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2017 FINALS with foreign construction companies by pooling their

1. How is the ff defined for income tax purposes? resources.

a. Person - means an individual, a trust, estate or
corporation The position of one of the partners as regards setting up a
b. Corporation - shall include partnerships, no matter corporation instead: he distributive share in the profits would
how created or organized, joint stock companies, joint be the one subject to tax and would be part of their gross
accounts, association, or insurance companies, but income as corporations.
does not include GPP and joint venture or consortium
formed for the purpose of undertaking construction 3.
projects or engaging in petroleum, coal, geothermal, A company is not a resident foreign corporation when it set up
and other energy operations pursuant to an operating a subsidiary in the PH. Such subsidiary is a distinct entity from
consortium agreement under a service contract with its parent company.
the Govt
c. Resident Alien – means an individual whose Company’s personnel stay in the PH for the first 3 months of
residence is within the PH and who is not a citizen operations is considered as short and definite. Based on
thereof jurisprudence, short and definite stay in the country does not
make them resident aliens for purpose of taxation. (NRA –
2. Joint Venture short and definite)
Joint venture as an entity is not considered as a taxable entity.
Jurisprudence provides that in order for this to be applicable, For the first year, f expenses amounted to more than $100k,
the ff requisites must be followed: parent company will charge subsidiary for the expenses plus a
a. Must be created for purposes of joint undertaking of a 10% mark up. If it does not exceed, parent company will only
construction project bill subsidiary at cost or without mark-up. For the 2nd
b. Involve pooling of resources by licensed contractors, subsequent years, subsidiary agreed that it would provide
licensed by PH Contractors Accreditation Board parent company a portion (10%) of its total gross sales. If the
(PCAB) of the DTI total cost of its personnel was $150k, then there’s mark-up
c. Local contractors are engaged in construction business which is a realized gain on the part of the parent company
d. Joint venture itself must likewise be duly licensed as upon which it has complete dominion. There is gross income of
such by the PCAB $15k to be reported by the parent company. As this is service
income, its source of income is within the PH, which is taxable
The non-taxibility of joint ventures created for the undertaking income for non-resident foreign corporation based on their
of a construction project is not dependent on the number of gross income.
projects they engaged in, as the provision is silent on this
matter. Jurisprudence tells us that such privilege granted to The agreement of the parent company and the subsidiary
local construction business was meant to help them compete provides the former 10% on its gross sales. Gross sales is the
amount of sales received by a corporation. Cost of goods sold
(all direct costs and expenses incurred to provide services) qualify as interest expense deductible for the HeirsCo,
such as personnel cost, has not yet been factored in the considering that such expense was ordinary and necessary,
determination of the 10% gross sales. Therefore, regardless of made in accordance with a legally demandable debt. However,
whether the 2nd year of operation would amount to gross loss, if the abovementioned were not attendant to the infusion
the 10% is based on the gross sales and not on the total gross schemed payment based on earnings would instead qualify as
income/loss of the subsidiary. dividend payment to ParentCo and the infused funds would
then be capital investment. Dividend payments are not
Since the services were performed in the PH, the salaries of the deductible as expense on the part of the distributing company.
personnel are income sources from within the PH. These must
be subjected to withholding tax on compensation, which would The transfer pricing to be applicable must be between related
be properly withhold by the payor. But in this case, the parties. However, in the case of Filinvest, BIR does not have the
subsidiary who is in control of the payment of compensation power to impute theoretical interest rate on loan transactions
should withhold the same. when such was not intended by the parties. Despite the BIR
being authorized by the Tax Cose to distribute, allocate,
4. apportion, and shift income and expenses, the surrounding
All gains or losses from exchange or other disposition of circumstances attending the transaction should be considered
property shall be recognized except in pursuance of plan or in determining reasonable ness of the transaction whether
merger or consolidation: such shall be the subject matter of transfer pricing.
a. A corporation exchanges property for stock of another
corporation which is a party to merger 5.
b. A shareholder exchange stock for stock of another Depreciation can be claim if the ff requisites are satisfied:
corporation which is a party to merger a. Reasonable
c. A security holder exchanges his securities for stock of b. Incurred within the taxable year
another corporation which is a party to merger c. Depreciable property used in the taxpayer’s trade or
The basis of the shares on the hands of the transferor shall be
the basis of the property exchanged, decreased by: As the car is being used in his trade or business, the car is
a. Amount received by transferor considered as an ordinary asset, which is subject to
b. FMV of property received with the stocks depreciation allowance.
Increased by:
a. Gain realized by the transferor upon such exchange Even if the person has not income for the year, he is till require
provided that any liability assumed by the transferee shall to file an income tax return. Under the tax code, an indivudal
be considered as cash amount received by the transferor engaged in business, trade or profession, is always require to
file income tax return regardless on whether he had no income
If the infusion of funds was made pursuant to a loan for the year. It’s claimed deductions shall always be under
agreement, with stipulated interest in writing, then this would
scrutiny of the tax authorities whether such were properly and therefore, ordinary income. Gain or loss from transactions
applied or claimed. over such property will form part of his gross income subject
to allowable deductions.
BIR RMC provides that stock options exercised by the 2016 FINALS
employee is a taxable compensation on the part of the 1. Capital Asset v Ordinary Asset
employee. However, since the recipient was a top executive, it
is a fringe benefit subject to 35% tax computed on the gross-up In the hands of an individual, a capital asset, if a real property
monetary value of stock options at the time of exercise. shall be subject to 6% CGT based on the selling price or FMV,
whichever is higher. If it is an ordinary asset, the gain/loss is
Since the shares are not listed in the stock exchange and it is a determined by subtracting the cost from the selling price (SP-
capital stock, it will be subject to the final tax of 15%. cost), and such gain is treated as part of gross income, while
the loss is treated as deduction.
7. Capital Asset v Ordinary Asset
A capital asset is defined in the tax code in a negative way. It is If the selling price would be lower than the cost of property or
any asset except: equal to cost, I will suggest that it he treats it as an ordinary
a. Stock in trade or property included in the inventory of the asset so that the loss will be treated as deduction to gross
taxpayer income and therefore, taxable income will be lower and taxes
b. Primarily held for sale to customers in the ordinary course will be lower.
of his trade or business
c. Property used in trade or business which is subject to 2.
allowance for depreciation The treatment for the payment of lease rentals will depend on
d. Real property used in trade or business the accounting method that he is using.

The classification is essential in determining the proper tax For the 3 months security deposit, this will not be considered
rates and treatment to be applied. taxable since this is not an income or a gain on his part. Hence,
no income tax.
In the hands of an individual, a capital asset, if a real property
shall be subject to 6% CGT based on the selling price or FMV, Under accrual method, income is recognized when it earned
whichever is higher. If it is an ordinary asset, the gain/loss is regardless of whether or not cash is received. In this case, only
determined by subtracting the cost from the selling price (SP- 2 months is earned and it would be taxable. The last month
cost), and such gain is treated as part of gross income, while was not rented out therefore not considered as gain.
the loss is treated as deduction.
Under cash method, income is recognized when cash is
If the individual however, is a dealer in property, real received regardless if there is performance or not. The whole 3
properties are usually held by such individual as inventory, months will be taxable immediately. But since there was a
cancellation, the previously recognized income must be If they will set-up a subsidiary, the foreign entity will be a non-
deducted for the amount of the rent for the last month. resident foreign corporation. The subsidiary will be treated as
a domestic corporation and it will be subject to corporate
3. income taxes provided in the law. Dividend payments by the
The architect is a non-resident, thus he will be only taxable for subsidiary to the foreign entity will be subject to treaty rates, if
income arising from sources within the PH. any, or 15% if there is sparing or 30% if no tax sparing. (The
tax sparing provision was basically to equalize the burden for
The tax code provides that for income arising from services, foreign entities who establishes branch or subsidiary in the PH.
the source of income is the country where the services were This happens when foreign country where the foreign entity
performed. So if the architect who is in Canada designs the came from allows tax credit for income earned in the PH.
plains in Canada, he will not be taxable in the PH for service
fees. For royalties, he will be subject to final tax of 20% if the 6. Tax Free Transaction
income will come from sources within the PH.
If an individual exchanges property to a corporation for
4. Requirements for business expense to be deductible shares of stock of such corporation, it will be exempt from
tax if he alone or together with others not exceeding four,
a. Must be in relation to trade, business, or profession of will gain control of the corporation and provided that it is
taxpayer for a legitimate business purpose and not merely to avoid
b. Ordinary and necessary expenses taxes.
c. Reasonable amount
d. Paid or incurred/accrued during the taxable year In this case, since property was exchanged for stock and he
e. Substantiated by sufficient evidence gained control, assuming it is for legitimate business
f. Not against law, morality, public order, public policy purpose, and then it is exempt from tax.
g. Withholding taxed paid to BIR
The subsequent sale will yield to a taxable gain. The cost
5. Branch v Subsidiary basis will remain to be the original cost and will not be
adjusted because the first transaction was not taxable.
If there will be a branch, the foreign entity will considered as a
resident foreign corporation and the income of the branch will 7. Improperly Accumulates Earnings Tax
be subjected to corporate income tax rates. Remittances made
by the branch to the head office will be subject to branch profit IAET is imposed to corporations that permit earnings and
remittance tax. Since it is a resident foreign corporation, the profit to accumulate instead of being divided or
income that will be taxable are those sourced from within the distributed. It is designed to compel corporations to
PH . BPRT is 15%. distribute earnings so that the said earnings by
shareholders could turn be taxed.
Applicable to: All domestic corporations which are If an individual is a non-resident alien not engaged in
classified as closely-held corporations: (1) at least 50% of business in the PH, his gross income will be subject to final
OCS or (2) 50% of the total combined voting power of all withholding tax of 25%, otherwise the rent income is not
classes of stock is owned directly/indirectly by not more subject to final tax since rent is not among the
than 20 individuals. enumerations provided by the Tax Code subject to final
tax. It will be subject to CWT if the source of income is a
Not applicable to: Publicly held corporations, banks, required withholding agent. The rent income will be
insurance companies, taxable partnerships, GPP, non- included in full in the computation of the income subject to
taxable joint ventures, entities registered with PEZA or the graduated tax rate. The taxes withheld may be claimed
other special economic zone as tax credit, which will be deducted to his income tax still
Amount that may be retained =100% of paid up capital +
reasonable needs If in the end, he finds out that he has no tax due, he may
ask for a refund or a tax credit from the BIR. For refund,
Prima facie evidence of IAE: Corporation is mere holding cash will be returned to him and for credit, it will be
company or investment company, permitted to accumulate deducted to future payments of tax.
beyond, unrelated business or in stock or securities of an
unrelated business, investment in bonds and other long 9. Filing of returns
term securities, in excess of 100% paid up capital.
Minimum wage earners are generally not required to file
Computation: ITR and for employees, the employers usually file for them
Taxable income through substituted filing. General rule is that individuals
Income Exempt from Tax who earn pure compensation income is not required to
Income Excluded from GI file. However, if an individual deriving compensation
Income Subject to Final Tax concurrently from two or more employers during taxable
NOLCO deducted year shall file income tax return.
Gross Income which could have been distributed
(Dividends actually or constructively paid) 10. Things to change in tax code
(Income Tax Paid) For fringe benefits tax, supervisory and managerial
(Amount reserved for reasonable needs of the business) employees are subject to fringe benefits tax to be paid by
Total the employer. The employee therefore need not include
Multiply by: IEAT rate of 10% the monetary value in his income tax return. But if fringe
IAET benefit is received by rank and file, it is not subject to
fringe benefit tax but the employee must include it in
8. Creditable Withholding Tax v Final Withholding Tax income tax return and subject it to tax. In short, the
supervisory and managerial will enjoy the full monetary
value of fringe benefits but rank and file will be subjected
to tax. Proper legislation is to be done to equalize the

For de minimis benefits must be amended in a sense that

the limits must be increased. In present economy, the
values are very small and not updated.