Income Tax - Taxation 1

8/2/2019 Income Tax - Taxation 1

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叶清蓮 Taxation I P a g e | 1

For Income to be Taxable1. There must be GAIN2. It must be REALIZED or RECEIVED, actually or constructively3. It must NOT be EXCLUDED by law or by treaty

Examples of NOT INCOME1. Money held in TRUST2. Increase in the value of the property prior to disposition

3. Deposit without interest4. Proceeds are mere return in capital

COMPUTATION OF TAXABLE INCOME1. Individual earning PURELY COMPENSATORY INCOME

Gross Compensation- Personal & Additional Exemption- Premium payments on health or hospital insurance (P2400/year)TAXABLE INCOME

2. Individual DOING BUSINESSGross Revenue/Sales- Cost of Sales

GROSS INCOME- Allowable Deductions- Personal & Additional ExemptionTAXABLE INCOME

3. Domestic or FC doing businessGross Revenue/Sales- Cost of SalesGROSS INCOME- Allowable DeductionsTAXABLE INCOME

SITUS OF TAXATION The place or authority that has the right to impose and collect taxes

Interest Residence of the debtorCompensation for personal services Place of performanceRent and royalty Location of the propertyGain from sale of real propertyGain from sale of personalproperty

Place of saleProduced here and Soldwithout

Partly within,partly without

Produced without andSold hereTaxpayer sells it abroadthrough a sales officeProduced here and Soldhere

Income within

Purchased without andsold withinPurchased within andSold withinPurchased within andSold without

Income without

Gain from sale of shares of stockof DOMESTIC CORPORATION

Regardless of place of sale, it is Philippinesource

Dividend income From DC From FCIncomewithin thePhilippines

Income within the Philippines IFmore than 50% corporation’sworldwide income is derivedfrom Philippine sources

TAX ON CORPORATIONSDOMESTIC CORPORATIONS

In General 30% of TAXABLE INCOME from ALL sourcesOptional GrossIncome Taxation

15% of GROSS INCOME

Election of such will be irrevocable for 3 consecutive

taxable years

Gross Sales- Sales returns, discounts and allowances- Cost of goods sold

GROSS INCOME

For sale of service:Gross Receipts

- Sales returns, discounts and allowancesGROSS INCOME

Minimum CorporateIncome Tax (MCIT)

2% of GROSS INCOME

*same Gross Income computation as with Optional GrossIncome Taxation

When applied:a. Beginning on the 4th taxable year immediately

following the year in which such corporationcommenced its business operation

b. The computation of MCIT is greater than the regulartaxable income

c. Where corporation has zero or negative taxableincome

To whom applied:

a.

Domestic corporationsb. Resident Foreign corporations




Carry-over of Excess MCIT:Excess of MCIT over the regular income tax shall be carriedforward and credited against regular income tax for thesucceeding 3 years when regular income tax is higher thanMCIT

MCIT may be suspended by the Sec. of Finance on1. Prolonged labor dispute

2. Force majeure3. Legitimate business reverses

Exempted from MCIT:a. RFC – international carrierb. RFC – offshore banking unitc. RFC – regional operating headquartersd. Those under Economic Zones

ImproperlyAccumulated EarningsTax (IAET)

10% of IAET of domestic and closely-held corporations

Closely-held Corporationsa. Those at least 50% in value of the outstanding

capital stock, or

b. At least 50% of total combined voting power of allclasses of stockc. Owned directly or indirectly by not more than 20

individuals

Prima facie evidence of IAET:1. Corporation is a mere holding company or

investment company

Holding company corporation having practicallyno activities except holding property and collectingincome therefrom

2. Earning or profits of corporation are permitted toaccumulate beyond the reasonable needs of thebusiness

Exception:The use of undistributed earnings and profits forREASONABLE NEEDS of the BUSINESS

a. Immediate needs of the businessb. Reasonably anticipated needs

3. Substantial investment of earning in an unrelatedbusiness

4. Investment in bonds and other long term securities5. Accumulation of earnings in excess of 100% of paid-

up capital

Those considered as reasonable needs:1. Allowance for increase of accumulated earnings up

to 100% of paid-up capital2. Earnings reserved for expansion, improvement and

repairs as approved by Board of Directors3. Earnings reserved for compliance with any loan or

obligation established under a legitimate businessagreement

4. In case of subsidiaries of foreign corporation,reserved or intended for investments in thePhilippines

5. Those required by law to be retained6. Anticipated losses or reverses in business

Corporations NOT COVERED by IAET:a. Banks and other financial institutionsb. Insurance companiesc. Publicly held corporationsd. Taxable partnershipse. General Professional Partnershipsf. Non-taxable joint ventures

g. Those registered in Economic ZonesNon-ProfitProprietaryeducationalinstitutions andhospitals

10% of TAXABLE INCOME on relatedtrade, business or activity excepton certain PASSIVE INCOMES

Private educational institutions areexempt from VAT

30% on ENTIRETAXABLE INCOME IFgross income fromunrelated trade,business or activityexceeds 50% of totalincome

Non-profit and non-stock educationinstitutions

EXEMPT from tax on revenues and assets ACTUALLY,DIRECTLY and EXCLUSIVELY used for educational purposes

Liable for taxes on:a. Income derived from any of their real propertiesb. Any activity conducted for profitc. Interest income from any bank deposits and foreign

currency depositsGSIS / SSS / PHIC /PCSO / Local WaterDistrict

EXEMPT

Corporation EXEMPTfrom taxation underSection 30

Subject to INCOME TAX on their income froma. Any of their properties, real or personalb. Activities conducted for profit regardless of the

disposition made of such incomeIncentives toRegisteredEnterprises underInvestment PrioritiesPlan

Income Tax Holiday Pioneer firms – 6 years fromcommercial operation

Non-pioneer firms – 4 years fromcommercial operation




Newly registered firms – fully exemptfrom income taxes

(all above can be extended for morethan 1 year but no registered firmmay avail of this for a periodexceeding 8 years)

Registered expanding firms – exemptfor 3 years from commercialoperation(no extension is allowed)

Additionaldeduction for laborexpense

1st 5 years from registration – 50% ofthe wages

The above is doubled if the activityis located in less developed areas

Special EconomicZone

In lieu of taxes, 5% of the Gross Income shall be remittedto the national government

RESIDENT FOREIGN CORPORATIONS

In General Same with Domestic Corporations except it willbe based on INCOME sourced WITHIN thePhilippines

Optional Gross Income TaxationMinimum Corporate Income Tax(MCIT)Brach Profit Remittance 15% of the total profits applied for remittance or

earmarked for remittance without any deductionfor the tax component

Remittance by a branch to its head office exceptthose registered in Economic Zones

What is not included:Any income from sources not connected with theconduct of its business in the Philippines

International Air Carrier 2.5% on GROSS PHILIPPINE BILLINGS (GPB)

GPB:Gross revenue derived from

a. Carriage of persons, excess baggage,cargo and mail

b. Originating from Philippinesc. In a continuous and uninterrupted flightd. Irrespective of the place of sale and the

place of payment of ticket or passagedocument

For a flight which originates in the Philippinesand transshipment takes place in any portoutside the Philippines on another airline, onlythe aliquot portion of the cost of the ticketcorresponding to the leg flown from thePhilippines to the point of transshipment shallform part of GPB

When not applicable:1. To domestic corporations like PAL or

CebuPac2. Offline carriers those who have no

landing rights in the Philippines If selling tickets in the Philippines,

income from such shall be subject toregular income tax of a residentforeign corporation

3. International Shipping 2.5% on GROSS PHILIPPINE BILLINGSOffshore Banking Units 10% FINAL TAX of

any interest

income derivedfrom foreigncurrency loansgranted fromresidents

EXEMPTIncome derived by OBU from

foreign currency transactionsfroma. non-residentsb. other OBUc. local commercial banksd. branches of foreign

banks authorized byBSP to transact withOBU

Regional Area Headquarters EXEMPTRegional OperatingHeadquarters

10% on TAXABLE INCOME

NON-RESIDENT FOREIGN CORPORATIONS

In General 30% on GROSS INCOME from all sourceswithin the Philippine even passiveincomes EXCEPT capital gains on sale ofdomestic shares

Cinematographic Film owner, lessor ordistributor

25% on GROSS INCOME

Owner or lessors of vessel chartered byPhilippine nationals

4.5% on GROSS INCOME

Owner or lessors of aircraft, machineries

and other equipment

7.5 on GROSS INCOME




ITEMS INCLUDED IN GROSS INCOME

1. Derived from conduct oftrade or business orexercise of a profession

2. Rents Improvements by Lessee:a. Lessee introduced improvements per

agreement with lessor, lessor may report

income either1. At the time of completion on the basis of

FMV of such building or improvement2. Spread over the life of the lease

considering the estimated depreciatedvalue of such at the termination of thelease

b. Lease is terminated not through purchase bylessor and lessor comes into possession priorto the time originally fixed, lessor isconsidered to receive additional income forthat year IF value of building exceeds theamount already reported as income

c. Destroyed before expiration of lease, lessor isentitled to deduct as loss the amountpreviously reported as income less any salvagevalue to the extent that such loss was notcompensated for by insurance

3. Interests (see Allocation of Income and Deductions at thelast page)

4. Prizes & winnings5. Compensation for

servicesNot allowed to deduct any other deduction fromtheir salary

6. Annuities7. Royalties8. Dividends Notes on Dividends a. When corporation

receives interest whichare tax free itbecomes TAXABLE asDIVIDENDS when itDISTRIBUTES the sameto its SHAREHOLDERS

b. Dividend paid by DC toNRFC taxable in FULL

Dividends paid inSecurities otherthan Stock

Considered as income, in theamount of FMV, whenreceived by stockholder

Dividends paid inProperty

If paid in stock of anothercorporation notconsidered a stock dividend

Basis is FMV at the time thedividend becomes payable

Sale of Stockreceived asDividends

GR: stock dividends are NOTTAXABLE

Exception:When it causes CHANGE inthe corporate identity or in

the nature of the sharesissued whereby proportionalinterest of the stockholdersafter distribution isESSENTIALLY DIFFERENT fromhis former interest

Sale of Stockreceived asDividends

GAIN or LOSS from such saleis treated as arising from saleor exchange of CAPITALASSET

Stock Declarationand SubsequentRedemption

If after stock dividends aredeclared, a corporationcancels or redeems the same

making such redemptionessentially equivalent to aDISTRIBUTION of a TAXABLEDIVIDEND

Distribution inLiquidation

When corporation distributesALL its properties or assets inCOMPLETE LIQUIDATION,GAIN realized is TAXABLE

9. Gains derived fromdealings in property

Gain or loss in exchange of property is recognizedwhen:

a. Property received in exchange is essentiallydifferent from the property disposed

b. Property received has market value

10. Pensions EXEMPT11. Partner’s distributiveshare from net income ofGPP

GPP is TAX EXEMPT BUT the income of theindividual partners are subject to tax

Income derived from other sources

Recovery of damages (compensation forinjury; from tortuous act)

Not taxable

Recovery of items previously deductedfrom gross income

Taxable

Forgiveness of indebtedness If it amounts to

1.

Payment of income (personperforming a service) Taxable




2. Capital transaction (corporationforgiving the debt of a stockholder) Taxable

3. Gift ExemptIncome derived from illegal business TaxableRecovery of lost earnings TaxableRefunds and Tax Credits GR: taxes previously claimed and

allowed as deductions BUT subsequently

was refunded or granted as tax creditshould be declared as part of grossincome of that year

Exceptions: (some)a. Taxes assessed against local

benefits of a kind tending toincrease the value of the propertyassessed

b. Taxes which are not allowable asdeductions under the law

PASSIVE INCOME

DomesticCorporation

Resident ForeignCorporation

Non-ResidentForeign

CorporationInterest under FCDU 7.5% 7.5% ExemptIncome derived bydepositary BANK fromForeign Currencytransactions withNON-RESIDENTS,OBUs, etc

Exempt

Interest income from

Foreign Currencyloans granted by aBANK to RESIDENTSother than OBUs

10%

Royalty of all typesWITHIN thePhilippines

20% 20% 30%

Royalty WITHOUT thePhilippines

Taxable Incomeunder 30% tax rate

Exempt

Interest on BankDeposits

20%

Dividend fromDomestic

Corporations (Inter-corporate Dividends)

Exempt Exempt 15%

Sale of Shares ofStock not listed andnot traded through alocal stock exchangeheld as Capital Asset

5% or 10% of netcapital gains

Sale of shares ofstock listed andtraded through local

stock exchange

.5% of gross sellingprice or gross value

Sale of Real propertyheld as Capital Asset

6% of gross sellingprice or currentmarket value,

whichever is higher

Normalcorporate tax

Sale of Real propertyheld as Capital Assetmade to Governmentor GOCCs

6% of gross sellingprice or currentmarket value OR

under normalincome tax rate

Sale of Real Propertyheld as OrdinaryAsset when seller is

habitually engaged inreal estate business

1.5%, 3% or 5% ofgross selling price or

current market

value

Sale of Real Propertyheld as OrdinaryAsset when seller isnot habituallyengaged in realestate business

7.5% of gross sellingprice or current

market value

Sale of Real Propertyheld as OrdinaryAsset when seller isexempt fromcreditable

withholding tax

Exempt

ITEMS EXCLUDED FROM GROSS INCOME

1. Gifts, Bequests & Devices Must be characterized bya. Disinterested generosity, andb. Pure liberality

Most critical consideration: Giver’s intention ormotive

But, income derived from those properties shallbe included in the gross income

2. Income exempt underTreaty




3. Amount received byinsured as Return ofPremium

Received eithera. during the termb. at the maturity of the termsc. upon surrender of the contract

4. Life Insurance Proceeds of such paid to the heir or beneficiariesupon the DEATH of the insured to avail of thetotal exemption

If the insured SURVIVES, there is only PARTIALEXEMPTION to the extent that the proceedsconstitute return of capital

If such is held by the insurer under an agreementto pay interest, the interest payments shall beincluded in the gross income

5. Compensation for Injuriesor Sickness

Includes the AMOUNT OF DAMAGES received onaccount of such injuries (physical) or sickness

However, if damages only amount to return ofcapital, it is EXEMPT

6. Retirement Benefits,

Gratuities, Pensions

Includes:

a. Amount received as a consequence ofSEPARATION for any cause beyond control

Sickness must be job threatening renderingthe taxpayer incapable of working

b. Benefits received from a foreigngovernment by non-resident citizens oraliens who reside permanently in thePhilippines

c. Veterans benefitd. SSS benefite. GSIS benefitf. Benefit from RA 7641

Conditions:1. At least 60 years old2. 5 years of service at the time of

retirement

Limited exemption:½ month salary for every year of service

g. Reasonable Private Benefit PlanConditions:1. At least 50 years old2. In the service of the same employer for

at least 10 years at the time of

retirement3. Approved by BIR

h. Terminal Leave pay

Amount paid for the commutation of leavecredits

Excludable only for government employees7. Miscellaneous items a. Income derived from FOREIGN

GOVERNMENTSb. Income derived from GOVERNMENT or its

political subdivisionsc. Prizes, awards in SPORTS competition

sanctioned by National Sports Associationswherever held

d. Prizes and awardse. 13th month pay and other benefitsf. GSIS, SSS, Medicare, Pag-ibig contributions

& Union dues of individualsg. Gains from sale of bonds, debentures or

other certificate of indebtedness with aMATURITY OF MORE THAN 5 YEARS

h. Gains from REDEMPTION OF SHARES inmutual fund

FRINGE BENEFITSDefinition

Fringe Benefit =

a. any good, service or other benefit

b. furnished or granted in cash or in kind

c. by an employer to an individual employee

d. except rank and file employees – hence, only FB given or furnished tomanagerial or supervisory employees are subject to FBT

Imposition of a Final tax of 32% on the grossed up monetary value of thefringe benefits

Actual Monetary Value = Grossed up monetary value

68%

Grossed up Monetary value X 32% = Fringe Benefit Tax

Managerial Employees = those who are vested with powers or prerogatives tolay down and execute management polices and/or hire, transfer, suspend, etc.employees

Supervisory Employees = those who effectively recommend such managerialactions if the exercise of such authority is not merely routinary or clerical innature but requires use of independent judgment




Rank-and-file Employees = all employees who are holding neither managerialnor supervisory positions

Special Cases for Fringe Benefit Tax

Received by non-resident alien not engaged in trade or business 25%

Received by alien or Filipino employed by ROH or RAH 15%

Received by employees in a SPEZA 25% or 15%

Items of Fringe Benefits

Taxable:

a. Housing

Monetary Value

Employer leases a residential property for the use of theemployee and such is the usual place of residence of theemployee

50% of the valueof the benefitEmployer purchases a residential property on installment basis

and allows the employee to use it as his usual residence

Employer purchases a residential property and transfersownership to the employee

b. Expense account – those personal expenses such as groceries, paid for orreimbursed by the employer even if these are duly receipted for in thename of the employer

c. Vehicle of any kind

Monetary Value

Employer purchases vehicle in the name ofthe employee regardless of usage of such

100% of the acquisition cost

Employer pays for the car on installment basisand ownership of the car is placed in thename of the employee

Acquisition cost exclusive ofinterest

5 years

Employer shoulders a portion of the amountof the purchase price of a vehicle owned bythe employee EXCEPT when the subsidy isdeclared part of the employee’s taxablecompensation income subject to withholdingtax

Amount shouldered by theemployer

Employer owns and maintains a fleet of 50% of the

vehicles for the use of the business and theemployees

Acquisition cost exclusive ofinterest

5 years

Use of yacht Depreciated value at an estimateduseful life of 20 years

d. Household personnel, such as maid, driver, etc

e. Interest on loan at less than market rate to the extent of the differencebetween the market rate and actual rate are granted

Monetary Value

Employer extends a loan to anemployee free of interest

Computed at 12%

Loan given at a rate lower than 12% Difference of theinterest and the 12%

f. Membership fees, dues, and other expenses borne by the employer for theemployee in social and athletic clubs or other similar organizations

g.

Expenses for foreign travelMonetary Value

Cost of first class ticket given to an employee 30% of the value

Travel expense of family members of the employee 100% of the value

h. Holiday and vacation expenses

i. Educational assistance to employee or his dependents

j. Life or health insurance and other non-life insurance premiums or similaramounts in excess of what the law allows

Certain exemptions on those taxable fringe benefits:

a. Housing

1. Military officials

2. Situated inside or adjacent to the premises of a business or factorywithin 50 meters thereof

3. Temporary housing for employee who stays for not more than 3months

b. Expense Account

1. Expense duly receipted for and in the name of the employer and is notin the nature of a personal expense attributable to the employee




2. RATA which are fixed in amount and regularly given as part of monthlycompensation since it will be treated as income of the employee

c. Vehicle

o Use of aircraft owned and maintained by the employer

d. Expenses for Foreign Travel

1. If it is reasonable for the purposes of attending business meetings or

conventions2. If it is for local travel expenses not more than $300 per day not

including lodging

3. Cost of economy or business class tickets

e. Educational Assistance

1. Employee was granted a scholarship by the employer and theeducation is directly connected to the trade or business of theemployer, and there is a written contract that the employee mustremain in employ for a period of time

2. Assistance was extended to the employee’s dependents and wasprovided through a scholarship program of the company

f. Life or Health Insurance, etc. Premiums in excess of what the law allows

1. Contribution is pursuant to existing law such as GSIS or SSS

2. If it is group insurance of the employees

Not Taxable:

a. FB which are authorized and exempted from tax under special laws

b. Contributions of the employer for the benefit of the employee toretirement, insurance and hospitalization benefit plans

c. Benefits given to rank and file employees, whether granted under acollective bargaining or not

d. De minimis benefits

De Minimis Benefits

Facilities or privileges furnished or offered by an employer to his employeesthat are of relatively small value and are offered and furnished by theemployer merely as a means of promoting the health, goodwill, contentment orefficiency of his employees

Items of De Minimis Benefits:

a. Monetized unused vacation leave credits not exceeding 10 days during theyear

b. Medical allowance for employee’s dependents not exceeding P125 permonth

c. Rice subsidy of P1 500 or 1 sack of rice per month

d. Uniform and clothing allowance not exceeding P4 000 per year

e. Medical benefits not exceeding P10 000

f. Laundry allowance of P300 per month

g. Employee achievement awards in the form of tangible personal propertyother than cash with an annual monetary value not exceeding P10 000

received under an established written planh. Flowers, fruits, books given under special circumstances (illness, marriage,

etc)

i. Christmas and major anniversary celebration for employees not exceedingP5 000 per year

j. Daily meal allowance for overtime work not exceeding 25% of the basicminimum wage

The amount of de minimis benefit is not computed in determining the P30,000ceiling of ―other benefits‖ provided in Sec. 32(b)

o But, if the employer pays more than the ceiling prescribed, the excess istaxable as fringe benefit to the employee only

Any amount given by the employer as benefits, whether deminis or not, shallbe deductible as business expense

DEDUCTIONS FROM GROSS INCOME

Who may AVAIL ofdeductions?

Individuals 1. Citizen2. Resident alien3. Non-resident alien doing business

in the Philippines4. Members of GPP

Corporations 1. Domestic corporations2. Resident Foreign corporations

3.

Proprietary educational institutions& hospital4. GOCCs

Who CANNOT AVAIL ofdeductions

1. Individuals earning purely compensation income2. Non-resident aliens not engaged in trade or

business3. Non-resident Foreign corporations

Allowable Deductions Individuals with grossincome from EMPLOYER-EMPLOYEE RELATIONSHIPONLY

a. Premium paymentson health or hospitalinsurance

b. Personal andadditionalexemptions

Individuals with grossincome from BUSINESS or

a. Optional StandardDeduction or




PROFESSION Itemized Deductions

(For discussion onOSD, see attachedReviewer )

b. Premium paymentson health or hospital

insurancec. Personal and

additionalexemptions

Corporations Itemized Deductions

ITEMIZED DEDUCTIONS

1. Bad debts Requisites to be deductible:a. Existing indebtedness due to taxpayerb. Debt is valid and legally demandablec. Debt is connected to TBPd. It must not be sustained in a transaction between

related taxpayerse. Actually ascertained to be WORTHLESS andUNCOLLECTIBLE as of the end of taxable year

f. Actually charged to the taxpayer at the end of thetaxable year

Tax-Befit Rule:Recovery of bad debts previously allowed as deduction shall beincluded part of gross income in the year of recovery

Ascertainment of worthlessness:1. Taxpayer did in fact ascertain the debt to be worthless

in the year which the deduction is sought2. He acted in good faith

When Bad Debts are not deductible:a. For a bank, it is the BSP which determines the

worthlessness of the debtsb. For insurance company, it must be declared insolvent

for bad debts to arise2. Expenses In General, to be deductible:

a. Amount of expenses must be reasonableb. It must be substantiatedc. It must not be contrary to law, morals or public policyd. If it is required to be withheld, it must have been paid

to BIR

ORDINARY & NECESSARYRequisites:

a. It must be ordinary AND necessaryb. It must be paid or incurred during the taxable yearc. For the purpose of carrying on the TBPd. Including reasonable allowance for

1. Salaries2. Travel expenses in pursuit of TBP

3. Rentals4. Entertainment, amusement & recreational expenses

directly connected with TBP

Substantiation requirement:There must be sufficient evidence to substantiate

a. Amount of expenses deductedb. Direct connection of the expense to the

development, management, operation and/orconduct of TBP

Ordinary expense = normal or usual in the TBP

Necessary expense = appropriate and helpful in thedevelopment of TBP

Business expense = expenditure related to TBP that isdeductible in the year incurred

Capital expense = expenditure that improves or adds to thevalue of property or equipment

Not immediately deductible Deductible over time such as in the form of

depreciation

Bribes, Kickbacks & Other Similar Payments:not deductible

Representation Expense = expenses incurred in connectionwith conduct of TBP

a. Entertaining, providing amusement and recreation to,or meeting with guests

b. At a dining place, place of amusement, country club,theater, etc.

If the taxpayer is the registered member of country club, thepresumption is that such expenses are Fringe Benefits unlesshe can prove that these are actually representation expenses

Entertainment facilities = refers to yacht, vacation home and

similar item of real or personal property used by taxpayerprimarily for entertainment of guests or employees




3. Losses Requisites for deductibility of ORDINARY LOSS:a. Loss must be of the taxpayerb. Actually sustained during the taxable yearc. Not compensated for by insurance or other forms of

indemnityd. Incurred in TBP or property connected with TBP through

force majeure or from robbery, theft or embezzlemente. Evidenced by a completed transaction

f. Not claimed as deduction for estate tax purposesg. Notice of loss filed with BIR within 45 days from date of

discovery

Types of LOSSES:1. Ordinary losses

a. Incurred in TBP

NET OPERATING LOSS CARRY-OVER (NOLCO)Excess of allowable deduction which has not beenpreviously offset as deduction from gross income

Requisites:1. Taxpayer was not exempt from income tax inthe year of such NOL

2. There has been no substantial change in theownership of the business enterprise

How applied:NOL shall be carried over as deduction from grossincome for the next 3 consecutive taxable yearsimmediately following the year of such loss

For mines other than oil and gas wells, if loss isincurred within its 1st 10 years, carry-over will befor the next 5 years

Notes on NOLCO:1. If there is change of ownership, for NOLCO to

be available the surviving entity must be theone which accumulated the NOLCO or that thetransferor GAINS CONTROL of at least 75% ofoutstanding issues or paid-up capital oftransferee

2. When individual claimed OSD or taxpayer paidincome tax under MCIT, he cannot claimdeduction of NOLCO simultaneously and the 3-year period for NOLCO shall continue to run

b. Incurred by property connected with TBP throughforce majeure or robbery, theft or embezzlement

How applied:1. Total destruction – replacement cost in

restoring the property in its normal operatingcondition This shall not be more than the net book

value of the property immediately beforethe casualty

2. Partial destruction – excess over the net book

value immediately before the casualty shouldbe capitalized subject to the depreciation overthe remaining useful life of property

3. Special lossesa. Capital losses

Allowed only to the extent of gains from such losses1. Losses from sale or exchange of capital asset2. Losses resulting from securities (capital assets)

becoming worthless3. Losses from short sales of property4. Losses due to failure to exercise privilege or

option to buy or sell property

b. Losses from wash sales of stock or securities

GR: not deductibleException: claim is made by a dealer in stock orsecurities and made in ordinary course of business

c. Wagering losses

Allowed only to the extent of gains from such losses

d. Abandonment lossese. Losses due to voluntary removal of building incident

to renewal of replacementsf. Loss of useful value of capital assets due to charges

in business conditions

Deductible to the extent of actual loss sustainedafter improvements, depreciation or salvage value

g. Losses from sales or exchanges of property betweenrelated taxpayers – not deductible

4. Taxes Requisites for deductibility:a. Paid or incurred within the taxable yearb. In connection with TBPc. Imposed directly on the taxpayer

d. Not specifically excluded by law from being deductedfrom gross income




Deductible Taxes:a. National or local taxesb. Paid or incurred during the taxable yearc. In connection with taxpayer’s TBP

Non-deductible Taxes:a. Philippine income taxb. Income tax imposed by authority of any country EXCEPT

when taxpayer signifies his desire to avail of tax creditc. Estate and donor’s taxes d. Taxes assessed against local benefits of a kind tending

to increase the value of property assessede. Final taxesf. Special assessments

Tax-Benefit RuleTaxes, when refunded or credited, shall be included as part ofgross income in the year of receipt

For NRA-ETB and RFC, taxes paid or incurred shall be allowedas deduction insofar as they are connected to income within

Philippines

TAX CREDITRight of an income taxpayer to deduct from his income taxpayable the foreign income tax he has paid to his foreigncountry

Who can claim?a. Citizenb. Resident aliens deriving income from within or without

the Philippines IF there is reciprocityc. Domestic corporationd. Members of GPP

Limitation on the amount that may be taken as tax credit:Not to exceed the same proportion of tax against which suchcredit is taken

When credit may be taken:a. Year in which the taxes accruedb. Year in which the taxes were paid

5. Depreciation a. A gradual diminution in the1. service or useful value of tangible property2. amortization of intangible property

b. Due from exhaustion, wear and tear, and normalobsolescence

For NRA-ETB and NRC, applicable only when such property islocated in the Philippines

Requisites for deductibility:a. Allowance for depreciation must be reasonableb. It must be for property used for employment in TBc. Allowance must be charged offd. Schedule of the allowance must be attached to the

returne. The depreciation value cannot be beyond the

acquisition cost

Methods of Depreciation:1. Straight-line method

Cost – Salvage valueEstimated Life

2. Declining balance method

Cost – Accumulated depreciation X rateEstimated Life

3. Sum of years digit method

Nth period X (Cost – Salvage value)Sum of the year’s digits

Special types of Depreciation:a. Petroleum operations

Useful life: 10 years or shorter as may be permitted byCommissioner

Useful life of property not used directly: 5 years understraight line method

b. Mining operations

Useful life: 10 years

If expected life greater than 10 years: depreciate overany number of years between 5 and the expected life

6. Interest Requisites for deductibility:a. There must be an indebtednessb. Indebtedness must be that of the taxpayerc. Indebtedness must be connected with TBPd. There must be an interest expense paid or incurred

upon such indebtedness and during the taxable yeare. Interest must have been stipulated in writingf. Interest must be legally due and demandable

g. Interest payment arrangement must not be betweenrelated taxpayers




Limitation on deduction:It is only 33% of the interest income subject to final tax

Example:Interest expense = P3000Interest income = P2000Deductible interest expense = P3000 – (P2000 x 33%)

Non-deductible interest expense:a. Interest paid in advance through discount or otherwise

Allowed as deduction in the year it is paidb. Payments made between:

1. Members of family2. Individual and a corporation where more than 50%

of outstanding capital stock is owned by suchindividual

3. 2 corporations where more than 50% of outstandingstock is owned by the same individual

4. Grantor and fiduciary / beneficiary5. Indebtedness is incurred by a service contractor to

finance petroleum corporation

6.

Interest on preferred stock which in reality isdividend7. Interest on unpaid salaries and bonuses

7. Depletion ofoil and gaswells andmines

Reduction of cost or value as such are converted intoinventories

No further allowance is granted if it equals the capitalinvested

For NRA and FC, only to those located in the Philippines8. Charitable

and othercontributions

Requisites for deductibility:a. Contribution or gift must be actually paidb. It must be given to organizations specifiedc. Net income of the institution must not inure to the

benefit of any private stockholder or individual

Contributions FULLY DEDUCTIBLE:1. Donations to the government for priority activities

according to National Priority Plan determined by NEDA2. Donations to certain foreign institutions or international

organizations3. Donations to accredited NGOs

Contributions PARTIALLY DEDUCTIBLE:1. Donations to the government exclusively for public

purposes2. Donations to accredited domestic corporations or

association3. Donations to social welfare institutions

4. Donations to non-accredited NGOs

For individuals, not more than 10% of taxable income beforededucting the charitable contributionFor corporations, not more than 5% of taxable income beforededucting the charitable contribution

Valuation of property donated other than money = Acquisition

cost9. Research &

developmentRequisites for deductibility:

a. Paid or incurred during the taxable yearb. Ordinary and necessary expenses in connection with TBPc. Not chargeable to capital account

Can be fully deducted or amortized

Requisites for amortization:a. Paid or incurred in connection with TBPb. Not treated as expensec. Chargeable to capital account but not to property of a

character which is subject of depreciation or depletion

d.

Amortized over a period of not less than 60 months asmay be elected by taxpayer10. Pension trusts Requisites for deductibility:

a. Employer must have established a pension or retirementplan

b. Such must be reasonable and actuarially soundc. It must be funded by the employerd. Amount contributed must be no longer subject to

control or disposition of the employere. Payment has not been allowed as deductionf. Deduction is apportioned in equal parts over a period of

10 consecutive years

OPTIONAL STANDARD DEDUCTIONOptional Standard Deduction (OSD)—deduction which an individual other than anon-resident alien, or a corporation, subject to income tax, may elect in an amountnot exceeding 40% of his gross sales or gross receipts, as the case may be, or acorporation, in an amount not exceeding 40% of its gross income. In lieu of takingitemized deductions

Optional Standard Deduction for Individuals

1. Individuals covered

a. Citizen, resident or non-resident

b. Resident alien

c. Taxable estate and trust






o intention to elect OSD must be specifically signified in his incometax return

2. Once OSD is chosen and is signified in his return, it shall be irrevocable forthe taxable year for which it is made

3. Individual who is entitled and claimed for the OSD is no longer required tosubmit with his return such financial statements otherwise required by theTax Code

4. Except when the Commissioner otherwise permits, the individual shall keep such records pertaining to his gross sales or receipts, or in the case ofcorporation, such records pertaining to its gross income as may be requiredby the Tax Code and by revenue rules and regulations

5. In filing of the quarterly income tax returns, taxpayer may opt to use eitherID or OSD

o However, in filing the final adjustment income tax return,taxpayer must make a choice

CAPITAL GAINS AND LOSSES

Ordinary Assets a. Stock in trade of taxpayer

b. Merchandise inventoryc. Depreciable assets used in TBd. Real property used in TB

Capital Assets Property of taxpayer other than capital assets, those notconnected with TB

Net Capital Gain Gains > Loss from sales or exchanges of capital assetsNet Capital Loss Loss > Gains from sales or exchanges of capital assetsPercentage taken into account:a. 100% if capital asset is held (actually held) for more than 12 monthsb. 50% if capital asset is held for less than 12 months

Limitation on Capital Loss:Only to the extent of the gains

Example:Gains = P5000Loss = P15000Net Capital Loss = P10000However, in this case, only P5000 is deduction (only to the extent of the gain)Scenarios:

1. Capital Gains Tax on Stock trade = 5% -- 10%2. Capital Gains Tax on Real property = 6%3. Ordinary asset on Stock trade or Real property = Gross Income4. Ordinary asset Not on Stock trade or Real property = Gross Income5. Capital asset Not on Stock trade or Real property = Gross Income

Computation ofGain or Loss:

GAINAmount realized >

Basis or adjustedbasis for

LOSSBasis or adjusted

basis fordetermining loss >

AMOUNT REALIZED=

Money received +fair market value

determining gain

Layman:Selling price orproceeds > Cost

amount realized

Layman:Cost > Selling priceor proceeds

of property (otherthan money)received

Mode of Acquisition: Basis of determining gain or loss fromsale or disposition of property

Purchase Cost of the property

Inheritance Fair market value at the time ofacquisition, hence, at the time of death

Gift Cost to the donor who did not acquire itas gift BUT if such is greater than theFMV at the time of the gift, FMV shall bethe basis

Acquired for less than adequateconsideration

Amount paid by transferee

Property acquired where gain or loss isnot recognized

Same as the basis of property exchangeda. Increased by

1. Dividends2. Amount of any gain

recognized by the exchange

b. Decreased by1. Money received2. FMV of other property

received3. Liability assumed by

transferee




ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

ACCOUNTING PERIODSFiscal year Calendar year

Ending on the last day of anymonth other than December

January 1 to December 31

Taxable income is computed based on this if:a. Accounting period is other than fiscal yearb. Taxpayer has no accounting periodc. Taxpayer does not keep booksd. Taxpayer is an individual

METHODS OF ACCOUNTINGCash Method Accrual Method

Recognition of incomeand expense dependenton inflow or outflow ofcash

Income, gains and profits are included in gross incomewhen earned, whether received or not

Expenses are allowed as deductions when incurred,although not yet paid

Accounting for LONG-TERM Contracts

Long term contracts:Building, installation or construction contracts covering aperiod in excess of 1 year

Persons whose gross income are derived in whole or inpart from such contracts shall report such income uponthe basis of PERCENTAGE of COMPLETION

Example:Contract for building a condominium is P10M for 5 years.On the 1st year, the completed construction is 30%;hence, the gross income to be declared is P3M (30% ofP10M)

Installment Basis Sales of Dealersin PersonalProperty

Proportion of the installmentpayments actually received in thatyear, which the gross profit realizedor to be realized when payment iscompleted, bears to the contractprice

Example:Contract price is P100000Gross profit is P25000Payable in 2 equal annual installments

To compute the rate = GPContract Price

To compute the income =Receivable X Rate

Sale of Realproperty andCasual sale ofPersonalproperty

Computation: SAME as that of Sale ofDealers in Personal Property

When applicable:a. Price is casual sale is greater

than P1000b. Initial payment in sale of real

property does not exceed 25%of selling price

Sale of Real

propertyconsidered asCapital Asset byan Individual

May pay the CAPITAL GAINS TAX in

installments under BIR Rules

Change from Accrual toInstallment Basis

Amounts received in prior years are not excluded

Allocation of Incomeand Deductions

To whom applied:2 or more organizations or TB owned or controlleddirectly or indirectly by the same interestHow applied:Commissioner is authorized to distribute, apportion orallocate gross income or deductions between or amongsuch in order to prevent evasion of taxes or to clearlyreflect the income of any such organization or TB

RETURNS AND PAYMENT OF TAXESIncome Tax Return—a tax return where the statement or declaration of what isreported is the income of the taxpayer and the allowable deductions for thetaxable year

Individuals Required to File Income Tax Return

1. Resident citizen regardless of the source of his income

2. Non-resident citizen on his income from sources within the Phils.

3. Resident alien on his income from sources within the Phils.

4. Non-resident alien engaged in trade or business or in the exercise of profession in the Phils. as to his income from souces within the Phils.




Individual Not Required to File Income Tax Return

1. Individual whose gross income does not exceed his total personal andadditional exemptions for dependents

o Citizens and any alien individual engaged in business or practiceof profession within the Phils. shall file ITR regardless of theamount of gross income

2. Individuals

a. Earning pure compensation income

b. Derived from sources within the Phils

c. From one employer

d. Income tax on which has already been correctly withheld

3. Regardless of the amount of income since the final income tax imposedthereon is to be withheld by the payor-corporation and/or person and paidto the BIR

a. Individuals whose income consists solely of royalties, interests,prizes, winning, dividends, and share of an individual person inpartnership or association, joint venture or consortium

b. Aliens employed by regional or area headquarters and regionaloperating headquarters of multinational corporations withrespect to compensation income

c. Aliens employed by offshore banking units with respect tocompensation income

d. Aliens employed by foreign service contractors andsubcontractors engaged in petroleum exploration in the Phils.with respect to compensation income

4. Minimum Wage Earner or individual who is exempt from income tax

o Such individuals will no longer have to personally file his own butinstead, the employer’s annual information return filed will be

considered as the substituted ITR of the employee

Filing of Individual ITR

1. When to file—on or before April 15 of each year, or, in meritorious cases,within the extension which may be granted by the Commissioner ofInternal Revenue

o Individuals engaged in trade or business or the practice of a profession file first, second and third quarter returns on or before April 15,August 15, and November 15, respectively

o Individuals subject to tax on capital gains

i. Gains from sale or exchange of shares of stock not traded through a

local stock exchange = within 30 days after each transaction and a

final consolidated return on or before April 15 cover all stocktransactions of the preceding taxable year

ii. Gains from sale or disposition of real property = within 30 days following each sale or other disposition

2. Where to file (file-where-you-live or work-rule)—except in cases wherethe Commissioner of Internal Revenue otherwise permits, where thetaxpayer’s legal residence or principal place of business is located, with

ana. authorized or Accredited Agent Bank

b. Revenue District Officer

c. Revenue Collection Officer

d. Duly authorized Treasurer of the City or Municipality

o filed in triplicate, 2 copies for Bank / BIR Office and 1 copy for thetaxpayer

o Legal Residence—address where the taxpayer normally resides

o Principal Place of Business—place where the main business activity ofthe taxpayer is conducted

o If at the time of filing, taxpayer has no legal residence in the Phils be filed with the Office of the Commissioner of Internal Revenue

o Employer-Taxpayer file his return with the revenue office with jurisdiction over his place of work or employment

o Non-resident Citizens with income derived from sources within Phils. file with Phil. Embassy or the nearest Phil. Consulate, or it may bemailed to the Commissioner of Internal Revenue

o Exempts from this rule: (they can file their return with the revenue district officer or municipal treasurer nearest their current place of assignment)

a. Filipinos abroad, including those employed by Phil. Gov’t

b. Members of AFP temporarily assigned to places other than theirlegal residence

2. Return of Husband and Wife—file a return to include income of bothspouses

o If this is not practicable, each spouse may file a separate return ofincome but the returns so filed shall be consolidated by the BIR forpurposes of verification

3. Return by Parent Representative of Taxpayer—income of unmarriedminors derived from property received from a living parent shall beincluded in the return of the parent

o This is not required when donor’s tax has been paid on such property or

when transfer of such property is exempt from donor’s tax




o Return may be made by his duly authorized agent or representative or bythe guardian or other person charged with the care of his person orproperty if he is unable to make his own return because of disability

4. Attachments—prescribed statements and BIR forms duly signed must beattached

5. Quarterly Income Tax Return—those individuals receiving self-employment income shall file a quarterly income tax return of his estimated income and

pay the estimated taxo Made in 4 installments:

a. On or before April 15

b. On or before August 15

c. On or before November 15

d. On or before April 15 of the following calendar year for the finaladjusted ITR

o Any excess of the total quarterly payments and taxes withheld over theincome tax computed in the final ITR shall, at the option of thetaxpayer, either be

a.

Issued a tax refund or tax credit certificate b. Applied as credit against the quarterly income tax liabilities for

the taxable quarters of the immediately succeeding year

Payment of Individual Income Tax

1. When and Where—paid by the person subject thereto at the time thereturn is filed (pay-as-you-file)

o Last day of payment of income tax coincides with the last day forfiling the return

o It is paid at the place where the return is filed

2. Payment of Tax in Installments—if the tax dues is in excess of P2,00, thetaxpayer may elect to pay the tax in 2 equal installments

a. First installment be paid at the time the return is filed

b. Second installment, on or before July 15 following the closing ofthe calendar year

o If any installment is not paid, whole amount of the tax unpaidbecomes due and payable together with the delinquency penalties

o If the tax withheld from salaries is more than ½ of the tax due taxpayer pays nothing in his first installment while the secondinstallment will be ½ the total tax due less the excess withholdingtax

Filing of Corporate Income Tax Return and Payment of the Tax

1. When to file—corporation may employ either a calendar year (Jan. 1 toDec. 31)or fiscal year as basis for filing its annual ITR

a. Every corporation subject to tax, except non-resident foreigncorporations, shall render quarterly ITR of its gross income anddeductions on a cumulative basis for the preceding quarter/s and afinal or adjustment return covering the total taxable income for the

preceding calendar or fiscal yearb. Corporate quarterly declaration shall be filed within 60 days

following the close of each of the first 3 quarters of the taxable year

c. Final adjustment return be filed on or before April 15 or on or beforethe 15th day of the 4th month following the close of the fiscal year, asthe case may be

d. In case of excess tax payments, taxpayer has option of either to

i. File a claim for the tax refund or tax credit certificate

ii. Carry-over and apply the excess against the income tax due forthe taxable quarters of the succeeding taxable year

2. Where to File—except as the Commissioner otherwise permits, the

quarterly income tax declarations and the final adjustment return shall befiled, within those having jurisdiction over the location of the principaloffice of the corporation or where the main books of accounts and otherdata from which the return as prepared are kept, with the

a. authorized or Accredited Agent Bank

b. Revenue District Officer

c. Revenue Collection Officer

d. Duly authorized Treasurer of the City or Municipality

3. When and Where to Pay—paid at the time and place of filing thedeclaration or return

WITHHOLDING TAX

Withholding tax onWages or Compensation

GR: every employer must withhold from compensationpaid an amount computed in accordance with theregulations

Exceptions: where such compensationa. Does not exceed the statutory minimum wageb. P5000 monthly or P60000 a year

Liability for Tax:1. Employer

a. Liable for withholding and remittance of

correct amount of tax




b. Failure to withhold and remit, employer isliable for the tax plus penalties

2. Employeea. Failure to file withholding exemption

certificate or supplied inaccurate or falseinformation, the tax shall be collected fromhim plus penalties

b. Excess taxes withheld by the employer shall

not be refunded if due to:1. Failure or refusal to file withholdingexemption certificate

2. False or inaccurate informationFinal Withholding Tax Once withheld and paid, nothing is further to be doneCreditable WithholdingTax

Once withheld, the individual must further deduct this inhis scheduler rate since what he received is consideredas income but deducted with what was already withheld

Example:Receivable = P10MWithholding tax = 15%

Income = P8.5M (P10M x 15%) X 17% (35% scheduler rate – 15% already withheld)

Income Tax - Taxation 1

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