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1.

Treasure found or punitive damages representing profits lost

TAXATION 2 2.
3.
Amount received by mistake
Cancellation of the taxpayer’s indebtedness
4. Payment of usurious interest
5. Illegal gains-gambling, theft, embezzlement (income to embezzler if
forgiven by the owner), extortion fraud
6. Tax refund
7. Bad debts recovery
This work is NOT intended FOR SALE or COMMERCE. This WORK is a freeware.
Earnings, lawfully or unlawfully, acquired without the consensual
It may be freely copied and distributed, nevertheless, PERMISSION TO COPY from
recognition, express or implied, of an obligation to repay AND without
the editor is ADVISABLE to protect the interest of the ORIGINAL restriction as to their disposition are TAXABLE, even though it may still be
SOURCES/REFERENCES of this material. claimed that he is not entitled to retain the money or even though he may
still be adjudged to restore its equivalent.
I would like to seek the indulgence of the reader for some Bar Questions which are
improperly classified under a topic and some topics which are improperly or ignorantly Place where income may be earned: Income may be earned from:
phrased, for the arranger is just a Student who has prepared this work while in his 3rd
year of Law school under constraints and within his limited knowledge of the law. I a. Within the Philippines;
would like to seek the reader’s indulgence also for a number of typographical errors in b. Without the Philippines; and
this work. Global Taxpayer: A Resident Filipino Citizen or a Domestic
Corporation
Income Taxation c. Partly within the Philippines and partly without the Philippines
G.R. Only INCOME WITHIN is taxable in the Philippines
Exception: When the taxpayer is a Resident Filipino Citizen or a
What is an INCOME? Domestic Corporation

- Income means ALL WEALTH that flows into the hands of the taxpayer other Sources and Taxability of Income
than as a mere return of capital
Sources of Income Income Taxpayers
- It includes the forms of income specifically described as gains derived from the
Earned:
sale or other disposition of capital. RC/DC NRC/Aliens/FC

Sources of INCOME Within Taxable Taxable


- Source of income is any property, activity or service that produced the
income. Without Taxable Non Taxable

PROPERTY (capital) Partly within and w/out Taxable Partly Taxable


LABOR (service)
SALE (exchange of capital asset and activity)

- Income derived from WHATEVER SOURCE forms part of the taxpayer’s


income. REQUISITES OF INCOME TO BE TAXABLE (GReT)

This includes the following: 1. There must be GAIN or PROFIT, whether in cash or its equivalent

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Jaybee de Guzman Pascua Review notes on Taxation
- There should be earnings in EXCESS of the capital invested or in EXCESS of
- Income is the fruit of capital. - The original investment or fund
the amount invested. A RECOVERY OF AMOUNT INVESTED IS NOT AN
used in order to generate
INCOME.
earning which is called income
- Income is the service of wealth. - Is a wealth
2. The gain must be REALIZED or RECEIVED

- Receipt included constructive receipts – that income must be credited to the


taxpayer without any substantial limitation or condition upon which 3. Income vs. Receipts
payment is to be made.
Income Receipts
Examples of Income Constructively Received
- Refers to the amount after - Are considered cash collected
a. Interest credited on savings bank deposit; excluding capital invested, cost over a business period.
b. Matured interest coupons not yet collected by the taxpayer; of goods sold and other - Receipts may include capital as
c. Dividends applied by the corporation against the indebtedness of a deductions allowed by law. well as its earnings.
stockholder
d. Share in the profit of a partner in a general professional partnership,
although not yet distributed, is regarded as constructively received.
e. Intended payment deposited in court (CONSIGNATION)
WHAT IS AN INCOME TAX
3. The gain MUST NOT BE EXCLUDED BY LAW or TREATY from taxation.
- Is a TAX IN INCOME whether gross or net
- There are some EXCLUSIONS FROM GROSS INCOME as provided for by - Is an impositions by the government wherein the test of faculty is: INCOME
the NIRC, other tax laws and treaty. So, not all income is required to be (earnings)
included in computing the taxable income.
PURPOSES OF INCOME TAX
DISTINCTION
- INCOME TAX has been increasingly relied upon by the Government
1. Income vs. Revenue a. To provide a large amount of revenue,
b. To remove inequalities in the distribution of income and wealth which
Income Revenue are deterrents to social progress.

- Refers to the earnings of - All funds accruing to the BASIC IN INCOME TAX LAW
individuals, partnership, treasury of the government
corporation or estate and trust derived from tax, donation, - Title II of RA No. 8424, the Tax Reform Act of 1997 otherwise known as the
whether or not subject to tax. grants and any other tax. NIRC of 1997.
- The law has undergone a lot of amendments and the latest amendment
being the provisions of RA 9504 – An act amending the Sections 22, 24, 34,
2. Income vs. Capital 35, 51 and 79 of RA 8424, as amended relative to the withholding of Income
Tax on Compensation and other concerns specially PERSONAL and
ADDITIONAL EXEMPTIONS.
Income Capital
In the Philippines, the INCOME TAX in the NIRC is:

a. National - taxes collected by the National Government

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Jaybee de Guzman Pascua Review notes on Taxation
Examples: estate and donor taxes, income tax, value- added tax,
excise tax, custom tax and documentary stamp taxes. - Final Withholding Tax (sec. 32A)
o The withholding agent is obligated to withheld
b. Direct – demanded from people who are bound by law to pay the tax. These o Recipient of such income will no longer be required to report such
taxes are non- transferrable. income because the amount withheld constitute as a FINAL
Examples: community tax, income tax, transfer taxes, traveller’s tax SETTLEMENT of the tax liability of that particular income.
and corporate income tax. Ex:
Interest, Royalties, Dividends received by individual taxpayer and
c. Indirect – demanded in the first instance from one person but the burden Non Resident foreign Corporation, and Prizes amount to more than
thereof can be shifted or passed to another. These taxes are transferrable. P10,000.00
Examples: E-VAT, custom duties, amusement tax, Excise tax on
specific goods and percentage taxes. - Substituted Filing of Income Tax (R.R. No. 30-2002)
o As per Revenue Reg. - Taxpayer is no longer required to file income
d. Ad Valorem - imposed based on a specific proportion of the VALUE fixed tax return, Provided that following requisites are present:
by law or as appraised. a) Must be pure compensation earner. No other source of income
Examples: Real Estate Tax Custom Duties and Excise Tax on b) Must only have one employer
fermented liquors, cigars, cigarettes, gasoline and automobiles. c) The tax withheld must be equal to tax due on tax payable.
o Employer must file an Information Tax Return
e. Specific - imposed and based on some STANDARD of WEIGHT or o The BIR form 1604 serves as Tax Return.
MEASUREMENT. - Tax Rates ( Sec. 24 NRC – Individual Tax Rates and Sec. 27 NIRC – Corporate
Examples: Excise Taxes on distilled spirits, wines fireworks, and Tax Rates).
cinematographic films. o Progressive Income Tax Rate – 5% to 32%
o Uniform Corporate Income Tax Rate 30% effective January 1, 2009.

SALIENT FEATURES OF THE PRESENT INCOME TAX SYSTEM IN THE PHIL. INCOME TAX SYSTEMS
(RA 8424, the NIRC)
A. Schedular System,
- Schedular System of Taxation - Provides for different tax rules and tax treatment
- Net income Taxation (Sec. 34 and 35 of the NIRC – it allows deductions and - Classifies or categorize income
grants exemption). - Employed in imposing tax on INDIVIDUAL taxpayers.
- Gross Income Taxation (Sec. 25 par. b,c,d,e) of the NIRC and Sec. 28B 1,2,3,4 –
granted under exceptional cases and does not allow exemption and deduction) B. Global System
- Global System of Taxation. - It views the tax base
- Comprehensive Income Tax Situs (Sec. 23 of the NIRC) - It treats in common all the categories of taxable income of taxpayers and
All the possible criteria or basis are included imposes a uniform tax rate
a) R – residence of the taxpayers RA and NRA ETB - It does classify or categorize income of corporate taxpayers.
b) P – place where income is derived (NRA NETB and NRFC)
c) Nationality and Residency of the taxpayers (RC and DC – because can DISTINCTION
be taxed on income within and without)
- Pay as you file system (Sec. 56A1 of the NIRC and Sec. 77 par. C)
Schedular System vs. Global System
- Creditable Withholding Tax
o The withholding agent (source of income) is obligated to withhold Provides for UNIFORM tax rules As to tax Provides for DIFFERENT tax
on certain items on income or tax treatment treament rules or tax treatment
o This tax withheld may be credited against the income tax due by
the taxpayer.

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Jaybee de Guzman Pascua Review notes on Taxation
As to Allows no deduction Allows deduction
As to claimed for
Does not classify / categorize categorize/ classifies or categorizes income. Grants NO exemption Grants exemption
DEDUCTIONS
income. classification of
or
Income
EXEMPTIONS
UNIFORM in character 30% Applies to INDIVIDUAL
uniform corporate rate effective As to tax rate INCOME Taxation. Applies to two (2) kinds of Applies to the following – RC,
As to
taxable year 2009. taxpayers – NRA-ETB and NRC, NRA-ETB, RA, DC, RFC
Applicability
NRFC
Advantages

- Eradicates/minimizes graft - Just and favorable system


and corruption - Minimizes fraud in claiming
- Simplifies computation of deductions
tax - Provides equitable relief –
- Simple rules to be level of disposable income
understood by the ordinary will improve and economic
citizen activity will increase.
- More revenues to the govt. - More revenues to the govt.

Disadvantages

- Can no longer claim - Vulnerable to graft and


business legitimate expenses corruption
- Susceptible of fraudulent
manipulation of gross - Provides complicated rules
income which an ordinary citizen
- Result to tax evasion finds it difficult to
understand
- Result to tax evasion

Taxable income or net


income – all items of
Gross Income Gross Income less
As to tax Base allowable deductions
and exemptions
authorized by law. (sec.
31 NIRC)

Gross Income Taxation vs. Net Income Taxation

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Jaybee de Guzman Pascua Review notes on Taxation
GROSS INCOME 3. Dividends received by individual taxpayer and Non resident Foreign
Corporation;
4. Prizes and winnings amounting to more than P10,000.00;
DEFINITION OF GROSS INCOME

- Means ALL INCOME derived during a taxable year by a taxpayer FROM NORMAL TAX vs. FINAL TAX
WHATEVER SOURCE, whether legal or illegal, including but not limited to
the following items: (Sec. 32, NIRC) A. FINAL TAX
- Subject to FINAL TAX – No need to Report in the year-end income Tax
Return (ITR) - Subject to final tax rate
1. Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;
Summary application of FINAL TAX
2. Gross income derived from the conduct of trade or business or the - Income subject to final tax is an income wherein the tax is fully collected
exercise of a profession; through the withholding tax system. The payor of the income withholds the
3. Gains derived from dealings in property; tax and remits to the government as a final settlement of the income tax due
4. Interests; on said income. THIS IS TO ENSURE THE COLLECTION OF INCOME
5. Rents; TAX ON SAID INCOME.
- The recipient of the income is no longer required to include the item of
6. Royalties;
income subjected to “final tax” as part of his gross income in his income tax
7. Dividends; returns.
8. Annuities;
9. Prizes and winnings; B. NORMAL TAX
10. Pensions; and - Subject to NORMAL TAX Report in the year-end income Tax Return (ITR) –
11. Partner's distributive share from the net income of the general Subject to Progressive Rate of 5% to 32%.
professional partnership.
- Is taxable income subject to final tax?
A. Normal Tax – Sec. 32A (1)(2)(3)(5)(6)(10)(11)
a. IF NO - subject to NORMAL TAX report in the year-end Income Tax
1. Compensation for services in whatever form paid, including, but not Return (ITR) – Subject to Progressive Rate of 5% to 32%
limited to fees, salaries, wages, commissions, and similar items; b. IF YES - no need to report in the year-end ITR – Subject to Final Tax
Rate
2. Gross income derived from the conduct of trade or business or the
exercise of a profession;
3. Gains derived from dealings in property;
4. Rents;
5. Annuities;
6. Pensions; and
7. Partner's distributive share from the net income of the general
professional partnership.

B. Final Withholding Tax – Sec. 32A (4)(6)(7)(9)

1. Interests;
2. Royalties;

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- Any remuneration for services performed by an employee for his employer
BAR QUESTIONS: under an employer-employee relationship, UNLESS specifically
QUESTION EXCLUDED by the Tax Code.
What is meant by income subject to "final tax"? Give at least two examples of income of
resident individuals that is subject to the final tax. (3%) NOTE the Existence of Employer-Employee Relationship: When the
person for whom services are rendered (EMPLOYER) has the right to
SUGGESTED ANSWER:
Income subject to final tax refers to an income wherein the tax due is fully
control and direct the individual who performs the services (EMPLOYEE)
collected through the withholding tax system. Under this procedure, the payor of not only as to the result in accomplishing the work but also as to the details
the income withholds the tax and remits it to the government as a final settlement and means by which that result is accomplished.
of the income tax due on said income. The recipient is no longer required to
include the item of income subjected to "final tax" as part of his gross income in
his income tax returns. Examples of income subject to final tax are dividend TWO TAX IMPLICATIONS OF COMPENSATION INCOME
income, interest from bank deposits, royalties, etc.
1) As to the EMPLOYER – IT IS AN EXPENSE (necessary and ordinary
QUESTION
What do you think is the reason why cash dividends, when received by a resident citizen but can only claim the reasonable fair value of the services rendered)
or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the 2) As to the EMPLOYEE – IT IS AN INCOME ( either compensation or
progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer. other income)
(5%)

SUGGESTED ANSWER: COMPUTATION OF TAXABLE INCOME


The reason for imposing final withholding tax rather than the progressive tax
schedule on cash dividends received by a resident citizen or alien from a
domestic corporation, is to ensure the collection of income tax on said income. If Gross Compensation Income xxxxx
we subject the dividend to the progressive tax rate, which can only be done
through the filing of income tax returns, there is no assurance that the taxpayer
will declare the income, especially when there are other items of gross income Less: Deductions
earned during the year. It would be extremely difficult for the BIR to monitor
compliance considering the huge number of stockholders. By shifting the
responsibility to remit the tax to the corporation, it is very easy to check
compliance because there are fewer withholding agents compared to the number Premium Payments on Health and/or
of income recipients. Hospitalization Insurance (Sec. 34(M) xxxxx

Likewise, the imposition of a final withholding tax will make the tax available to
the government at an earlier time. Finally, the final withholding tax will be a sure
revenue to the government unlike when the dividend is treated as a returnable
income where the recipient thereof who is in a tax loss position is given the Balance
chance to offset such loss against dividend income thereby depriving the
government of the tax on said dividend income. [Note: It is recommended that
any of the foregoing answers can be given full credit because the question
Less: Personal Exemptions xxxxx
involves a policy issue which can only be found in the deliberations of Congress.]

Additional Exemptions xxxxx xxxxx

A. COMPENSATION INCOME Sec. 32A (1)

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Jaybee de Guzman Pascua Review notes on Taxation
Taxable Income xxxxx 12. Thirteenth (13th) Month Pay other benefits

G.R.: NOT TAXABLE if total amount is P30,000.00 or less


EXCEPTION: TAXABLE - Amount in excess of P30,000.00.

13. Vacation and Sick Leave


Reminder:
- NO BUSINESS and PERSONAL EXPENSES are allowed as deductions from When Taxable?
GROSS COMPENSATION INCOME. - If paid or availed of as salary of an employee who is in vacation or on
- RULE on Compensation Income applies only to RC, RA, BRC, and NRA- sick leave notwithstanding his absence from work, it constitutes taxable
ETB. compensation income.
- It DOES NOT apply to NRA-NETB, DC, RFC, NRFC, ESTATE, TRUSTS.
(Reason: Compensation presupposes personal service) When Not Taxable
- Monetized value of unutilized vacation leave credits of ten (10) days or
less which were paid to private employees.
FORMS OF COMPENSATION INCOME [Sec. 32A(1)] - Monetized value of leave credits of the government employees during
1. Basic Salary or Wage the year ( monetized leave of gov’t. employees even exceeds 10 days
2. Honoraria shall not be taxable or not considered compensation income)
3. Commission - Terminal leave Payments received by the Government Employees or
4. Fees their heirs upon death of the employees.
5. Hazard or Emergency Pay Terminal Leave means money value of accumulated vacation and
6. Overtime Pay sick leave.
7. Profit Sharing
8. Awards for Special Services 14. Retirement Pay
9. Beneficial Payments - Lump sum payment received by an employee who has served a company
10. Fixed or Variable Allowances for a considerable period of time and has decided to withdraw from work
into privacy.
- Generally, TAXABLE.
When NOT considered compensation:
1) If the reimbursement and/or advances is necessary and ordinary NOT Taxable, in the following instances:
expenses incurred by the employee in the pursuit of employer’s a) SSS or GSIS retirement pays
business. b) Retirement Pay due to OLD AGE provided the following REQUISITES
Ex: Transportation, Representation, Other Allowances such as COLA are met:
1) Private retirement plan maintained by the employer approved by
2) If employee is required to account account/liquidate for the the BIR for the exclusive benefit of all the employee.
transportation and representation expenses. 2) Retiring official or employee who has rendered at least ten (10)
years of service
3) The excess of actual expenses over advance made is considered taxable 3) at least 50 years old at the time of his retirement.
income if not returned to the employer. 4) Must be availed of only once.

11. Tips and Gratuities


- paid directly to the employee by a customer of the employer which are NOT
accounted for by the employee to the employer are considered
TAXABLE INCOME, but not subject to withholding tax.

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Jaybee de Guzman Pascua Review notes on Taxation
BAR QUESTIONS:
QUESTION 15. Pension Plan

Under what conditions are retirement benefits received by officials and employees of private - Allowance paid regularly to a person on his retirement or to his dependents
firms excluded from gross income and exempt from taxation? (3%)
on his death, in consideration of past services, meritorious work, age, loss, or
SUGGESTED ANSWER:
injury.
The conditions to be met in order that retirement benefits received by officials and - Generally, TAXABLE.
employees of private firms are excluded from gross income and exempt from
taxation are as follows: NOT taxable in the following instances:

Under Republic Act No. 4917 (those received under a reasonable private a) When the law provides. (ex. Filipino working abroad)
benefit plan) : b) When BIR approves, provided the following requisites are met:
a. the retiring official or employee must have been in service of the same
employer for at least ten (10) years;
b. that he is not less than fifty (50) years of age at the time of retirement; 1) Private retirement plan maintained by the employer approved by
and the BIR for the exclusive benefit of all the employee.
c. that the benefit is availed of only once. 2. Retiring official or employee who has rendered at least ten (10)
years of service
Under Republic Act No. 7641 (those received from employers without any 3. at least 50 years old at the time of his retirement.
retirement plan):

a. Those received under existing collective bargaining agreement and other


agreements are exempt; and BAR QUESTION:
b. In the absence of retirement plan or agreement providing for retirement QUESTION
benefits the benefits are excluded from gross income and exempt from Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the
Interest Income from a time deposit of P500.000.00 with ABC Bank. Is Miss Santos liable to
income tax if:
pay any tax on her Income?
i. retiring employee must have served at least five(5) years; and
ii. that he is not less than sixty (60) years of age but not more than
SUGGESTED ANSWER:
sixty five (65).
Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28(b((7)(F), Tax
Code). However, as regards her time deposit, the interest she receives thereon is
QUESTION
subject to 20% final withholding tax. (Sec. 21(a)(c), Tax Code).
To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a
private company after ten (10) years of service. Pursuant to the company's qualified and
approved private retirement benefit plan, he was paid his retirement benefit which was
16. Separation Pay
subjected to withholding tax. Is the employer correct in withholding the tax? Explain. (2%)

SUGGESTED ANSWER: Separation pay is taxable if voluntarily availed of.


-
It depends. An employee retiring under a company's qualified and private retirement Not taxable If involuntarily availed of due to death sickness or other
-
plan can only be exempt from income tax on his retirement benefits if the following physical disability or for any cause beyond the control of the said official or
requisites are met: employee.
a. that the retiring employee must have been in service of the same - Any payment by an employer to an employee on account of dismissal
employer for at least ten (10) years;
constitutes compensation regardless whether the employer is legally bound
b. that he is not less than 50 years of age at the time of retirement;
and
by contract, statute or otherwise, to make such payment.
c. the benefit is availed of only once. OTHER FORMS of COMPENSATION INCOME/ COMPENSATION IN KIND
In the instant case, there is no mention whether the employee has likewise complied
with requisites number (2) and (3). 1. Insurance premiums paid by the employer

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Jaybee de Guzman Pascua Review notes on Taxation
- If the beneficiary designated is employee’s family, executor, administrator
or heirs:
(Donor so Subject to (Donee, neither No Consideration
EMPLOYEE can claim as a COMPENSATION INCOME IF the
Donor’s Tax subject to donees
employee is RANK AND FILE
Tax-Exluded from
Gross Income
If the employee is a MANAGER OR SUPERVISOR, such insurance
premiums paid by the employer will be treated as FRINGE
BENEFIT. (Sec. 33n (B) (10)
Taxable Capital Transaction
Premiums paid by the employer on life insurance coverage of the
employee wherein the beneficiary is the employee’s family, Creditor Debtor Consideration
EMPLOYER can claim as an EXPENSE.

- However, if the beneficiary of the life insurance is the employer: Corporation Stockholder
Such payment of insurance premium shall neither be part of the
employee’s compensation income nor a deductible expense of the
employer. Expense-Reduction Indirect Dividend- Indirect Dividend
in Capital Subject to Final Tax
2. Cancellation/Condonation or Forgiveness of Debt

CAN BE: Taxable Compensation Income


Taxable Donation
3. Shares of Stock Received as Compensation
Taxable Capital Transaction
Basis of Valuation: Fair Market Value of the shares of stock at the time the
service is rendered.
Taxable Compensation Income
Creditor Debtor Consideration 4. Employee Stock Option
- Privilege granted to key employees of a corporation to avail of the
Employer Employee corporation’s share in the future for a certain price.

Ex:
Deductible as Compensation Income Service Rendered/
EXPENSE Performed Market price – (less) Option Price = Compensation Income
P20 P15 equals P5 multiplied by the
number of shares
granted
Taxable Donation
Creditor Debtor Consideration
5. Income Tax Paid by the Employer
Basis of Valuation: Amount of Tax Paid
Employer/ Other Employee/Other
Person Person
6. Living Quarters/Lodging and Meals

- If living quarters are furnished to the employee in addition to cash salary,


the rental value of living quarters should be reported as income. Thus
TAXABLE

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Jaybee de Guzman Pascua Review notes on Taxation
- If living quarters are furnished to the employee for the exclusive benefit of fringe benefit is exempt from FBT because the employee does not
the employer, not part of compensation income of the employee. Thus NOT recognize income from the benefit.
TAXABLE.
Rationale of Granting Fringe Benefits
- If living quarters are furnished to the employee, NOT for the exclusive
benefit of the employer, the RENTAL VALUE of the living quarters - Incentive to encourage employees’ (1) productivity and (2) loyalty to
SHOULD BE REPORTED as INCOME to the extent to the reasonable needs employer.
of the employee. The excess shall be considered as expense of the employer.

GENERAL RULE for MEALS & LODGING Fringe Benefit Granted to Managerial and Supervisory Employees

- the value of any board and lodging furnished by an employer is ordinarily Section 33(A) of the NIRC
taxable on the employee. - Fringe Benefit granted by the employer to managerial and supervisory
employees are taxable with final fringe benefit tax of 32%.
EXCEPTIONS: (PC) EXCLUDED as Compensation Income-NOT TAXABLE
- Tax Base of Fringe Benefits is based on the GROSSED-UP MONETARY
a. They are furnished on the employer’s business premises. The exclusion for VALUE (GMV) granted by the employer to its managerial and
lodging is allowed only when it is furnished on the business premises of the supervisory employees.
employer; and
b. The employee accepts the lodging as a condition of his employment in order Monetary Values of
to perform his duties properly. Fringe Benefit = tax to be
GMV = X 32%
paid
68%
7. Fringe Benefit Granted to Rank and File Employees /Managerial/
Supervisory
Note: Convenience of the Employee Rule – not part of fringe
- Fringe Benefit Tax (FBT) (Section 32A (1) is a monetary burden imposed by benefit, thus not taxable
the sovereignty on any good, service, or other benefit furnished or granted
by an employer, in cash or in kind, in addition to basic salaries, to an EXAMPLES:
individual employee other than a rank-and-file employee. It is a final tax on
the employee which shall be withheld and paid by the employer on a 1) D Co. paid fringe benefits to its rank-and-file and managerial employees, as
quarterly basis. follows:

- To rank and file employees – P200,000


Fringe Benefit Granted to Rank and File Employees - To Managerial employees – 272,000
Total of 472,000.00
- Fringe Benefit granted by the employer to the rank and file employees - What is the amount of FBT?
are taxable as COMPENSATION INCOME subject to NORMAL TAX
RATE.
Monetary Value of FB 272,000
- BUT, remember CONVENIENCE OF THE EMPLOYEE RULE – means
not part of compensation income, thus NOT TAXABLE.
Gross-Up Divisor 68%
CONVENIENCE OF THE EMPLOYEE RULE –When a fringe
benefit is given solely for the convenience of the employer, the

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Jaybee de Guzman Pascua Review notes on Taxation
Gross-Up Monetary Value P 400,000.00 Gross-Up Divisor 68%

Multiplied by FBT rate 32% Gross-Up Monetary Value P 588,236.00

FB TAX P 128,000.00 Multiplied by FBT rate 32%

FB TAX P 188,235.00

2) ABC Corp. purchased a residential property and transferred the same in the name
of its chairman of the Board as a fringe benefit. The property has affair market value
of P6,000,000.00 and zonal value o P5,000,000.00
Fringe Benefit Definition Section 33(B) of the NIRC
- What is the amount of FBT?
- fringe benefit' means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual employee
Monetary Value of FB 6,000,000
(except rank and file employees as defined herein) such as, but not
limited to, the following:
Gross-Up Divisor 68%
1) Housing;
Non taxable Housing Fringe Benefit (MPT)
- Military Housing Unit (AFP)
Gross-Up Monetary Value P 8,823,000.00
- Housing Unit situated in the business premises of the
employer adjacent thereto, if it is within 50 meters parameter
from the business perimeter of the employer.
Multiplied by FBT rate 32%
- Temporary Housing Unit, 3 months or less staying in the
premises of the business of the employer.
FB TAX P 2,823,529.00
2) Expense account;
- Representation and transportation allowance (RATA) fixed in
amounts and received by the employees is part of
compensation income and NOT taxable fringe benefit.
3) San Mig. Co. spent a four day free vacation in El Nido, Palawan to all of its 3) Vehicle of any kind;
employees of which 80% are rank-and-file employees. Total expenses incurred by the
company for the said vacation amounted to P2,000,000.00 4) Household personnel, such as maid, driver and others;

- What is the amount of FBT? 5) Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
- The benchmark interest rate of 12% shall remain in effect until
Monetary Value of FB 400,000 revised by a subsequent regulation.
(P2,000,000.00 x 20%

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Jaybee de Guzman Pascua Review notes on Taxation
6) Membership fees, dues and other expenses borne by the employer
for the employee in social and athletic clubs or other similar BAR QUESTION
organizations;
QUESTION
7) Expenses for foreign travel; X was hired by Y to watch over V’s fishponds with a salary of Php 10,000.00. To enable
him to perform his duties well, he was also provided a small hut, which he could use as his
- Expenses for the purpose of attending business meetings and
residence in the middle of the fishponds. Is the fair market value of the use of the small hut
conventions shall not be treated as taxable fringe benefits. by X a "fringe benefit" that is subject to the 32% tax imposed by Section 33 of the National
Internal Revenue Code? Explain your answer. (5%)
8) Holiday and vacation expenses;
SUGGESTED ANSWER:
9) Educational assistance to the employee or his dependents; and No. X is neither a managerial nor a supervisory employee. Only managerial or
supervisory employees are entitled to a fringe benefit subject to the fringe benefits
tax. Even assuming that he is a managerial or supervisory employee, the small hut
10) Life or health insurance and other non-life insurance premiums or
is provided for the convenience of the employer, hence does not constitute a
similar amounts in excess of what the law allows. (Section 33[B]) taxable fringe benefit. (Section 33, NIRC).
- Except contributions made by employer to SSS, GSIS and similar
contributions arising from provisions of any other existing law and -
premiums for the group insurance of employees paid by the employer.

Tax Accounting for the Fringe Benefit furnished to the Employee and the Fringe
BAR QUESTION Benefit Tax Thereon
QUESTION
A "fringe benefit" is defined as being any good, service or other benefit furnished or - As G.R., the amount of taxable fringe benefit and the fringe benefits tax shall
granted in cash or in kind by an employer to an individual employee. Would it be the
employer or the employee who is legally required to pay an income tax on it? Explain.
constitute allowable deduction from gross income or employer.

SUGGESTED ANSWER: - The FBT is not an additional tax on the employer. He can claim the fringe
It is the employer who is legally required to pay an income tax on the fringe benefit and the FBT as a deductible expense from his gross income.
benefit. The fringe benefit tax is imposed as a FINAL WITHHOLDING TAX
placing the legal obligation to remit the tax on the employer, such that, if the tax FRINGE BENEFITS ON SPECIAL ALIENS
is not paid the legal recourse of the BIR is to go after the employer. Any amount
or value received by the employee as a fringe benefit is considered tax paid
hence, net of the income tax due thereon. The person who is legally required to Recipient Tax Rate Tax Base
pay (same as statutory incidence as distinguished from economic incidence) is
that person who, in case of non-payment, can be legally demanded to pay the tax.
25% FBT on the Monetary value
NRANETB GMV of the FB of the FB divided
by 75%
NOTE:
- The EMPLOYER is the one liable for the payment of Fringe Benefit Tax
(FBT). The EMPLOYEE (manager and supervisor) is NET OF TAX.
- The FBT is a FINAL TAX on the employee’s (manager and supervisor)
income to be withheld by the employer.
- The withholding and remittance of FBT shall made on a quarterly basis.
Section 87(A) and 58 of the NIRC.

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Jaybee de Guzman Pascua Review notes on Taxation
3. Fringe Benefits given to the rank and file employees, whether
1. Alien individual employed by:
granted under a collective bargaining agreement or not; and

- Regional or area headquarters of a 4. De minimis benefits


MNC or by a regional operating - Benefits granted by the employer to its employee that
headquarters of a MNC. relatively of small value and given for the purpose of
promoting:
- An Offshore banking unit of a foreign C-ontenment
H-ealth
bank established in the Philippines 15% FBT on the Monetary value
E-efficiency and
GMV of the FB of the FB divided G-oodwill
- A foreign service contractor / by 85%
subcontractor engaged in petroleum DE MINIMIS BENEFITS
operations in the Philippines. 1) Monetized unused vacation leave credits of private employees not
exceeding 10 days during the year
Monetized value of unused Vacation and Sick Leave paid to government
- Any of their Filipino employees who
officials and employees (10 days not anymore applicable-BIR Ruling 93-34)
are employed and occupying the same
2) Medical cash allowance to dependents of employees not exceeding P750 per
position as those occupied or headed by semester or P125 per month
the alien employees. 3) Rice subsidy of P1,500 or 1 sack of 50 kg rice amounting to not more than
P1,500
4) Uniform and clothing allowance not exceeding P5,000 per year
5) Actual yearly medical benefits not exceeding P10,000
Subject to normal Monetary value 6) Laundry allowance of P300 per month
Employees in Special Economic Zones, rate of FBT or the of the FB divided 7) Employee achievement awards, for length of service or safety achievement
including Clark Zone and Subic Special special rates of by 85% in the form of tangible personal property other than cash or gift certificate,
Economic and Free Trade Zone. 25% or 15% as with an annual monetary value not exceeding P10,000 received by the
provided above. employee under an established written plan which does not discriminate in
favor of highly paid employees
8) Christmas and major anniversary celebrations not exceeding P5,000 per
employee per annum

FRINGE BENEFIT NOT TAXABLE


B. GROSS INCOME FROM BUSINESS TRADE PROFESSIONAL INCOME
- only not subject to FBT, but can be subjected to other kind of tax like Sec 32A (2)
income tax.
- Manufacturing business merchandising or trading, servicing, farming; and
The following fringe benefits are not taxable: long term contract.
1. Fringe benefits which are authorized and exempted from tax under
special laws; Illustration of computing income:

2. Contributions of the employer for the benefit of the employee to Gross Sales Pxxx
retirement, insurance and hospitalization benefit plans; Less: Sales Returns & Allowances Pxxx Pxxx

13
Jaybee de Guzman Pascua Review notes on Taxation
Net Sales (manufacturing business) Pxxx 3) Depreciable assets used in the trade/business
Less: Cost of Goods Sold/ 4) Real property used in trade/business
Cost of Sales/Services Pxxx

Gross Profit/Gross Income Pxxx b) Capital assets


- property held by the taxpayer (whether or not connected with his trade or
COMPUTATION OF TAXABLE INCOME FOR INDIVIDUAL TAXPAYER business) Hence, capital assets are property of a taxpayer other than ordinary
assets.
Gross Income Pxxx
Less: Allowable Deductions Pxxx THREE (3) SPECIFIC RULES GOVERNING CAPITAL TRANSACTIONS
(Itemized or Optional 40%)
1) Holding Period Rule [Sec. 39(B) of the NIRC]
Net Income Pxxx
Less: Authorized Personal Exemption RULES:
(Personal and Additional) Pxxx GR: for purposes of computing capital loss and capital gain, the actual
holding period is taken into account.
Taxable Income Pxxx Exception: If securities become worthless during the taxable year and are
COMPUTATION OF TAXABLE INCOME FOR CORPORATE TAXPAYER capital assets, the loss resulting therefrom shall be considered as a loss
from the sale or exchange, on the last day of such taxable year, of capital
Gross Income Pxxx assets.
Less: Allowable Deductions Pxxx
(Itemized or Optional 40%) - Not applicable to Corporate Taxpayer. So, always 100% taxable in their
Capital Gain
Taxable Income Pxxx - Applicable to individual taxpayer. Refers to reportable percentages of
capital gain or loss [Sec. 39(B(1)(2) of the NIRC]
Note: For NRFC 30% Final Tax based in Gross Income
Section 74 of the NIRC Sec. 39(B) of the NIRC
- Self-employment Income consists of income derived from the conduct In the case of a taxpayer, other than a corporation, only the
of trade or business, or from the exercise of profession. following percentages of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:
C. GAINS DERIVED from DEALINGS IN PROPERTY Sec 32A (3)
(1) One hundred percent (100%) if the capital asset has been held
- Disposable through SALE or EXCHANGE of ASSETS. for not more than twelve (12) months; and

Section 39 (A)(2)(3) of the NIRC (2) Fifty percent (50%) if the capital asset has been held for more
Net Capital Gain – refers Ordinary Gain than twelve (12) months;
Net Capital Loss – refers to Ordinary Loss 2) Capital Loss Limitation Rule [Sec. 39(B) of the NIRC]
KIND OF ASSETS: RULES:
GR: Applies to both corporation and individual.
a) Ordinary assets (SOUR) Exception: Trust Corporations and Banks.
1) Stock in trade of taxpayer or other property which would properly be in
kind included in an inventory of the taxpayer at the close of taxable - Net Capital Gain is added to ordinary gain BUT Net Capital Loss
year. (Excess of Capital Loss over Capital Gain) is NOT DEDUCTIBLE
2) Property for sale in the ordinary course of business from ordinary gain.

14
Jaybee de Guzman Pascua Review notes on Taxation
- Capital Loss deductible to the extent of Capital Gain, can not be treated as a loss in 2007(100%) = P6,000 only
deductible from ordinary gain. since it should not exceed the net income of
- Net Ordinary Loss is DEDUCTIBLE from Net Capital Gain the taxable yr. w/c the loss was incurred

- Net Operating loss Carry Over (NOLCO) applies to both individual


BAR QUESTION and Corporate Taxpayer
What is the rationale for the rule prohibiting the deduction of capital losses from ordinary
gains?Explain. CAPITAL TRANSACTIONS NOT GOVERNED BY THE THREE (3) SPECIFIC
RULES
SUGGESTED ANSWER:
It is to insure that only costs or expenses incurred in earning the income shall be - Meaning said capital transactions are SUBJECT TO SPECIAL RULES.
deductible for income tax purposes consonant with the requirement of the law
that only necessary expenses are allowed as deductions from gross income. The
1. Sale of real property classified as Capital Assets which is not used in trade or
term "NECESSARY EXENSES" presupposes that in order to be allowed as
deduction, the expense must be business connected, which is not the case insofar
business.
as capital losses are concerned. This is also the reason why all non-business
connected expenses like personal, living and family expenses, are not allowed as - Section 24 (D) (1) of the NIRC
deduction from gross income (Section 36(A)(1) of the 1997 Tax Code). Rule: Capital Gains Tax equivalent to SIX (6%) Percent based on GROSS
PRICE or ZONAL VALUE, whichever is higher.
The prohibition of deduction of capital losses from ordinary gains is designed to
forestall the shifting of deductions from an area subject to lower taxes to an area Query:
subject to higher taxes, thereby unnecessarily resulting in leakage of tax revenues. If in the transaction, you incurred a loss, capital loss, are you liable to
Capital gains are generally taxed at a lower rate to prevent, among others, the
pay the 6% Capital Gain Tax?
bunching of income in one taxable year which is a liberality in the law begotten
from motives of public policy (Rule on Holding Period). It stands to reason - Yes, as a general rule, based on the DOCTRINE OF
therefore, that if the transaction results in loss, the same should be allowed only PRESUMPTIVE GAIN.
from and to the extent of capital gains and not to be deducted from ordinary
gains which are subject to a higher rate of income tax. (Chirelstein, Federal Exemption to the Rule: (Section 24(D) (2) TAX AVOIDANCE
Income Taxation, 1977 Ed.) CONDITIONS that must concur in order that the SIX (6%)
PERCENT capital gains tax will not be paid. Tax avoidance
conditions are the following:

3) Net Capital Loss Carry Over (NCLCO) [Sec. 39(B) of the NIRC] 1. Proceeds of sale must be used to purchase/construct new
principal residence;
RULES: 2. Complying with the 18 months period from the sale or
- NCLCO applies only to Individual Taxpayer and NEVER to a disposition, the purchase or construction must be done;
Corporate Taxpayer 3. 30 days notice from sale or disposition-inform the BIR
a. Corporations cannot carry over a net capital loss about the sale;
b. If net capital loss is sustained in any taxable yr., such loss is 4. 10 year limitation –can availed of once every ten years.
treated in the succeeding taxable yr. as a loss from the
sale/exchange of a capital asset held for not more than 12 mos.
(100% deduction)
c. Such net capital loss that should be carried over should not
exceed the net income for the year Incurred (prior year’s net
income)
Example: NI in 2006 = P6,000
NCL in 2006 = 10,000

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Jaybee de Guzman Pascua Review notes on Taxation
BAR QUESTIONS  .. this only applies to the sale of REAL ESTATE which are ordinary
QUESTION assets of the seller… Thus, when the real estate sold is capital asset
Rene, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a form to the seller, his income from the sale of real estate will be subject to
of investment in 1990 for Php 1 million. The land was sold to B, his colleague, at a time when capital gains tax, and no CREDITABLE WITHHOLDING TAX shall
the real estate prices had gone down and so the land was sold only for Php 800,000 which was be imposed on the transaction.
then the fair market value of the land. He used the proceeds to finance his trip to the United
States. He claims that he should not be made to pay the 6% final tax because he did not have
any actual gain on the sale. Is his contention correct? Why? (5%) The withholding agent/buyer is required to withhold a creditable
withholding tax based on the higher of the following:
SUGGESTED ANSWER:
No. The 6% capital gains tax on sale of a real property held as capital asset is a) Gross selling price/total amount of consideration, or
imposed on the income presumed to have been realized from the sale which is the b) The fair market value determined in accordance with Section
fair market value or selling price thereof, whichever is higher. (Section 24(D), NIRC). (E) of the Code
Actual gain is not required for the imposition of the tax but it is the gain by fiction of
law which is taxable.
A. Upon the following valued of real property where the
seller/transferor is habitually engaged in the real estate
business as per proof of registration with the HLURB or
CAPITAL GAIN ON REAL TRANSACTIONS the HUDCC or other satisfactory evidence ( for example,
he/it consummated during the preceding year at least six
Option of individual transferring Real Properties to government owned or controlled taxable real estate transactions, regardless of amount):
corporations
- Norma Income Tax
a) With a selling price of P500,000. 00 or less 1.5%
- CGT of 6%
b) With a selling price of more than P500,000. 00
Tax Treatment on the Sale, Transfer or Exchange of Real Property (Revenue 3.0%
but not more than P2 million pesos
Regulation 8-98)
c) With a selling price of more than P2 million
- The Capital Gains Tax (CGT) Return will be filed by the seller within 30 days 5.0%
peos
following each sale or disposition of real property. Payment of the CGT will
be made to an Authorized Agent Bank (AAB) located within the Revenue
District Office (RDO) having jurisdiction over the place where the property (Sec. 2.57.2 (J) of RR No. 2-98 as amended by RR 6-2001)
being transferred is located.
B. Where the seller/transferor is not habitually engaged in
- Creditable withholding taxes, on the other hand, deducted and withheld by the real estate business ( but the real estate sold is an
the withholding agent/buyer on the sale, transfer or exchange or real ordinary asset) – 6%
property classified as ordinary asset will be paid by the withholding
C. Where the seller/transferor is exempt from creditable
agent/buyer upon filing of the return with the AAB located within the RDO
withholding tax in accordance with Section 2.57.5 of RR
having jurisdiction over the place where the property being transferred is
located. Payment will have to be done within 10 days following the end of No. 2-98 ( When the seller is exempt from income taxes.
the month in which the transaction occurred, provided, however, that taxes As earlier noted, the creditable taxes withheld serve as
advance payment of income taxes. So when seller is tax-
withheld in December will be filed on or before January 25 of the following
exempt, it follows that no tax should be withheld from
year.
his income.) – EXEMPT
ORDINARY ASSETS EXPANDED WITHHOLDING TAX
 Please Note that the sale of foreclosed properties by banks is subject
to creditable withholding tax of 6% because banks are not

16
Jaybee de Guzman Pascua Review notes on Taxation
considered as habitually engaged in the teal estate business, and GAIN is RECOGNIZED BUT LOSS is NOT
properties acquire by banks through foreclosure sales are DEDUCTIBLE.
considered as ordinary assets pursuant to RR No. 7-2003.
c. Other transactions wherein the gain is recognized and loss is not
deductible.
2. Sale of SHARES OF STOCK NOT listed and traded thru local stock exchange.
1) Illegal transactions
- Sections 24(C), 25(3)[Tax on the Individual] and Sections 27(D)(2), 28(7)(C) 2) Transactions between Related Taxpayers. (Sec. 32(B)
[Tax on Corporations of the NIRC]. 3) Wash sale (Sec. 38)
- A sale or disposition of stock securities, by a seller who is
RULE: not a dealer in securities or shares or stocks, where
Capital Gains Not more than P100,00.00 – 5%(final tax rate) substantially identical securities are acquired or purchased
Any Amount in exceeding P100,000.00 is subject to 10% (final tax rate) within a 61 day period, beginning 30 days before the sale
and ending 30 days after the sale.
- IF LISTED and TRADED thru STOCK EXCHANGE – FINAL TAX RATE on - Even if sold by a dealer in securities if the transaction was
the net capitals is ½ of 1% (.005) of the Gross Selling Price. not made in the ordinary course of the business of such
dealer, there was WASH SALE.
- Section 40 (C) of the NIRC, SALE/EXCHANGE of PROPERTY
- SPECIAL RULES IN DETERMINING ACQUISITION COST FOR THE
a. General Rule: PURPOSE OF COMPUTING GAIN FOR LOSS IN THE EXCHANGE OF
- Entire amount of GAIN or LOSS, as the case may be, shall BE PROPERTY - Section 40 (B)
RECOGNIZED.
- If the property was acquired by purchase on or After March 1, 1913
(Date of the first Income Tax Law in the Phil.) – BASIS: Acquisition Cost
b. Exemptions:
- No GAIN, no LOSS recognized (Gain not taxable, Loss not Example:
Deductible)
Land costing P1,000 on March 1, 1913
and was exchange for a cow with a cost
- NOTE: With regard to merger and consolidation (Sec. 40 (C)(2) of P30,000.00
a,b,c
What is the gain/loss in exchange

- Exchange of property, Exchange of stock for stock,


and exchange of securities for stock or securities – and Fair market value of the properties FMV of the Cow P 58,000
it is TRANSACTION IS SOLELY IN KIND - NO at the time of exchange are: Less: Acquisition
Cost of the land P 1,000
CASH IS GIVEN THEREFORE TAX EXEMPT
Land P 150,000

- TRANSACTION IS SOLELY ON KIND – no cash


given therefore tax exempt Cow P 58,000 Gain on exchange: P 57,000

- TRANSACTION NOT SOLELY IN KIND – if cash is


guven an additional consideration for transaction OR

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Jaybee de Guzman Pascua Review notes on Taxation
- If the property was acquired by inheritance – BASIS: Fair Market Value
at the date of acquisition/date inherited

Example: - If the property was acquired for less than full and adequate
Car inherited was sold P 100,000.00 consideration – BASIS: The amount paid by the transferee.

Example:
What is the gain/loss in exchange

Fair market value of the car when Sales Price P 100,000 What is the gain/loss in exchange
inherited: P 150,000 Less: FMV when P 1,000
inherited
Mr. A sold a car costing P500,000 for Sales Price to C P 290,000
Fair market value of the car when
only P200,000 to Mr. B. Mr. B sold Less: Amount paid
sold: P 90,000
the same to Mr. C for P290,000 by the transferre – C P 200,000

Loss on exchange: P 50,000

Gain on Sale: P 90,000


- If the property was acquired as a gift – BASIS: The same as it would be
in the hands of the donor, or the Fair Market Value at the time when the
gift was made, whichever is LOWER.

Example:

Donee received a ring as a gift. Donor


acquired for P 10,000.00 D. INTEREST INCOME Section 32A (4)

What is the gain/loss in exchange - Earning derived from depositing or lending of money, goods, or credits.
Unless exempted by law, interest income received by the taxpayer, whether
or not usurious is subject to income tax.
Fair market value of the car when Sales Price P 15,000
given by the donor: P 8,000 Less Cost of Sale P 8,000
TAX EXEMPT INTEREST INCOME
Donee sold the ring to another
person: P 15,000

Gain on exchange: P 7,000 1. Section 32(B)(7)(a) – under exclusion income

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Jaybee de Guzman Pascua Review notes on Taxation
- INCOME DERIVED from investments in the Philippines in loans, stocks
bonds or other domestic securities, or from INTEREST ON DEPOSITS in the
banks in the Philippines by FOREIGN GOVERNMENT. - The dispositive portion of the decision on the case of DUMAGUETE
CATHEDRAL CREDIT COOPERATIVE vs. CIR (G.R. No. 182772, Jan. 22,
2. Section 22(FF) – Long term deposit or investment certificate 2010) is quoted as follows:

Section 24 (B) (1) & Section 25 (A) (2) - interest income on long term “WHEREFORE, the Petition is hereby GRANTED. The assailed
investments 5 years or more. December 18, 2007, Decision of the CTA and the April 11, 2008
Resolution are REVERSED and SET ASIDE. Accordingly, the
assessment for deficiency withholding taxes on interest from the
savings and time deposits of petitioner’s members for taxable years
NOTE: BUT if pre-terminated before 5th year entire interest income will be
1999 and 2000 as well as the delinquency interest of 20% per annum are
subject to final tax based on remaining maturity(length of holding period)
hereby cancelled.
4 years to less than 5 years – 5%
- SUPREME COURT UPHOLDS TAX EXEMPTION OF COOPERATIVES:
3 years to less than 4 years – 12% “Every cooperative in the country owes it to DCCCO for being instrumental
in bringing to the SC the issue of whether cooperatives and cooperative
2 years to less than 3 years – 20% members are exempted from paying taxes on the interest earned in their
deposits with their cooperatives. The SC ruled in favor of cooperatives and
their members – exempting them from paying the 20% final withholding
taxes on their deposits interests.
3. Section 24 (B) (1) & Section 25 (A) (2)

- INTEREST INCOME on bank deposits under expanded foreign currency


deposit if the interest income is received by a NON RESIDENT 5. Interest received by Landlord paid by tenant on the price o land under
INDIVIDUAL (NRC & NRA) tenant purchases agreement as part of CARP.

But if received by a RESIDENT INDIVIDUAL – Final Tax Rate of 7.5% Question: Do landowners pay taxes for transactions involving transfer of
ownership?
(Section 27(D)(1)
Answer: No. Transfer of ownership transactions under RA 6657 are
But if received by a CORPORATE TAXPAYER – Final Tax Rate of 7.5% exempted from taxes arising from capital gains and from payment of
registration fees and all other taxes and fees for the transfer.
(Section 27(A)(7)(a)

Comprehensive Agrarian Reform Law of 1988 – Republic Act No. 6657


4. Interest received by a member from a duly registered cooperative ( Revenue
Regulation No, 20-20013)

19
Jaybee de Guzman Pascua Review notes on Taxation
- Sec. 6 Exemptions from Taxes and Fees of Land Transfers. – Transactions 2 years to less than 3 years – 20%
under this Act involving transfer of ownership, whether form natural or
juridical persons, shall be exempted from taxes arising from capital gains.
These transactions shall also be exempted from the payment of registration
fees, and all other taxes and fees for the conveyance of transfer thereof.
FINAL TAX RATES on INTEREST INCOME FOR CORPORATE TAXPAYER
Provided, that all arrearages in real property taxes, without penalty or
interest, shall be deductible from the compensation to which the owner may (Section 27(D)(1) & Sec. 28(7)(a)
be entitled.

- Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements - A final tax of 20% for DC, RFC.
FINAL TAX RATES on INTEREST INCOME FOR INDIVIDUAL TAXPAYER

(Section 24(B)(1) & Sec. 25(A)(2)


- Interest income received by corporate taxpayer under the expanded foreign
currency deposit system – 7.5% for DC and RFC
- Interest from any currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar
arrangements - A final tax of 20% for RC, RA, and NRAETB - Interest on foreign loans – 20% for NFRC (Sec. 28(B)(5)(a))

- Interest income received by an individual taxpayer under the expanded - Interest on foreign currency loans granted by depository banks to RFC – 10%
foreign currency deposit system – 7.5% for RC and RA; for DC and RFC (Sec. 28(A)(7)(b) & Sec. 27(D)(3) last par.)

EXEMPT for NRC & NRAETB

INTEREST INCOME SUBJECT TO THE NORMAL TAX RATE 5% to 32%


- Interest on long term deposit or investment in bank (maturity of 5 years) – (individual) & 30% (corporation) – to be reported in the annual ITR
EXEMPT for RC, NRC, RA and NRAETB

NOTE: BUT if pre-terminated before 5th year entire interest income will
be subject to final tax based on remaining maturity (length of holding - If the INTEREST INCOME is earned in the normal conduct of business like
period) from lending money, goods or credits, from one person to another without
any withholding tax made.
4 years to less than 5 years – 5%

3 years to less than 4 years – 12%

20
Jaybee de Guzman Pascua Review notes on Taxation
BAR QUESTION
QUESTION a. if the advanced rental is a security deposit which restricts the lessors as
to its use, then such amount should be excluded in the determination of
State with reasons the tax treatment of the following in the preparation of annual income tax rental income.
returns: Interest on deposits with: (i) BPI Family Bank; and (ii) a local offshore banking unit
b. If the advanced rental income is a prepaid rental received without
of a foreign bank;
restriction as to its use, the entire amount is taxable in the year it is
SUGGESTED ANSWER: received whether the lessor uses cash or accrual method of accounting.

Both items are excluded from the income tax return: What would be the tax treatment?

Interest income from any currency bank deposit is considered passive income from - There are two (2) methods are recognized in reporting such additional rent
sources within the Philippines and subject to final tax. Since it is subject to final tax income:
it is not to be included in the annual ITR. (Sec. 24[B][1], NIRC) (u) Same as No. (j).
a. Outright method: Report as income with FAIR MARKET VALUE after the
construction in that taxable year.

Example:
- Mr. X leases its lot to Mrs. Y for a term of 3 years with an annual rental of
E. RENTAL INCOME Section 32A (5) P50,000.00. As of January of the first year, Mrs. Y completed the construction
of an improvement on the lot with a value of P1,500,000 with an estimated
- refers to earnings derived from leasing real estate as well as personal
life of 5 years. The leasehold contract stipulates that the improvement will
property.
- It includes all other obligations assumed to be paid by the lessee to the 3rd belong to Mr. X after the term of the lease.
party in behalf of the lessor (i.e., interest, taxes, loans, insurance premiums
and others). Computation:

SUBJECT TO NORMAL REGULAR TAX RATE Value of the Building P1,500,000

- BASIS: Gross receipts for the year earned or unearned


Add: Annual Rental per 50,000.00
agreement
INCOME FROM LEASEHOLD IMPROVEMENTS
Total lease income to be reported P1,500,000.00
- when the lessee erected or build permanent improvements on the leased
property which will become the property of the lessor upon the expiration of
the lease, the value of the improvements should be reported as income of
the lessor in either of the following methods:
b. Spread-out Method: spread over the term of the lease and be reported as
income for each year of the lease an aliquot part thereof. Spread over the life
a. Outright method
of the lease using the depreciated value of the property/ESTIMATE BOOK
b. Spread-out Method VALUE of the property

- The computation of income from lease agreement shall be governed by the - Mr. X leases its lot to Mrs. Y for a term of 3 years with an annual rental of
following rules:
P50,000.00. As of January of the first year, Mrs. Y completed the construction

21
Jaybee de Guzman Pascua Review notes on Taxation
of an improvement on the lot with a value of P1,500,000 with an estimated
life of 5 years. The leasehold contract stipulates that the improvement will - Royalties other than books, literary works and musical compositions
belong to Mr. X after the term of the lease. (includes those which are derived from natural resources or products such
as coal, gas, oil, copper, silver, gold and other similar products) are royalty
income subject to a final tax of 20%
Cost of the bldg. P1,500,000
FOR CORPORATE TAXPAYER (DC and RFC)

Less: Accumulate. Depreciation at the end of Lease - Royalties received by corporation is subject to a final tax of 20%.
(P1,500,000/5 years) 3 years 900,000

Book value of improvement at the end of lease G. DIVIDEND INCOME Section 32A (7)
P 600,000.00

- is a form of earnings derived from the distribution made by a corporation


out of its earnings or profits and payable to its stockholders, whether in
money (cash dividend) or in other property (property dividend). The
following rules shall govern the determination whether dividends are
Divide by the term of lease 3 subject to tax or not:

- NOTE: the different provisions of the NIRC imposing a tax on dividend on


Annual income on leasehold improvement P 200,000 income only includes within its purview cash and property dividends
making stock dividends exempt from income tax.

Add : Annual rental 50,000 TAX EXEMPT DIVIDEND INCOME

Dividends received by:


Total Annual income from lease a. Another Domestic Corporation from a Domestic Corporation (intercorporate
P 250,000.00
dividends) Sec. 27(D)4
b. RFC from DC
c. Pure liquidating dividend
Reason why Liquidating Dividend is NOT TAXABLE: Return of
stockholders investment. It arises from the dissolution of assets by a
F. ROYALTIES Section 32A (6) corporation to its stockholders upon corporate dissolution (Sec. 73(A)
NIRC)
- a royalty income is a compensation or portion of proceeds paid to the owner
of a right, such as an oil right or a patent for the use of it; a portion of the d. Dividends received from a Cooperative (R.A. 6938)
proceeds from the work of an author or composer.
e. Stock Dividend - Section 73 (B)
- Royalties received by an individual taxpayer and Corporate Taxpayer
always subject to FINAL TAX Reason why Stock Dividend is NOT TAXABLE: There is no flow of
wealth so no realized gain. It is just a transfer of surplus account to the
FOR INDIVIDUAL TAXPAYER (RC, NRC, RA, NRAETB) capital account.

- Royalty from books, literary works and musical compositions are royalty Instances when Stock Dividend is SUBJECT TO TAX
income subject to a final tax of 10%.

22
Jaybee de Guzman Pascua Review notes on Taxation
1) When there is a change in the stockholder interest in the net equity
of the corporation d. Dividends received by NFRC, from a domestic corporation
- The role of the corporation management is to increase the - 15 % (Sec. 28 (B)(5)(b). BUT if without reciprocity 30% (RA 9337)
value of the firm to its stockholders. It will include what form - RA 9337 – Cash property dividends received from domestic corporation by a
of profit should be returned to the stockholders in the form of non-resident foreign corporation are subject to final withholding tax of
dividends. 35%. The 45% rare for dividends paid to a non-resident foreign may be
- Shareholders equity changes due to the three (3) things: reduced to 15% subject to the conditions that the country in which the
a) Net income of losses non-resident foreign corporation, taxes deemed to have been paid in the
b) Payment of Dividends Philippines equivalent to 20% which represents the difference between the
c) Share issuance or repurchase regular tax on corporations and the reduced tax on dividends.

2) When it is received by usufructuary - Provided, that effective Jan. 1, 2009, the credit against the tax due shall be
- Stock dividends cannot be issued to a person who is not a equivalent to 15% which represents the difference between the regular
stockholder in payment for services rendered. Stock dividend income tax of 30% and 15% tax on dividends.
can be issued only to stockholders and not to strangers or non-
stockholders DIVIDEND INCOME subject to the NORMAL CORPORATE TAX (30%) (to be
reported in the Annual ITR) – Section 42 (A) (2) (b)
3) When the board of Directors declared Stock Dividend not in
accordance with the Corporation Code of the Philippines - Dividend received by a domestic corporation given by or received from a
Ex: Declaration of Stock Dividend out of the Standing Capital FOREIGN CORPORATION from income derived from sources within. –
Stock. the Phil. Income should be at least50% of the world income of said foreign
corporation for three year period ending with the close or its taxable year
4) Redemption or cancellation of the Stock dividend distributed to the
preceeding the declaration of such dividend.
extent that it represent a distribution of earnings or profits (Section
73(B)
- Dividend received by a RFC from DC are not subject to TAX. (TAX EXEMPT
Reason: resorting to devious means to circumvent the law and
evade the tax. Corporate earnings would be distributed under the DIVIDEND). Dividends received by a domestic corporation from a foreign
guise of its initial capitalization by declaring the stock dividends corporation are subject to corporate tax.
previously issued and later redeem said dividends by paying cash
to the stockholder. DIVIDEND INCOME subject to the NORMAL INDIVIDUAL TAX RATE OF 5%
to 32% (to be reported in the Annual ITR) – Section 42 (B) (2)
5) When it is in the nature of DISGUISED DIVIDEND
Ex: Payment of services rendered will be paid by stocks. a. Dividends received by a partner in a GPP

FINAL TAX RATES on DIVIDEND INCOME H. ANNUITIES Section 32A (8)

a. Dividends received by RC, NRC and RA, from a domestic corporation - represents as installment payments for life insurance sold by insurance
- the final tax is 10%. (Sec. 24 (B) 2) companies. Under the contract of life annuity, the debtor binds himself to
pay an annual pension or income during the life of one or more determinate
b. Dividends received by NRA-ETB, from a domestic corporation persons in consideration of a capital consisting of money or other property,
- The final tax rate is 20 % (Sec. 25 (A) 2) whose ownership is transferred to him at once with burden of the income.

c. Dividends received by NRA-NETB, from a domestic corporation 1) If the part of the annuity payment represents interest - it is a taxable income.
- The final tax rate is 25% (Section 25 (B)

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Jaybee de Guzman Pascua Review notes on Taxation
2) If the annuity is a return of premium - it is not taxable. 3) At least 50 years old at the time of his retirement and availed of
retirement for the first time.
I. PRIZES AND WINNINGS Section 32A (9)

- PRIZES - a reward for a contest or a competition. In other words, a prize is a K. PARTNER’S DISTRIBUTIVE SHARES FROM THE NET INCOME OF
THE GENERAL PROFESSIONAL PARTNERSHIP Section 32A (11)
remuneration of an effort reflecting ones superiority, like prize money of a
boxing contest
- Subject to regular/normal tax
- BUT if the partner’s share is from business partnership or general
a. PRIZES amounting to more than P10,000.00 - subject to FINAL
partnership in trade – Such partner’s share is SUBJECT TO FINAL TAX.
TAX of 20%
b. PRIZES P10,000.00 or less - subject to NORMAL TAX and it is to
be included in the ITR
L. OTHER SOURCES OF INCOME

- WINNINGS - a reward for an event that depends on by chance. For


A. BAD DEBTS RECOVERY
example winnings from gambling, lottery or raffle ticket.
- Shall be included in the Gross Income in the year of recovery to the extent of
a. WINNINGS regardless of any amount is ALWAYS subject to the tax benefit of said deduction
FINAL TAX of 20% - It is taxable because the taxpayer received tax benefit through the reduction
BUT: If received outside the Philippines it is subject to NORMAL of its income in the preceeding year.
- So upon recovery of bad debts, it is a taxable gain.
TAX (Sec. 24(B)(1)
- It shall be included as part of the gross income in the year of receipt to the
However, WINNINGS from LOTTO and PCSO are EXEMPT from extent of the income tax benefit of the said deduction
TAX (Sec. 24(B)(1)

Requisites for the deductibility of BAD DEBTS EXPENSES (CUBAN)


J. PENSION Section 32A (10)
C – charged off or written off against the books of the taxpayer
U – the amount written off must be uncollectible in the near future, no slim
- this is a stated allowance paid regularly to a person on his retirement or to
chance of recovery collecting such amount.
his dependents on his death, in consideration of past services, meritorious
B – it must arise from business trade/profession
work, age, loss or injury.
A - ascertain to be worthless
RULES: N – not arising from transactions between related taxpayers.
- Generally TAXABLE
- NOT TAXABLE in the following instances:
B. TAX REFUND OR CREDIT
a. When the LAW provides (SSS, GSIS) - general rule: refunds from taxes paid are taxable
b. When BIR approves a pension plan of private company, provided the - except of the following: Refunds of taxes paid in
following requisites are met:
a. Estate or donor’s tax
1) Private Retirement plan maintained by the employer approved by b. Philippine Income tax
the BIR for the exclusive benefit of all the employee. c. Stock transaction tax
2) Retiring official or employee has rendered at least ten (10) years of d. VAT (claimed as an input)
service

24
Jaybee de Guzman Pascua Review notes on Taxation
- Principle of TAX BENEFIT RULE (also known as RECAPTURE RULE)
will apply – states that: if a taxpayer deducted an item on his income tax
return and enjoyed a tax benefit (reduction of his tax liability) and in the
subsequent year recovers all or part of that item, he will recognize gross
income in the year the deducted item is recovered.

C. ILLEGALLY OBTAINED INCOME is TAXABLE

Ex: Gambling; Ransom Money from Kidnapping; Extortion, Smuggling,


Embezzlement.

25
Jaybee de Guzman Pascua Review notes on Taxation
TAX EXCLUSIONS FROM GROSS INCOME 3. Salaries and Stipend in Dollars received by Non-Filipino Citizens servings as
staff of:
- items/receipts NOT INCLUDED in the determination of the Taxable - International Rice Research Institute (IRRI)
Income. - For Foundation Grants
- Exempt from Income Tax - Agricultural Department of the Southeast Asian Fisheries Development
- Not included in the Income Tax Return Center
- Not taxable - Population Council of New York

REASONS FOR TAX EXCLUSIONS


C. A provision of TAX CODE exempts it from tax
A. The item of receipt does not fall within the definition of INCOME for income
tax purposes A. Section 32

NOT TAXABLE DAMAGES (B) Exclusions from Gross Income. - The following items shall not be included in
gross income and shall be exempt from taxation under this title:
a. Damages recovered in libel and slander suits
b. Damages recovered for alienation of affection (1) PROCEEDS FROM LIFE INSURANCE whether such is received is an
c. Damages recovered for breach of promise to marry INSTALLMENT or LUMP SUM – Section 32(B)(1)
d. Damages recovered for loss of life of spouse
e. Damages recovered in annulment of marriage - ALWAYS EXCLUDED irrespective of the beneficiary designated in the
policy
RESONS WHY NOT TAXABLE DAMAGES: - This applies to Group Insurance, Death Benefits, Workmen’s Compensation
- Recovery in such action is not derived from CAPITAL, LABOR, or Insurance, Health or Accident Insurance.
from BOTH COMBIBED but merely COMPENSATORY
Reason: It is an indemnity rather than gain or profit, because insurance is a
EXEMPTIONS: TAXABLE DAMAGES CONTRACT of INDEMNITY
a. Compensation for unrealized earnings
b. Interest for those non taxable damages BAR QUESTION
c. Damages for unrealized profits QUESTION
d. Compensatory liquidated damages State with reasons the tax treatment of the following in the preparation of annual income
tax returns: Proceeds of life insurance received by a child as irrevocable beneficiary;
e. Damages recovered in intangible assets infringement suits.
SUGGESTED ANSWER:
RESONS WHY TAXABLE DAMAGES: Not to be reported in the annual income tax returns because the proceeds of the
- Represent recovery of loss of profit life insurance are excluded from gross income. Proceeds of Life insurance policies
paid to the heirs or beneficiaries upon the death of the insured is an exclusion from
gross income. (Sec.32[B]
B. A SPECIAL LAW exempts it from tax. [l],NIRC)

1. Prizes received in charity, Horse Racing, Sweepstakes from PCSO

2. Income from BOND and SECURITIES In relation to Section 85(E) – INCLUSION of proceeds from Life Insurance
- For sale in the international market P.D. 81 in the Gross Estate
- issued by EPZA P.D. 66 - Gen. Rule: Proceed from Life Insurance is INCLUDED in the
determination of GROSS ESTATE.

26
Jaybee de Guzman Pascua Review notes on Taxation
- Exception: It is only EXCLUDED in the determination of Gross Estate
IF: BAR QUESTIONS
a) If the designation of the beneficiary is IRREVOCABLE.
b) If represents proceeds from Group Insurance Policy. QUESTION
On 30 June 2000, X took out a life insurance policy on his own life in the amount of
P2,000,000.00. He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his
BUT: Insurance premiums paid by the employer
son, Z, to the balance of P1,000,000.00 but, in the latter designation, reserving his right to
substitute him for another. On 01 September 2003, X died and his wife and son went to the
- If the beneficiary designated is employee’s family, executor, insurer to collect the proceeds of X's life insurance policy. (8%)
administrator or heirs, consequence are: (a) Are the proceeds of the insurance subject to income tax on the part of Y and Z for
their respective shares? Explain.
EMPLOYEE can claim as a COMPENSATION INCOME IF the (b) (b) Are the proceeds of the insurance to form part of the gross estate of X?
employee is RANK AND FILE Explain.

SUGGESTED ANSWERS:
If the employee is a MANAGER OR SUPERVISOR, such insurance (a) No. The law explicitly provides that proceeds of life insurance policies paid to the
premiums paid by the employer will be treated as FRINGE heirs or beneficiaries upon the death of the insured are excluded from gross income
BENEFIT. and is exempt from taxation. The proceeds of life insurance received upon the death
of the insured constitute a compensation for the loss of life, hence a return of capital,
Premiums paid by the employer on life insurance coverage of the which is beyond the scope of income taxation. (Section 32(B)(1) 1997 Tax Code)
employee wherein the beneficiary is the employee’s family,
EMPLOYER can claim as an EXPENSE. (b) Only the proceeds of P1,000,000.00 given to the son, Z, shall form part of the
Gross Estate of X. Under the Tax Code, proceeds of life insurance shall form part of
the gross estate of the decedent to the extent of the amount receivable by the
- However, if the beneficiary of the life insurance is the employer: beneficiary designated in the policy of the insurance except when it is expressly
stipulated that the designation of the beneficiary is irrevocable. As stated in the
Such payment of insurance premium shall neither be part of the problem, only the designation of Y is irrevocable while the insured/decedent
employee’s compensation income nor a deductible expense of the reserved the right to substitute Z as beneficiary for another person. Accordingly, the
employer. proceeds received by Y shall be excluded while the proceeds received by Z shall be
included in the gross estate of X. (Sect/on 85(E), 1997 Tax Code)

(2) Amount Received by Insured as Return of Premium. - Section 32(B)(2)


Reason: It is JUST A MERE RETURN OF CAPITAL

Example: In life insurance, endownment, or annuity payments, either


during or at the maturity of the contract
- TAXABLE if Annuity payment represents INTEREST
- NOT TAXABLE if Annuity payment represents RETURN of
PREMIUM

- CASH SURRENDER VALUE OF THE POLICY is NOT TAXABLE.


- BUT if the amount received exceeds the aggregate premiums paid, the
excess shall be included in the Gross Income and is taxabe.

(3) Gifts, Bequests, and Devises. - Section 32(B)(3)


Reason: It is NOT a product of capital or industry.

27
Jaybee de Guzman Pascua Review notes on Taxation
BUT – the income from such property shall be INCLUDED in the BAR QUESTIONS
GROSS INCOME QUESTION:
Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay
P400.000.00 for his hospitalization. He was unable to work for six months which meant that he
did not receive his usual salary of P 10,000.00 a month or a total of P60.000.00. He sued the
DONOR DONEE
bus company and was able to obtain a final judgment awarding him P400.000.00 as
reimbursement for his hospitalization, P60.000 for the salaries he failed to receive while
Neither subject to hospitalized, P200,000.00 as moral damages for his pain and suffering, and P 100,000.00 as
Donation exemplary damages. He was able to collect in full from the judgment. How much income did he
Liable for DONOR’S TAX donor’s tax nor
Intervivos realize when he collected on the judgment? Explain.
income tax
SUGGESTED ANSWER:
Neither subject to None. The P200.000 moral and exemplary damages are compensation for injuries
Donation Mortis donor’s tax nor sustained by Mr. Infante. The P400.000.00 reimbursement for hospitalization expenses
Liable for ESTATE TAX
Causa income tax or Estate and the P60.000.00 for salaries he failed to receive are 'amounts of any damages
Tax received whether by suit or agreement on account of such injuries.' Section 28(b)(5) of
the Tax Code specifically exclude these amounts from the gross income of the
individual injured. (Section 28(b), NIRC and Sec. 63 Rev. Reg. No. 2)

ALTERNATIVE ANSWER:
(4) Compensation for Injuries or Sickness. - Section 32(B)(4) The income realized from the judgment is only the recovery for lost salaries. This
Reason: It is COMPENSATORY, NOT GAIN/PROFIT. It adds nothing to constitutes taxable income because were it not for the injury, he could have received it
the individual. from his employer as compensation income. All the other amounts received are either
Moral Damages – Not taxable/Exempt compensation for injuries or damages received on account of such injuries' which are
Exemplary Damages – Not taxable/Exempt exclusions from gross income pursuant to Section 28(b)(5) of the Tax Code.
BUT: Damages for loss of earnings/income is TAXABLE
QUESTION:
JR was a passenger of an airline that crashed. He survived the accident but sustained serious
physical injuries which required hospitalization for 3 months. Following negotiations with the
airline and its insurer, an agreement was reached under the terms of which JR was paid the
following amounts: P500,000.00 for his hospitalization; P250,000.00 as moral damages; and
P300,000.00 for loss of income during the period of his treatment and recuperation. In
addition, JR received from his employer the amount of P200,000.00 representing the cash
equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are
subject to income tax? Explain. (5%)

SUGGESTED ANSWER:
All amounts received from the airline company are excluded from gross income.
Under Sec. 32(B)(4) of the NIRC, amounts of damages received, whether by suit or
agreement, on account of personal injuries or sickness are excluded from gross
income. Since the amounts received from the airline company were received as
damages by agreement on account of personal injuries, all shall be excluded from JR's
gross income.

The amount of P200,000.00, less the equivalent of not more than 10 days of vacation
leave, received by JR from his employer, is subject to income tax under Sec. 2.78.1 (a)
(7) of R.R. No. 2-98.

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Jaybee de Guzman Pascua Review notes on Taxation
(5) Income Exempt under Treaty - Section 32(B)(5)
Commissioner vs. Mitsubishi Metal Corporation
181 SCRA 814
Reason: Adherence to the generally accepted principles of international law.
Facts:
Example: Income derived by the US Consular officials in the
1) E/I Bank of Japan is a tax exempt financing institution under RP-
Philippines in connection with such consular services.
Japan Tax Treaty
2) It extended loan to Mitsubishi Metal Corp., a Japanese Corp.
(6) Retirement Benefits, Pensions, Gratuities, etc. - Section 32(B)(6)
3) It extended loan to Phil. Corp, Atlas Corp.
a. Retirement benefits received by officials and employees of private firms,
Arguments of MMC: The source of fund lent to Atlas Corp is a tax-exempt
whether individual or corporations are EXEMPT when:
financing institution. It is an agent of tax-exempt financing institution.
1. Private plan maintained by their employer approved by the BIR for
Supreme Court held: There is supporting documents showing that MMC is
the exclusive benefit of the employee
the agent of I/E Bank of Japan. The 20M is now the exclusive money of
2. Retiring official or employee who has rendered at least 10 years of
MMC as borrower, so no longer a money of I/E Bank of Japan. Therefore,
service
subject to tax.
3. At least 50 years of age at the time of retirement

b. Separation benefits due to death, sickness or other physical disability or


for any cause beyond the control of the said official or employee.
b. Income Derived by the Government or its Political Subdivisions. Section
c. Social security benefits, retirement gratuities, pensions and other similar 32(B)(7)(b)
benefits received by resident or nonresident citizens of the Philippines
or aliens who come to reside permanently in the Philippines from Income derived from
foreign government agencies and other private or public institutions. - any public utility or
- from the exercise of any essential governmental function
d. Benefits received from the GSIS including retirement gratuity received
by government officials and employees. Recipients of the INCOME must be:

(7) Miscellaneous Items. - Section 32(B)(7) 1. Local Government Units (LGU)


2. Government of the Philippines/Republic of the Philippines.
a. Income Derived by Foreign Government. - Section 32(B)(7)(a)
note: GP/RP and National Government is NOT INTECHANGEABLE
Income received from investments in the Philippines BY:
GP/RP – does not include GOCCs
National Govt. – includes all the bureaus and instrumentalities including
(i) foreign governments GOCC’s
(ii) financing institutions controlled and owned, by foreign
governments, and General Rule – Income received by GOCCs is SUBJECT TO TAX
(iii) international or regional financial institutions established by Exemption: four (4) tax exempts GOCCs
foreign governments. 1) GSIS – Govt. Service Insurance System
2) SSS – Social Security System
Reason: to lessen the burden of foreign loans or lessen the interest 3) PHIC – Phil. Health Insurance Corp.
4) PCSO – Phil. Charity Sweepstakes
of the foreign loans

29
Jaybee de Guzman Pascua Review notes on Taxation
note: 1 tax exempt GOCC under R.A. 9679 otherwise known as 1. Received in Recognition of local and international Sports
New PAG-IBIG Fund Law of 2009 competition held in Philippines and abroad sanctioned by
National Sports Association (accredited by the Philippine
c. Prizes and Awards. Section 32(B)(7)(c) Olympic Committee)
Prizes and awards under the following condition: 2. It must be an unconditional receipt, recipient is not required to
render substantial future services.
1. A received recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievement.
2. The recipient was selected without any action on his part to enter the BAR QUESTION
contest; and QUESTION:
3. The recipient is not required to render substantial future services as a Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing
condition to receiving the prize or awards. Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc
received the amount of P500,000 as his prize which was donated by Ayala Land Corporation.
4. The BIR tried to collect income tax on the amount received by Onyoc and donor's tax from
Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay.
BAR QUESTION Decide.
QUESTION:
Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in SUGGESTED ANSWER:
the on the-spot peace poster contest sponsored by a local Lions Club. Shall the reward be The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct
included in the gross income of the recipient for tax purposes? Explain. (3%) in imposing the income tax. R.A. No. 7549 explicitly provides that 'All prizes and
awards granted to athletes in local and international sports tournaments and
SUGGESTED ANSWER: competitions held in the Philippines or abroad and sanctioned by their respective
No. It is not includable in the gross income of the recipient because the same is national sports associations shall be exempt from income tax". Neither is the BIR
subject to a final tax of 20%, the amount thereof being in excess of P10.000 (Sec. correct in collecting the donor's tax from Ayala Land Corporation. The law is clear
24(B){1), NIRC of 1997). The prize constitutes a taxable income because it was made when it categorically stated "That the donor's of said prizes and awards shall be
primarily in recognition of artistic achievement which he won due to an action on exempt from the payment of the donor's tax."
his part to enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-
spot contest, it is evident that he must have joined the contest in order to earn the
prize or award.
e. 13th Month Pay and Other Benefits. Section 32(B)(7)(e)
5.
- Total Exclusion shall NOT exceed P30,000
d. Prizes and Awards in sports Competition. Section 32(B)(7)(d) - OTHER BENEFITS: It will include CHRISTMAS BONUS,
PRODUCTIVITY INCENTIVES
Exempted by: Example:
RA 7549 otherwise known as an exempting all Prizes and awards Ms. X, an accountant, receives a basic salary of P25,000.00 per month. She
gained from local and International Sports tournament and received the following during the year.
competitions for the payment of income and other forms of taxes and The gross income of Ms. X can be shown as follows:
for other purposes. Basic Salary - P 300,000.00
13th month pay - 25,000.00
Under RA 7549:
Productivity Bonus - 10,000.00
1. Recipient is EXEMPT from INCOME TAX
Clothing allowance - - 5,000.00
2. Contributor of the Award/Donor is EXEMPT from DONOR’s TAX
De minimis
3. Contributor of the Award/Donor can claim it as DEDUCTION
from Gross Income.
Computation of Taxable Income
CONDITIONS FOR EXEMPTION Nontaxable Taxable

30
Jaybee de Guzman Pascua Review notes on Taxation
Basic Salary 300,000 TAX EXEMPTION of STATUTORY MINIMUM WAGE EARNER

a. Statutory wage earner – Section 22 (GG)


13th month pay 30,000
- Fixed by RTWBP of the DOLE

Productivity Bonus 5,0000 b. Minimum wage Earner – Section 22 (HH)

- Minimum wage earner in private sector or in public sector shall


Clothing allowance-de minimis 4,0000 EXEMPT from TAX and NOT subject to withholding tax.

- Holiday pay, overtime pay, night shift differential pay and hazard
Clothing allowance excess amount 1,000 pay earned by the MWE’s shall be covered by the INCOME TAX
EXEMPTION

Total 34,000.00 306,000.00 BUT REMEMBER THAT (Under RA 9504)

An employee who receives additional compensation such as: commissions,


f. GSIS, SSS, Medicare and Other Contributions. - Section 32(B)(7)(f) honoraria, fringe benefits, benefits in excess of allowable statutory amount of P30,000,
taxable allowances and Other taxable income other than SMW, Holiday pay,
EXEMPTION: Overtime pay, night shift differential pay and hazard pay SHALL NOT ENJOY THE
- GSIS Educational Plan Premium PRIVILEGE OF BEING MWE, therefore, his ENTIRE EARNINGS ARE NO
- GSIS Memorial Plan Premium LONGER EXEMPT FROM INCOME TAX.

g. Gains from the Sale of Bonds, Debentures or other Certificate of


Indebtedness. - Section 32(B)(7)(g)

- with a maturity of more than five (5) years.

Query: On Jan. 9, 2009, X invested in a 10-year 12% bond for P1,000,000.00.


On Oct. of the same year, Langit sold the bond for P1,100,000.00 resulting
the gain on sale of P100,000.00. Is the gain on sale exempt from tax?
Answer: YES. It is exempt from tax. It has a maturity of more than five (5)
years. The holding period is not the basis of tax exemption.

h. Gains from Redemption of Shares in Mutual Fund.- Section 32(B)(7)(h)

- Gains realized by the investor upon redemption of shares of stock


in a mutual fund company as defined in Section 22 (BB) of this
Code

B. Republic Act 9504

31
Jaybee de Guzman Pascua Review notes on Taxation
CORPORATE INCOME TAXATION BAR QUESTION
QUESTION:
Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro-
For purposes of taxation “corporation” includes partnerships, no matter how created indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and
or organized, joint-stock companies, joint accounts (cuentas en participacion), Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold,
associations, or insurance companies. realizing a net profit of P1,000,000.00 for parcel A and P500.000.00 for parcel B.
The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct?
It does NOT include:
SUGGESTED ANSWER:
The BIR is correct, since a "corporation" as defined under Section 20 (a) of the Tax Code includes
1. general professional partnerships (partnerships formed by persons for the partnerships, no matter how created or organized, except general profes.sional partnerships. The
sole purpose of exercising their common profession, no part of the income of business partnership, in the in.stant case, shall therefore be taxed in the same manner as a
which is derived from engaging in any trade or business) corporation on the sale of parcel B. The sale shall thus be subject to the creditable withholding tax
under Revenue Regulations 1-90, as amended by 12-94, on the sale of parcel B, and the
2. joint venture or consortium formed for the purpose of undertaking partnership shall report the gain realized from the sale when it files its income tax return.
construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a
service contract with the Government.

PARTNERSHIPS JOINT ACCOUNTS AND JOINT VENTURES FORMED FOR PROFITS

- Registered Partnership – TAXABLE - These are Joint Emergency Operation without legal personality. It operates
the business affairs of the two companies as though they constitute a single
- Unregistered Partnership TAXABLE if the following requisites are present.
entity thereby obtaining substantial economy and profit operation.
1. There must be an agreement oral or writing to contribute money,
property, or industry to a common fund.
2. There is intention to divide profits. - it is TAXABLE.

CO-OWNERSHIP JOINT STOCK COMPANIES


- They are generally classified as a partnership possessing some of the
- Unregistered Partnership is not the same with Co-ownership.
characteristics of a corporation.
- They appear to be like corporation to the extent that they have capital stock
- Co-ownership is TAX EXEMPT.
when capital is divided or made transferable even without the consent of the
- BUT, Co-ownership will become taxable if it is converted to Unregistered co-partner, they partake the nature of partnership.
Partnership. - It is TAXABLE.

- Co-ownership converted to Unregistered Partnership WHEN: NOT CONSIDERED CORPORATION FOR INCOME TAX PURPOSES
1. If the properties and income are used as common fund with intention to
produce profits.
1. Joint construction venture
2. After the co-ownership was partitioned, the shares of the heirs are held
under a single management for profit making. 2. General Professional Partnership
3. Joint venture engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service
contract with the Government.

32
Jaybee de Guzman Pascua Review notes on Taxation
4. Tax exempt Government Owned and Controlled Corporations – SSS, GSIS, “The income of whatever kind and character of the foregoing organizations
PhilHealth (PHIC), Pag-ibig and PCSO. FROM ANY OF THEIR PROPERTIES, real or personal, OR FROM ANY OF
THEIR ACTIVITIES CONDUCTED FOR PROFIT regardless of the disposition
made of such income, shall be subject to tax imposes under this Code.
EXEMPTIONS FROM TAX ON CORPORATIONS (11 Corporations that are tax
- Means they are TAX EXEMPT, however they are considered
exempt) – Section 30 of the NIRC (CREB-CLEF-SMB)
CORPORATIONS for INCOME TAX PURPOSES.

1. Labor, agricultural or horticultural organization not organized principally


for profit; MAJOR GROUPS OF CORPORATION FOR INCOME TAX PURPOSES
2. Mutual savings bank not having a capital stock represented by shares, and (Sources, Tax Base, Tax Rate)
cooperative bank without capital stock organized and operated for mutual
purposes and without profit; A. NON RESIDENT FOREIGN CORPORATION (Section 22 (I)
3. A Beneficiary society, order or association, operating fort he exclusive
benefit of the members such as a fraternal organization operating under the
Source : WITHIN
lodge system, or mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness, Tax Base : GROSS Income
accident, or other benefits exclusively to the members of such society, order,
or association, or non-stock corporation or their dependents; Tax Rate : 35% effective July 1, 2005
4. Cemetery company owned and operated exclusively for the benefit of its 30% Effective January 1, 2009 (R.A. No.
members; 9337)
5. Non-stock corporation or association organized and operated exclusively for
Religious, charitable, scientific, athletic, or cultural purposes, or for the SPECIAL NON RESIDENT FOREIGN CORPORATION
rehabilitation of veterans, no part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person; 1. Non resident Lessor of Cinematographic Film – Section 28 (B) (2)
6. Business league chamber of commerce, or board of trade, not organized for - 25% based on Gross Income Derived from within the Philippines
profit and no part of the net income of which inures to the benefit of any
private stock-holder, or individual; 2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals -
7. Civic league or organization not organized for profit but operated Section 28 (B) (3)
exclusively for the promotion of social welfare; - 4.5% of gross rentals, lease or charter fees from leases or charters to
8. A non-stock and nonprofit Educational institution; Filipino citizens or corporations, as approved by the Maritime
9. Government Educational institution; Authority
10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch
or irrigation company, mutual or cooperative telephone company, or like 3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment -
organization of a purely local character, the income of which consists solely Section 28 (B) (4)
of assessments, dues, and fees collected from members for the sole purpose - 7.5% of gross rentals or fees
of meeting its expenses;
11. Farmers', fruit growers', or like association organized and operated as a
Sales agent for the purpose of marketing the products of its members and SUMMARY of INCOME TAX RULES FOR NON RESIDENT FOREIGN
turning back to them the proceeds of sales, less the necessary selling CORPORATION
expenses on the basis of the quantity of produce finished by them;
TRANSACTIONS TAX RATE

BUT REMEMBER, Last paragraph of Section 30 of the NIRC

33
Jaybee de Guzman Pascua Review notes on Taxation
1. On sale of shares of stock of a domestic - Is there need of proof of the tax Credit? – The prevailing view in Wander
Corporation not listed and traded thru a local stock Case (160 SCRA 573) held that NO need of proof of actual amount granted
exchange, held as capital assets: as tax credit. As long as the Foreign Government allows tax credit, it will
On the net capital gain: suffice.
Not over P10,000.00 Final tax of 5%

On any amount in excess of P100,000.00 Final tax of 10% B. RESIDENT FOREIGN CORPORATION
2. Interest on foreign loans Final tax of 20%
Source : WITHIN

Tax Base : Taxable Income


3. Dividend from Domestic Corporation Final tax of 15%
Tax Rate : 35% effective July 1, 2005
30% Effective January 1, 2009 (R.A. No.
4. Gross Income from sources within the Philippines Final tax of 30% 9337)

NOTE: Tax Rules of those Special Non-Resident Corporation


SPECIAL RESIDENT FOREIGN CORPORATION
Non resident Lessor of Cinematographic Film 25% based on Gross Income
Derived from within the 1. International Carriers
Philippines - 2.5% based on Income derived from within based on Gross Philippine
Billings (GPB)
Nonresident Owner or Lessor of Vessels Chartered by 4.5% of gross rentals, lease or
Philippine Nationals charter fees from leases or charters What is GPB? - Section 28 (A) (3) (a)
to Filipino citizens or
In the case of International Air Carriers, GPB refers to the amount of:
corporations, as approved by the
Maritime Authority - gross revenue derived from carriage of persons, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted
Nonresident Owner or Lessor of Aircraft, Machineries and 7.5% of gross rentals or fees flight, irrespective of the place of sale or issue and the place of payment of
Other Equipment the ticket or passage document
- gross revenue from tickets revalidated, exchanged and/or indorsed to
another international airline if the passenger boards a plane in a port or
point in the Philippines
- for flights which originate from the Philippines, but transshipment of
TAX SPARING CREDIT passenger takes place at any port outside the Philippines on another airline,
the gross revenue consisting of only the aliquot portion of the cost of the
The Situation: The NRFC received a dividend from DC are subject to 15% instead of ticket corresponding to the leg flown from the Philippines to the point of
tax rate of 30%. transshipment [RR 15-2002]
- BUT WHY? – To attract and encourage more foreign Investment
- The 15% is called Spared Tax Rate In the case of International Shipping, GPB means:
- gross revenue whether for passenger, cargo or mail originating from the
Condition before 15% Spared Tax Rate will apply Philippines up to final destination, regardless of the place of sale or
- The Foreign Government must allow Tax Credit in those taxes deemed paid payments of the passage or freight documents.
to the Philippines by the Foreign Government / NRFC
2. Offshore Banking Units authorized by the Bangko Sentral ng Pilipinas (BSP) [Sec.
28(A)(4)

34
Jaybee de Guzman Pascua Review notes on Taxation
- 10 % based on Income derived from WITHIN Gross Onshore Income. - Gains, profits, effectively connected with the conduct of trade or business in
the Philippines.
- BUT, income or profit or gain derived from DIRECT INVESTMENT of
3. Offshore Currency Deposit Unit [Section 28(A)(7)(b)
mother corporation is not considered as Branch Profit because the same
- 10% based on income derived from WITHIN Gross Onshore income.
were not effectively connected with the conduct of business in the
SUMMARY of INCOME TAX RULES FOR NON RESIDENT FOREIGN Philippines.
CORPORATION

TRANSACTIONS TAX RATE C. DOMESTIC CORPORATION

Source : WITHIN
1. On sale of shares of stock of a domestic
Corporation not listed and traded thru a local stock Tax Base : Taxable Income
exchange, held as capital assets:
On the net capital gain: Tax Rate : 35% effective July 1, 2005
Not over P10,000.00 Final Tax of 5%
30% Effective January 1, 2009 (R.A. No.
On any amount in excess of P100,000.00 Final Tax of 10%
9337)

2. From sources WITHIN the Philippines on Passive


Income of: SPECIAL DOMESTIC CORPORATION
Interest under the expanded foreign currency deposit Final Tax of 7.5%
system
1. Private Educational Institution
Interest on any currency bank deposit, yield or other 2. Non Profit Hospital
monetary benefit from deposit substitute, trust fund Final Tax of 20%
- Tax Rate is 10% on their Taxable Income provided the Gross Income from
and similar arrangement royalty.
unrelated trade, business or other activity DOES NOT EXCEED 50% of the
3. Dividend from DC EXEMPT total gross income.
- Tax rate is 30% of the Taxable Income if its income from unrelated trade or
business EXCEEDS 50% of the Total Gross Income.
4. Branch profit Remittance tax Final Tax of 15%
Exception: profits derived from activities registered
with the PEZA – EXEMPT What is unrelated trade, business, or other activity?
- The conduct of which is not substantially related to the exercise or
5. Taxable Income (NET) from all sources WITHIN Normal Tax Rate of 30%
the Philippines performance by such educational institution of its educational purpose.
NOTE: But, beginning with the fourth (4th) year from - Include income derived from anxillary activities-school owned canteen,
start of operations whichever is higher of Normal Tax cafeteria, dormitory and bookstore within the school premises.
(30%) or MCIT (2%)
NOTE: Consider also the TAX Rates of those Special
Resident Foreign Corporation
SUMMARY of INCOME TAX RULES FOR NON RESIDENT FOREIGN
CORPORATION
WHAT ARE CONSIDERED BRANCH PROFIT?

35
Jaybee de Guzman Pascua Review notes on Taxation
TRANSACTIONS TAX RATE 6. In lieu of No. 5
(30% on Taxable Income)
And beginning with the year 2000
GROSS INCOME TAXATION on Gross Income 15%
1. On sale of shares of stock of a domestic
- A domestic corporation have the
Corporation not listed and traded thru a local stock option between Gross Income
exchange, held as capital assets: taxation and Net Income Taxation.
On the net capital gain: However, once a domestic
NOTE: Consider also the TAX Rates of those Special
corporation opted for gross income
Domestic Corporation taxation, said option by the
Not over P10,000.00 Final Tax of 5%
corporation shall be
IRREVOCABLE for three (3)
On any amount in excess of P100,000.00 Final Tax of 10%
consecutive years.

IF LISTED and traded thru local Stock Exchange ½ of 1% of Gross Selling Price

MINIMUM CORPORATE INCOME TAX


2. On sale of land and/or building held as capital - Applicable only to Domestic Corporations and Resident Foreign
assets on the GROSS SELLING PRICE or CURRENT
Corporations.
FAIR MARKET VALUE prevailing at the TIME of
SALE whichever is higher:
Capital Gain Tax Final Tax of 6% WHEN DOES A CORPORATION START TO BE COVERED BY THE MCIT?
- A minimum corporate income tax of 2% of the gross income as of the end of
3. From sources WITHIN the Philippines on the taxable year is hereby imposed on a corporation subject to income tax
PASSIVE Income of beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the
Interest under the expanded foreign currency deposit Final Tax of 7.5%
minimum income tax is greater than the regular corporate income tax for the
system
taxable year.
Interest on any currency bank deposit, yield or other Final Tax of 20%
monetary benefit from deposit substitute, trust fund PURPOSE OF MCIT?
and similar arrangement royalty - To forestall the prevailing practice of corporation in over claiming
deductions.
4. Dividend from DC EXEMPT

BAR QUESTION
5. Taxable Income (NET) from all sources WITHIN Normal Tax Rate of 30% QUESTION:
the Philippines What is the rationale of the law in imposing what is known as the Minimum Corporate
NOTE: But, beginning with the fourth (4th) year from Income tax on Domestic Corporations? (3%)
start of operations whichever is higher of Normal Tax
(30%) or MCIT (2%) SUGGESTED ANSWER:
The imposition of the Minimum Corporate Income Tax (MCIT) is designed to
forestall the prevailing practice of corporations of over claiming deductions in order
to reduce their income tax payments. The filing of income tax returns showing a tax
loss every year goes against the business motive which impelled the stockholders to
form the corporation. This is the reason why domestic corporations (and resident
foreign corporations) after the recovery period of four years from the time they
commence business operations, they become liable to the MCIT whenever this tax
imposed at 2% of gross income exceeds the normal corporate income tax imposed on
net income.

36
Jaybee de Guzman Pascua Review notes on Taxation
Net amount to be paid 75,000 100,000 35,000
COMPUTATION OF MCIT
- The MCIT is equal to two (2%) percent of the Gross Income of the
Corporation at the end of the taxable year.
- Gross Income means GROSS SALES less sales returns, discounts and
allowances and Cost of Service Sold. SUSPENSION OF THE PAYMENT OF MCIT – SECTION 27(E)(3)
- The Secretary of Finance, upon recommendation of the BIR Commissioner,
WHEN IS THE MCIT REPORTED AND PAID? may suspend the imposition of the MCIT on a corporation in any of the
- The MCIT is paid on an annual basis. It is not computed nor it is paid on a following cases:
quarterly basis. a. sustained losses from prolonged labor dispute
- It is reported under the Annual Final Adjustment Income Tax Return which b. Force majeure of Fortuitous event
corporations are required to file on the 15th of the fourth month following c. Legitimate business reverses
the close of its taxable year.

CARRY FORWARD PROVISION UNDER MCIT (SECTION 27(E)(2) IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
- Any excess of the minimum corporate income tax over the normal income
tax shall be carried forward and credited against the normal income tax Rule:
payable for the next three years immediately succeeding the taxable year in - There is imposed for each taxable year, in addition to other taxes, a tax
which the minimum corporate income tax was paid. equal to 10% of the improperly accumulated taxable income of domestic
and closely- held corporations formed or availed of for the purpose of
Example: avoiding the income tax/dividend tax with respect to its shareholders or the
shareholders of any other corporation, by permitting the earnings and profits of
Year 2000 Year 2001 Year 2002 the corporation to accumulate instead of dividing them among or distributing them
to the shareholders.
Note:
Norma Income Tax 50,000 60,000 100,000 - Improperly means if accumulation of earnings or profits is
unreasonable if it is not necessary for the purpose of the business.

MCIT 75,000 100,000 60,000


Rationale of IAET
- If the earnings and profits were distributed, the shareholders would then be
liable to income tax; if the distribution were not made to them, they would
incur no tax in respect to the undistributed earnings and profits of the
corporation. It is a tax in the nature of a PENALTY to the corporation for the
improper accumulation of its earnings, and a DETERRENT to the
Amount to be paid 75,000 100,000 100,000
avoidance of tax upon shareholders who are supposed to pay dividends tax
on the earnings distributed to them.

Less: Excess MCIT


Exception: Immediacy Test
Year 2000 25,000 - The use of undistributed earnings and profits for the reasonable needs of the
Year 2001 40,000 business would not generally make the accumulated or undistributed
earnings subject to the tax. What is meant by “reasonable needs of the
business” is determined by the IMMEDIACY TEST.

Immediacy Test - It states that the “reasonable needs of the


business” are the immediate needs of the business including reasonably

37
Jaybee de Guzman Pascua Review notes on Taxation
anticipated needs AND there should be PROOF of immediacy or direct NOTA BENE: DC that do not fall under the definition for
correlation of anticipated needs. closely-held corporations” are publicly-held corporations. But a
branch of a foreign corporation is a RFC, not domestic, therefore it
is not covered under the regulation.
The following constitute accumulation of earnings for the REASONABLE NEED
OF THE BUSINESS: (ILL ABE)

1. the paid-up capital of the corporation as of Balance Sheet date, inclusive of


accumulations taken from other years;
2. Earnings reserved for definite corporate EXPANSION projects or programs
requiring considerable capital expenditure as approved by the Board of
Directors or equivalent body;
3. Earnings reserved for BUILDING, PLANT or EQUIPMENT
ACQUISITION as approved by the Board of Directors or equivalent body;
4. Earnings reserved for compliance with any LOAN COVENANT or pre-
existing obligation established under a legitimate business agreement;
5. Earnings required by LAW or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its
distribution;
6. In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for INVESTMENTS WITHIN
THE PHILIPPINES as can be proven by corporate records and/or relevant
documentary evidence.
Exempt Corporations: The IMPROPERLY ACCUMULATED EARNINGS TAX shall
not apply to the following corporations: (BIG-PENT) (Section 29(B)(2)

1. Banks and other non-bank financial intermediaries;


2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
5. General professional partnerships;
6. Non- taxable joint ventures; and
7. Enterprises that are registered:
a. with the Philippine Economic Zone Authority (PEZA) under R.A. 7916;
b. pursuant to the Bases Conversion and Development Act of 1992 under
R.A. 7227; and
c. under special economic zones declared by law which enjoy payment of
special tax rate on their registered operations or activities in lieu of
other taxes, national or local.

Closely-held corporations are those: at least 50% in value


of the outstanding capital stock; or at least 50% of the total
combined voting power of all classes of stock entitled to vote is
owned directly or indirectly by or for not more than 20 individuals.

38
Jaybee de Guzman Pascua Review notes on Taxation
ALLOWABLE DEDUCTIONS FROM GROSS INCOME Family living and personal
Business expenses As to Nature
Section 34 expenses

Corporate taxpayers
- These are amounts allowed by law to reduce the gross income to taxable except NRFC, it can also
Individual taxpayers only
income. be claimed by individual As to Claimant
except NRA-NETB
- Section 34 of the NIRC – shall not apply to Gross Compensation Income Taxpayers except NRA-
EXCEPT Section 34 (M) [Premium Payments on Health and/or NETB.
Hospitalization Insurance of an Individual Taxpayer] which can be
deducted from Gross Compensation Income.
1. Itemized
deduction
2. Optional
ALLOWANCE OF PERSONAL EXEMPTION
deduction
for INVIDUAL TAXPAYER
s (OSD) of
Section 35 of the NIRC
40% of
Gross
- Substitutes for the disallowance of family, living and Personal expenses 1. Basic personal
Income or
exemption
Reciept As to Kinds
KINDS of PERSONAL EXEMPTION 2. Additional personal
OSD is
exemption
1. Basic personal exemption applicable
- P50,000 whether taxpayer is married, head of the family, or single to
individual
2. Additional personal exemption and
- P25,000 IN ADDITION to the basic personal exemption for each qualified corporate
dependent children not exceeding four (4) [RA 9504] taxpayers
(sec. 3
R.A. 9504)
DISTINCTION

1.)
2.)

Deduction from Gross Allowance for Personal


Income Exemptions Deductions from Gross Income Exclusion from Gross Income
Section 34 Section 35
- Something paid or incurred - Should not form part of gross
Actual business Arbitrary amounts because in doing business or trade income because excluded by
expenses or expenses it may not be enough to law, by the constitution or does
As to Amount not fall within the definition of
incurred in the exercise cover personal living
of profession expenses income.

To recover the cost of To cover family living and


As to Purpose - Pertains to the computation - Pertain to the determination of
doing business personal expenses
of ordinary taxable income Gross Income

39
Jaybee de Guzman Pascua Review notes on Taxation
2. In case of married persons only the spouse claiming the additional
exemptions for dependents shall be entitled to the deduction.

BASIC PRINCIPLES 3. The deduction shall not exceed P2,400 for the family or P200 a month.

a. Non resident alien not engaged in trade or business (NRA-NETB) and non
resident foreign corporation (NRFC) are not allowed to claim deductions II. OPTIONAL STANDARD DEDUCTION (OSD) – Section 34(L)

b. The taxpayer must point to some specific provisions of the statute/law - OSD is a deduction from gross income allowed to be taken in lieu of the
authorizing the deduction. itemized deductions.

c. The taxpayer must prove that he is entitled to the deduction authorized or - Applicable to INDIVIDUAL (but not to non-resident alien and to
allowed. Corporation)

d. If the taxpayer fails to deduct certain expenses for the taxable year, he - The taxpayer must signifies in his return his intention to select Optional
cannot deduct them from the income of the next or succeeding year. Standard Deduction.

e. Cohan Rule Principle OTHERWISE, he shall be considered as having availed of the


Itemized Deduction.
- if expenses were incurred and there are no documentary evidence to
support such, BIR must make an estimate of deduction that may be - The election of OSD is irrevocable for the taxable year for which the
allowed in computing the taxpayer’s taxable income. choice is made.
- Disallowance of 50% of the taxpayer’s claimed deduction is VALID.
The election to claim either the OSD or the itemized deduction for
the taxable year must be signified by checking the appropriate box
KINDS OF ALLOWABLE DEDUCTIONS in the income tax return filed for the first quarter of the taxable year
adopted by the taxpayer. Once the election is made, the same type
of deduction must be consistently applied for all the succeeding
I. PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION quarterly returns and in the final income tax return for the taxable
INSURANCE (PHHI) - SECTION 34 (M) year. Any taxpayer who is required but fails to file the quarterly
income tax return for the first quarter shall be considered as having
- Premiums paid during the taxable year for health and/or availed of the itemized deductions option for the taxable year.
hospitalization insurance taken by him on himself, including his
family. - OSD shall NOT apply to Gross Compensation Income Arising out of
- Applicable only to individual Employer-employee relationship.

Conditions before PHHI shall be allowed as deduction from gross income: OSD RATE
- 40% of Gross Sales/Gross Receipts INDIVIDUAL TAXPAYERS
1. That the family had a gross income of not more than two hundred fifty other than NRA
thousand pesos (250,000.00) for the taxable year. - 40% of Gross Income CORPORATE TAXPAYERS

- Family means NUCLEAR FAMILY – parents and the children who - Applicable also to CORPORATION as allowed by Sec. 3 of R.A. 9504
are not yet taxpayers their income notwithstanding.

REVENU REG. No. 16-2008

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Jaybee de Guzman Pascua Review notes on Taxation
Basis of the OSD
Implementing the Provisions of Section 34 (L) of the Tax Code of 1997, as P 1,000,000.00 P 200,000.00
Amended by Sec. 3 of RA No. 9504, Dealing on the Optional Deduction (OSD)
allowed to Individuals and Corporations in Computing their Taxable Income.
x OSD rate (maximum) .40% .40%
Person Covered
1. Individuals
1. RC OSD AMOUNT P 400,000.00 P 80,000.00
2. NRC
3. RA If CORP.
4. Taxable estates and trusts If INDIVIDUAL

2. Coporation Gross Sales


1. DC P 1,000,000.00 P 1,000,000.00
2. RFC
Less: Cost of Sales
It should be emphasized that the cost of sales in case of individual seller of 0 800,000
goods, or the cost of services in the case of individual seller of services, are not
allowed to be deducted for purposed of determining the basis of the OSD pursuant Gross sales/Gross
to this Section in as much as the law (RA 9504) is specific as to the basis thereof which P 1,000,000.00 P 200,000.00
sates that for individuals, the basis of the 40% OSD shall be the “gross sales” or “gross
receipts” and not the gross income.
Less: OSD (maximum) .40% .40%
In the case of sellers of services, the term “gross income” means the “gross
receipts” less sales return, allowances discounts and cost of services. “Cost of the NET INCOME P 600,000.00 P 120,000.00
services” means all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including salaries and employees and
specialists directly rendering the service.

SEC. 5. ILLUSTRATIVE examples in Determining the BASIS of the 40% OSD REVENUE REGULATIONS No. 2-2010
for INDIVIDUALS and CORPORTIONS. Suppose a retailer of goods, whose
accounting method is under the accrual basis, has a gross sales f P 1M with a cost of Amendment to Sections 6 and 7 of Revenue Regulations No. 16-2008 with
sales amounting to P800,000.00 Respect to the Determination of the OSD of GPP and the Partners thereof, As well as
the Manner and Period for making the election to claim OSD in the Income Tax
Returns.
If INDIVIDUAL If CORP.
If the GPP availed of the itemized deduction in computing its net income ,
the partner may still claim itemized deductions from said share provided, that, in
Gross Sales
P 1,000,000.00 P 1,000,000.00 claiming itemized deductions, the partner is precluded from claiming the same
expenses already claimed by the GPP. If the GPP claimed itemized deductions the
partners comprising it can only claim itemized deductions which are in the nature of
Less: Cost of Goods Sold
0 800,000 ordinary and necessary expenses for the practice of profession which were not
claimed by the GPP in computing its net income or distributable net income during
the year.

41
Jaybee de Guzman Pascua Review notes on Taxation
Examples of these are representation expenses incurred by the partner - when it is normal or common or - where it is appropriate and
where the covering invoice of receipt is issued in his name; travelling expenses while usual in relation to the business of helpful in the development of the
away from home, which were not liquidated by the partnership; depreciation of a car the taxpayer and the surrounding taxpayer’s business, meaning it is
used in the practice of profession where said car is registered in the name of the circumstances. intended to realize a profit or to
partner and similar expenses. (DReTS) minimize the loss.

Hence, if the GPP availed of itemized deductions, the partners are not
allowed to claim the OSD from their share in the net income because the OSD is a
proxy for all the items of deductions allowed in arriving at taxable income. - The expenses must be incurred in trade or business carried on by the
Taxpayer.
If the GPP avails of OSD in computing its net income, the partners
comprising its net income, the partners comprising it can no longer claim further - The expenses must be substantiated by proof – Receipts are the best proof
deduction from their share in the said net income. BUT the burden of proof lies upon the taxpayer to establish the relationship
of the expenses and the business.
If the partner also derives other gross income from trade, business or
practice of profession apart and distinct from his share in the net income of the GPP, - The expenses must be reasonable.
the deduction that he can claim from his other gross income would follow the same
deduction availed of from his partnership income as explained in the foregoing rules. - The expenses must not be against public policy, public moral or law.
Provided, however that if the GPP opts for the OSD, the individual partner may still claim
40% of its gross income from trade, business or practice of profession but not to - If the expense is subject to withholding tax, proof of payment to BIR must be
include his share from the net income of the GPP. shown.

- The expenses must be paid or incurred during the taxable year.


III. ITEMIZED DEDUCTIONS – Section 34 (A to J)

KINDS OF ITEMIZED DEDUCTION (by statutory classification) BELT DID CPR Two (2) Accounting Methods in the recognition of expenses.
A. Business Expenses
B. Interest 1) CASH METHOD – recognized when paid so, expenses will be deducted in
C. Taxes the year in which they are paid.
D. Losses - Cash basis tax payers include income when it is received and claim
E. Bad Debts deductions when expenses are paid. A cash basis taxpayer can look to
F. Depreciation the doctrine of constructive receipt and the doctrine of cash equivalence
G. Depletion to help determine when income is received.
H. Charitable and Other contributions
I. Research and Development Expenditure
J. Pension Trust Contribution 2) ACCRUAL BASIS METHOD – recognized when incurred so, expenses will
A. BUSINESS EXPENSES be deducted in the year in which they accrue.

- The expenses must be ORDINARY and NECESSARY. - Accrual basis taxpayers include items when they are earned and claim
deduction when expenses are incurred. An accrual basis taxpayer looks
ORDINARY EXPENSES NECESSARY EXPENSES to the “all-events test” and “earlier-of test” to determine when income
is earned.

- Under the all-events test, an accrual basis taxpayer generally must


include income “for the taxable year when all the events have occurred

42
Jaybee de Guzman Pascua Review notes on Taxation
that fix the right to receive income and the amount of the income can be 5. Rent Expense
determined with reasonable accuracy. For Business property – at least P500 – 5%
Non Business/residential Property – at least P10,000 – 5%
- Under the “earlier-of test” an accrual basis tax payer receives income
when: 6. Cost of material and supplies
1. The required performance occurs - Deductible only to the amount actually consumed or used in operation.
2. Payment therefore is due; or
3. Payment therefore is made, whichever happens earliest. 7. Repairs
Rules in deductibility:
KINDS OF BUSINESS EXPENSES
Incidental or ordinary repairs are deductible – means keeps the asset in its
1. Compensation for Personal Services ordinary working condition
Requisites:
1. Personal services actually rendered Extraordinary repairs are not deductible – means expenses incurred that
2. Compensation is for such services rendered will add material value to the property or prolong its life. They are
3. Reasonable CAPITAL EXPENSES.

Salary expenses are allowed as deductions from gross business income only G.R.: Capital Expenditures are NOT deductible
of the corresponding withholding tax has been deducted and remitted tot eh Exemption: Capital expenditures allowable to private educational
BIR. institutions [Sec. 34 (A)(2)]
Options:
2. Travelling Expenses (including transportation, meals and lodging expenses) 1) Deduct immediately as expenditures
Requisites: 2) Deduct as allowances for depreciation
a) Paid or incurred while “away from home”
b) Paid or incurred in the conduct of trade or business B. INTEREST EXPENSES
c) Reasonable and necessary expenses.
- amount which one has contracted to pay for the use of borrowed money or
3. Representation and Entertainment Expenses amount of compensation paid for the use of money or forbearance from such
Requisites: use.
a) Paid or incurred in the conduct of trade or business - There must be an indebtedness. “no indebtedness, no deduction”
b) Paid or incurred during the taxable year - Interest or penalties for crime committed are NOT DEDUCTIBLE.
c) Not contrary to law, morals and public policy - Indebtedness must be that of the taxpayer.
d) Reasonable and necessary. FOR CORPORATION – the loan must be obtain in its corporate
e) Subject to the rule of SUBSTANTIATION (there must be records as to capacity, using corporate assets as security
the amount, date, and place of expense, purposes or relationship of the - The debt must have been incurred in connection with taxpayer’s trade or
expense to the business). business.
- The interest must have been stipulated in writing.
4. Advertising and Promotional Expenses - Interest must be paid or accrued within the taxable year.
Requisites:
a) Must be substantiated NOTE the 2 methods of accounting in the recognition of expenses:
b) All payments for the purchase of promotional giveaways, contest prizes Cash Basis – deductible in the year it is actually paid.
or similar material must be properly receipted. Accrual Basis – deductible in the year it is accrued even of not actually paid.
c) All payments for services such as radio and TV time, print ads,
advertising expertise must be subjected to withholding tax.
INTEREST EXPENSE DEDUCTIBLE WITH LIMITATION [Sec. 34(B)(1)]

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Jaybee de Guzman Pascua Review notes on Taxation
Situation: Taxpayer has interest income subjected to 20% final tax and at the same
Situation: Taxpayer has interest income subjected to 20% final tax and at the same time incurred during interest expense during the year.
time incurred during interest expense during the year.
For CORPORATION – the allowable deduction for interest expense shall be
For INDIVIDUAL – the allowable deduction for interest expense shall be reduced by an amount equal to 33% of interest income.
reduced by an amount equal to 38% of interest income.

Illustration:

Normal Tax Rate 32% Illustration:

Normal Tax Rate 30%


Less: Final Tax on Interest Income 20%

Less: Final Tax on Interest Income 20%


Tax Difference 12%

Tax Difference 10%


Divided by 32%

Divided by 30%
Tax difference rate 38%

Tax difference rate 33%

X record shows the following data:


- Interest expense on business plan: P25,000.00 X corporation shows the following data:
- Interest Income on time Deposit: P10,000.00 - Interest expense on business plan: P50,000.00
- Interest Income on time Deposit: P40,000.00
How much is the interest expense deductible?
How much is the interest expense deductible?
Actual Interest Expense 25,000.00
Actual Interest Expense 50,000.00

Less: Tax differential on interest


income (10,000 x 38%) P 3, 800 Less: Tax differential on interest
income (40,000 x 33%) P 13, 200

Deductible Interest Income P 21, 200.00


Deductible Interest Income P 36, 800.00

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Jaybee de Guzman Pascua Review notes on Taxation
NON DEDUCTIBLE INTEREST EXPENSE [Section 34 (B)(2)]
BAR QUESTION
(a) interest paid in advance or Prepaid interest [Section 32 (B)(2)(a)] QUESTION:
- IF the taxpayer reporting income on the CASH BASIS, the interest expense Explain if the following items are deductible from gross income for income tax purposes.
of a business loan paid in advance shall be allowed as a deduction in the Disregard who is the person claiming the expense. (5%)
1) Interest on loans used to acquire capital equipment or machinery.
year that the principal indebtedness is FULLY PAID.
2) Depreciation of goodwill.

- If the indebtedness is payable in periodic amortization, the amount of SUGGESTED ANSWER:


interest which corresponds to the amount of the principal amortized or paid 1) Interest on loans used to acquire capital equipment or machinery is a deductible item
during the year shall be allowed as deduction in such taxable year; from gross income. The law gives the taxpayer the option to claim as a deduction or
treat as capital expenditure interest in.curred to acquire property used in trade,
(b) Interest payment on indebtedness not business related business or exercise of a profession. (Section 34(B) (3), NIRC).
- Interest payment in favor of a relative (related debtor and creditor) [Section
2) Depreciation for goodwill is not allowed as deduction from gross income. While
32 (B)(2)(b)]
intangibles maybe allowed to be depreciated or amortized, it is only allowed to those
intangibles whose use in the business or trade is definitely limited in duration. (Basilan
(c) Interest paid on indebtedness to finance petroleum exploration. [Section 32 Estates, Inc. v, CIR, 21 SCRA 17). Such is not the case with goodwill.
(B)(2)(c)]
ALTERNATIVE ANSWER:
Depreciation of goodwill is allowed as a deduction from gross income if the goodwill is
OPTIONAL TREATMENT OF INTEREST EXPENSE. acquired through capital outlay and is known from experience to be of value to the
business for only a limited period. (Section 107, Revenue Regulations No. 2). In such
case, the goodwill is allowed to be amortized over its useful life to allow the deduction
At the option of the taxpayer, interest incurred to acquire property used in trade
of the current portion of the expense from gross income, thereby paving the way for a
business or exercise of a profession may be allowed as: proper matching of costs against revenues which is an essential feature of the income
tax system.
Tax payer has Two Option:
(1) Deduct it outright or
(2) Treat is a capital expenditure

C. TAXES

Requisites to be deductible:

1. taxes paid or incurred within the taxable year


2. must be in connection with the taxpayer's profession, trade or business
3. tax must be imposed by law on, and payable by, taxpayer (direct tax)

Non Deductible Taxes from Gross Income:

1. Philippine Income Tax;


2. Estate and donor's taxes;
3. Foreign Income tax, if claimed as a tax credit
4. Percentage tax on stock transaction
5. Valued-added tax
6. Taxes not related to business, trade, or profession

45
Jaybee de Guzman Pascua Review notes on Taxation
7. Other items related to tax such as:
- Special assessment tax
- Surcharges NON DEDUCTIBLE LOSSES FROM GROSS INCOME (not allowed by law as
- Compromise penalty deductions)

BUT NOTE: Tax Benefit Rule - Taxes allowed as deductions, if there is tax refund or 1. Loss on voluntary removal of building on land purchased with a view to
tax credited, shall be included as part of gross income in the year of receipt to the erect another building (Sec. 97, Rev. Reg. No. 2)
extent of the income tax benefit of said deduction.
2. Gambling losses not covered by gambling gains [Sec. 34 (D)(6) NIRC]
Taxes Deductible from Gross Income - Can be allowed as deductions to the extent of gambling wins. NOT
ALLOWED AS DEDUCTION from business income, compensation
1. Documentary Stamp Taxes income and gains from sole of capital assets.
2. Occupational Taxes
3. Privilege and License Taxes 3. Capital loss not covered by capital gains [Sec. 34 (D)(6) NIRC]
4. Excise Taxes - Capital loss deductible to the extent of capital gain, can not be
5. Import Duties deductible from ordinary gain.
6. Local Business Taxes Reason: to preserve Section 34(1)(1) of the NIRC that only ORDINARY
7. Automobile Registration Fees and NECESSARY EXPENSES will be allowed to be deducted from the
8. Community Tax Gross Income. Capital Loss is not a business connected expense, not
9. Municipal Tax ordinary expense.
4. Losses from exchanges of property in corporate readjustments (Sec. 40,
- For NRA-ETB and RFC, taxes paid or incurred are allowed as deductions NIRC)
only if and to the extent that they are connected with income from sources With Regard to MERGER AND CONSOLIDATION [Sec. 40 (C)(2)a,b,c]
within the Philippines.
- (1) Exchange of property, (2) Exchange of stock for stock (3) Exchange
of securities for stock or securities – and the transactions is SOLELY in
D. LOSSES KIND – and NO CASH is GIVEN, therefore, TAX EXEMPT.

- These represent (1) reduction on resources due to unintended destruction or - If – TRANSACTIONS NOT solely in KIND – gain is recognizes BUT
(2) deprivation of things not in the ordinary course of business. LOSS is NOT DEDUCTIBLE.

Section 39(A)(2)(3) 5. Losses from illegal transactions


- CAPITAL GAIN – ORDINARY GAIN 6. Loss from sales or exchanges of property between related taxpayers.
- CAPITAL LOSS – ORDINARY LOSS 7. Losses from exchanges of property where the property received is not
substantially different form the property disposed of (Sec. 40, NIRC)
REQUISITES FOR DEDUCTIBILITY OF ORDINARY LOSSES: 8. Losses not incurred in trade, profession or business or in any transaction
entered into for profit [Sec. 36(A) NIRC].
1. the loss must be actually sustained in a closed and completed transaction;
2. The loss must be that of the taxpayer and incurred in trade, profession or Other transactions wherein the GAIN RECOGNIZED and LOSS IS NOT
business, should arise from fires, storms, shipwreck, or other casualties, or DEDUCTIBLE
from robbery, theft or embezzlement.
3. The loss must not be compensated for by insurance or other forms of 1. Illegal Transactions
indemnity 2. Transactions between Related Taxpayers. (Sec. 36(B), NIRC)
4. The loss must be reported to the BIR from 30 to 90 days from the date of its 3. Wash Sale (Section 38 of the NIRC)
discovery.

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Jaybee de Guzman Pascua Review notes on Taxation
- a sale or other disposition of stock or securities where substantially deduction from gross income shall be carried over as a deduction from gross
identical securities are acquired or purchased within a 61 day period, income for the next three (3) consecutive taxable years immediately
beginning 30 days before the date of such sale or disposition and ending following the year of such loss.
30 days after the sale. RULE
- Even if sold by a dealer in securities of the transaction was not made in
the ordinary course of the business of such dealer, there is WASH - NOLCO cannot be deducted against compensation income (employer-
SALE/ employee relationship)

- If a person, natural or juridical, is enjoying tax exemption pursuant to the


BAR QUESTION NIRC or any special law – NOT ENTITLED TO DEDUCT NOLCO from
QUESTION: GROSS INCOME
Give the requisites for deducibility of a loss. (5%)
- In cases of BUSINESS COMBINATIONS, if there is a substantial change in
SUGGESTED ANSWER:
the ownership of the business - NOT ENTITLED TO DEDUCT NOLCO
The requisites for deducibility of a loss are:
1) loss belongs to the taxpayer;
from GROSS INCOME, If less than 75% of the paid up capital or nominal
2) actually sustained and charged off during the taxable year; value of outstanding shares retained by the same persons
3) evidenced by a closed and completed transaction;
4)not compensated by Insurance or other forms of indemnity; - In cases of BUSINESS COMBINATIONS, if there is NO substantial change
5) not claimed as a deduction for estate tax purposes in case of individual taxpayers; in the ownership of the business – NOLCO is ALLOWED TO BE
and DEDUCTED from GROSS INCOME If NOT less than 75% of the paid up
6) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days capital or nominal value of outstanding shares retained by the same persons.
with the BIR.
- FOR MINES (other than oil and gas wells) – NOLCO incurred in any of the
first 10 years of operation may be carried over a deduction from taxable
DEDUCTIBLE LOSSES from GROSS INCOME (provided the requisite for income for the next 5 years immediately following the year of loss.
deductibility are complied with)

1. Business losses such as losses incurred in trade or profession TAXPAYERS ENTITLED TO CALIM NOLCO FROM GROSS INCOME
2. Casualty losses such as losses due to storks, fires, shipwreck or other casualties
of property connected with profession, trade or business 1. Any individual (including estates and trusts) engaged in trade or business or in
3. Losses of business property due to theft, robbery or embezzlement the exercise of his profession,
4. Net Operating Loss Carry Over (NOLCO) Section 34(D)(3) 2. domestic and resident foreign corporations subject to the normal income tax
(e.g., manufacturers and traders)
Query: In case of PARTIAL LOSS, what is the measure of loss? 3. Special Corporation subject to preferential tax rates under the Code such as
- Ans.: Cost to restore property back to its normal condition OR Book Value, private educational institutions, hospitals, and regional operating
WHICHEVER IS LOWER, and then reduced by insurance recovery or any headquarters.
form of indemnity.
WHO ARE NOT ENTITLED TO DEDUCT NOLCO
NET OPERATING LOSS CARRY-OVER (NOLCO):
1. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign
- Is the excess of allowable deductions over gross income of the business or Currency Deposit Unit (FCDU) of a domestic or foreign banking corporation,
enterprise for any taxable year. duly authorized as such by the Bangko Sentral ng Pilipinas (BSP);
2. An enterprise registered with the Board of Investments (BOI
- The net operating loss of the business for any taxable year immediately 3. An enterprise registered with the Philippine Economic Zone Authority (PEZA)
preceding the current taxable year, which had not been previously offset as

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Jaybee de Guzman Pascua Review notes on Taxation
4. An enterprise registered under R.A. No. 7227, otherwise known as the Bases NOTE: Tax Benefit Rule or Recapture Rule : a recovery of bad debts previously
Conversion and Development Act of 1992 allowed as deduction in the preceding years shall be included as part of the gross
5. Foreign corporations engaged in international shipping or air carriage business in income in the year of recovery to the extent of the income tax benefit of said
the Philippines; and deduction.
6. In general, any person, natural or juridical, enjoying exemption from income tax,
pursuant to the provisions of the Code or any special law, with respect to its Requisites for the deductibility of BAD DEBTS EXPENSES (CUBAN)
operation during the period for which the aforesaid exemption is applicable.
Its accumulated net operating losses incurred or sustained during the said C – charged off or written off against the books of the taxpayer
period shall not qualify for purposes of the NOLCO. U – the amount written off must be uncollectible in the near future, no slim
chance of recovery collecting such amount.
B – it must arise from business trade/profession
SPECIAL/OTHER RULES ON LOSSES A - ascertain to be worthless
N – not arising from transactions between related taxpayers.
- A taxpayer who claims the 40% optional standard deduction shall not
simultaneously claim deduction of the NOLCO. Further, the three-year
reglementary period shall continue to run notwithstanding the fact that the F. DEPRECIATION
aforesaid taxpayer availed of the 40% optional standard deduction during
the said period. - An annual reasonable allowance to reduce the useful value of the tangible
fixed assets resulting from wear and tear, and normal obsolescence.
- DC and RFC cannot enjoy the benefit of NOLCO for as long as it is subject to
MCIT in any taxable year. Nevertheless, the running of the three-year - For intangible assets such as patents, copyright and franchise, the annual
reglementary period for the expiry of NOLCO is not interrupted by the fact allowance to reduce their useful value is called “amortization”
that such corporationis subject to "Minimum Corporate Income Tax"
computation. Includes:

- A loss in one line of business is not permitted as allowable deduction from 1. The gradual diminution in the service or useful value of tangible property
gain another line of business, if one of the two lines is exempted from tax. due from exhaustion, wear and tear and normal obsolesce

2. Amortization of the face value of intangible assets with definitely limited


E. BAD DEBTS duration.

- A bad debt results from the worthlessness or uncollectibility in whole or in REQUISITES TO BE DEDUCTIBLE
part, of amounts due to the taxpayer by others, arising from money lent or
from uncollectible amounts of income from goods sold or services rendered. 1. It must be reasonable.
2. It must be charged off during the year
BAD DEBTS RECOVERY: 3. The asset must be use in profession trade or business.
4. The asset must have a limited useful life.
- Shall be included in the Gross Income in the year of recovery to the extent of
the tax benefit of said deduction
- It is taxable because the taxpayer received tax benefit through the reduction METHODS USED IN COMPUTING DEPRECIATION: (Section 34(F)(2)
of its income in the preceeding year.
- So upon recovery of bad debts, it is a taxable gain. 1. The straight-line method;
- It shall be included as part of the gross income in the year of receipt to the - If no SALVAGE VALUE:
extent of the income tax benefit of the said deduction COST ÷ LIFE = DEPRECIATION
- If there is SALVAGE VALUE

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Jaybee de Guzman Pascua Review notes on Taxation
COST - SV Cost of coal property 4,200,000.00
= DEPRECIATION
LIFE
Less: Salvage value 200,000.00

2. Declining-balance method;
3. The sum-of-the-years-digit method; and Depletion base 4,000,000.00
4. any other method which may be prescribed by the Secretary of Finance
upon recommendation of the Commissioner.
Divided by estimated tons to be extracted 2,000,000.00

G. DEPLETION OF OIL AND GAS WELLS AND MINES


Depletion per ton 2
- Depletion is the exhaustion of natural resources due to production. It is the
reduction of cost or value of natural resources such as oil and gas wells and
mines as the resources are converted into inventories Multiplied by No. of tons extracted during the year 400,000.00

WHO ARE ENTITLED TO CLAIM DEPLETION AS DEDUCTION FROM GROSS


INCOME
Depletion expenses during the year P 800,000.00
- Persons who derived income from the extraction of oil, gas, and mineral for
the purpose of recovering his capital.

- The taxpayer must acquire economic interest in a mineral land and must
have capital investment in the property and not mere economic EXPLORATION AND DEVELOPMENT COST – Section 34 (G)(2)
disadvantage.
- “Exploration expenditures” – expenses paid/incurred before the
- In case of FC, depletion shall be allowed only if the mining property is development stage of the mine intended to ascertain the existence location,
located in the Philippines. extent, or quality of any deposit of ore or other mineral.

- “Development expenditures” – expenditures paid or incurred during the


REQUISITES FOR DEDUCTIBILITY development stage of the mine or other natural deposits.

1. Depletible natural resources assets like mines, gas and oil wells. - TAX TREATMENT: During the taxable year, the taxpayer can TREAT it as:
2. Charged off within the taxable year. 1. Part of the adjusted basis for deposit cost
3. Allowance for depletion is computed in accordance with the cost depletion 2. Deduction to compute taxable income from mining operations.
method. ➢If the taxpayer will choose this option, the following
CONDITION must be complied with:
Example with the COST DEPLETION METHOD - If total amount deductible for exploration and development
expenditures shall not exceed 25% of the net income from
X mining acquired a coal property with an estimated deposit of 2,000,000.00 mining operations computed without the benefit of any tax
tons for 4,200,000.00. It is estimated that the property has a salvage value of P200,000. incentives under existing laws.
If Baguio mining corporation was able to produce 400,000 tons. What is the amount of
the deductible depletion expense during the year.

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Jaybee de Guzman Pascua Review notes on Taxation
- The actual explorations and development expenditures minus - research,
25%of the net income from mining shall be carried forward to - educational,
the succeeding years until fully deducted. - character-building and youth and sports development,
- health,
- social welfare,
H. CHARITABLE AND OTHER CONTRIBUTIONS - cultural or
- charitable purposes, or a combination thereof.
- The amount of any charitable contribution of property other than money
shall be based on the acquisition cost of said property. Provided, not more than 30% of the charitable contribution should be used
It is NOT an OPERATING EXPENSE BUT allowed by law, to be deducted from for administration purposes.
GROSS INCOME.
Provided further that, the contribution must be utilized not late than 15th
REQUISITES FOR DEDUCTIBILITY: day of the 3rd month after close of its taxable year.

1. The contribution or gift must be actually paid during the taxable year..
2. The recipient must be an entity or institution specified by the TAX CODE or AS PROVIDED BY SPECIAL LAW, contributions or donations made to the
SPECIAL LAW. following are also deductible in full:
3. The net income of the institution must not inure to the benefit of any individual
or private stockholder. 1. Integrated Bar of the Philippines (P.D. 1810)
2. Development Academy of the Philippines (P.D. 205)
AS PROVIDED by the TAX CODE, CONTRIBUTIONS OR DONATIONS made to 3. Agricultural Department of Southeast Asian Fisheries Development Center
the following are DEDUCTIBLE IN FULL: (P.D. 292)
4. National Social Action Council (P.D. 294)
1. Donations to the Government - Donations to the Government of the 5. Task force on Human Settlement
Philippines or to any of its agencies or political subdivisions, including fully- 6. National Museum, Library and Archives (P.D. 373)
owned government corporations, exclusively to finance, to provide for, or to 7. Intramuros Administration (P.D. 1616)
be used in undertaking PRIORITY ACTIVITIES in: 8. Lungsod ng Kabataan (P.D. 1631)
- education,
- health,
- youth and sports development, CONTRIBUTION SUBJECT TO LIMITATION:
- human settlements,
- science and culture, and - Are not deductible in FULL as specified by the law or such deduction has
- in economic development not met the requisites to be deducted in full:

2. Donations to Certain Foreign Institutions or International Organizations Corporate: 5% of the Net Income before charitable contributions or the
in compliance with agreements or treaties - Donations to foreign ACTUAL CONTRIBUTION whichever is lower
institutions or international organizations which are fully deductible in
pursuance of or in compliance with agreements, treaties, or commitments Individual Taxpayer: 10% of the net income before Charitable Contributions
entered into by the Government of the Philippines and the foreign or the ACTUAL Contribution whichever is LOWER.
institutions or international organizations or in pursuance of special laws;

3. Donations to Accredited Non-government Organizations (NGO) - The term I. RESEARCH AND DEVELOPMENT
"nongovernment organization" means a non-profit domestic corporation:
Organized and operated exclusively for: - Cost incurred paid or incurred by the taxpayer during the taxable year in
- scientific, connection with his profession, trade or business for the following:

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Jaybee de Guzman Pascua Review notes on Taxation
1. Improvements of processes and formulas Taxpayers allowed for Taxpayers NOT allowed for
2. Development of improved or new products PERSONAL EXEMPTION PERSONAL EXEMPTION

TAX TREATMENT
1. RC 1. NRA-ETB not
1. Deferred expenses charge to CAPITAL ACCOUNT – allowed as deduction
2. NRC enjoying reciprocity
ratably distributed / or a period of not less than 60 months beginning with
3. RA clause
the month in which the taxpayer FIRST REALIZES benefits from such
4. Estate and Trusts 2. NRA-NETB
expenditure.
5. NRA-ETB enjoying 3. Corporations
reciprocity clause 4. Partnerships
2. Ordinary and necessary expense DEDUCT FROM GROSS INCOME

J. PENSION TRUST PRINCIPLE OF RECIPROCITY

- Fund intended to provide retirement benefits to the employees. - Means that NRA-ETB shall be allowed a personal exemption only if the
income tax law in his country grants personal exemptions to the citizens of
REQUISITES FOR DEDUCTIBILITY: and residents of the Philippines, subject to the following limitations:
1) The PE does not include additional exemption; and
1. Employer must have established a pension or retirement plan for the 2) The amount of exemption shall in no case exceed the PE granted by our
retirement plan for the payment of reasonable pension to its employees and law to citizens or residents of the Philippines.
approved by the BIR;
2. Pension plan is reasonable and actuarially sound; - NRA-ETB – means those who have stayed within the Philippines for more
3. It must be funded by the employer; and than 130 days during the taxable year shall be deemed nonresident aliens
4. Amount contributed by the employer must no longer be subject to control of doing business in the Philippines.
the employer.
BAR QUESTION
QUESTION:
ALLOWANCE OF PERSONAL EXEMPTION FOR INDIVIDUAL TAXPAYER Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came
to the Philippines several times and stayed in the country for an aggregated period of more than
180 days. How will Mr. Cortez be taxed on his income derived from sources within the
– Personal exemptions are arbitrary amounts allowed by law to be deducted Philippines and from abroad? (5%)
from income to cover personal, living, or family expenses of the taxpayer.
These deductions are allowed on the theory that the minimum requirements SUGGESTED ANSWER:
of subsistence of a taxpayer should be free from tax. Mr. Cortez being a non-resident alien individual who has stayed for an aggregated
period of more than 180 days during the calendar year 1999, shall for that taxable year
be deemed to be a non-resident alien doing business in the Philippines.
- Personal Exemption – P50,000 whether taxpayer is married, head of the
family or single (RA 9504)
Considering the above, Mr. Cortez shall be subject to an income tax in the same manner
as an individual citizen and a resident alien individual, on taxable income received
- Additional Exemption – P25,000 IN ADDITION to the basic personal from all sources within the Philippines. [Sec. 25 (A) (1), NIRC of 1997] Thus, he is
exemption or each qualified dependent children not exceeding four (4) (RA allowed to avail of the itemized deductions including the personal and additional
9504) exemptions but subject to the rule on reciprocity on the personal exemptions. (Sec. 34
(A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), Ibid.]

-
PERSONAL EXEMPTION

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Jaybee de Guzman Pascua Review notes on Taxation
ADDITONAL EXEMPTION BAR QUESTION
QUESTION:
Taxpayers entitled to Additional Exemption Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is
1. RC legally married to Mario. They have a child named Jill. The children are all minors and not
2. NRC gainfully employed.
3. RA if qualified children are LIVING WITHIN THE PHILIPPINES
1. How much personal exemption can Charlie claim? Explain. (2.5%)
- If children are living abroad, RA is not entitled to additional
exemptions. SUGGESTED ANSWER:
Charlie can claim the personal exemption of a Head of a Family or P25,000.00
Requisites for additional Exemption provided that, at least one of his minor and not gainfully employed children is
unmarried and living with and dependent upon him for chief support (Tax Reform
Dependent must be: Act, RA 8424, Chapter VII, Section 35[A]; BIR Revenue Regulation 02-98).
1. A taxpayer’s child, whether legitimate, illegitimate or legally adopted;
2. How much additional exemption can Charlie claim? Explain. (2.5%)
2. Chiefly depending for support on the taxpayer
3. Living with the taxpayer SUGGESTED ANSWER:
4. Not married; not gainfully employed, and not more than 21 years old (Sec. His children from his previous marriage who are legitimate children and his
35(b), NIRC) illegitimate child with Jane will all entitle him to additional personal exemption of
P8,000.00 for each dependent, if apart from being minor and not gainfully employed,
- The law allows the continuous additional exemption even if the dependent they are unmarried, living with and dependent upon Charlie for their chief support
child is more than 21 years old, with the provision stating “or if such (Tax Reform Act, RA8424, Chapter VH, Section 35(A); BIR Revenue Regulation 02-98).
dependent, regardless of age, is incapable of self-support because of mental
or physical defect” (Sec. 35B, par. 4, NIRC)

Rules in claiming Additional Exemptions Qualified Dependents other than children

- If BOTH spouses are working only one can claim the additional exemption A. Parents
- If ONLY one spouse is working said spouse may claim Additional 1. Incapable of self support
Exemption 2. Taxpayer should provide the chief support

General Rule: Husband is the proper claimant B. Brothers/sisters


Exception: Wife can claim if: 1. Should not be more than 21 years old
- husband explicitly waives his right 2. Should not be gainfully employed
- husband has no income 3. Regardless of age, if brother/sisters is incapable of self support due to
- husband works abroad mental or physical defect
4. Taxpayer provided for the chief support
C. Senior citizen
1. Resident of the Philippines
2. At least 60 years old
3. Retired from either government or private service
4. Has income of NOT MORE THAN P60,000 per year will be reviewed by
NEDA every 3 years.

Rules:

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Jaybee de Guzman Pascua Review notes on Taxation
- Taxpayer or benefactor of senior citizen shall be entitled only to the 12. Reaches 21 y.o. – abnormal child and P25,000.00 P25,000.00
BASIC PERSONAL EXEMPTION of P50,000 incapable to support himself
- He shall not be entitled to claim the ADDITIONAL EXEMPTION of
P25,000 for supporting his/her parents, brother/sisters or senior 13. Marries P25,000.00
citizen.

14. Gainfully Employed P25,000.00


CHANGE OF STATUS SUMMARY
Note: Dependent children – maximum of four
15. Dies P25,000.00
Change of Status Personal Exemption

This year Next year

1. Married P50,000.00 P50,000.00 BAR QUESTION


QUESTION
2. Died P50,000.00 RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to
twins. Unfortunately, however, LISA died in the course of her delivery. Due to complications,
one of the twins also died on December 15, 2003. In preparing his Income Tax Return (ITR) for
3. Widowed with 1 qualified child P75,000.00 P75,000.00 the year 2003, what should RAM indicate in the ITR as his civil status: (a) single; (b) married;
(c) Head of the family; (d) widower; (e) none of the above? Why? Reason. (5%)
4. Widowed w? qualified dependent not his P50,000.00 P50,000.00
child SUGGESTED ANSWER:
RAM should indicate "(b) married" as his civil status in preparing his Income Tax
5. Widowed w/out dependents P50,000.00 P50,000.00 Return for the year 2003. The death of his wife during the year will not change his
status because should the spouse die during the taxable year, the taxpayer may still
6. Legally separated w/ 1 qualified P75,000.00 P75,000.00 claim the same exemptions (that of being married) as if the spouse died at the close of
dependent child such year (Section 35/Cj, NIRC).

7. Legally separated w/qualified dependent P50,000.00 P50,000.00


not his child

8. Legally separated w/out qualified P50,000.00 P50,000.00 DEFINITION:


dependent

9. Not legally separated P50,000.00 P50,000.00


Dependent
- means a legitimate, illegitimate or legally adopted child chiefly dependent
upon and living with the taxpayer if such dependent is not more than
twenty-one (21) years of age, unmarried and not gainfully employed or if
such dependent, regardless of age, is incapable of self-support because of
Additional Exemption mental or physical defect.

Head of family
10. Born P25,000.00 P25,000.00 - means an unmarried or legally separated man or woman with one or both
parents, or with one or more brothers or sisters, or with one or more
11. Reaches 21 y.o. – normal child P25,000.00 legitimate, recognized natural or legally adopted children living with and
dependent upon him for their chief support, where such brothers or sisters

53
Jaybee de Guzman Pascua Review notes on Taxation
or children are not more than twenty-one (21) years of age, unmarried and BAR QUESTION
not gainfully employed or where such children, brothers or sisters, QUESTION:
regardless of age are incapable of self-support because of mental or Mar and Joy got married in 1990. A week before their marriage. Joy received, by way of
physical defect. donation, a condominium unit worth P750.000.00 from her parents. After marriage, some
renovations were made at a cost of P150.000.00. The spouses were both employed in 1991 by the
same company. On 30 December 1992, their first child was born, and a second child was born on
Living with
07 November 1993. In 1994, they sold the condominium unit and bought a new unit. Under the
- may be construed that the taxpayer and his dependents reside under on foregoing facts, what were the events in the life of the spouses that had income tax incidences?
roof, or do not necessarily reside under one roof with consideration on the
character of the separation. SUGGESTED ANSWER:
The events in the life of spouses. Mar and Joy, which have income tax incidences are the
following: 1) Their marriage in 1990 qualifies them to claim personal exemption for
Gainfully employed married individuals; 2) Their employment in 1991 by the same company will make
- means that the dependent is engaged in an employment work or trade that them liable to the income tax imposed on gross compensation income; 3) Birth of their
first child in December 1992 would give rise to an additional exemption of P5,000 for
will remove him from the status of chief support from the taxpayer.
taxable year 1992; 4) Birth of their second child in November 1993 would likewise
entitle them to claim additional exemption of P5,000 raising their additional personal
Chief support exemptions to P 10,000 for taxable year 1993; and 5) Sale of their condominium unit in
- refers to the principal or maid support whether money or in kind extended 1994 shall make the spouses liable to the 5% capital gains tax on the gain presumed to
continuously to the dependent, such that of withdrawn, the dependent will have been realized from the sale.
have a destitute life.

BAR QUESTION
QUESTION:

Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and
Vilma have six minor children who live and depend upon Arnold for their chief support. The
children are not married and not gainfully employed.
1) For income tax purposes, may Arnold be considered as "head of a family?" [3%]
2) Is Arnold entitled to deduct from his gross income, an additional exemption for each of his
illegitimate child? [2%]

SUGGESTED ANSWER:
1) Yes. An unmarried man who has illegitimate minor children who live with him and
depend upon him for their chief support is considered as "head of the family" (RR No.
2-98 implementing Section 35, NIRC).

2) No. Arnold is only entitled to deduct additional personal exemption for four (4) out
of the six (6) illegitimate children. The maximum number of dependents for purposes
of the additional personal exemption is four. (Sec. 35, NIRC).

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Jaybee de Guzman Pascua Review notes on Taxation
TAX ON PARTNERSHIPS 5. The share of a partner shall be subject to a creditable withholding income tax
of ten (10%) percent if the current year’s income payment is P720,000.00 and
DEFINITION OF PARTNERSHIP below, and fifteen (15%) if P720,000.00. THIS WILL BE REMITTED BY THE
PARTNERSHIP TO THE BIR.
- a contract,
- whereby two or more persons bind themselves
- to contribute money, property or industry
- to a common fund to engage in profitable activities
- with the intention of dividing the profits among themselves. PRESIDENTIAL DECREE 1773

ART. 1767. By a contract of partnership, two or more persons bind themselves to P.D. 1773 allows OSD if the reported income of the individual partner as share
contribute money, property or industry to a common fund with the intention of from the general professional partnership is not previously reduced by the
dividing the profits among themselves. (New Civil Code of the Philippines) partnership’s business expenses.

If the share received by an individual taxpayer from a professional partnership is


TWO KINDS OF PARTNERSHIPS based on NET INCOME OF THE PARTNERSHIP (gross income minus allowable
itemized deductions), it shall no longer be allowed to deduct 40% OSD; otherwise,
For purposes of taxation, the two (2) kinds of partnerships are as follows: there will be a double deductions.

1. General Professional Partnership


2. General Partnership in Trade or General Co-Partnership Illustration:

Atty. X is one of the partners of NUT & BOLT Partnership which is engaged in
GENERAL PROFESSIONAL PARTNERSHIP rendering professional services (the sole source of income of the partnership) with a
net income before tax of P200,000.00. Atty. X has 60% shares in the profit or loss of the
- a partnership formed by persons for the sole purpose of exercising their partnership. The other income of Atty. X is a buy and sell business with a gross
common profession income of P200,000.00 and related expenses of P80,000.00

General Professional Partnership and Partners are subject to the following Rules:
Question: 1) Assuming that Atty. X is married with a qualified dependent children, is
1. The general professional partnership shall not be subject to income tax NUT & BOLT partnership liable for income tax?
- BUT, GPPs, however, are required to file returns of their income for the
purpose of furnishing information as to the share in gains or profits that 2) How much is the income tax still due of Atty. X if the partnership withheld a ten
each partner shall include in their individual return. (10%) percent withholding income tax?

2. The partners shall be liable for income tax only in their separate or Answer: NUT & BOLT Partnership is not liable for income tax only in his separate
individual capacities; and individual capacity and should not in any way change the tax status of NUT &
BOLT partnership as GPP.
3. Each partner shall report as gross income his distributive share in the
partnership net income; The income tax due to Atty. X would be:

4. For purposes of computing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as the net
income of corporation;

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Jaybee de Guzman Pascua Review notes on Taxation
Income Tax due P 19,750
Gross Income professional partnership (P200,000.00 x 60%) P120,000.00

Less: Tax withheld by the partnership (120,000 x 10%) 12,000


Gross income from buy and sell business P200,000

Income tax still due P 7,750

Less: Allowable Deductions 80,000 P120,000

GENERAL PARTNERSHIP IN TRADE

- A partnership wherein a part of all of its income is derived from the conduct
of trade of business.
Income before personal exemption P240,000
General Partnership in Trade and its Partners are subject to the following Rules:

Less: Personal Exemption 1. The partnership is subject to the rules on corporations (capital gain tax, final
tax on passive income, normal tax, and MCIT).

Basic P50,000 2. The partnership must quarterly and year-end income tax;

Additional (P25,000 x 3) P75,000 125,000 3. The taxable income of the partnership, less the income tax thereon, is the
distributable net income of the partnership.

4. The share of a partner in the partnership’s distributable net income of a year,


even if not actually received, will be considered constructively received by
Taxable Income P115,000 the partner in the same year that the net income of the partnership is
determined and will be subject to a final withholding tax of ten (10%)
percent, as if dividend.

Illustration

Tax on P70,000 P 8,500 WE Partnership of William and Eduardo reported the following earnings:
Professional fee P100,000.00
Professional Expenses 60,000
Tax on excess (P115,000-70,000) x 25% 11,250 Business Income – trading 200,000.00
Business Expenses –trading 120,000.00

Question: Will WE partnership be liable to income tax?

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Jaybee de Guzman Pascua Review notes on Taxation
Answer: WE partnership is liable to pay income tax, because it earned business Net Income before income taxes P 100,000
income. Hence, it is considered and treated as a corporation, which is liable to
corporate income tax of 30% or MCIT.
Less: Income Tax 200,000
The income tax payable of WE Partnership would be:

Revenues:

Professional Fee P 100,000 Net income for distribution:

Business Income – Trading 200,000 William Eduardo

Profits Distribution (P84,000/2) P 42,000 P 42,000

Expenses: Multiplied by tax for Dividends 10% 10%

Professional P 60,000 Final Tax withheld by the Partnership P 4,200.00 P 4,200.00

Business – Trading 120,000 P180,000

SUMMARY

Is the partnership income earned from trading? – if YES, THEREFORE:


Net taxable Income P 120,000
Type – commercial/partnership in trade
Income Tax – NCIT-30% or MCIT-2%
Multiplied by Corporate Income tax rate 30% Withholding Tax – Final Withholding Tax of 10%

Is the partnership income earned from trading? – if NO, THEREFORE:


Income Tax due P 36,000.00
Type – professional partnership
Income Tax – Exempt from Income Tax
Withholding Tax – Creditable of Withholding
P 720,000 and below – 10%
More than 720,000 – 15%
Assume that the partners agreed to divide the net income equally, the tax pertinent to
the shares of William and Eduardo would be:
TAX ON JOINT VENTURE

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Jaybee de Guzman Pascua Review notes on Taxation
ESTATE and TRUST is to be transferred from the decedent to his successors / from
- In the Philippines, is a business activity that is organized or established only the trustee to the beneficiary.
for a temporary or short-period of time.
RULE:
- It is dissolved once its business objective is accomplished.
Example: The undertaking of a corporation project by which when the project - Meantime, that the property is not yet transferred to the
is completed the joint venture is also terminated. successors/beneficiaries the estate/trust can generate earnings – thus,
SUBJECT TO INCOME TAX.

- An unincorporated joint venture is taxed like a corporation.


TAXABLE INCOME AND TAX ESTATE OR TRUST
- A joint venture for a construction project of the government is not subject to
income tax. - For taxation purposes, it shall be determined in the same manner and basis
as in the case of INDIVIDUAL TAXPAYERS.

TAX ON CO-OWNERSHIP - Gross Income – Section 32A, NIRC

CO–OWNERSHIP as a general rule is TAX EXEMPT because the activities of the co- - Deductions – Section 34, NIRC
owners are usually intended to preserve the property and to collect the income from
the property. - Taxable Income – Section 61, NIRC
 Personal exemption applied to the income of estate or trust shall be
NOTE: The income derived by a co-owner from the property shall be reported in his now P20K – R.A. 9504
individual tax return regardless whether such income is actually or constructively
received.
 Additional Exemption as allowed in Section 35 (change status) but
anymore allowed in succeeding years.
When co-ownership is subject to tax:

1. When co-ownership is formed or established voluntarily, or upon agreement of


the parties.
2. When the individual co-owner reinvested his share in the co-ownership to - Tax Rate – Section 24A, NIRC
produce another income generating activities.
3. Where the inherited property, remained undivided for more than 10 years, and
no attempt was ever made to divide the same among the co-heirs, nor was the
property under administration proceedings nor held in trust, the property - Special Deduction – Section 61, NIRC
should be considered as owned by an unregistered partnership.
 the estate is allowed to deduct the amount of income of the estate
during the taxable year that is paid or credited to the legatee, heir
TAX ON ESTATE AND TRUST or beneficiary, subject to a creditable withholding tax of 15%

ESTATE – properties, rights and obligations including those properties, earnings or  the allowed deduction shall form part of the income of the recipient
obligations that have accrued thereto since the opening of the succession.
legatee, heir or beneficiary.
TRUST – administration of funds and properties in behalf of individuals.
 potion of the gross estate paid to the heir is NOT deductible from
the income of the estate.

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Jaybee de Guzman Pascua Review notes on Taxation
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Jaybee de Guzman Pascua Review notes on Taxation
ESTATE TAX
A. CITIZEN

- Gross Estate = Probate Property - Filipino at date of death (whether resident or non-resident) – all properties
WHEREVER SITUATED shall be subjected to Philippine Estate Tax.
 All property owned by a decedent at the time of death, including stocks,
bonds real estate, mortgages, and any other property that technically
belonged to him. BUT it shall not include the exclusive properties of the
B. RESIDENT ALIEN
surviving spouse.

 It is to be reduced by decedent’s debts, taxes, funeral expenses, share of the


- Foreigner but a RESIDENT of the Philippines when he died – ALL
properties WHEREVER SITUATED shall be subjected to Philippine Income
surviving spouse and other permissible deductions to arrive at a net taxable
Tax.
estate.

C. NON-RESIDENT ALIEN
BAR QUESTION
QUESTION:
- Foreigner but who is NOT a RESIDENT of the Philippines at the date of his
Discuss the rule on situs of taxation with respect to the imposition of the estate death – ONLY properties SITUATED IN THE PHILIPPINES shall be
tax on property left behind by a non-resident decedent. (2%) subjected to Philippine Income Tax.

SUGGESTED ANSWER:

The value of the gross estate of a non-resident decedent who is a Filipino citizen
at the time of his death shall be determined by including the value at the time of
his death of all property, real or personal, tangible or intangible, wherever
situated to the extent of the interest therein of the decedent at the time of his
death [Sec. 85 (A), NIRC of 1997). These properties shall have a situs of taxation
in the Philippines hence subject to Philippine estate taxes.

On the other hand, in the case of a non-resident decedent who at the time of his
death was not a citizen of the Philippines, only that part of the entire gross estate
which is situated in the
Philippines to the extent of the interest therein of the decedent at the time of his
death shall be included in his taxable estate. Provided, that, with respect to
intangible personal property, we apply the rule of reciprocity.

CLASSIFICATIONS OF DECEDENT

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Jaybee de Guzman Pascua Review notes on Taxation
BAR QUESTION the estate tax return shall be filed with an authorized agent bank, or Revenue
QUESTION: District Officer, Collection Officer, or duly authorized Treasurer of Pasig City,
the City in which the decedent Mr. de la Cruz was domiciled at the time of his
Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack death. [Sec. 90 (D). NIRC of 1997]
while on a business trip to the USA. He died intestate on June 15, 2000 in New
York City, leaving behind real properties situated in New York; his family home
in Valle Verde, Pasig City; an office condominium in Makati City; shares of
stocks in San Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at the
time of his death. As the sole heir and appointed Administrator, how would you
determine the gross estate of the decedent? What deductions may be claimed by
the estate and when and where shall the return be filed and estate tax paid? (3%)

SUGGESTED ANSWER:

The gross estate shall be determined by including the value at the time of his
death all of the properties mentioned, to the extent of the interest he had at the
time of his death because he is a Filipino citizen. [Sec. 85 (A), NIRC of 1997]

With respect to the life insurance proceeds, the amount includible in the gross
estate for Philippine tax purposes would be to the extent of the amount
receivable by the estate of the deceased, his executor, or administrator, under
policies taken out by decedent upon his own life, irrespective of whether or not
the insured retained the power of revocation, or to the extent of the amount
receivable by any beneficiary designated in the policy of insurance, except when
it is expressly stipulated that the designation of the beneficiary is irrevocable.
[Sec. 85 (E) NIRC of 1997]

The DEDUCTIONS that may be claimed by the estate are:


1) The actual funeral expenses or in an amount equal to five percent (5%) of the
gross estate, whichever is lower, but in no case to exceed two hundred thousand
pesos (P200.000.00). [Sec. 86 (A) (1) (a). NIRC of 1997]

2) The judicial expenses in the testate or intestate proceedings.(Sec. 86(A)(1)


3) The value of the decedent's family home located in Valle Verde, Pasig City in
an amount not exceeding one million pesos (P1,000,000.00), and upon
presentation of a certification of the barangay captain of the locality that the
same have been the decedent's family home. [Sec. 86 (A) (4), Ibid]

4) The standard deduction of P1,000,000. (Sec. 86(A)(5)

5) Medical expenses incurred within one year from death in an amount not
exceeding P500,000.(Sec. 86(A)(6)

The ESTATE TAX RETURN shall be filed within six (6) months from the
decedent's death (Sec. 90 (B), NIRC of 1997], provided that the Commissioner of
Internal Revenue shall have authority to grant in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the return (Sec. 90 (c), Ibid]
Except in cases where the Commissioner of Internal Revenue otherwise permits,

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Jaybee de Guzman Pascua Review notes on Taxation
100,000 shares x P 100 = P10,000,000.00
Add: Retained earnings 7,000,000.00
Total P17,000,000.00
Divided by outstanding shares 100,000 shares
Book value per share P 170
VALUATION BASIS OF PROPERTY IN GROSS ESTATE (starting point in
Gross Estate = 170 x 20,000 shares = P3,400,000.00
computing the Philippine Estate Tax Liability)
3. Shares of stock listed or traded in the stock exchange
General Rule:
- Fair market value is derived from the mean of the highest and lowest
- Valuation of property in the gross estate shall be based on the FAIR quotations on a trading day at valuation date or nearest the valuation date.
MARKET VALUE prevailing at the time of the decedent’s death.
Exercises on valuation:
Mr. D was the owner if 2,000 shares of SVX Corp. a company listed in the local stock
SPECIFIC RULES exchange. He acquired the shares at P20 per share. At the time of his death, trading of
the shares in the stock exchange showed the following performance:
1. Real Property
- Fair market value as shown in the schedule of fixed values with the Asked Bid Closed
provincial or city assessor’s office or fair market value as determined by the
Commissioner of the BIR (zonal valuation) whichever is higher. P25 P18 P20

35 28 30
Exercises on valuation:
1)Mr. A owned a parcel of land which acquired several years for P150,000. Upon his
death fair market value of the property was P1,000,000 while the zonal value was
P1,200,000. What was the value of the property in the gross estate of Mr. A? Answer: Lowest P20
Highest P30
Answer: P1,200,000.00 Mean/Average P25
Reason: The zonal value is higher than the fair market value
Gross Estate P25 x 2,000 shares = P50,000.00
2)Mr. B inherited house and lot then with a fair market value of P800,000 for
the house and P500,000 for the lot. Upon his death, fair market value of the house was 4. Notes receivable
P200,000 while the zonal value was P150,000 and the fair market value of the lot was - Valuation shall be based on the face value plus accrued interest income up
P1,000,000 while the zonal value P1,500,000. What was the value of the house and lot to time of decedent’s death.
in the gross estate?
5. Usufruct, uses habitation, annuity
Answer: House P 200,000 – fair market value is higher
- Valuation is the probable life of the beneficiary based on the basic standard
Lot P 1,500,000 – zonal value is higher.
mortality table approved by the Secretary of Finance upon the
recommendation by the insurance commissioner.
2. Shares of stock NOT listed or traded in the stock exchange
- Fair market value is the book value at valuation date.
ADDITIONS TO THE GROSS ESTATE
Exercises on valuation:
Mr. C owned 20,000 shares in the stocks of GLI Corp representing 20% of the issued
and outstanding shares with a par value of P100. The corporation was not listed. At - are those properties which are not physically located in the estate at the date
the time of his death, the corporation’s retained earnings is P7,000,000. What should of death, but are still to be included as part of the gross estate of the
be the value of the shares in the gross estate of Mr. C? decedent.

Answer: Total outstanding shares A. Decedent’s Interest accrued at the date of death
20,000/20 = 100,000 shares
Book value:

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Jaybee de Guzman Pascua Review notes on Taxation
- Value of an interest in property or rights accrued in favor of the decedent on  To settle family disputes; and
or before his death which have been received only after his death  To relieve taxpayer of the burden of management.

Examples: C. Revocable Transfer


 Dividends declared on or before the death of the stockholder, and - these are properties transferred with retention or reservation of rights over
receive by the estate after said stockholder’s death the property by the donor or the transferor while he still lives.
 Partnership’s profits earned prior to death of the partner received
by the estate after the partner’s death. - the donor or the transferor has reserved the power to alter, amend, and
 Accrued interest and rents on or before the time of death but revoke the donation or the transfer while he still lives.
collected until after
D. Property passing under General Power of Appointment
B. Transfers in Contemplation of Death - It is the right to designate by will or deed the persons who are to receive
- these are properties not physically available in the estate at the time of death certain properties from the estate of a prior decedent.
because the decedent transferred them during his lifetime in anticipation of
his death. - As a RULE, it is a GENERAL POWER OF APPOINTMENT. The property
subject to the power shall be included in the gross estate because in
- Purpose is to PREVENT EVASION from estate tax liability by the use of substance he owns the property.
other forms of conveyances rather than by succession.
Example:
- The executor should attempt to show that the deceased was of sound mind P transferred property to Q with a provision that should Q transfer the
and in good health at the time of making the gift. property. It may be in favor of anybody. SO, if Q will transfer to R, the value
of the property should be included in the GROSS ESTATE of Q.
- But if the sale is for an adequate and full consideration, law provides that
there is NO transfer in contemplation of death since it is now a bona fide - BUT, if it is a SPECIAL POWER OF APPOINTMENT, the property subject
sale. to the power shall be excluded from the gross estate.

- There is contemplation of death when the following instances present: Example:


 While still living the decedent transferred his property in favor of S transferred property to T with a provision that should T transfer the
another person but the transfer was intended to take effect only property, it must be in favor of U. So, if T will transfer to U, the value of the
upon the former’s death. property should be excluded from the GROSS ESTATE of T.
 By gift intended to take effect at death, or after, or under which the
E. PROCEEDS OF LIFE INSURANCE
donor reserved the income or the right to designate the persons
- life insurance policy taken out by the decedent upon his life and received by
who should enjoy the income.
the following:
 Any transfer of the decedent’s substantial property in nature of a
a. revocable beneficiary
final disposition without adequate and full consideration of death
b. the estate
unless the executors will have to prove that the decedent was
c. its executor or administrator
prompted to make a gift by a motive essentially associated with
shall FORM PART of the taxable gross estate.
life rather than with death.
Note: Life insurance covers all description of insurance related to life,
Motive associated with life are:
including death benefits and accident insurance.
 To see children enjoying the property while the donor lives;
 To save income taxes
- GENERAL RULE: Proceeds of life insurance will form of the taxable gross
 To save personal property taxes
estate and generally taxable.
 To see the family carry on the business in the family name

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Jaybee de Guzman Pascua Review notes on Taxation
- EXCEPTIONS: - SO THAT, such amount can also be claimed as DEDUCTIONS from the GROSS
1. When third person is designated as an irrevocable beneficiary. ESTATE.
2. When the proceeds are from group insurance with heir as beneficiary.
3. When the proceeds are from group insurance with heir as beneficiary.
EXEMPTION/ EXCLUSIONS FROM ESTATE TAX
Note: According to the Insurance Code, the designation is presumed to be
REVOCABLE designation, in case the designation of the beneficiary is not 1. The merger of the usufruct in the owner of the naked title (Sec. 87 [A])
clear or not stated. - The legal right to use and enjoy the benefits and profits of something
belonging to another.
F. TRANSFER FOR INSUFFUCIENT CONSIDERATION
- If disposed for LESS than its adequate and full consideration - Example: LT died and transferred property to children by will. L inherited
the usufruct and T, inherited the naked title. IF L will subsequently die, and
- The value to be included in the gross estate shall be determined by the the usufruct is transferred to T, T will become the absolute owner of the
following rules: property. The transfer therefore is EXEMPTED from ESTATE TAX

1. If the transfer was in the nature of a legitimate sale for an adequate and
2. The transmission or delivery of the inheritance or legacy of the fiduciary heirs or
full consideration in money. NO VALUE SHALL BE INCLUDED in the
legatee to the fideicomissary. (Sec. 87 [B])
Gross Estate.
- Fiduciary – the first heir of the property
2. If the consideration received is less that adequate and full consideration.
The EXCESS OF THE FAIR MARKET VALUE of the property at the
- Fideicommissary – the second heir whose relationship to the fiduciary heir
time of decedent’s death OVER the consideration received shall be
must be one degree of generation such that of a parent and a child.
included in the Gross Estate.
3. IF there was no consideration received on the transfer, the value to be
- Reason for exempting such transfer from estate tax: TO AVOID DOUBLE
included in the Gross Estate shall be the fair market value of the
TAXATION.
property at the time of the decedent’s death.

3. Second Transfer as desired by the predecessor. (Sec. 87 [C])


G. CLAIMS AGAINST INSOLVENT PERSONS
- This transfer from the first heir, legatee, or done in favor of another
- Refer to receivables left by the decedent but the court consequently found
beneficiary, IN ACCORDANCE WITH THE DESIRE OF THE
the related debtor insolvent.
PREDECESSOR.
- Reason for exemption from the estate tax: It has been previously
- SO, the entire amount of collectibles shall be included in the GROSS
subjected to the same tax.
ESTATE.
- Requisites:
- BUT, the claims against insolvent person shall be part of ORDINARY
a. That no part of the net income of which inures to the benefit of
DEDUCTION against the Gross Estate in the determination of the NET
any individual;
TAXABLE ESTATE.
b. That no more than 30% of the said bequests, devises, legacies
or transfers shall be used by such institutions for
H. AMOUNT RECEIVED BY HEIRS UNDER RA 4917, Section 86(7), NIRC
- An act providing that RETIREMENT BENEFITS of employees of private firms shall
administration purposes.
not be subject to attachment, levy, execution or any TAX whatsoever.
4. Exemption under the reciprocity clause. (Sec. 104 [1st par. Last part])
- THEREFORE, the amount received by heirs shall be reported as part of the GROSS - No estate tax shall be imposed with respect to the intangible personal
ESTATE. property situated in the Philippines and owned by a non-resident alien
if the laws of his foreign country allows similar exemption on transfer

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Jaybee de Guzman Pascua Review notes on Taxation
taxes on intangible personal property situated in that foreign country Intangible property xxx xxx
and owned by a Filipino Citizen not residing in the said foreign
country.
Add: ADDITIONS TO THE GROSS ESTATE
5. Capital of the surviving spouse. (Sec. 85 [H])

- The properties belonging to the surviving spouse are not inducted as Transfer in contemplation of death xxx
gross estate of the decedent therefore not subject to estate tax.

- If the decedent is married, his gross estate would consist of his/her


Revocable transfer xxx
exclusive properties and her share in the conjugal properties.

- If the decedent is unmarried, all of his or her resources are exclusive


Transfer under Gen. Power of Appt. xxx
properties.

6. Other exemptions from estate tax under special laws


Proceeds of life insurance policy xxx
- Benefits received by members from the GSIS and the SSS by reason of
death.

Revocable Transfers xxx


- War benefits given by the Philippine Government and the U.S.
Governments due to damages suffered during the last war.

Transfer for insufficient consideration xxx


- Benefits received by beneficiaries residing in the Philippines under laws
administered by the U.S. Veterans Administration.

Claims against insolvent person xxx


- Grants and donations to the Intramuros Administration.

Amount received by heirs under RA 9417 xxx xxx


HOW TO DETERMINE THE GROSS ESTATE OF THE DECEDENT?

(Pro-forma Computation of the Gross Taxable Estate)


TOTAL GROSS ESTATE xxxx

For decedent who was single, widow, widower, or without surviving spouse:

Less : Deductions xxx


PROPERTIES AT THE TIME OF DEATH:

Ordinary deductions xxx


Real or immovable property xxx

Allowable deductions xxx


Tangible personal property xxx

Special deductions xxx xxx

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Jaybee de Guzman Pascua Review notes on Taxation
NET TAXABLE ESTATE xxxx Amount received by heirs under RA 9417 xxx xxx

TOTAL GROSS ESTATE xxxx

For MARRIED decedent


Less : Deductions xxx
PROPERTIES AT THE TIME OF DEATH:

Ordinary deductions xxx


Real or immovable property xxx

Allowable deductions xxx


Tangible personal property xxx

Special deductions xxx xxx


Intangible property xxx xxx

NET TAXABLE ESTATE xxxx


Add: ADDITIONS TO THE GROSS ESTATE

Less: ½ share of the Surviving Spouse xxxx


Transfer in contemplation of death xxx

NET TAXABLE ESTATE XXXX


Revocable transfer xxx

Transfer under Gen. Power of Appt. xxx Note: Share of the surviving spouse is 50% of the conjugal property after
deductions.

Proceeds of life insurance policy xxx

DEDUCTIONS FROM THE GROSS ESTATE


Revocable Transfers xxx
- Items which the law on estate tax permits to be subtracted from the value of
the gross estate in order to arrive at the net taxable estate.
Transfer for insufficient consideration xxx
- So, there must be a specific provision of the stature authorizing such
deduction.
Claims against insolvent person xxx
- Deductions, whether ordinary deductions, allowable deductions and other
allowable deductions CAN ONLY BE CLAIMED BY THE ESTATE OF:

1. CITIZEN (resident or non-resident) and

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Jaybee de Guzman Pascua Review notes on Taxation
2. RESIDENT ALIEN
Allowed Deduction = Ordinary deductions x Philippine Gross Estate
- As a rule: Deductions from the Gross Estate are presumed to be conjugal Entire Gross Estate
deductions.
- ALLOWABLE DEDUCTIONS FOR NON-RESIDENT ALIEN
Exception: When it is specifically identified as exclusive deduction.
1. Transfer for public purpose
2. Vanishing deductions
ORDINARY DEDUCTIONS 3. Share in the conjugal property (if married decedent)

- As provided for by law, consist of EXPENSES, LOSSES, INDEBTEDNESS,


TAXES and ETCETERA, (ELITE) as follows: RULES IN DEDUCTIONS FROM GROSS ESTATE

1. Funeral Expenses FUNERAL EXPENSES


2. Judicial Expenses
3. Claims against the estate - The amount allowed as deductible funereal expense from gross estate is
4. Claims against Insolvent Persons EQUAL TO THE ACTUAL EXPENSES INCURRED or 5% of the GROSS
5. Unpaid mortgage ESTATE whichever is LOWER, nut in no case to exceed P200,000.00.
6. Unpaid taxes
7. Losses - Receipts or invoices or other pieces of evidence must duly support the
8. Transfer for public use funeral expenses.

ALLOWABLE DEDUCTIONS - Only those actually paid out of the estate before interment must be included
- Are deductions that are still allowed by law and are enumerated as follows: in as funeral expenses.

1. Medical Expenses - Those expenses contributed by relatives and friends must not be included.
2. Vanishing Deductions or property previously taxed.
3. Standard Deductions P1,000,000.00 (always deduct) Examples – Funeral Expenses
4. Amount received by heirs under AR No. 4917 1. Actual expenses P 210,000.00
Gross Estate P 4,200,000.00 x 5%
- As provided for by law, other allowable deductions/special deductions are Deductible Funeral Expenses is P 200,000.00
as follows:
1. Share in the conjugal property (applicable only to married 2. Actual expenses P 185,000.00
decedents) Gross Estate P 3,000,000.00 x 5%
Deductible Funeral Expenses is P 150,000.00
2. Value of the Family Home
3. Actual expenses P 250,000.00
IF THE DECEDENT IS A NON-RESIDENT Gross Estate P 5,000,000.00 x 5%
Deductible Funeral Expenses is P 200,000.00
- General Rule: No ORDINARY DEDUCTIONS are allowed
MEDICAL EXPENSES
- Except: If properties NOT situated in the Philippines were included in the
GROSS ESTATE. So, the amount of deduction is limited only to its - Medical expenses should be incurred by the decedent WITHIN ONE YEAR
proportionate part based on the value of property situated in the PRIOR to his death which shall be duly substantiated with receipts. The
Philippines. maximum amount allowable is P500,000.00.

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Jaybee de Guzman Pascua Review notes on Taxation
Example: - If the decedent is married, the standard deduction of P1,000,000.00 shall be
deducted first from the decedent’s gross conjugal estate before the share of
Decedent prior to his death on November 2009 was hospitalized for the the surviving spouse.
following period:
- Any amount absorbed by the gross conjugal estate will be deducted from the
January to June 2008 P 250,000 decedent’s exclusive estate.

August to September 2008 P 85,000 FAMILY HOME

- Amount equivalent to the current fair market value or zonal value of the
December 2008 to March 2009 P 150,000 decedent’s family home, which shall not exceed P1,000,000.00

If single/head of the family Up to P1,000,000.00


Medical Expenses P 150,000

50% of the value or


If married and family home is conjugal property
up to P 500,000.00

If married and family home is exclusive property Up to P1,000,000.00


BAR QUESTION
QUESTION:

On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his
doctors, nurses, and others who attended to Y during his last illness. The cost of the
dinner amounted to Php 50,000.00. Compared to his gross estate, the Php 50,000.00 did
VANISHING DEDUCTIONS
not exceed five percent of the estate. Is the said cost of the dinner to commemorate his one
year death anniversary deductible from his gross estate? Explain your answer. (5%)
BAR QUESTION
SUGGESTED ANSWER: QUESTION:
No. This expense will not fall under any of the allowable deductions from gross
estate. Whether viewed in the context of either funeral expenses or medical Vanishing deductions in estate-taxation?
expenses, the same will not qualify as a deduction. Funeral expenses may include
medical expenses of the last illness but not expenses incurred after burial nor SUGGESTED ANSWER:
expenses incurred to commemorate the death anniversary. (DeGuzman V. De Vanishing deductions or property previously taxed in estate taxation refers to the
Guzman, 83 SCRA 256). Medical expenses, on the other hand, are allowed only if diminishing deducibility/ exemption, at the rate of 20% over a period of five (5)
incurred by the decedent within one year prior to his death. (Section 86(A)(6), years until it is lost after the fifth year, of any property (situated in the
NIRC). Philippines) forming part of the gross estate, acquired by the decedent from a
prior decedent who died within a period of five (5) years from the decedent's
death.

STANDARD DEDUCTION

- Every decedent is allowed by the law a Standard deduction of P1,000,000.00 - Vanishing deduction or Property Previously taxed
form his/her Gross Estate. This deduction is standard and not optional.

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Jaybee de Guzman Pascua Review notes on Taxation
 Less: Proportionate expenses
Initial basis x expenses xx
 This deduction is a privilege allowed to the estate of the decedent to
Gross estate
provide some relief from the burden of taxation as a result of the
successive transfers by inheritance or donation of the same property  Final Basis xx
within a relatively short period of time. (not exceeding five (5) years).

 Multiply by VD rate xx

- When can a vanishing deductions be claimed


 Amount of vanishing deduction xx

1. The present decedent died within five years form the receipt of the
inheritance or donation;

2. The property on which to claim a vanishing deduction must be - Note on value taken:
located in the Philippines;
 Value taken shall be the amount whichever is lower between the
3. The property must have formed part of the taxable estate of the
value of the property in the gross estate of the prior decedent and
prior decedent, or of the taxable gift of the donor;
value of the gift or value of the same property in the gross estate of
the present decedent.
4. The property for which vanishing deduction is claimed cab ne
identified as having been received by the decedent form donor as
gift or from such prior decedent by gift, bequest, devise, or
- Note on expenses:
inheritance, or a property acquired in exchange therefore;
 Expenses for vanishing deduction purposes do not include family
5. The donor’s tax or estate tax has been finally determined and paid home, medical expenses, standard deduction and amount received
by or in behalf of such donor or the estate of such prior decedent; under RA 4917.

6. No vanishing deduction on the property was allowed to the estate - Illustration


of the prior decedent. Prior decedent: acquisition cost 150,000.00
Upon death, fair market value 500,000.00
Upon death, zonal value 800,000.00
- Pro-forma vanishing deduction computation
Present decedent: upon death, fair market value 750,000.00
Upon death, zonal value 1,250,000.00
 Value taken xx
For vanishing deduction purposes, what is the value taken?
Answer: Value of the property in the
gross estate of prior decedent 800,000
 Less: Paid Mortgage (if any) xx
Value of the property in the
Gross estate of present decedent 1,250,000
 Initial Basis xx

Whichever is lower and the lower amount is 800,000.00

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Jaybee de Guzman Pascua Review notes on Taxation
 Initial Basis 750,000.00
- Vanishing deduction rates:

Period from receipt of property to  Less: Proportionate expenses


Rate (750,000/2,500,00x945,000) P 466,500.00
decedent’s death

 Final Basis
Within 1 year 100%

Beyond 1 year to 2 years 80%  Multiply by VD rate 80%

Beyond 2 year to 3 years 60%  Amount of vanishing deduction P 373,200.00

Beyond 3 year to 4 years 40% 

RATES OF ESTATE TAX


Beyond 4 year to 5 years 20%
TAX TABLE

If net taxable Estate is: Estate tax is:

- Illustration:

 Part of the gross estate of the decedent is a parcel of land with present Not over P200,000.00 0%
fair market value of P1,000,000.00. The decedent received this 2 years
ago from his father as inheritance. At the date when it was inherited,
the fair market value was P800,000.00 with a mortgage of P50,000.00 Over 200,000 but not over 500,000 P 0 + 5% of the excess over P200,000
which was paid by the decedent. The Gross Estate of the decedent is
P2,500,000.00 and the following deductions are being claimed from
the Gross Estate: Over 500,000 but not over 2,000,000 P 15,000 + 8% of the excess over P500,000
Funeral expenses P150,000.00
Judicial expenses 20,000.00
Medical expenses paid 570,000.00 Over 2,000,000 but not over 5,000,000 P 135,000 + 11% of the excess over P2,000,000
Transfer for public use 300,000.00
 Solution:
 Value taken 800,000.00 Over 5,000,000 but not over 10,000,000 P 465,000 + 15% of the excess over P5,000,000

 Less: Paid Mortgage P 50,000.00 Over 10,000,00 P 1,215,000 + 20% of the excess over P10,000,000

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Jaybee de Guzman Pascua Review notes on Taxation
5. TIME OF PAYMENT (Sec. 91)

PROCEDURES FOR THE SETTLEMENT OF THE ESTATE TAX - It shall be paid at the time the return is filed by the Administrator and
Executor or the Heirs.
1. NOTICE OF DEATH TO BE FILED (Sec. 89) Extension of time for payment is allowed:
- all cases of transfers subject to tax, or 1) If the estate is settled through the courts, not to exceed five
- where, though exempt from tax, the gross value of the estate exceeds (5) years
Twenty thousand pesos (P20,000) or; 2) If the estate is settled extrajuicially, not to exceed two (2)
- If the property left by the decedent is a land or real property, regardless of years
value BUT IF THERE IS NEGLIGENCE IN THE ASSESMENT, NO
EXTENISION CAN BE GRANTED.
WRITTEN NOTICE TO BE FILED within two (2) months after the
decedent's death, or within a like period after qualifying as such
executor or administrator. BAR QUESTION
QUESTION:
2. FILING OF ESTATE TAX RETURN (Sec. 90)
- In all cases of death where the estate is NOT TAX exempt from tax or Remedios, a resident citizen, died on November 10, 2006. She died leaving three
condominium units in Quezon City valued at P5 million each. Rodolfo was her only heir.
- Through tax exempt, gross valued of the estate exceeds Two hundred He reported her death on December 5, 2006 and filed the esate tax, he asked the
thousand pesos (P200,000), or Commissioner of internal revenue to give him one (1) year to pay the estate tax due. The
- If the property left by the decedent is land or real property, regardless of commissioner approved the request for extension of time provided that the estate tax be
value computed on the basis of the value of the property at the time of payment of the tax ? (3%)
- MUST FILE A ESTATE TAX RETURN. IF the Estate Tax Return shows a
a) Does the Commissioner of Internal revenue have the power to extend the
gross value of P2,000,000.00 it shall be supported by a statement duly payment of estate tax? If so, what are the requirements to allow such
certified by a Certified Public Accountant regarding the itemized assets extension?
and deductions as well as the tax due of the decedent. b) Does the condition that the basis of the estate tax will be the value at the time
of the payment have legal basis? Reason briefly.
3. TIME OF FILING OF ESTATE TAX RETURN (Sec. 90)
- estate tax return shall be filed within six (6) months from the decedent's SUGGESTED ANSWER:
death.
- Reasonable extension of time of 30 days is allowed by the BIR in some
meritorious cases.

4. PLACE OF FILING OF ESTATE TAX RETURN (Sec. 90) 6. LIABILITY FOR PAYMENT (Sec. 91)
- except in cases where the Commissioner otherwise permits, the return - The estate tax shall be paid by the executor or administrator, or any
shall be filed with: person in actual or constructive possession of any property of the
a. authorized agent bank, or Revenue District Officer, Collection decedent before delivery to any beneficiary of his distributive share of the
Officer, or estate.
b. duly authorized Treasurer of the city or municipality in which the
decedent was domiciled at the time of his death 7. DISCHARGED OF EXECUTOR or ADMINISTRATOR FROM PERSONAL
c. or if there be no legal residence in the Philippines, with the Office LIABILITY (Sec. 92)
of the Commissioner - Notice from the BIR as to the amount of the Estate Tax to be paod must be
paid by the persons primarily liable to pay Estate Tax, the Executor AND
Administrator.

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Jaybee de Guzman Pascua Review notes on Taxation
- After which they shall be discharged from personal liability.

8. SURCHARGES, INTERES and PENALTIES


- It will be imposed in the event of violation of the law, criminal penalties
and Civil Liabilities.
-

BAR QUESTION
QUESTION:

Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack
while on a business trip to the USA. He died intestate on June 15, 2000 in New
York City, leaving behind real properties situated in New York; his family home
in Valle Verde, Pasig City; an office condominium in Makati City; shares of
stocks in San Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at the time
of his death. As the sole heir and appointed Administrator, how would you
determine the gross estate of the decedent? What deductions may be claimed by
the estate and when and where shall the return be filed and estate tax paid?
(3%)

SUGGESTED ANSWER:
The gross estate shall be determined by including the value at the time of his
death all of the properties mentioned, to the extent of the interest he had at the
time of his death because he is a Filipino citizen. [Sec. 85 (A), NIRC of 1997]

With respect to the life insurance proceeds, the amount includible in the gross
estate for Philippine tax purposes would be to the extent of the amount receivable
by the estate of the deceased, his executor, or administrator, under policies taken
out by decedent upon his own life, irrespective of whether or not the insured
retained the power of revocation, or to the extent of the amount receivable by any
beneficiary designated in the policy of insurance, except when it is expressly
stipulated that the designation of the beneficiary is irrevocable. [Sec. 85 (E) NIRC
of
1997]

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Jaybee de Guzman Pascua Review notes on Taxation
BUSINESS TAXES BAR QUESTIONS
State whether the following transactions are
a)VAT Exempt;
b) subject to VAT at 10%; or
WHAT IS BUSINESS?
c) subject to VAT at 0%:
1. Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece
- Business or in the course of trade or business means the regular conduct or Martirez.
pursuit of a commercial or economic activity including transactions incidental 2. Services rendered by Jake's Construction Company, a contractor to the World
thereto by any person or government entity. Health Organization in the renovation of its offices in Manila.
3. Sale of tractors and other agricultural implements by Bungkal Incorporated to
REQUISITES OF BUSINESS TO BE SUBJECTED TO BUSINESS TAX: local farmers.
4. Sale of RTW by Cely's Boutique, a Filipino dress designer, in her dress shop and
other outlets.
1. The activity should be a commercial or economic activity, but exceptions (not 5. Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity
economic activity but there is a business tax) like: operating a student dormitory (monthly fee PI,500). [1%]

a. an importation of goods for personal use is subject to the value-added SUGGESTED ANSWER:
tax. VAT is a business tax. 1. VAT exempt. Sale of agricultural products, such as fresh vegetables, in
b. An overseas communication, even if not related to business, is subject to their original state, of a kind generally used as, or producing foods for
human consumption is exempt from VAT. (Section 109(c), NIRC).
the percentage tax called Overseas Communications Tax. Percentage tax
2. VAT at 0%. Since Jake's Construction Company has rendered services to
is a business tax. the World Health Organization, which is an entity exempted from
taxation under international agreements to which the Philippines is a
A commercial or economic activity is an activity where the purpose is Profit signatory, the supply of services is subject to zero percent (0%) rate. (Sec.
or Income. 108[B1(3), NIRC).
3. VAT at 10%. Tractors and other agricultural implements fall under the
2. There should be regularity in the activity, but with exceptions (not regular definition of goods which include all tangible objects which are capable of
activity but there is a business tax) like: pecuniary estimation (Sec. 106[A1(1), NIRC, the sales of which are subject
to VAT at 10%.
4. This is subject to VAT at 10%. This transaction also falls under the
a. a services rendered in the Philippines by non-resident foreign persons definition of goods which include all tangible objects which are capable of
shall be considered as being rendered in the course of trade or business. pecuniary estimation (Sec. 106[A1(1), NIRC, the sales of which are subject
b. Isolated transactions may be subjected to VAT or percentage tax. to VAT at 10%.
5. VAT Exempt. The monthly fee paid by each student falls under the lease
A regular activity is an activity involving more than one isolated transaction. of residential units with a monthly rental per unit not exceeding Php
It requires repetition and continuity of action. 8,000, which Is exempt from VAT regardless of the amount of aggregate
rentals received by the lessor during the year. (Sec. 109(x), NIRC). The
term unit shall mean per person in the case of dormitories, boarding
THREE (3) MAJOR BUSINESS TAXES IN THE NIRC
houses and bed spaces (Sec. 4.103-1, RRNo. 7-95).

1. Value-Added Tax COMMENT: The problems do not call for a yes or no answer. Accordingly, a bar
2. Percentage Tax or General Consumption Tax candidate who answered only VAT exempt. VAT at 10% or VAT at 0%. as called
3. Excise Tax for in the problem without further reasons, should be given full credit.

BUSINESSES THAT ARE EXEMPTED FROM VAT OT PERCENTAGE TAXES


(regardless of annual gross sales or receipts)
As provided by the Section 109, NIRC

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Jaybee de Guzman Pascua Review notes on Taxation
(K) Transactions which are exempt under international agreements to which the
(A) Sale or importation of agricultural and marine food products in their original state, Philippines is a signatory or under special laws, except those under Presidential
livestock and poultry of a kind generally used as, or yielding or producing foods for
Decree No. 529;
human consumption; and breeding stock and genetic materials therefor.
(L) Sales by agricultural cooperatives duly registered with the Cooperative
Products classified under this paragraph shall be considered in their original state even
Development Authority to their members as well as sale of their produce, whether
if they have undergone the simple processes of preparation or preservation for the
in its original state or processed form, to non-members; their importation of direct
market, such as freezing, drying, salting, broiling, roasting, smoking or
farm inputs, machineries and equipment, including spare parts thereof, to be used
stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses,
directly and exclusively in the production and/or processing of their produce;
ordinary salt, and copra shall be considered in their original state;
(M) Gross receipts from lending activities by credit or multi-purpose cooperatives
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn,
duly registered with the Cooperative Development Authority;
livestock and poultry feeds, including ingredients, whether locally produced or
imported, used in the manufacture of finished feeds (except specialty feeds for race
(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly
horses, fighting cocks, aquarium fish, zoo animals and other animals generally
registered with the Cooperative Development Authority: Provided, That the share
considered as pets);
capital contribution of each member does not exceed Fifteen thousand pesos (P
15,000) and regardless of the aggregate capital and net surplus ratably distributed
(C) Importation of personal and household effects belonging to the residents of the
among the members;
Philippines returning from abroad and nonresident citizens coming to resettle in the
Philippines: Provided, That such goods are exempt from customs duties under the Tariff
(O) Export sales by persons who are not VAT-registered;
and Customs Code of the Philippines;
(P ) Sale of real properties not primarily held for sale to customers or held for lease
(D) Importation of professional instruments and implements, wearing apparel, domestic
in the ordinary course of trade or business, or real property utilized for low-cost
animals, and personal household effects (except any vehicle, vessel, aircraft, machinery,
and socialized housing as defined by Republic Act No. 7279, otherwise known as
other goods for use in the manufacture and merchandise of any kind in commercial
the Urban Development and Housing Act of 1992, and other related laws, residential
quantity) belonging to persons coming to settle in the Philippines, for their own use and
lot valued at P1,919,500 and below, house and lot, and other residential dwellings
not for sale, barter or exchange, accompanying such persons, or arriving within ninety
valued at Two million five hundred thousand pesos (P 3,199,200) and
(90) days before or after their arrival, upon the production of evidence satisfactory to the
below: Provided, That not later than January 31, 2012 and every three (3) years
Commissioner, that such persons are actually coming to settle in the Philippines and that
thereafter, the amounts herein stated shall be adjusted to their present values using
the change of residence is bona fide;
the Consumer Price Index, as published by the National Statistics Office (NSO);
(E) Services subject to percentage tax;
(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand
pesos (P 12,800) Provided, That not later than January 31, 2009 and every three (3)
(F) Services by agricultural contract growers and milling for others of palay into rice,
years thereafter, the amount herein stated shall be adjusted to its present value
corn into grits and sugar cane into raw sugar;
using the Consumer Price Index as published by the National Statistics Office
(NSO);
(G) Medical, dental, hospital and veterinary services except those rendered by
professionals;
(R) Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed prices
(H) Educational services rendered by private educational institutions, duly
for subscription and sale and which is not devoted principally to the publication of
accredited by the DEPED, the CHED, the TESDA and those rendered by
paid advertisements;
government educational institutions;
(S) Sale, importation or lease of passenger or cargo vessels and aircraft, including
(I) Services rendered by individuals pursuant to an employer-employee
engine, equipment and spare parts thereof for domestic or international transport
relationship;
operations;
(J) Services rendered by regional or area headquarters established in the Philippines
(T) Importation of fuel, goods and supplies by persons engaged in international
by multinational corporations which act as supervisory, communications and
shipping or air transport operations;
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income from the Philippines;

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Jaybee de Guzman Pascua Review notes on Taxation
(U) Services of banks, non-bank financial intermediaries performing quasi-banking
 Fermented Liquors  Mineral products
functions, and other non-bank financial intermediaries; and

(V) Sale or lease of goods or properties or the performance of services other than
the transactions mentioned in the preceding paragraphs, the gross annual sales  Tobacco Products  Non-essential goods
and/or receipts do not exceed the amount of P 1,919,500: Provided, That not later
than January 31, 2009 and every three (3) years thereafter, the amount herein stated
shall be adjusted to its present value using the Consumer Price Index as published  Cigars  Cigarretes
by the National Statistics Office (NSO);

(2) A VAT-registered person may elect that Subsection (1) not apply to its sale of
goods or properties or services: Provided, That an election made under this
Subsection shall be irrevocable for a period of three (3) years from the quarter the
election was made.

BAR QUESTION
RULES IN BUSINESS TAXES
What are the characteristics of the Value-Added Tax?
- Businesses NOT expressly mentioned in Letter A to U of Section 109 of SUGGESTED ANSWER:
NIRC which have gross sales not exceeding One Million Five Hundred The value-added tax is an indirect tax and the amount of tax may be shifted or
Thousand Pesos (P1,500,000.00) shall be: passed on to the buyer, transferee or lessee of the goods, properties or services.

 exempt from the value added tax, BUT……subject to the 3% ALTERNATIVE ANSWER:
percentage tax, EXCEPT if:
The value-added tax has the following characteristics: 1) It is an indirect tax
where tax shifting is always presumed: 2) It is consumption-based; 3) It is
a. a different percentage applies imposed on the value-added in each stage of distribution; 4) It is a credit-invoice
b. taxpayer opted to be a value-added tax payer. method value-added tax; and 5) It is not a cascading tax.

- Manufacturers or importers who are subject to the excise taxes also pays
either:
a. Value added tax; or
b. The 3% percentage tax NATURE AND CHARACTERISTICS OF THE VALUED ADDED TAX

- Excise Taxes are imposed on: 1. Value added tax is a tax on consumption

1. manufacturers; or 2. Levied on the sale, barter exchange or lease of goods or properties and
2. Importers of any of the following categories of goods or articles: services in the Philippine and the importation of goods into the Philippines

3. Seller is the one statutorily liable for the payment of tax, but the amount of
 Distilled spirits  Automotive
tax may be shifted or passed on to the buyer, transferee or lessee of the
goods or properties or services.

 Wine  Manufactured fuel oils


REVENUE REGULATION NO. 7-2010

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Jaybee de Guzman Pascua Review notes on Taxation
Implementing the Tax Privileges Provisions of Republic Act No. 9994, Otherwise SEC. 4. Privileges for the Senior Citizens
Known as the "Expanded Senior Citizens Act of 2010", and Prescribing the Guidelines
for the Availment Thereof The senior citizens shall be entitled to the following:

Income tax exemption of Senior Citizen: a. the grant of twenty percent (20%) discount and exemption from the value -
added tax (VAT), if applicable, on the sale of the following goods and services
1. The value-added tax exemption privileges granted to VAT-registered from all establishments, for the exclusive use and enjoyment or availment of
taxpayers selling goods and services identified in the Act to Senior Citizens; the senior Citizen
2. The tax privileges granted to establishments giving discount on their sale of
goods and services to Senior Citizens; 1. on the purchase of medicines, including the purchase of influenza and
3. The tax implication of taking care and supporting senior citizens by their pnuemococcal vaccines, and such other essential medical supplies,accessories and
benefactors; and, equipment to be determined by the Department of Health (DOH).
4. The tax privileges granted to private entities who engage Senior Citizens as
2. on the professional fees of attending physician/s in all private hospitals, medical
their employees. facilities, outpatient clinics and home health care services;

Will not extend to: 3. on the professional fees of licensed professional health providing home health care
- 20% final withholding tax on interest income services as endorsed by private hospitals or employed through home health care
- 7.5% final withholding tax on interest income employment agencies;

The availment of the income tax exemption of Senior Citizens - 4. on medical and dental services, diagnostic and laboratory fees in all private
hospitals, medical facilities, outpatient clinics, and home health care services, in
accordance with the rules and regulations to be issued by the DOH, in coordination
- A Senior who is a minimum wage earner, or whose taxable income during
with the Philippine Health Insurance Corporation (PhilHealth);
the year does not exceed his personal exemptions, will be exempt from
income tax upon compliance. 5. in actual fare for land transportation travel in public utility buses (PUBs), public
utility jeepneys (PUJs), taxis, Asian utility vehicles (AUVs), shuttle services and
- A Benefactor of a Senior Citizen shall be entitled to claim the basic personal public railways, including Light Rail Transit (LRT), Mass Rail Transit (MRT), and
exemption of P50,000 Philippine National Railways (PNR);

6. in actual transportation fare for domestic air transport services and sea shipping
- Will not entitle 25,000 Pesos
vessels and the like, based on the actual fare and advanced booking;

- Additional Deduction from Gross Income of Private Establishments for 7. on the utilization of services in hotels and similar lodging establishments,
Compensation Paid to Senior Citizens, Private Establishments employing restaurants and recreation centers;
Senior Citizens shall be entitled to additional deduction from their gross
income equivalent to 15% of the total amount paid as salaries and wages to 8. on admission fees charged by theaters, cinema houses and concert halls, circuses,
Senior Citizens subject to the provisions. leisure and amusement; and

9. on funeral and burial services for the death of senior citizens;


REVENUE MEMORANDUM CIRCULAR NO. 7-2010
b. exemption from the payment of individual income taxes of senior citizens
who are considered to be minimum wage earners in accordance with Republic
Circularizing Sections 4 and 5 of Republic Act No. 9994, An Act Granting Additional
Act No. 9504;
Benefits and Privileges to Senior Citizens, Further Amending Republic Act No. 7432,
as amended, otherwise known as “An Act to Maximize the Contribution of Senior
c. the grant of a minimum of five percent (5%) discount relative to the monthly
Citizens to Nation Building, Grant Benefits and Special Privileges and For Other
utilization of water and electricity supplied by the public utilities: Provided,
Purposes.
That the individual meters for the foregoing utilities are registered in the name

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Jaybee de Guzman Pascua Review notes on Taxation
of the senior citizen residing therein: Provided, further, That the monthly
consumption does not exceed one hundred kilowatt hours (100 kWh) of
electricity and thirty cubic meters (30 m3) of water: Provided, furthermore,
That the privilege is granted per household regardless of the number of senior
citizens residing therein;

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Jaybee de Guzman Pascua Review notes on Taxation
VALUE ADDED TAX
b. Optional Registration
- Any person who is not required to register as a VAT taxpayer because
BAR QUESTION
his sales in a 12 month period shall not exceed P 1,919,500.00, may
QUESTION: register for the Value Added Tax.
Who are liable for the payment of Value-Added Tax?

SUGGESTED ANSWER: INVOICES AND RECEIPTS


Any person who:
a. sells, barters or exchanges goods or properties in the course of - A taxpayer who is in business should have his invoices and receipts
trade or business; or registered with the BIR.
b. sells services in the course of trade or business; or - If the taxpayer is a VAT taxpayer the invoices and receipts shall clearly show
c. imports goods, whether or not in the course of trade or that he is a VAT taxpayer.
business.
BAR QUESTION
QUESTION:
What is the basis of the Value-Added Tax on taxable sales of real property?

WHO ARE LIABLE FOR THE PAYMENT OF VALUE-ADDED TAX? SUGGESTED ANSWER:
The basis of the Value-Added Tax on taxable sale of real property is "GROSS
Any person who: SELLING PRICE" which is either selling price stated in the sale document or the
a. sells, barters or exchanges goods or properties in the course of trade or "Zonal Value", whichever is higher. In the absence of zonal values, the gross
business; or selling price shall refer to the market value as shown in the latest tax declaration
b. sells services in the course of trade or business; or or the consideration, whichever is higher.
c. imports goods, whether or not in the course of trade or business.

REGISTRATION OF BUSINESS VALUE-ADDED TAX ON SALE OF GOODS and PROPERTIES


(Sec. 106(1) [a to e])
- Every taxpayer subject to the Value Added Tax must register with the
Bureau of Internal Revenue as a VAT taxpayer. Tax Base – Gross Selling Price (Sec. 106 (1) [par. 2])
- Pay the annual registration fee of P500.oo for every separate and distinct
establishment, including facility types (sales outlet, places production, Tax Rates
warehouses and storage places) where the business is conducted. a. 12% of the gross selling price
- For VAT-exempt persons they must also register as non- VAT taxpayers b. Zero percent (0%) of the gross selling price if:
1. Export Sale – Sec. 106 (2)[a])
2. Foreign Currency Denominated Sale (Sec. 106 (2)[b])
REGISTRATION FOR VALUE ADDED TAX 3. Sales to persons or entities whose exemption under special laws or
international agreements to which the Phil. is signatory effectively
Either: subject to zero rate. (Sec. 106 (2)[c])
a. Mandatory Registration -Section 236 (G); or
- When the business gross sales or receipts for the past 12 months, other Formula:
those exempt under Section 109 of NIRC letter A to U, have
EXCEEDED P 1,919,500.00 Tax Base x Tax Rates
- When there are reasonable grounds to believe that his gross sales or
receipts for the next 12 month will exceed P 1,919,500.00

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Jaybee de Guzman Pascua Review notes on Taxation
Gross Selling Price 12% or 0% VALUE-ADDED TAX ON IMPORTATION OF GOODS

- All importation of goods in the Philippines are subject to VAT, even if such
goods are not intended to be sold or used for business activities……
= Vat Output/Output Tax
..EXCEPT those mentioned under Section 109 of NIRC.

Tax Base and Tax Rate – Section 107A, NIRC


BAR QUESTION
QUESTION: the value used by the Bureau of Customs in determining
Under the Value Added tax (VAT), the tax is imposed on sales, barter, or exchange of tariff and customs duties plus customs duties, excise taxes,
goods and services. The VAT is also imposed on certain transactions "deemed-sales".
What are these so called transactions "deemed sales'?
if any, and other charges, such tax to be paid by the 12%
importer prior to the release of such goods from customs
SUGGESTED ANSWER: custody

The following transactions shall be deemed sale: = VAT Output/Output Tax


a. consumption of inventory; Section 110 (A)[3](b 3rd paragraph)
b. Distribution to stockholders;
c. Distribution to Creditors;
Consignment of goods; and
d. Retirement from or cessation of business Transfer of Goods by Tax-Exempt Persons (in cases of Tax-Free Importation)

- Sale or exchange of tax-free goods to non-exempt person in the Philippines is


taxable with Internal Revenue Taxes against the purchase, transferee or
Transactions Deemed Sale recipient who shall be considered as importer thereof. (Sec. 107B, NIRC)

1. consumption of inventory; VALUE-ADDED TAX ON SALE OF SERVICES AND USE OR LEASE OF


- Goods originally intended for sale, but used or consumed for personal use by the PROPERTIES (SEC. 108,NIRC)
taxpayer is considered deemed sales. (Sec. 106B (1), NIRC)
Requirements for Value-Added Taxability of Service Transactions
2. Distribution to stockholders;
- Transfer of inventory to shareholders as share in the profits of a VAT-registered 1. The service must be reformed or is to be performed in the course of
person is considered as transactions deemed sale. (Sec. 106B (2), NIRC)
business in the Philippines.
3. Distribution to Creditors; 2. The service is rendered for valuable consideration actually or
- Transfer of inventory in payment of debts constitute transactions deemed sale. (Sec. constructively received.
106B, NIRC) 3. The service rendered is not exempt from VAT under the Tax Code,
other special laws or international.
4. Consignment of goods; and
- Consignment of goods is considered transaction deemed sales if actual sale is not Tax Base – Gross Receipts (Sec. 108 (A) [last par])
made within 60 days following the date such goods were consigned.
Tax Rates
5. Retirement from or cessation of business
a. 12% of the gross receipts
- The merchandise inventory left at the retirement of business is deemed sold
for VAT purposes.
b. Zero percent (0%) of the gross receipts on the following sale or exchange of
services:

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1. Processing, manufacturing or repacking goods for other persons doing Vat on Professional Fees
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted - as a rule, earnings from a practice of profession (including services rendered
for in accordance with the rules and regulations of the Bangko Sentral ng by factors of medicine and lawyers) will be subject to a 12% VAT if:
Pilipinas (BSP;
a. the professional is a VAT-registered person, or
2. Services other than those mentioned in the preceding paragraph rendered to b. Not VAT-registered but his total gross receipts exceed P1,919,500.00
a person engaged in business conducted outside the Philippines or to a per year (RA 9337)
nonresident person not engaged in business who is outside the Philippines
when the services are performed, the consideration for which is paid for in Formula:
acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP); Tax Base x Tax Rates

3. Services rendered to persons or entities whose exemption under special laws Gross Receipts 12% or 0%
or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;
= Vat Output/Output Tax
4. Services rendered to persons engaged in international shipping or Section 110 (A)[3[(b,3rd par.)
international air transport operations, including leases of property for use
thereof;
TAX CREDITS
5. Services performed by subcontractors and/or contractors in processing,
- CREDITABLE INPUT TAX or VAT INPUT (Sec. 110 (A)[3] (b, 2nd
converting, of manufacturing goods for an enterprise whose export sales
paragraph)
exceed seventy percent (70%) of total annual production;
WHAT ARE THE INPUT TAXES?
6. Transport of passengers and cargo by air or sea vessels from the Philippines
- Input Taxes are the value added taxes paid on local purchases and importation
to a foreign country; and
of goods FOR:
7. Sale of power or fuel generated through renewable sources of energy such
1. Sale
as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean
2. Conversion into or intended to form part of a finished product sale,
energy, and other emerging energy sources using technologies such as fuel
including packaging materials
cells and hydrogen fuels.
3. Use as supplies
4. Use in trade or business, for which depreciation or amortization is
NOTE: all kinds of services performed in the Philippines are subject to VAT at rate if 12%,
except those which are classified and qualified as Zero-rated or VAT exempt transactions. allowed for income tax purposes except automobiles aircrafts and
(Section 108, NIRC) yachts.
5. Purchases of real property;
Common Carriers by Air or Sea 6. Purchases of services;
7. Presumptive input tax;
- Common carriers by air and sea relative to the transport of passengers and 8. Transitional Input tax.
cargoes within the Philippines is subject to 12% VAT
- BUT in Section 108 (B) (6), as added by R.A. No. 9337 - transport of Formula
passengers and cargo by air or sea vessels from the Philippines to a foreign
country shall be subject to zero (0%) rate. Tax Base x Tax Rates

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Gross Receipts 12% or 0%
TOTAL AMOUNT IN THE INVOICE P 120,000.00

= Vat Output/Output Tax


Section 110 (A)[3[(b,3rd par.) PROBLEM: CREDITABLE INPUT TAX or VAT INPUT

Mr. DEE LAH TAH purchases sardines from fisherman and processes them into
canned sardines called – BUBOY SARDINES. Going processing in a certain taxable
period were the following purchases value added tax not included:
WHAT IS PRESUMPTIVE INPUT TAX?
Fish from fisherman P100,000.00
- Persons or firms engaged in processing sardines, mackerel and milk and in Tin cans P 20,000.00
manufacturing refined sugar and cooking oil and pack noodle-based instant Tomato paste in cans P 5,000.00
meals shall be allowed a PRESUMPTIVE INPUT TAX equivalent to FOUR Olive oil in plastic bottles P 2,500.00
(4%) percent of the goods value in money of their purchases of PRIMARY Pepper from farmers P 1,800.00
AGRICULTURAL PRODUCTS which are used as inputs to their production. Paper labels from printers P 500.00
Sales during the period, value added tax not included, amounted to P400,000.00
WHAT IS A TRANSITIONAL INPUT TAX? Determine the VAT Output or Output Tax
Determine the VAT Input or Input Tax
- A taxpayer not subject to the VAT becomes SUBJECT to the VAT because: Output Tax (400,000 x 12%) P48,000.00
 The gross sales of the preceding year exceeded P1,919,500.00; or
 The taxpayer being exempt from the VAT system, he was qualified, Input Taxes:
and opted to be registered under the value added tax system. Fish from fisherman (P100,000.00 x 0%) P0
Tin cans (P 20,000.00 x 12%) P 2, 400.00
- Then, he shall be allowed an input tax on his inventory on the transition Tomato paste in cans (P 5,000.00 x 12%) P 600.00
date of goods, material and supplies equivalent to two percent (2%) of the Olive oil in plastic bottles (P 2,500.00 x 12%) P 300.00
inventory value, OR the valued added tax actually paid on it, WHICHEVER Pepper from farmers (P 1,800.00 x 4%) P 72.00
IS HIGHER, excluding goods that are VAT exempt. Paper labels from printers (P 500.00 x 12%) P 60.00
TOTAL INPUT TAXES P 3,432.00
- The inventory on the transition date should be reported to the BIR.

Output tax 48,000.00


THE VALUE ADDED TAX IN THE SALES INVOICE Less Input tax 3,432.00
VAT Payable to BIR P44,568.00
- As a general rule the VALUE-ADDED TAX should be shown as a separate
item in the sales invoice. If the invoice shows only a total the VAT
component on the total shown in the invoice is determined by multiplying RULES IN VALUE ADDED TAX
the total fraction of 12/112.
- An input VAT is usually creditable against an Output VAT if the related
Example: If the total invoice amounting to P120,000.00 VAT included. goods or service from which it arises are used in the conduct of business.

So the VAT is computed as follows: - At the end of any taxable period, if the Output VAT exceeds the Input VAT,
only such excess amount is payable by the taxpayer to the BIR (Section 110
120,000 x 12/112 P 12,857.14 B)
NET AMOUNT (120,000 -12,857.14 ) P 107,142.86

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VAT formula: District Office where he is registered, an application for registration
VAT Output/Output Tax information update in a form prescribed therefor;
Less: VAT Input/Input Tax
VAT Payable to the BIR  Cancellation of Value-Added Tax Registration. – A VAT-registered
person may cancel his registration for VAT if:
- If the Input VAT, inclusive of input tax carried over from the previous
quarter(s) exceeds the Output VAT, the excess Input VAT shall be carried  He makes written application and can demonstrate to the
over to the succeeding quarter or quarters. Commissioner’s satisfaction that his gross sales or receipts for the
following twelve (12) months, other than those that are exempt
Output VAT from sales P100,000 under Section 109 (A) to (U), will not exceed P 1,919,500.00)

 He has ceased to carry on his trade or business, and does not expect
Less: Input VAT from: P60,000 to recommence any trade or business within the next twelve (12)
months.

Purchases 50,000 SECTION 112 (B)(C)


 within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which
Carry-over from last quarter P110,000 may be used in payment of his other internal revenue taxes.

 BIR will grant refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from
the date of submission of complete documents in support of the
application.
Excess Input VAT (P10,000.00)
- MONTHLY DECLARATION AND QUARTERLY REFUND -
SECTION 114 (A)(B)

 Within the 25 days after the end of the quarter, there shall be a
Note: The excess input VAT can be claimed as a VAT credit in the Quarterly VAT return. Payment of VAT shall be made to an authorized
succeeding quarters. agent bank, Revenue Collection Officer or duly authorized city or
- SECTION 112 (A) municipal Treasurer in the Philippines located within the revenue
 Any Input VAT attributable to the zero-rated sales by a VAT-registered district where the taxpayer is registered or required to register.
person may, at his option and WITHIN two (2) years, after the close of
the taxable quarter when the sales were made, be refunded or applied
for a tax credit certificate which may be used in the payment of internal - WITHHOLDING OF VALUE-ADDED TAX - SECTION 114(C)
taxes, except transitional input tax, to the extent that such input tax has
not been applied against output tax.  The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or –controlled corporations
- CANCELLATION OF REGISTRATION AS A VAT TAXPAYER (GOCCs) shall, before making payment on account of each purchase of
goods and services which are subject to the value-added tax imposed in
SECTION 236 (F) Sections 106 and 108 of this Code, deduct and withhold a final value-
 General Rule. – The registration of any person who ceases to be added tax at the rate of five percent (5%) of the gross payment to be
liable to a tax type shall be cancelled upon filing with the Revenue remitted within ten (10) days following the end of the month the
withholding was made. But for lease or use of properties or property

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rights to non-resident owners shall be subject to 12% withholding tax at
the time of payment

- THE COMMISSIONER OF INTERNAL REVENUE HAS THE POWER


SUSPEND THE BUSINESS OPERATIONS OF A TAXPAYER IN THE
FOLLOWING CASES (SECTION 115):

1. Failure to issue receipts or invoices;


2. Failure to file a value-added tax return; or
3. Understatement of taxable sales or receipts by thirty percent (30%)
or more of his correct taxable sales or receipts for the taxable
quarter.

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Jaybee de Guzman Pascua Review notes on Taxation
PERCENTAGE TAX
Take Note of the BUSINESSES THAT ARE EXEMPTED FROM VAT OR
PERCENTAGE TAXES (regardless of annual gross sales or receipts) as
Under Sections 116 to 127 of the NIRC the percentage taxes are: provided for by Section 109 of the NIRC.

a. 3% percentage tax on persons exempt from the value added tax because their B. Percentage Tax on Domestic Carriers;
gross annual sales do not exceed One Million Nine Hundred Nineteen
Thousand Five Hundred (1,919,500.00) Pesos, and who are not required to pay - There are common carrier’s that can be subjected to percentage tax, and
there are also common carriers that can be subjected to VAT.
a percentage tax under any of (b) to (l) below; (Sec. 116)
b. Percentage Tax on Domestic Carriers; (Sec. 117)
- Common Carrier by Land:
c. Percentage Tax on International Carriers; (Sec. 118)
d. Tax on Franchises; (Sec. 119) 1. Transporting of goods or cargoes 12 VAT
e. Overseas communication Tax (Sec. 120)
f. Tax on Banks and Non-banks Financial Intermediaries performing quasi-
banking functions; (Sec. 121) 2. Transporting of passengers 3% Common Carriers Tax

g. Tax on other non-bank financial intermediaries; (Sec. 122)


h. Tax on Life Insurance companies; (Sec. 123)
3. Car for rent or hire driven by the lessee 3% Common Carriers Tax
i. Tax on Agents of Foreign Insurance Companies; (Sec. 124);
j. Amusement Taxes; (Sec. 125)
k. Tax on Winnings; (Sec. 126) 4. Carriers Transportation Contractors including 3% Common Carriers Tax
l. Tax on Stock transactions. (Sec. 127) person who transport passengers for hire.

5. Other domestic carriers by land for transport 3% Common Carriers Tax


of passengers, except owners of animal-drawn
TAX BASE OF PERCENTAGE TAXES two wheeled vehicles

- Percentage taxes are based on gross receipts. 6. Keepers of garage 3% Common Carriers Tax

- Payable by the sellers of the services, except the overseas communications


tax, which is payable by the user of the facilities of the seller.
NOTE: The percentage tax/common carriers tax of 3% is based
- Gross receipts are cash actually or constructively received. Receivables are on quarterly gross receipts.
not yet taxable although an income is already earned thereon.

- There are no deductions from gross receipts, except Sales Returns and - How does one determine the actual gross receipts of a jeepney or taxi on
Allowances and Sales Discounts, to arrive at the taxable gross receipts. which to apply the 3% percentage tax?

Ans: The law provides statutory minimum quarterly gross receipts:


TAX RATES
Quarterly Monthly
A. 3% percentage tax based on gross quarterly sales on persons exempt from
the value added tax because their gross annual sales do not exceed One
Million Nine Hundred Nineteen Thousand Five Hundred (1,919,500.00)
Pesos.

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Jaybee de Guzman Pascua Review notes on Taxation
Jeepney for hire:
Manila and other cities P 2 400 P 800 However, those whose gross receipts did not exceed P10,000,000.00 may opt
Provicial P 1,200 P 400 to registered under the VAT system. But once option is exercised, (as a VAT
registered) the option is IRREVOCABLE (for 3 years).
Public Utility Bus
Not exceeding 30 passengers P 3,600 P 1,200
Exceeding 30 but nit 50 pax P 6,000 P 2,000
E. Overseas communication Tax (Sec. 120)
Exceeding 50 passengers P 7,200 P 2,400
- Amounts received for overseas dispatch message or conversation
Taxis: originating from the Philippines (outgoing message) shall be subjected to a
Manila and other cities P 3,600 P 1,200 percentage tax known as the overseas communications tax.
Provicial P 2,400 P 800

- Tax base – on the amount paid by the user to the provider of the
Car for hire: communication facility
With Chauffeur P 3,000 P 1,000
Without chaffeur P 1,800 P 600
- Tax rate – 10% of the amount paid

- But, the overseas communications tax shall not apply to:

C. Percentage Tax on International Carriers;


1. Government
- International air carriers and International shipping carriers doing business
in the Philippines shall pay a tax equivalent to 3% of their quarterly gross
2. Diplomatic Services
receipts from shipping outgoing from the Philippines.
3. International Organization
D. Tax on Franchises;
4. News Services
- Franchise is law. It authorizes a certain person, natural or juridical persons,
to operate a public utility. Certain franchise grantees are subject to
F. Tax on Banks and Non-banks Financial Intermediaries performing quasi-
percentage tax and also known as franchise tax.
banking functions;
- However, there are also other franchise grantees that shall be subject to the
- Tax Base : Gross receipts sources WITHIN the Philippines.
VAT.
- Tax Rates :
- FRANCHISE TAX IS: On Gross Receipts covered by the law granting the
1. On interest, commission and discounts from lending activities as
franchise:
well as income from financial leasing on the basis of the remaining
1. For radio and/or television broadcasting companies
maturities of instruments from which such receipts were derived:
whose annual gross receipts of the preceding year did not
exceed P10,000,000.00 - 3%
Maturity period is five years or less - 5%
Exceeds 10 million - 12% VAT
Maturity period is more than five years - 1%
2. On gas and water utilities - 2%
2. On dividends and equity share in net income subsidiaries – 0%
- NOTE: On radio and/or television broadcasting company whose annual
gross receipts of the preceding year exceeded P10,000,000.00 shall be
3. On royalties, rentals of property, real or personal, profits from
subject to the VAT.
exchange and all other items treated as gross income under the

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Jaybee de Guzman Pascua Review notes on Taxation
income tax law and on net trading gains on foreign currency, debt resident, if any tax on such premiums is imposed by the foreign
instruments, derivatives and other similar financial instruments – country where the branch is established;
7% 4. Reinsurance premiums, if the insured of personal insurance,
resides outside the Philippines, if any tax on such premiums is
G. Tax on other non-bank financial intermediaries; imposed by the foreign country where the original insurance has
been issued or perfected;
- Tax base : Gross receipts sources WITHIN the Philippines. 5. Portion of the premiums collected or received by the insurance
companies on variable contracts (as defined in section 232(2) of
- Tax Rates : Presidential Decree No. 612), in excess of the amounts necessary to
1. On interest, commission and discounts from lending activities as insure the lives of the variable contract workers.
well as income from financial leasing on the basis of the remaining
maturities of instruments from which such receipts were derived:
I. Tax on Agents of Foreign Insurance Companies;
Maturity period is five years or less - 5%
Maturity period is more than five years - 1% - Every fire, marine or miscellaneous insurance agent authorized under the
Insurance Code to procure policies of insurance as he may have previously
2. On interest, commission and discounts and all other items treated been legally authorized to transact on risks located in the Philippines for
as gross income under the Income tax law - 5% companies not authorized to transact business in the Philippines shall PAY
A TAX EQUAL TO TWICE THE TAX IMPOSED ON LIFE INSURANCE
H. Tax on Life Insurance companies; COMPANIES (Sec. 123) hence, TEN PERCENT (10%).

- Insurance companies may be divided into two classes - BUT an owner of property to apply for and obtain for himself policies in
a. Non-life insurance companies; and foreign companies in cases where said owner does not make use of the
b. Life insurance companies services of any agent, company or corporation residing or doing business in
the Philippines. In all cases where owners of property obtain insurance
Note: Non-life insurance companies are subject to the VAT directly with foreign companies, it shall be the duty of said owners to report
to the Insurance Commissioner and to the Commissioner each case where
Life insurance companies are subject to a PERCENTAGE TAX, insurance has been so effected, and shall pay the tax of five percent (5%) on
called PREMIUM TAX premiums paid.

- Tax Base : Total life insurance premiums collected (gross receipts),whether


in money, notes, credits, or any substitute for money; J. Amusement Taxes;

- Tax Rate : 5% - Amusement tax on admission to theaters, cinematographs, concert halls,


circuses and other places of amusement is a local tax.
- Exemptions:
1. premiums refunded within six (6) months after payment on - Tax Base: GROSS RECEIPTS of the proprietor, lessee or operator of the
account of rejection of risk or returned for other reason to a person amusement place. It includes income from television, radio and motion
insured; picture rights, if any.
2. reinsurance premiums paid by a company that has already paid the
tax; - Amusement Places NOT ALL are subject to the amusement tax.
3. Premiums collected or received by any branch of a domestic
corporation, firm or association doing business in the Philippines - Amusement Activities – NOT ALL are subject to amusement taxes.
on account of any life insurance of an insured who is a non-
- Amusement places subject to percentage tax called amusement tax:

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Jaybee de Guzman Pascua Review notes on Taxation
Place for boxing exhibition - 10% - The taxpayer may file a separate return for each branch or place of business,
Place for professional basketball - 15% or a consolidated return for all.
Cockpits, cabarets, night or day clubs - 18%
Jai-alai and race tracks - 30% - As GENERAL RULE:
Every person liable to pay a percentage tax shall file a quarterly
- Exemption: BOXING EXHIBITIONS where World or Oriental return of the amount of his gross receipts and pay the tax thereon,
Championships is nay division is at stake shall be exempt from amusement within twenty five (25) days after the end of each taxable month.
tax, IF ONE OF THE CONTENDERS is a citizen of the Philippines and said
exhibitions are promoted by citizens of the Philippines or a by a corporation - EXCEPTION:
or association at least sixty (60%) percent of the capital of which is owned by When the BIR Commissioner may, by the rules and regulations
such citizens. prescribe the time for filing the returns.

K. Tax on Winnings;

- The tax is on winning of:


1. Person who wins in horse races and jai-alai. Tax must be based on
his WINNINGS. - 10%
2. BUT if winnings is from double forecast, quinella and trifecta bets -
4%.
3. Owner of winning race horses, based on the price. - 10%.

NOTE: The tax shall be withheld from the winnings or prize by the
operator, manager, or person in charge of the horse races or jai-alai.

L. Tax on Stock transactions.

- On sale, barter, exchange or other disposition of shares listed and trade thru
a local stock exchange, other than by a dealer in securities:

½ of 1 percent based on the gross selling price or gross value in


money of the shares sold.

- On sale, barter, exchange or other disposition of shares thru initial public


offering of shares of stock in a closely held corporation, in accordance with
the proportion of the shares sold, bartered, exchanged, or otherwise
disposed of to the total outstanding shares of stock after listing in the local
stock exchange, as follows:

Up to 25% - 4%
Over 25%, but not over 33 and 1/3% - 2%
Over 33 and 1/3% - 1%

RETURN AND PAYMENT OF PERCENTAGE TAXES

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Jaybee de Guzman Pascua Review notes on Taxation
EXCISE TAX Retail price – it is the amount of money or prices which an ultimate consumer or end
user pays for the product.
- A national internal revenue tax to which only MANUFACTURERS or
IMPORTERS may be subjected to excise tax. If the retail price: Excise tax would be:

TWO (2) KINDS OF EXCISE TAXES Less than P250 per 750ml P75 per proof liter

1. Specific Tax - An excise tax imposed and based on weight or volume or


capacity or any other physical unit of measurement. P250 to P675 per 750ml P150 per proof liter

2. Ad Valorem Tax – an excise tax imposed and based on selling price or other
specified value of the article. More than P675 per 750ml P300 per proof liter

PURPOSE OF EXCISE TAX

- To curtail consumption of certain commodities which are considered harmful


to the individual as well as the community as a whole; How to determine proof liter:
- To protect domestic industries from competition caused by similar imported
products;
- To distribute the tax burden in proportion to benefit derived from a particular 1 liter = 1,000 ml
government service;
Percent of proof = Degree of proof per 100%
- To raise revenue.
Proof liter = Percent of proof liter x
volume in liter
ARTICLES SUBJECT TO EXCISE TAX

1. Alcohol products
But, if the alcohol products is produced from sap of nipa, coconut, cassava, camote,
2. Tobacco Products
buri palm or from juice or syrup of sugar cane, the excise tax would be as follows:
3. Petroleum Products
4. Mineral Products
5. Automobiles
6. Non-essential Goods. Excise tax:

ALCOHOL PRODUCTS Small-scale production (not P4 per proof liter


more than 100 liters/day)
Distilled Spirits
- Substance known as ethyl alcohol and ethanol including all dilutions,
purification and mixtures thereof, from whatever source, by whatever process Commercial production (more
than 100 liter/day P8 per proof liter
produced, and shall include whisky, brandy, rum, gin and vodka and other
similar products or mixtures.

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Jaybee de Guzman Pascua Review notes on Taxation
Wines (exclusive of VAT & Excise Tax)
- Alcoholic beverages produced by fermentation without distillation from juice
of any kind of fruit. Less than P14.50 P6.15

P14.50 up to P22 P9.15


Retail price per liter: Tax per liter:
(exclusive of VAT and Excise Tax)

More than P22 P12.15


Sparkling wine/champagne, regardless of proof liter:

P500 and less P100

TOBACCO PRODUCTS (Sec. 148)


More than P500 P300
1. P 0.75/KILO of the following products

- Tobacco twisted by hand or reduced into a condition to be consumed in any


manner other than the ordinary mode of drying and curing;
- Tobacco prepared or partially prepared with or without the use of any
Wine containing 14% alcohol or less P12 machine or instrument or without being pressed or sweetened;
- Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings
of tobacco.
Wine containing more than 14% alcohol but more than P24
25% alcohol by volume 2. P 060/KILO of tobacco specially prepared for chewing and not suitable for use
in any other manner;

Fortified wines produced by mixture of distilled spirits Same manner as


with water and other substance such as flavoring in distilled sspirits 3. P 1.00 per piece of cigar (cigar means all rolls of tobacco or any substitute
extracts and coloring materials in such portion that the thereof, wrapped in leaf tobacco)
restaurant mixture contains more than 25% of alcohol
by volume.
4. P 0.40 per pack on cigarettes packed by hand (cigarette means all rolls of finely
cut leaf tobacco or any substitute thereof, wrapped in paper or in any other
similar materials).

Fermented liquors 5. Cigarette packed by machine:

- Alcoholic beverages produced by fermentation without distillation of grain or Retail price/pack: Excise tax per pack:
malt, which include beer, lager, ale porter and other similar products but
excluding tuba, basi, tapoy and other similar domestic fermented liquor.
(excluding VAT & Excise Tax)

Retail price/liter: Tax per liter: Below P5.0 P1.00

P5.00 to 6.50 P5.00

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Jaybee de Guzman Pascua Review notes on Taxation
Over P6.50 but not over P10 P8.00
4. On indigenous petroleum, a tax of three percent (3%) of the fair
international market price thereof, on the first taxable sale, barter, exchange
Over10 P12.00 or such similar transaction,

AUTOMOBILES

Tax Base
6. 1. If locally manufactured or if imported for re-sale domestically, the tax base
shall ne the manufacturer of importer’s selling price net of excise and value
added tax.
PETROLEUM PRODUCTS (Sec. 148) 2. If the importation is not intended for re-sale domestically, the tax base shall
be the total value used by the Bureau of Customs in determining tariff and
1. P4.50/LITER of volume of P4.50/KILO of lubricating oil and greases. custom duties, including custom duty and all other charges plus 10% of the
2. P0.05/LITER on processed gas total thereof.
3. P3.50/LITER on waxes and petroleum
4. P0.05/LITER on denatured alcohol used for a motive power. Tax Rate
5. P4.50/LITER on Naptha, regular gasoline and other similar products of
distillation/ Gasoline Driven Diesel Driven Tax Rate
6. P3.35/LITER on leaded premium gasoline.
Up to 1600cc Up to 1800cc 15%
7. P3.67/LITER on aviation turbo jet fuel.
8. P0.60/LITER on kerosene 1601 to 2000cc 1801 to 2300cc 35%
9. P1.63/LITER of diesel fuel oil.
10. ZERO on liquefied petroleum gas 2001 to 2700cc 2301 to 3000cc 50%
11. P0.56/KILO of asphalt
2701 or over 3001 or over 100%
12. P0.30/LITER of bunker fuel oil. But if other petroleum product will be
produce from the banker oil, the excise which have been levied shall be
credited with excise taxes paid in the produced petroleum products.

NON ESSENTIAL GOODS (Sec. 150)


MINERAL PRODUCTS (Sec.151)
Non essential goods include the following:
1. A tax of Ten pesos (P10.00) per metric ton On coal and coke;
2. On all nonmetallic minerals and quarry resources, a tax of two percent (2%) 1. All goods commonly or commercially known as jewelry, whether real or
based on the actual market value of the gross output thereof at the time of imitation, pearls, precious and semi-precious stones and imitations thereof
removal 2. Perfumes and toilet waters;
3. On all metallic minerals, a tax based on the actual market value of the gross 3. Yachts and other vessels intended for pleasure or sports.
output thereof at the time of removal thereof; for:
(a) Copper and other metallic minerals; Excise Tax Base and Rate
- 1% on the 1st 3 years upon the effectivity of RA No. 7729
- 1 ½% on the 4th and the 5th years - There shall be levied, assessed and collected a tax equivalent to twenty-
- 2% on the 6th years and thereafter,; percent (20%) based on the wholesale price or the value of importation used
by the Bureau of Customs in determining tariff and customs duties, net of
(b) Gold and chromite, - 2%. excise tax and value-added tax,

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Jaybee de Guzman Pascua Review notes on Taxation
PLACE AND TIME FOR FILING OF RETURN AND PAYMENT OF TAX

The return shall be filed and excise tax shall be paid:

- By the manufacturer or producer before removal of the products from the


place of production. A separate return of each place of production shall be
filed by every liable person.

- By the importer before removal of the importation from the custom warehouse
to be paid to the Custom Officers under the regulation of the Department of
Finance.

- With respect to the excise tax on nonmetallic mineral or mineral products, or


quarry resources shall be due and payable upon removal of such products
from the locality where mined or extracted, but with respect to the excise tax
on locally produced or extracted metallic mineral or mineral products, the
person liable shall file a return and pay the tax within fifteen (15) days after the
end of the calendar quarter when such products were removed subject to such
conditions as may be prescribed by rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner/ BIR.

- Except as the Commissioner otherwise permits, the return shall be filed with
and the tax paid to any authorized agent bank or Revenue Collection Officer,
or duly authorized City or Municipal Treasurer in the Philippines.

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Jaybee de Guzman Pascua Review notes on Taxation