, a final tax of 20% for citizens and resident aliens, the
[Sec. 26, NIRC]. rate is 10% since year 2000.
For purposes of computing the distributive share of
Non-Resident Alien Not Engaged in Trade or Business
the partners, the net income of the partnership shall
be computed in the same manner as a corporation,
A non-resident alien individual not engaged in trade
[Sec. 26, NIRC].
or business shall pay a tax equivalent to 25% on all
Each partner shall report as gross income his
items of income, except, for gain on sale of shares of
distributive share, actually or constructively
stock in any domestic corporation and real property
received, in the net income of the partnership,[Sec.
which shall be subject to the same rate applied to
26, NIRC]
other individual taxpayers.
Income of a general professional partnership are
Gain on sale of shares of stock:
deemed constructively received by the partners,
1. Not over P100,000 - 5%
[Sec. 73 (d), NIRC].
2. Over P100,000 -10%
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currency deposit system units and other depositary A cinematographic film owner, lessor, or distributor
banks under the expanded foreign currency deposit shall pay a tax of twenty five percent (25%) of its
system, including interest income from foreign gross income from all sources within the Philippines.
currency loans granted by such depositary banks
Non-resident owner or lessor of vessel chartered by
under said expanded foreign currency deposit
Philippine nationals
system to residents.
A non-resident owner or lessor of vessels shall be
A final income tax at the rate of ten percent (10%) is
subject to a tax of four and one-half percent (4 %)
imposed on such income. of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as
3. Intercorporate dividends approved by the Maritime Industry Authority.
Dividends received by a resident foreign corporation
from a domestic corporation liable to tax under the NIRC shall Non-resident owner or lessor of aircraft, machineries and
not be subject to income tax. other equipment
TAX ON NON-RESIDENT FOREIGN CORPORATION Rentals, charters and other fees derived by a non-
resident lessor of aircraft, machineries and other
Taxation of a non-resident foreign corporation, in general equipment shall be subject to a tax of seven and
one-half percent (7 %) of gross rentals or fees.
Rates of tax, in general
1997 35% Tax on certain incomes received by a non-resident foreign
corporation
1998 34%
1. Interest on foreign loans
1999 33%
A final withholding tax at the rate of twenty percent
2000 32% (20%) is hereby imposed on the amount of interest on
foreign loans contracted on or after 01 August 1986.
However, the tax is imposed on gross income, not on
taxable or net income. 2. Intercorporate dividends
Such gross income may include interests, dividends, A Final withholding tax at the rate of fifteen percent
rents, royalties, salaries, premiums (except (15%) is hereby imposed on the amount of cash and/or
reinsurance premiums), annuities, emoluments or property dividends received by a non-resident foreign
other fixed or determinable annual, periodic or corporation from a domestic corporation, subject to the
casual gains, profits and income, and capital gains, condition that the country in which the non-resident
except capital gains from the sale of shares of stock
foreign corporation is domiciled shall allow a credit
not traded in the stock exchange.
against the tax due from the non-resident foreign
Taxation of certain non-resident foreign corporations corporation taxes deemed to have been paid in the
Philippines equivalent to thirty two percent (32%) in the
1. Non-resident cinematographic film owner, lessor or year 2000.
distributor 25% of gross income
2. Non-resident owner or lessor of vessels chartered by This is the so-called tax sparing rule.
Philippine nationals 4 % of gross rentals, lease or
charter fees 3. Capital gains from sale of shares of stock not traded
3. Non-resident owner or lessor of aircraft, machineries in the stock exchange
and other equipment 7 % of gross rentals or fees a. Not over P100,000 5%
b. Over P100,000 10%
Non-resident cinematographic film owner, lessor or
distributor E. THE RULES AS APPLIED TO PASSIVE INCOME
Passive income
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1. Passive income from Philippine sources subject to iv. Other winnings, except PCSO and
final tax. Lotto, derived from sources within
2. Passive income from Philippine sources not subject the Philippines 20%
to final tax.
3. Passive income from sources outside the Philippines. b. Interest Income from bank deposits and deposit
substitutes
Passive income 1. interest from any currency bank deposit and yield
or any other monetary benefit from deposit substitutes and
1. Interest income from trust funds and similar arrangement 20% final tax
2. Rentals/ leases except non- resident alien not engaged in trade or business
3. Royalties which is 25%
4. Dividends
5. Annuities and proceeds of life insurance/ other types
2. interest income received by an individual (except
of insurance
a nonresident individual)from a depositary bank under the
6. Prizes and winnings, awards, and rewards
expanded foreign currency deposit system 7.5% except non
7. Gifts, bequests, and devises
resident alien, non resident engaged in trade/business and
8. Other types of passive income
non resident alien not engaged in trade and business
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1. If there is a change in the stockholders payments will be treated as dividends. [Section 71,
interest in the net assets of the corporation; Revenue Regulation 2]
2. If it is one issued by another corporation.
This is called dividend stock. 1.Cash and/or property dividends
Stock dividend vs. Dividend stock: Stock dividend is 10% final tax, by January 1, 2000, on the following:
not taxable, while dividend stock is taxable
a) Cash and or property dividend actually
3. Redemption of stock dividend; or constructively received from a
4. If the corporation had issued to a domestic corporation or from a joint
stockholder 2 different classes of shares of stock company, insurance or mutual
stock, any stock dividend that may be fund companies and regional operating
issued to such stockholder shall be taxable. headquarters of multinational
companies.
A stock dividend representing the transfer of surplus b) Share of an individual in the distributive
to capital account shall not be subject to tax. net income after tax of a partnership
It shall be taxable only if subsequently cancelled and except a general professional
redeemed by the corporation. partnership of which he is a partner
It is also taxable if it leads to a substantial alteration c) Share of an individual in the net income
in the proportion of tax ownership in a corporation. after tax of an association, joint
account, or a joint venture or
Dividends paid in property consortium taxable as a corporation of
Dividends paid in securities or other property, in which he is a member or a co-venturer
which the earnings of a corporation have been
invested, are income to the recipients to the amount 2.CIR vs CA and ANSCOR, GR no. 108576, January 20,
of the full market value of such property when 1999
receivable by individual stockholders.
A dividend paid in a stock of another corporation is Facts: Don Andres Soriano, a citizen and resident of the
not a stock dividend, even though the stock United States, formed the corporation "A. Soriano Y Cia",
distributed was acquired through the transfer by the predecessor of ANSCOR. Don Andres transferred some of his
corporation declaring the dividends of property to shares his two sons, Jose and Andres, Jr., as their initial
the corporation the stock of which is distributed as a investments in ANSCOR. Both sons are foreigners.
dividend. [Section 251, Revenue Regulations 2].
By 1947, ANSCOR declared stock dividends. Other stock
Liquidating dividend dividend declarations were made between 1949 and
December 20, 1963. On December 30, 1964 Don Andres
Where a corporation distributes all its assets in died. As of that date, the records revealed that he has a total
complete liquidation or dissolution, the gain realized shareholdings of 185,154 shares 50,495 of which are
or loss sustained by the stockholder, whether original issues and the balance of 134.659 shares as stock
individual or corporation, is a taxable income or dividend declarations. Correspondingly, one-half of that
deductible loss, as the case may be. shareholdings or 92,577 shares were transferred to his wife,
Doa Carmen Soriano, as her conjugal share. The other half
Disguised dividends formed part of his estate.
These are payments which are equivalent to Doa Carmen requested a ruling from the United States
dividend distribution. Internal Revenue Service (IRS), inquiring if an exchange of
common with preferred shares may be considered as a tax
avoidance scheme under Section 367 of the 1954 U.S.
In the case of excessive payments by corporations, if Revenue Act. he IRS opined that the exchange is only a
such payments correspond or bear a close recapitalization scheme and not tax avoidance. Doa Carmen
relationship to stockholdings, and are found to be a exchanged her whole 138,864 common shares for 138,860 of
distribution of earnings or profits, the excessive the newly reclassified preferred shares. The estate of Don
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Andres in turn, exchanged 11,140 of its common shares, for transactions. Simply put, depending on the circumstances,
the remaining 11,140 preferred shares, thus reducing its (the the proceeds of redemption of stock dividends are essentially
estate) common shares to 127,727. distribution of cash dividends, which when paid becomes the
absolute property of the stockholder. Thereafter, the latter
In 1973, after examining ANSCOR's books of account and becomes the exclusive owner thereof and can exercise the
records, Revenue examiners issued a report proposing that freedom of choice. Having realized gain from that
ANSCOR be assessed for deficiency withholding tax-at-source, redemption, the income earner cannot escape income tax
pursuant to Sections 53 and 54 of the 1939 Revenue
Code, for the year 1968 and the second quarter of 1969 3.Section 73. Distribution of dividends or Assets by
based on the transactions of exchange 31 and redemption of Corporations. -
stocks. The Bureau of Internal Revenue (BIR) made the
corresponding assessments despite the claim of ANSCOR that (A) Definition of Dividends. - The term 'dividends'
it availed of the tax amnesty under Presidential Decree (P.D.) when used in this Title means any distribution made
23 which were amended by P.D.'s 67 and 157. by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders,
Issue: whether the stock dividends of the Late Don are whether in money or in other property.
taxable and not covered by the tax amnesty.
Where a corporation distributes all of its assets in
Held: Sec. 83(b) of the 1939 NIRC was taken from the Section complete liquidation or dissolution, the gain realized
115(g)(1) of the U.S. Revenue Code of 1928. It laid down the or loss sustained by the stockholder, whether
general rule known as the proportionate test wherein stock individual or corporate, is a taxable income or a
dividends once issued form part of the capital and, thus, deductible loss, as the case may be.
subject to income tax.
(B) Stock Dividend. - A stock dividend representing
Specifically, the general rule states that: the transfer of surplus to capital account shall not be
subject to tax. However, if a corporation cancels or
A stock dividend representing the transfer redeems stock issued as a dividend at such time and
of surplus to capital account shall not be in such manner as to make the distribution and
subject to tax. cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable
the Exception dividend, the amount so distributed in redemption
or cancellation of the stock shall be considered as
taxable income to the extent that it represents a
However, if a corporation cancels or redeems
distribution of earnings or profits.
stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation
or redemption, in whole or in part, essentially (C) Dividends Distributed are Deemed Made from
equivalent to the distribution of a taxable dividend, Most Recently Accumulated Profits. - Any
the amount so distributed in redemption or distribution made to the shareholders or members
cancellation of the stock shall be considered of a corporation shall be deemed to have been made
as taxable income to the extent it represents a form the most recently accumulated profits or
distribution of earnings or profits accumulated surplus, and shall constitute a part of the annual
income of the distributee for the year in which
received.
The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a (D) Net Income of a Partnership Deemed
device for the actual distribution of cash dividends, which is Constructively Received by Partners. - The taxable
taxable. income declared by a partnership for a taxable year
which is subject to tax under Section 27 (A) of this
Code, after deducting the corporate income tax
Although redemption and cancellation are generally
imposed therein, shall be deemed to have been
considered capital transactions, as such. they are not subject
actually or constructively received by the partners in
to tax. However, it does not necessarily mean that a
the same taxable year and shall be taxed to them in
shareholder may not realize a taxable gain from such
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INCOME TAXATION
their individual capacity, whether actually a. gains presumed to have been realized
distributed or not. from sale or disposition of principal residence, the
proceeds of which is fully utilized in acquiring new
d.Capital Gains from Sale of Real Property principal residence within 18 months from
disposition shall be exempt from CGT
1. 6% final tax on gross selling price or current fair
market value, whichever is higher b. can be availed only once every 10 years
2. imposed upon capital gains presumed to have c. if the new principal residence is cheaper
been realized from the sale, exchange, or other than old (meaning there is no full utilization of the
dispositions of real property located in the proceeds), the difference will be subject to CGT
Philippines, including pacto de retro sales and other
forms of conditional sales d. exemption does not include exchange of
principal residence for a new principal residence ->
3. law presumes a gain, hence even if the sale was at subject to rules on exchange above.
a loss (bought for 2M, sold for 1.5M), CGT will still be
imposed on entire process of the disposition. e. Sales of shares of stock not listed or trated in the stock
Reason: the law does not talk about the net gain, it exchange
only considers gross selling price/FMV whichever is
higher CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK
4. refers to real property held as capital asset as Listed and traded through local stock exchange- this
opposed to ordinary asset(used in ordinary course of is not subject to income tax but subject to
business) percentage tax of of 1% of the gross selling price.
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February 20, 1977, and every year thereafter, or until capital asset. The tax due was only fifty (50%) percent of the
February 20, 1980. The same day, petitioner discounted the total gain from sale of the property held by the taxpayer
5
promissory note with AYALA, for its face value of beyond twelve months pursuant to Section 34 of the 1977
P1,847,016.00. AYALA issued nine (9) checks to petitioner, all National Internal Revenue Code (NIRC). The deficiency tax
dated February 20, 1976, drawn against Bank of the assessment was reduced to nine hundred thirty six thousand,
Philippine Islands with the uniform amount of two hundred five hundred ninety-eight pesos and fifty centavos
five thousand, two hundred twenty-four (P205,224.00) pesos. (P936,598.50), inclusive of surcharges and penalties for the
year 1976.
In his 1976 Income Tax Return, petitioner reported the
P461,754 initial payment as income from disposition of respondent Larin sent a letter to petitioner informing of the
2
capital asset. income tax deficiency that must be settled him immediately
but petitioner insisted that the sale of his land to AYALA was
on installment. As a consequence, a criminal complaint was
Selling Price of Land P2,308,770.00
filed against petitioner for tax evasion.
3
Less Initial Payment 461,754.00
Issue: Whether respondent court erred in finding that
petitioner's income from the sale of land in 1976 should be
Unrealized Gain P1,847,016.00
declared as a cash transaction in his tax return for the same
year (because the buyer discounted the promissory note
1976 Declaration of Income on Disposition of Capital issued to the seller on future installment payments of the
Asset subject to Tax: sale, on the same day of the sale);
Income P385,206.10
(b) Sales of realty and casual sales of personalty In
the case (1) of a casual sale or other casual
Income subject to tax (P385,206. disposition of personal property (other than
P192,603.65
10 x 50%) property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the
close of the taxable year), for a price exceeding one
In the succeeding years, until 1979, petitioner reported a thousand pesos, or (2) of a sale or other disposition
uniform income of two hundred thirty thousand, eight of real property if in either case the initial payments
4
hundred seventy-seven (P230,877.00) pesos as gain from do not exceed twenty-five percentum of the selling
sale of capital asset. In his 1980 income tax amnesty return, price, the income may, under regulations prescribed
petitioner also reported the same amount of P230,877.00 as by the Minister of Finance, be returned on the basis
the realized gain on disposition of capital asset for the year. and in the manner above prescribed in this section.
As used in this section the term "initial payment"
Revenue Director Mauro Calaguio authorized tax examiners means the payments received in cash or property
to examine the books and records of petitioner for the year other than evidences of indebtedness of the
1976. They discovered that petitioner had no outstanding purchaser during the taxable period in which the
receivable from the 1976 land sale to AYALA and concluded sale or other disposition is made. . . . (emphasis ours)
that the sale was cash and the entire profit should have been
taxable in 1976 since the income was wholly derived in 1976. Revenue Regulation No. 2, Section 175 provides,
The examiners recommended deficiency tax assessment for Sale of real property involving deferred payments.
two million, four hundred seventy-three thousand, six Under section 43 deferred-payment sales of real
hundred seventy-three (P2,473,673.00) pesos. However, after property include (1) agreements of purchase and
reviewing the examiners' report, Larin directed the revision of sale which contemplate that a conveyance is not to
the audit report, with instruction to consider the land as be made at the outset, but only after all or a
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INCOME TAXATION
substantial portion of the selling price has been paid, purchaser having promised to make two or more
and (b) sales in which there is an immediate transfer payments, in later years.
of title, the vendor being protected by a mortgage or
other lien as to deferred payments. Such sales either Petitioner asserts that Sec. 43 allows him to return as income
under (a) or (b), fall into two classes when in the taxable years involved, the respective installments as
considered with respect to the terms of sale, as provided by the deed of sale between him and AYALA.
follows: Consequently, he religiously reported his yearly income from
sale of capital asset, subject to tax, as follows:
(1) Sales of property on the installment
plan, that is, sales in which the payments
Year 1977 (50% of P461,754) P230,877.00
received in cash or property other than
evidences of indebtedness of the purchaser 1978 230,877.00
during the taxable year in which the sale is
made do not exceed 25 per cent of the 1979 230,877.00
selling price; 1980 230,877.00
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INCOME TAXATION
selling price. They also state what may be regarded as installment since, a taxable disposition resulted and
installment payment and what constitutes initial payment. petitioner was required by law to report in his returns the
Initial payment means the payment received in cash or income derived from the discounting. What petitioner did is
property excluding evidences of indebtedness due and tantamount to an attempt to circumvent the rule on payment
payable in subsequent years, like promissory notes or of income taxes gained from the sale of the land to AYALA for
mortgages, given of the purchaser during the taxable year of the year 1976
sale. Initial payment does not include amounts received by
the vendor in the year of sale from the disposition to a third Long-term contracts
person of notes given by the vendee as part of the purchase
14
price which are due and payable in subsequent years. Such The term long term contract means building,
disposition or discounting of receivable is material only as to installation or construction contracts covering a
the computation of the initial payment. If the initial payment period in excess of one year. [Section 48, NIRC]
is within 25% of total contract price, exclusive of the proceeds
of discounted notes, the sale qualifies as an installment sale, Treatment of income from long-term contracts
15
otherwise it is a deferred sale.
1. Percentage of completion basis
Although the proceed of a discounted promissory note is not 2. Completed contract basis
considered part of the initial payment, it is still taxable
income for the year it was converted into cash. The
subsequent payments or liquidation of certificates of Note: Section 48 of the NIRC provides that Persons whose
indebtedness is reported using the installment method in gross income is derive in whole or in part from such (long
16
computing the proportionate income to be returned, during
term) contracts shall report such income upon the basis of
the respective year it was realized. Non-dealer sales of real or
percentage of completion.
personal property may be reported as income under the
installment method provided that the obligation is still
The return should be accompanied by a return
outstanding at the close of that year. If the seller disposes the
entire installment obligation by discounting the bill or the certificate of architects or engineers showing the percentage
promissory note, he necessarily must report the balance of of completion during the taxable year of the entire work
the income from the discounting not only income from the performed under the contract.
initial installment payment.
G. EXCLUSION BY REASON OF SPECIAL LAWS
Where an installment obligation is discounted at a bank or
finance company, a taxable disposition results, even if the RA 9504 -Income and withholding tax exemption for
seller guarantees its payment, continues to collect on the minimum wage earners
installment obligation, or handles repossession of
17
merchandise in case of default. This rule prevails in the
18 Personal Exemptions:
United States. Since our income tax laws are of American
19
origin, interpretations by American courts an our parallel
For single individual or married individual judicially decreed
tax laws have persuasive effect on the interpretation of these
20 as legally separated with no qualified
laws. Thus, by analogy, all the more would a taxable
dependentsP 50,000.00
disposition result when the discounting of the promissory
For head of familyP 50,000.00
note is done by the seller himself. Clearly, the indebtedness
For each married individual *P 50,000.00
of the buyer is discharged, while the seller acquires money
Note: In case of married individuals where only one of the
for the settlement of his receivables. Logically then, the
spouses is deriving gross income, only such spouse will be
income should be reported at the time of the actual gain. For
allowed to claim the personal exemption.
income tax purposes, income is an actual gain or an actual
21
increase of wealth. Although the proceeds of a discounted
Additional Exemptions:
promissory note is not considered initial payment, still it must
be included as taxable income on the year it was converted to
cash. When petitioner had the promissory notes covering the For each qualified dependent, an P25,000 additional
succeeding installment payments of the land issued by exemption can be claimed but only up to 4 qualified
AYALA, discounted by AYALA itself, on the same day of the dependents
sale, he lost entitlement to report the sale as a sale on
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The additional exemption can be claimed by the following: gross income in because exempted
order to arrive at a by tax treaty, statute
net taxable income or the Constitution
The husband who is deemed the head of the family (NIRC) (in the nature of tax
unless he explicitly waives his right in favor of his exemptions) and
wife those which do not
come within the
The spouse who has custody of the child or children definition of income
in case of legally separated spouses. Provided, that
the total amount of additional exemptions that may
be claimed by both shall not exceed the maximum 2. Allowed only to 2. Can be availed by all
businesses, kinds of taxpayer
additional exemptions allowed by the Tax Code.
corporations,
The individuals considered as Head of the Family institutions.
supporting a qualified dependent
DEDUCTIONS COST
A. CONCEPT OF ALLOWABLE DEDUCTIONS
a) Deductions, Defined
withheld therefrom has been paid to BIR P904,769.00 allegedly arising from the 20% sales discount
(Section 34(K), NIRC) granted by respondent to qualified senior citizens in
compliance with [R.A.] 7432. Unable to obtain affirmative
response from petitioner, respondent elevated its claim to
the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for
e) Deductions vs. Tax Credit
Review.
DEDUCTIONS TAX CREDIT
The Tax Court dismissed respondents Petition for lack of
1. Subtracted from the gross 1. Deducted from taxable merit. CTA said:
income to arrive at net income to arrive at income
taxable income tax payable
x x x, if no tax has been paid to the government,
erroneously or illegally, or if no amount is due and
2. Diminishes income tax 2. Diminishes tax liability collectible from the taxpayer, tax refund or tax credit
payable
is unavailing. Moreover, whether the recovery of
the tax is made by means of a claim for refund or tax
i) CIR vs. Central Luzon Drug Corp, GR No. credit, before recovery is allowed[,] it must be first
159647, 15 April 2005 established that there was an actual collection and
receipt by the government of the tax sought to be
PANGANIBAN, J.: recovered. x x x.
The 20 percent discount required by the law to be given to Prescinding from the above, it could logically be
senior citizens is a tax credit, not merely a tax deduction from deduced that tax credit is premised on the existence of tax
the gross income or gross sale of the establishment liability on the part of taxpayer. In other words, if there is no
concerned. A tax credit is used by a private establishment tax liability, tax credit is not available.
only after the tax has been computed; a tax deduction,
before the tax is computed. RA 7432 unconditionally grants a The MR filed by the respondent was granted by the
tax credit to all covered entities. Thus, the provisions of the CTA. It then ordered petitioner to issue a Tax Credit
revenue regulation that withdraw or modify such grant are Certificate in favor of Central Luzon Drug.
void. Basic is the rule that administrative regulations cannot
amend or revoke the law. The CA affirmed in toto the Resolution of the Court
of Tax Appeals (CTA) in the reduced amount of P903,038.39.
Facts: Respondent is a domestic corporation primarily It reasoned that Republic Act No. (RA) 7432 required neither
engaged in retailing of medicines and other pharmaceutical a tax liability nor a payment of taxes by private
products. In 1996, it operated six (6) drugstores under the establishments prior to the availment of a tax credit.
business name and style Mercury Drug. Moreover, such credit is not tantamount to an unintended
benefit from the law, but rather a just compensation for the
From January to December 1996, respondent taking of private property for public use.
granted twenty (20%) percent sales discount to qualified
senior citizens on their purchases of medicines pursuant to Issue : Is the 20% sales discount a tax credit or a deduction
Republic Act No. [R.A.] 7432 and its Implementing Rules and from gross income or gross sales?
Regulations. For the said period, the amount totalled
P904,769.00. Ruling: The 20% sales discount is a tax credit as expressly
provided for by RA 7432.
On April 15, 1997, respondent filed its Annual
Income Tax Return 1996 declaring that it incurred net losses Tax Credit versus Tax Deduction
from its operations.
Tax credit generally refers to an amount that is
On January 16, 1998, respondent filed with subtracted directly from ones total tax liability. It
petitioner a claim for tax refund/credit in the amount of is an allowance against the tax itself or a
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INCOME TAXATION
deduction from what is owed by a taxpayer to the claimed -- shall be treated as a reduction from any tax
government. Examples of tax credits are withheld liability, plain and simple
taxes, payments of estimated tax, and investment
tax credits. Granting that there is a tax liability and respondent
claims such cost as a tax credit, then the tax credit can easily
Tax deduction -- defined as a subtraction from be applied. If there is none, the credit cannot be used and
income for tax purposes, or an amount that is will just have to be carried over and revalidated accordingly.
allowed by law to reduce income prior to *the+ If, however, the business continues to operate at a loss and
application of the tax rate to compute the amount of no other taxes are due, thus compelling it to close shop, the
tax which is due. An example of a tax deduction is credit can never be applied and will be lost altogether.
any of the allowable deductions enumerated in
Section 34[20] of the Tax Code. Tax Credit Benefit Deemed Just Compensation
A tax credit differs from a tax deduction. On the Sections 2.i and 4 of RR 2-94 deny the exercise by the
one hand, a tax credit reduces the tax due, including State of its power of eminent domain. Be it stressed that the
-- whenever applicable -- the income tax that is privilege enjoyed by senior citizens does not come directly
determined after applying the corresponding tax from the State, but rather from the private establishments
rates to taxable income. concerned. Accordingly, the tax credit benefit granted to
these establishments can be deemed as their just
A tax deduction, on the other, reduces the income compensation for private property taken by the State for
that is subject to tax in order to arrive at taxable public use.
income. To think of the former as the latter is to
avoid, if not entirely confuse, the issue. A tax credit SC affirmed Decision and Resolution of the Court of
is used only after the tax has been computed; a tax Appeals.
deduction, before.
ii) CIR vs. Central Luzon Drug Corp,
By ordinary acceptation, a discount is an abatement or GR No. 148512, 26 June 2006
reduction made from the gross amount or value of anything.
AZCUNA, J.:
To be more precise, it is in business parlance a deduction or
lowering of an amount of money; or a reduction from the FACTS: Central Luzon Drug Corporation has been a retailer of
full amount or value of something, especially a price. In medicines and other Pharmaceutical products since
business there are many kinds of discount, the most common December 19, 1994. In 1995, it opened three (3) drugstores
of which is that affecting the income statement or financial as a franchisee under the business name and style of
report upon which the income tax is based. Mercury Drug.
To stress, the effect of a sales discount on the income For the period January 1995 to December 1995, in
statement and income tax return of an establishment conformity to the mandate of Sec. 4(a) of R.A. No. 7432
covered by RA 7432 is different from that resulting from the (Senior Citizens Act), petitioner granted a 20% discount on
availment or use of its tax credit benefit. While the former is the sale of medicines to qualified senior citizens amounting to
a deduction before, the latter is a deduction after, the income P219,778.
tax is computed. As mentioned earlier, a discount is not
necessarily a sales discount, and a tax credit for a simple Pursuant to Revenue Regulations No. 2-94[1]
discount privilege should not be automatically treated like a implementing R.A. No. 7432, which states that the discount
sales discount. Where the law does not distinguish, we ought given to senior citizens shall be deducted by the
not to distinguish. establishment from its gross sales for value-added tax and
other percentage tax purposes, respondent deducted the
When the law says that the cost of the discount may be total amount of P219,778 from its gross income for the
claimed as a tax credit, it means that the amount -- when taxable year 1995. For said taxable period, respondent
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INCOME TAXATION
reported a net loss of P20,963 in its corporate income tax otherwise would be a departure from the clear mandate of
return. As a consequence, respondent did not pay income the law.
tax for 1995.
Accordingly, when the law says that the cost of the
Subsequently, on December 27, 1996, claiming that discount may be claimed as a tax credit, it means that the
according to Sec. 4(a) of R.A. No. 7432, the amount of amount -- when claimed shall be treated as a reduction
P219,778 should be applied as a tax credit, respondent filed a from any tax liability.
claim for refund in the amount of P150,193, thus:
The tax credit that is contemplated under the Act is a
Since the Commissioner of Internal Revenue was form of just compensation, not a remedy for taxes that were
not able to decide the claim for refund on time,*2+ erroneously or illegally assessed and collected. In the same
respondent filed a Petition for Review with the Court of Tax vein, prior payment of any tax liability is not a precondition
Appeals (CTA) on March 18, 1998. before a taxable entity can benefit from the tax credit. The
credit may be availed of upon payment of the tax due, if any.
The CTA dismissed the petition, declaring that even Where there is no tax liability or where a private
if the law treats the 20% sales discounts granted to senior establishment reports a net loss for the period, the tax credit
citizens as a tax credit, the same cannot apply when there is can be availed of and carried over to the next taxable year.
no tax liability or the amount of the tax credit is greater than
the tax due. In the latter case, the tax credit will only be to It must also be stressed that unlike in Sec. 229 of the
the extent of the tax liability. Also, no refund can be granted Tax Code wherein the remedy of refund is available to the
as no tax was erroneously, illegally and actually collected taxpayer, Sec. 4 of the law speaks only of a tax credit, not a
based on the provisions of Section 230, now Section 229, of refund.
the Tax Code. Furthermore, the law does not state that a
refund can be claimed by the private establishment The tax credit benefit granted to the establishments
concerned as an alternative to the tax credit. can be deemed as their just compensation for private
property taken by the State for public use. The privilege
Thus, respondent filed with the CA a Petition for Review. enjoyed by the senior citizens does not come directly from
the State, but rather from the private establishments
concerned.
CA concluded that the 20% discount given to senior SC affirmed Decision of the Court of Appeals.
citizens which is treated as a tax credit pursuant to Sec. 4(a)
of R.A. No. 7432 is considered just compensation and, as iii) Bicolandia Drug Corp vs. CIR GR
such, may be carried over to the next taxable period if there No. 142299, 22 June 2006
is no current tax liability.
AZCUNA, J.:
ISSUE: whether the 20% sales discount granted by
respondent to qualified senior citizens may be claimed as a FACTS: Petitioner Bicolandia Drug Corporation is a domestic
tax credit or as a deduction from gross sales. corporation principally engaged in the retail of
pharmaceutical products. Petitioner has a drugstore located
RULING: The CA and the CTA correctly ruled that based on in Naga City under the name and business style of Mercury
the plain wording of the law discounts given under R.A. No. Drug.
7432 should be treated as tax credits, not deductions from
income. Pursuant to the provisions of R.A. No. 7432 (Senior
Citizens Act), and Revenue Regulations No. 2-94, petitioner
The provision of RA 7432 explicitly employed the granted to qualified senior citizens a 20% sales discount on
word tax credit. Nothing in the provision suggests for it to their purchase of medicines covering the period from July 19,
mean a deduction from gross sales. To construe it 1993 to December 31, 1994.
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When petitioner filed its ITR 1993 and 1994, it at the total tax liability (Blacks Law
claimed as a deduction from its gross income the respective Dictionary).
amounts of P80,330 and P515,000 representing the 20% sales
discount it granted to senior citizens. In view of such apparent
discrepancy in the interpretation of the
However, alleging error in the computation and term tax credit, the provisions of the law
claiming that the aforementioned 20% sales discount should under R.A. 7432 should prevail over the
have been treated as a tax credit pursuant to R.A. No. 7432 subordinate regulation issued by the
instead of a deduction from gross income, petitioner filed a respondent under Revenue Regulation No.
claim for refund or credit of overpaid income tax for 1993 and 2-94. x x x
1994.
On the issue of whether or not petitioner is entitled
Petitioner contended that Section 4 of R.A. No. 7432 to the claim for refund of its overpaid income taxes for the
provides in clear and unequivocal language that discounts years 1993 and 1994 based on the evidence at hand, the CTA
granted to senior citizens may be claimed as a tax credit. ordered CIR to ISSUE tax credit certificates in favor of
Revenue Regulations No. 2-94, therefore, which is merely an petitioner [in] the amounts representing overpaid income tax
implementing regulation cannot modify, alter or depart from for the years 1993 and 1994. On the other hand, the CIRs
the clear mandate of Section 4 of R.A. No. 7432, and, thus, is Motion for Reconsideration is DENIED for lack of merit.
null and void for being inconsistent with the very statute it
seeks to implement. Consequently, the Commissioner filed a petition for
review with the CA asking for the reversal of the CTA Decision
The CIR, on the other hand, maintained that the and Resolution. However, CA denied such petition.
aforesaid section providing for a 20% sales discount to senior
citizens is a misnomer as it runs counter to the solemn duty Issue: The matter to be determined is the amount of tax
of the government to collect taxes. The Commissioner credit that may be claimed by a taxable entity which grants a
20% sales discount to qualified senior citizens on their
likewise pointed out that the provision in question employs
purchase of medicines. Is it the acquisition cost or the actual
the word may, thereby implying that the availability of the
amount of discount?
remedy of tax credit is not absolute and mandatory and it
does not confer an absolute right on the taxpayer to avail of Ruling:
the tax credit scheme if he so chooses. The Commissioner
further stated that in statutory construction, the Section 4(a) of R.A. No. 7432 states that:
contemporaneous construction of a statute by executive
officers of the government whose duty is to execute it is Sec. 4. Privileges for the Senior citizens.
entitled to great respect and should ordinarily control in its The senior citizens shall be entitled to the following:
interpretation.
a) the grant of twenty percent (20%)
The CTA ruled that: discount from all establishments relative to
utilization of transportation services, hotels and
Revenue Regulations No. 2-94 similar lodging establishments, restaurants and
gave a new meaning to the phrase tax recreation centers and purchase of medicines
anywhere in the country: Provided, That private
credit, interpreting it to mean that the 20%
establishments may claim the cost as tax credit.
discount granted to qualified senior citizens
is an amount deductible from the
The term "cost" in the above provision refers to the
establishments gross sales, which is amount of the 20% discount extended by a private
completely contradictory to the literal or establishment to senior citizens in their purchase of
widely accepted meaning of the said medicines. This amount shall be applied as a tax credit, and
phrase, as an amount subtracted from an may be deducted from the tax liability of the entity
individuals or entitys tax liability to arrive concerned. If there is no current tax due or the establishment
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INCOME TAXATION
reports a net loss for the period, the credit may be carried The Ruling of the Court of Tax Appeals
over to the succeeding taxable year. This is in line with the
interpretation of this Court in Commissioner of Internal The CTA rendered ordered petitioner to issue a tax credit
9
Revenue v. Central Luzon Drug Corporation wherein it certificate in the amount of P2,376,805.63 in favor of
affirmed that R.A. No. 7432 allows private establishments to respondent. In a number of analogous cases, CTA has
claim as tax credit the amount of discounts they grant to consistently ruled that the 20% senior citizens' discount
senior citizens. should be treated as tax credit instead of a mere deduction
from gross income. In quoting its previous decisions, the CTA
Accordingly, petitioners claim for refund must be ruled that RR 2-94 engraved a new meaning to the phrase
denied. The law expressly provides that the discount given to "tax credit" as deductible from gross income which is a
senior citizens may be claimed as a tax credit, and not a deviation from the plain intendment of the law. An
refund. administrative regulation must not contravene but should
conform to the standards that the law prescribes.
iv) CIR vs. Central Luzon Drug Corp,
GR No. 159610, 12 June 2008 (in The CTA also ruled that respondent has properly
relation to RA 9257) CARPIO, J.: substantiated its claim for tax credit by documentary
evidence. However, based on the examination, the CTA
Facts: Respondent is a domestic corporation engaged in the deemed it proper to consider the lesser of two amounts.
retail of medicines and other pharmaceutical products. In
1997, it operated eight drugstores under the business name Aggrieved by the CTA's decision, petitioner elevated the case
6
and style "Mercury Drug." before the Court of Appeals.
Pursuant to the provisions of RA 7432 and Revenue The Ruling of the Appellate Court
Regulations No. (RR) 2-94 issued by the BIR, respondent
granted 20% sales discount to qualified senior citizens on The CA affirmed the CTA's decision in toto.
their purchases of medicines covering 1997 which totalled
P2,798,508.00. The CA distinguished "tax credit" as an amount subtracted
from a taxpayer's total tax liability to arrive at the tax due
Respondent filed its 1997 Corporate Annual ITR while a "tax deduction" reduces the taxpayer's taxable
reflecting a nil income tax liability due to net loss incurred income upon which the tax liability is computed. "A credit
from business operations of P2,405,140.00. Respondent filed differs from deduction in that the former is subtracted from
its 1997 ITR under protest. tax while the latter is subtracted from income before the tax
19
is computed."
In March 1999, respondent filed with the petitioner
a claim for refund or credit of overpaid income tax for the Hence, this petition.
taxable year 1997 in the amount of P2,660,829.00.
Respondent alleged that the overpaid tax was the result of Issue: Whether the respondent may claim the 20% senior
the wrongful implementation of RA 7432. Respondent citizens' sales discount as a tax credit deductible from future
treated the 20% sales discount as a deduction from gross income tax liabilities instead of a mere deduction from gross
sales in compliance with RR 2-94 instead of treating it as a tax income or gross sales
credit as provided under Section 4(a) of RA 7432.
The Ruling of the Court
Petitioner contended that the construction given to
a statute by a specialized administrative agency like the BIR is
The petition lacks merit.
entitled to great respect and should be accorded great
weight. When RA 7432 allowed senior citizens' discounts to
In two similar cases involving the same parties on the same
be claimed as tax credit, it was silent as to the mechanics of
issues, the Court has squarely ruled that the 20% senior
availing the same. For clarification, the BIR issued RR 2-94 and
citizens' discount required by RA 7432 may be claimed as a
defined the term "tax credit" as a deduction from the
tax credit and not merely a tax deduction from gross sales or
establishment's gross income and not from its tax liability in
12 gross income. Under RA 7432, Congress granted the tax credit
order to avoid an absurdity that is not intended by the law.
benefit to all covered establishments without conditions. The
net loss incurred in a taxable year does not preclude the
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grant of tax credit because by its nature, the tax credit may sales for value-added tax or other
still be deducted from a future, not a present, tax liability. percentage tax purposes.
However, the senior citizens' discount granted as a tax credit (Emphasis supplied).
cannot be refunded.
xxx
RA 7432 expressly allows private establishments
to claim the amount of discounts they grant to Sec. 4. Recording/Bookkeeping
senior citizens Requirement for Private
as tax credit. Establishments
SECTION 4. Privileges for the Senior Citizens. The amount of 20% discount shall
- The senior citizens shall be entitled to the be deducted from the gross
following: income for income tax purposes
and from gross sales of the
a) the grant of twenty percent business enterprise concerned for
(20%) discount from all purposes of the VAT and other
establishments relative to the percentage taxes. (Emphasis
utilization of transportation supplied)
services, hotels and similar lodging
establishments, restaurants and Tax credit is defined as a peso-for-
recreation centers and purchase of peso reduction from a taxpayer's tax
medicines anywhere in the liability. It is a direct subtraction from the
country: Provided, That private tax payable to the government. On the
establishments may claim the cost other hand, RR 2-94 treated the amount of
as tax credit; (Emphasis supplied) senior citizens' discount as a tax deduction
which is only a subtraction from gross
However, RR 2-94 interpreted the tax credit income resulting to a lower taxable income.
provision of RA 7432 in this wise: RR 2-94 treats the senior citizens' discount
in the same manner as the allowable
Sec. 2. DEFINITIONS. - For purposes deductions provided in Section 34, Chapter
of these regulations: VII of the National Internal Revenue Code.
RR 2-94 affords merely a fractional
xxx reduction in the taxes payable to the
government depending on the applicable
tax rate.
i. Tax Credit - refers to the amount
representing 20% discount
granted to a qualified senior In Commissioner of Internal Revenue v. Central Luzon
citizen by all establishments Drug Corporation, the Court ruled that petitioner's definition
relative to their utilization of in RR 2-94 of a tax credit is clearly erroneous. To deny the tax
transportation services, hotels and credit, despite the plain mandate of the law, is indefensible.
similar lodging establishments, In Commissioner of Internal Revenue v. Central Luzon Drug
restaurants, drugstores, recreation Corporation, the Court declared, "When the law says that the
centers, theaters, cinema houses, cost of the discount may be claimed as a tax credit, it means
concert halls, circuses, carnivals that the amount- when claimed shall be treated as a
and other similar places of culture, reduction from any tax liability, plain and simple."
leisure and amusement, which
discount shall be deducted by the The tax credit may still be deducted
said establishments from their from a future, not a present, tax liability.
gross income for income tax
purposes and from their gross
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Petitioner-CIR alleged that respondent incurred a net "Sec. 4. Privileges for the Senior
loss from its business operations in 1997; hence, it did not Citizens. - The senior citizens shall
pay any income tax. Since no tax payment was made, it be entitled to the following:
follows that no tax credit can also be claimed because tax
credits are usually applied against a tax liability. (a) the grant of twenty percent
(20%) discount from all
In Commissioner of Internal Revenue v. Central Luzon establishments relative to the
Drug Corporation, the Court stressed that prior payment of utilization of services in hotels and
tax liability is not a pre-condition before a taxable entity can similar lodging establishments,
avail of the tax credit. The Court declared, "Where there is no restaurants and recreation centers,
tax liability or where a private establishment reports a net and purchase of medicines in all
loss for the period, the tax credit can be availed of and establishments for the exclusive
carried over to the next taxable year." It is irrefutable that use or enjoyment of senior citizens,
under RA 7432, Congress has granted the tax credit benefit to including funeral and burial
all covered establishments without conditions. Therefore, services for the death of senior
neither a tax liability nor a prior tax payment is required for citizens;
the existence or grant of a tax credit.
xxx
Hence, respondent is entitled to claim the amount of
P2,376,805.63 as tax credit despite incurring net loss from The establishment may claim the
business operations for the taxable year 1997. discounts granted under (a), (f),
(g) and (h) as tax deduction based
The senior citizens' discount may be claimed on the net cost of the goods sold or
as a tax credit and not a refund. services rendered: Provided, That
the cost of the discount shall be
Section 4(a) of RA 7432 expressly provides that allowed as deduction from gross
private establishments may claim the cost as a tax income for the same taxable year
credit. A tax credit can only be utilized as payment that the discount is granted.
for future internal revenue tax liabilities of the Provided, further, That the total
taxpayer while a tax refund, issued as a check or a amount of the claimed tax
warrant, can be encashed. A tax refund can be deduction net of value added tax if
availed of immediately while a tax credit can only be applicable, shall be included in
utilized if the taxpayer has existing or future tax their gross sales receipts for tax
liabilities. purposes and shall be subject to
proper documentation and to the
Hence, the senior citizens' discount may be claimed as a tax provisions of the National Internal
credit and not as a refund. Revenue Code, as amended."
(Emphasis supplied)
RA 9257 now specifically provides that all covered
establishments Contrary to the provision in RA 7432 where the senior
may claim the senior citizens' discount as tax citizens' discount granted by all covered establishments can
deduction. be claimed as tax credit, RA 9257 now specifically provides
that this discount should be treated as tax deduction.
On 26 February 2004, RA 9257, otherwise known as
the "Expanded Senior Citizens Act of 2003," was With the effectivity of RA 9257 on 21 March 2004, there is
signed into law and became effective on 21 March now a new tax treatment for senior citizens' discount granted
2004.
31 by all covered establishments. This discount should be
considered as a deductible expense from gross income and
no longer as tax credit. The present case, however, covers the
RA 9257 has amended RA 7432.
taxable year 1997 and is thus governed by the old law, RA
Section 4(a) of RA 9257 reads:
7432.
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The Decision of the CA was AFFIRMED. In lieu of the itemized allowable deductions, the OSD
may be deducted from the gross income as follows:
B. KINDS OF ALLOWABLE DEDUCTIONS
a) An individual other than a
a) Optional Standard Deductions (OSD) non resident alien OSD
b) Special Deductions must not exceed 40% of
c) Itemized Deductions (ID) his gross sales or gross
receipts
SPECIAL DEDUCTIONS those which are allowed by law to
b) A corporation OSD is not
specific taxpayers only.
exceeding 40% of its gross
1. Private Proprietary Educational Institutions (PPEI) income
[Section 34(A)(2)] - in addition to the expenses
allowed as deduction, PPEI has the option to treat
the amount utilized for the acquisition of From its name itself, standard deduction is optional
depreciable assets for expansion of school facilities (Mamalateo, page 213). The taxpayer must signify in his
such as: return that he elects the OSD, otherwise he shall be
a) Outright expense (the entire amount is considered as having availed of the itemized deductions.
deducted from gross income); or
b) Capital asset and deduct only from the gross The Tax Code provides that once a taxpayer elected
income an amount equivalent to its a deduction (either OSD or itemized) in his ITR, such election
depreciation every year. is irrevocable for the taxable year which the return is made
2. Insurance Companies (Section 37, NIRC) can deduct [Section 34(L), NIRC]. Hence, the taxpayer can change to
the following: itemized deductions in succeeding years. (Mamalateo, page
a) Net additions required by law to be made within 213).
the year to reserve funds; AND
Requites for the exercise of OSD:
b) Sums other than dividends paid within the year
on policy and annuity contracts 1) Available to both corporations and individuals
3. Estates and Trusts (Section 61, NIRC) can deduct the other than non-resident aliens
following: 2) OSD is optional - taxpayer signifies in his return
a) Amount of income paid, credited or his intention to elect OSD otherwise he is
distributed to the heirs/ beneficiaries; considered as having availed of ID
AND 3) Election is irrevocable for the year in which it is
b) Amount applied for the benefit of the made
grantor 4) Amount is limited to 40% of taxpayers gross
income or gross receipts
C. THE OPTIONAL STANDARD DEDUCTION (RA 9054, June
5) Proof of actual expenses is not required.
17, 2008)
Illustration 1 (Individual Taxpayer):
Earlier, only individual subject to tax under Section
24 of the NIRC (other than a non resident alien) may elect a Mr. X, a practicing lawyer, received
standard deduction. However, the new RA 9504 (Act a total professional fee amounting to
Amending among others Section 34 of the NIRC) allows OSD P600K during the taxable year. His related
not only to individual taxpayer (other than a non-resident itemized deduction allowed amounted to
alien) but also to corporation subject to tax under Section P100K. Mr. X opted to deduct OSD in lieu
27(A) and 28 (A)(1) of the Tax Code. of itemized deductions (ID).
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ii. Allowable Modes of Depreciation Basis, means the amount of the taxpayers
1. The straight line method Equal capital or investment in the property which
depreciation per unit of time, he is entitled to recover tax-free during the
regardless of use or production output period he is removing mineral in the
of the property. deposit.
2. Declining balance method Amount of Intangible cost in petroleum operations
depreciation is subtracted annually This refers to any cost incurred in
from the cost of the property and the petroleum operations which in itself has no
rate then only applied to the resulting salvage value and which is incidental to and
balance. necessary for the drilling of wells and
3. Sum of the year digit method preparation of wells for the production of
application of a changing fraction to petroleum.
the taxpayers cost basis for the Depletion and Depreciation
property, reduced by the estimated Both are predicated upon the same basic
residual salvage value. premise of avoiding tax on capital.
4. Unit of work or unit of production However, depletion is based upon the
method A provision is made for equal concept of the exhaustion of a natural
depreciation per unit of use regardless resource, whereas, depreciation is based
of the lapse of time. upon the concept of exhaustion of the
5. Job basis method The allowance is property, not otherwise a natural resource,
computed as being equal to the used in trade or business or held for the
difference between the cost of production of income. Thus, depletion and
depreciation of the asset purchased for depreciation are made applicable to
a particular job, and the salvage value different types of assets.
at the end of the job. g. Losses
6. Retirement method The cost of the implies an unintentional parting with
property retired each year is credited something of value
to the capital asset account and less Requisites:
net salvage value actual or estimated. 1. The loss must be incurred in the
Charged to expense in lieu of an annual trade, business or profession of the
provision for depreciation deductions. taxpayer.
7. Such other methods as may be allowed 2. It must be actually sustained and
by the Sec. of Finance upon charged off within the taxable year.
recommendation by the Commissioner. 3. It must be evidenced by a closed
f. Depletion and completed transaction.
exhaustion of natural resources such as oil Completed Transaction this means that the loss must be
and gas wells and mines as a result of fixed by identifiable event.
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Example: If it is a loss sustained from sale, the event that 1. Securities become worthless during the taxable year
may identify or complete the transaction is the
consummation of the contract of sale. 2. Securities are capital assets
Suppose it is in the nature of casualty losses like fire? 3. Losses are considered as losses from the sale or
exchange, on the last day of such taxable year, of
The fire destroyed your property in 1995, no payment has capital assets.
been made because the insurer and the insured were still
under negotiation. It was only in 1997 that they agreed on Net operating loss
the amount. The amount agrees upon is P100,000. The
taxpayer may claim that casualty losses only in 1997 when It means the excess of allowable deduction over
payment was actually made. This is the event that will gross income of the business in a taxable year.
complete the transaction.
4. It must not be compensated for by NET OPERATING LOSS CARRY-OVER (NOLCO)
insurance or other forms of
indemnity. NOLCO shall be carried over as a deduction from the
gross income for the next three (3) consecutive
5. If it is a casualty loss, the taxpayer taxable years immediately following the year of loss.
has filed a sworn declaration of loss
within 45 days after the date of the Such loss shall be allowed as a deduction if it had not
discovery of the casualty or robbery, been previously offset as deduction from gross
theft, or embezzlement. income.
Some recognized losses However, any net loss incurred in a taxable year
1. Ordinary losses/business losses sustained in the during which the taxpayer was exempt from income
course of trade, business or profession tax shall not be allowed as a deduction
2. Casualty losses
3. Capital losses involved are capital assets. NOLCO shall be allowed only if there has been no
4. Securities becoming worthless substantial change in the ownership of the business
5. Losses from wash sales of stock or securities or enterprise.
6. Wagering losses
There is no substantial change when:
Note: Capital losses and securities becoming worthless are
governed by rules on loss from the sale or exchange of capital 1. Not less than 75% in nominal value of
assets. outstanding issued shares, if the business is
in the name of a corporation, is held by or
Casualty loss on behalf of the same persons; or
2. Not less than 75% of the paid up capital of
This must be reported to the BIR earlier than 30 days the corporation, if the business is in the
but not later than 45 days following the date of loss. name of a corporation, is held by or on
behalf of the same persons.
Loss arises from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement. Losses form wash sales of stock or securities
Securities becoming worthless A wash sale occurs where it appears that within a
period beginning thirty (30) days before the date of
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the sale or disposition of shares of stock or securities Exception:A may claim that as deductible loss if this was
and ending thirty (30) days after such date, the demolished by value of a court order because the govt
taxpayer has acquired (by purchase or exchange) or considered this as a fire hazard, loss of useful value of
has entered into a contract or option to so acquire, property or capital asset.
substantially identical stock or securities.
Losses from wagering shall be allowed only to the Issue: Whether Picop is entitled to deductions against income
extent of gains form such transactions. of net operating losses incurred by the Rustan Pulp and Paper
The amount that is deductible must not exceed the Mills, Inc.; and
gains Decision:
(1) On 18 January 1977, Picop entered into a merger
Abandonment losses agreement with the Rustan Pulp and Paper Mills, Inc.
("RPPM") and Rustan Manufacturing Corporation
In the event a contract area where petroleum ("RMC"). Under this agreement, the rights,
operations are undertaken is partially or wholly properties, privileges, powers and franchises of
abandoned, all accumulated exploration and RPPM and RMC were to be transferred, assigned and
development expenditures pertaining thereto shall conveyed to Picop as the surviving corporation. The
be allowed as a deduction. entire subscribed and outstanding capital stock of
RPPM and RMC would be exchanged for 2,891,476
In case a producing well is subsequently abandoned, fully paid up Class "A" common stock of Picop (with a
the unamortized costs thereof, as well as the par value of P10.00) and 149,848 shares of preferred
undepreciated costs of equipment directly used stock of Picop (with a par value of P10.00), to be
therein, shall be allowed as a deduction in the year issued by Picop, the result being that Picop would
such well, equipment or facility is abandonment by wholly own both RPPM and RMC while the
the contracto. stockholders of RPPM and RMC would join the ranks
of Picop's shareholders. In addition, Picop paid off
SPECIAL LOSSES include the following: the obligations of RPPM to the Development Bank of
a. loss arising from voluntary removal of buildings as an the Philippines ("DBP") in the amount of
incident to renewal or replacement P68,240,340.00, by issuing 6,824,034 shares of
preferred stock (with a par value of P10.00) to the
Problem: DBP. The merger agreement was approved in 1977
Supposed the taxpayer had a building constructed on a parcel by the creditors and stockholders of Picop, RPPM
of land. He owned this as well as the building erected and RMC and by the Securities and Exchange
thereon. He had business and his business was conducted Commission. Thereupon, on 30 November 1977,
within the premises. Then, he decided to remove such apparently the effective date of merger, RPPM and
building as to construct a new building for new business. RMC were dissolved. The Board of Investments
approved the merger agreement on 12 January
Is the cost of demolition to give way to a new building 1978.
deductible loss? YES.
(2) In the instant case, to allow the deduction claimed
Suppose A purchased that parcel of land of B and included in by Picop would be to permit one corporation or
that sale was that of the building. A demolish this building in enterprise, Picop, to benefit from the operating
order to construct a new building. Is the cost of demolition losses accumulated by another corporation or
deductible insofar as A is concerned? enterprise, RPPM. RPPM far from benefiting from
the tax incentive granted by the BOI statute, in fact
NO. That can only be claimed as deductions if the one gave up the struggle and went out of existence and
demolishing the same is the taxpayer. The moment that is its former stockholders joined the much larger group
sold to another claim that as deductible loss. The treatment of Picop's stockholders. To grant Picop's claimed
here is, the cost of demolition should be capitalized in the deduction would be to permit Picop to shelter its
selling price. otherwise taxable income (an objective which Picop
had from the very beginning) which had not been
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Upon the other hand, even before the effective date of 3. Donations to accredited non-governmental
merger, on 30 August 1977, Picop sold all the outstanding organizations.
shares of RMC stock to San Miguel Corporation for the sum of
P38,900,000.00, and reported a gain of P9,294,849.00 from * These are fully deductible if the contributions are given to
this transaction. the following: [F. A. G.]
1. Government or its political subdivisions, agencies or
In claiming such deduction, Picop relies on section 7 (c) of instrumentalities, for the purpose of undertaking priority
R.A. No. 5186. projects of the government;
These priority projects include: [S.H.E.]
h. Charitable Contributions a. Sports development, science and invention
b. Health and human settlement
Kinds of charitable contributions c. Educational and economic development
1. Ordinary or those which are subject to limitations as 2. Foreign government or institution and international civic
to the amount deductible from gross income. organizations;
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e. Sports development and social welfare thereof, where no part of the net income of which
inures to the benefit of any private individual.
The amount of charitable contribution that may be claimed
as deduction may be: 2. Utilizes the contribution directly for the active
conduct of the activities constituting the purpose or
1. In the case of individual taxpayer: function for which it is organized and operated not
th
- Not more than 10% of the net income before charitable later than the 15 day of the month after the close
contribution of accredited NGOs taxable year in which the
contribution were received.
2. In the case of corporate taxpayer:
- Not more than 5% of the net income before the charitable 3. Administrative expenses shall, in no case, exceed
contribution thirty percent (30%) of the total expense.
IF the recipient of such contribution is any of the following 4. The assets, in the event of dissolution, would be
DC formed or organized for: [R.E.C.S.] distributed to another non-profit domestic
1. Religious purpose and rehabilitation of veterans corporation organized for a similar purpose, or to
2. Educational purpose like educational corporations the state for public purpose, or would be distributed
which are not qualified as NGO by a court to another organization.
3. Charitable, cultural purpose
4. Scientific, sports development an social welfare Utilization
purpose
1. Any amount of cash or kind (including administrative
10% or 5% of the net income before charitable expenses) paid or utilized to accomplish one or more
contribution purposes for which the accredited non-
governmental organization was created or
Example: organized.
If an individual taxpayer has a gross income of
P100,000 and the allowable deduction, except charitable 2. Any amount paid to acquire an asset used (or held
contribution, is P50,000. The Charitable contribution is for use) directly in carrying out one or more
P5,000. purposes for which the accredited non-
governmental organization was created or
Deduction first P50,000 from P100,000 and the organized.
result is P50,000.
This P50,000 is the basis of that 10% or 5% of net Proof of deductions
income before charitable contribution. So, 10% of the
P50,000 is P5,000. Hence, the actual contribution of P5,000 Contributions or gifts shall be allowable deductions
may be fully claimed as deduction. only if verified under the rules and regulations prescribed by
the Sec. of Finance.
But let us say, the amount of charitable contribution
is P10,000. So, he can only deduct P5,000 as charitable i. Pension Trusts
contribution, and not the actual amount of P10,000 because
the law imposes a limitation that the amount that may be Requisites for the deductibility of payments to pension trusts
claimed as deduction must not be more than 10% of net
income before charitable contribution. 1. The employer must have established a pension or
retirement plan to provide for the payment of
Non-governmental organization reasonable pensions to his employees.
It means a non-profit domestic corporation: 2. The pension plan is reasonable and sound.
1. Organized and operated exclusively for scientific, 3. it must be funded by the employer.
research, educational, character-building, and youth
and sports development, health, social welfare, 4. the amount contributed must no longer be subject
cultural or charitable purposes, or any combination to the control or disposition of the employer.
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Contribution to pension trust may refer to the c. The claimant must be the spouse claiming the
current year or past years. additional exemption.
CURRENT YEAR- this is considered as ordinary & necessary
expenses Premiums on life insurance policy is also included here
because it is included under the health insurance policy.
Employer may also make a contribution to the pension plan
in regard to the services rendered for the past 10 years. * If taxpayer has no compensation income, these deductions
may be claimed against the gross income of his business,
j. Research and Development Costs trade, or profession.
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Note: Only the spouse deriving taxable income can claim the
P32,000 personal exemption; if both have taxable income, 3. one ore more legitimate, recognized natural, or
each can claim P32,000 exemption. legally adopted children living with and dependent
Head of the family upon him or her for their chief support.
To be a head of a family, one or more legitimate, 3. not more than 21 years of age;
recognized natural or legally adopted children must live with
and depend on an unmarried or legally separated man or 4. not married; and
woman.
5. not gainfully employed or, even though over 21
A dependent, on the other hand, may be a years old, incapable of self support because of
legitimate, illegitimate or legally adopted child. mental or physical defect.
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1. Basic personal exemption: 1. Parents - One or both parents. Must be living with
the taxpayer and dependent upon the
a. single or legally separated without Php20,000.00 taxpayer for chief support.
dependent; - Parents must be natural parents.
b. head of the family; Php25,000.00 2. Brothers or sister - To be qualified they must be:
a. Living with the taxpayer;
c. each married individual if both of b. Dependent upon the taxpayer for chief
them are earning Compensation Php32,000.00 support;
income c. Unmarried;
(in case only one of the spouses is d. Not gainfully employed.
deriving gross income, only such e. No more than 21 years old except if
spouse shall be allowed the personal physically or mentally incapacitated;
exemptions) must be brothers or sisters by blood
one is enough
2. Additional exemption
- This only applies to qualified Php8,000.00 for 3. Children- Must be legitimate , illegitimate, legally
dependent child and children such every qualified adopted or stepchildren
as legitimate and illegitimate dependent child but Conditions:
children. not to exceed 4 a. Living with the taxpayer;
b. Dependent upon the taxpayer for chief
support;
Personal Exemption only individual taxpayers, including
c. Unmarried;
estate and trust, are entitled.
d. Not gainfully employed;
e. Not more than 21 years old except if
In case of estate and trust Php20,000.00
physically or mentally incapacitated.
R.C. N.R.C. R.A. NRA-NTB NRA-
NETB
/subject to
the rule on
reciprocity.
/ / / But it must
Personal within within not exceed X
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Dependent is considered living with the taxpayer even if there is no need of any recognition on the part of the
the former or the latter are not physically together if that is taxpayer.
brought about by force of circumstances. Example if one of
the parents will have to undergo by-pass operation in the U.S. Is this really the intention of law?
Chief Support means more than 50% of the needs of the No. The intention of the law has always been to recognize
dependents are provided by the taxpayer. this illegitimate child and this is one way of compelling the
taxpayers to recognize this child.
Problem: If the child or the brother/sister got married and The President of the Republic of the Phils. cannot issue an
then he has found to be physically or mentally incapacitated, executive order to increase the basic personal exemption
so bumalik si tatay at dependent sa tatay for chief support, because the provision under the Old Tax Code authorizing the
can he qualify as dependent? President to increase the personal and additional exemption
upon the recommendation of the Sec. of Finance has been
Answer: No, physical or mental defect applies only to age removed or deleted by RA 8424.
requirement. Once the child or brother/sister got married, he
is automatically disqualified as dependent. Now, you can only increase the amount of personal and
additional exemption by legislative enactment.
CHANGE OF STATUS:
1. Death of spouse during the taxable year;
2. Death of dependent during the taxable year;
3. Death of the taxpayer during the taxable year; estate of
the taxpayer may claim the basic personal exemption;
4. Additional dependent during the taxable year;
5. Taxpayer got married during the taxable year;
6. Gainful employment of the dependent during the
taxable year
7. Dependent became more than 21 years old during the
taxable year.
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