Taxation Law Reviewer
Oct 09, 2015
TAXATION LAW REVIEW NOTES
Taxation Law Review
TAXATION LAW REVIEW NOTES
I. BASIC PRINCIPLES OF TAXATION
A. TAXATION AS AN INHERENT POWER OF THE STATE
Power to tax is inherent in sovereignty
the moment the State exists, the power to tax automatically exists enforceable even without any delegation by the Constitution or legislation from Congress
LGUs have no inherent power to tax; but expressly granted by the Constitution or legislation
Lifeblood Theory (CIR v Algue)
Tax is necessary to meet the expenses of government without which the latter cannot operate Every person must contribute his share in the running of the government
B. PHASES AND SCOPE OF TAXATION
Levy where Congress enacts a statute to impose taxes
Collection
Subject Matter refers to persons, things, transaction, privilege, etc.
C. INHERENT LIMITATIONS
1. Taxation should be for public use
a. Public welfare should be the penultimate objective.
b. Taxation may be used to implement the States police power.
2. Taxation is inherently legislative.
3. The Government is self-explanatory.a. LGUs are expressly prohibited from levying tax from the NG
b. Ng may tax GOCCs, agencies and instrumentalities
4. Territoriality
a. Taxing authority cannot impose taxes on subjects beyond its territorial jurisdiction.
b. It may determine the tax situs.
D. CONSTITUTIONAL LIMITATIONS
Constitution is not the source of the taxing power. It simply defines and delimits the power.
1. Due Process Clause (Section 1, Art. III)
Enforced contribution from the people cannot be made without a law authorizing the same
Substantive Due Process
Requires that the tax statute must be within the constitutional authority of Congress and that it must be fair, just and reasonable.
Procedural Due Process
Requires notice and hearing, or at least an opportunity to be heard.
2. Equal Protection Clause (Section 1, Art. III)
Means that taxpayers of the same footing should be treated alike, both as to privileges conferred as well as on obligations imposed.
Violations (Villegas v Hsiu Chiong Tsai Poi)
When classification is made where there should be none
When no classification is called for
Valid Classification (Pp v Cayat)
There must be substantial distinctions that make real differences.
These must be germane and relevant to the purpose of law.
The distinction must not only be applicable to present but also to future conditions.
The distinction must apply to persons, things and transactions belonging to the same class.
3. Freedom of Religion (Section 5, Art. III)
Non Establishment Clause
Covers the prohibition to establish a national or official religion since in that case, there will be an appropriation from taxes paid by the people.
Free Exercise Clause
This is the basis of tax-exemption granted to religious institutions.
4. Non-Impairment of Contracts (Section 10, Art. III)
Applications
Peoples right and freedom to contract
Sanctity of contracts
Does not apply to franchises
Not applicable to police power and eminent domain
5. Non-imprisonment for Non-Payment of Tax (Section 20, Art. III)
Poll tax tax imposed on persons without any qualification (e.g. CTC); payment is not mandatory (merely permissive)
E. DOCTRINE OF EQUITABLE RECOUPMENT VS. DOCTRINE OF SET-OFF
Doctrine of Equitable Recoupment
Refers to a case where the taxpayer has a claim for refund but he was not able to file a written claim due to the lapse of the prescription period within which to make a refund.
The taxpayer is allowed to credit such refund to his existing tax liability.
Allowed only in common law countries, not in the Philippines
Doctrine of Set-off or Compensation
Applies when the government and taxpayer are mutually debtors and creditors of each other.
Also not allowed in the Philippines since taxes are not in the nature of contracts between parties.
Taxes grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of the individual taxpayer is not required. (Republic v. Mabulao)
F. DOUBLE TAXATION
Double Taxation
The imposition of the same taxing body of two taxes on what is essentially the same thing
The imposition of two taxes on the same property during the same period and for the same taxing purpose
Allowed in the Philippines because there is no prohibition in the Constitution or any statute
When not allowed? Elements:
The taxes are levied by the same taxing authority
Same subject matter
Same taxing period
Same purpose
International Juridical Double Taxation
The imposition of comparable taxes in 2 or more States on the same taxpayer in respect of the same subject matter and for identical periods.
Can be eliminated by 2 contracting States.
Should be eliminated in order to encourage foreign investors to invest in the Philippines
Most Favored Nation Clause
Grants the contracting party terms and condition not less favorable than those granted to the most favored among the other contracting parties.
Intended to establish the principle of equality of international treatment by providing the citizens of the contracting parties privileges accorded by either party to those of the MFN
Methods to minimize burden
By granting tax exemptions
By giving tax credits
By reducing the rate of tax
G. EXEMPTION FROM REAL ESTATE TAX
Note: The properties must be ACTUALLY, DIRECTLY and EXCLUSIVELY used for religious, educational and charitable purposes to be exempt from taxation. (Section 28[3], Art. VI).
II. INCOME TAXATION (RA 8242 Tax Reform Act of 1997)
A. INDIVIDUALS
Classification of taxpayers
1. Resident Citizen (RC)
a. Citizen of the Philippines residing therein
b. Citizen residing outside the Philippines without the intention of residing thereat permanently
c. Citizen who did not manifest to the total satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein perm.
2. Non-Resident Citizen (NRC)
a. Citizen who established to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
b. Citizen who leaves the Philippines during the taxable year to reside abroad as immigrants.
3. Overseas Contract Worker (OCW)
a. Covers only those individuals with a working contract abroad
b. TNTs are not considered OCWs but are usually classified as RCs
4. Resident Alien (RA)
a. An individual residing in the Philippines who is not a citizen thereof
b. Intention to reside in the Philippines is not necessary
5. Non-resident Alien Engaged in Trade or Business in the Philippines (NRA ETB)
a. Engaged in retail trade or business
b. Engaged in the exercise of profession therein
c. Staying for an aggregate period of more than 180 days for the calendar year
6. Non-resident Alien Not Engaged in Trade of Business in the Phils. (NRA NETB)
a. NRAs not engaged in business but deriving income in the country
7. Aliens Employed in MNCs, OBUs, & Petroleum Service Contractors
B. CORPORATIONS
Definition: NIRC defines a corporation as including partnerships, no matter how created or organized, joint stock companies, joint accounts, associations, insurance companies but does not include general professional partnerships and JV formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an agreement under a service contract with the government.Classification of Corporations
1. Domestic Corporations
2. Resident Foreign Corporations ETB
3. Non-Resident Foreign Corporations NETB
III. KINDS OF INCOME TAXES
Net Income Tax; Gross Income Tax; Final Income Tax; MCIT, IAET; Optional Corporate Income Tax
A. NET INCOME TAX
Taxable Income:Gross Income
Less: Deductions (Personal & Additional)
Net Income
Multiplied by: Tax Rate
Net Income Tax Payable
Less: Tax Credits
Net Income Tax Due
Note:This kind of income tax allows deduction, personal as well as additional exemptions
& tax credits.
The determination of actual gain or loss is material since the tax shall be based on NET
The rate of this tax is 32% for individual & 35% for corporate taxpayers.
B. GROSS INCOME TAX
Unlike the net income tax, the gross income tax does not allow deductions, hence he formula is:
Gross Income X Tax Rate = Tax Due
Notes: The application of this tax BARS the application of the income tax.
The gross income tax is always subject to the Final WHT.
C. FINAL INCOME TAX
This is the only income tax applicable to all types of taxpayers without distinctions. The formula is:
Gross Income X Tax Rate = Tax Due
Notes:Under final income tax, the rate is multiplied to each income individually as each income may have a different rate.
This tax does not allow deductions.
The determination of gain or loss is immaterial since the basis of taxation is the GROSS,
Hence actual gain or loss does not matter.
An income which is subject to final income tax is no longer subject to net income tax!
Withholding agent is responsible in filing the income tax returns.
Applicable only to passive income and income from sources within the Phils.
If the taxpayer fails to pay, the withholding agent shall be liable!!!D. MINIMUM CORPORATE INCOME TAX 2% on Gross Income
The 2% MCIT on gross income is imposed on corporations beginning the 4th year of the corporation. The formula is:
Gross Income X 2% = MCIT
Pay the MCIT or the Net Income Tax, whichever is higher!
Rationale: To prevent corporations from claiming too many deductions.
E. IMPROPERLY ACCUMULATED EARNINGS TAX 10% of Taxable Income
This tax is imposed on the improperly accumulated earnings by corporations.
Purpose: To discourage the practice of corporations of accumulating earnings
& profits in avoidance of the payment of taxes.
To avoid this:Distribute earnings among the shareholders.
F. OPTIONAL CORPORATE INCOME TAX 15% on Gross Income
Corporations may opt to be taxed at 15% of their gross income in lieu of the Net Income Tax or the MCIT. This may be imposed by the President upon the recommendation of the DOF.
IV. SOURCES OF INCOMEWhat is the relevance in determining the sources?
Its relevance relates to the income tax liability of the taxpayers. RC and domestic corporations are the only taxpayers liable for income derived from sources within and without the Philippines.
A. GROSS INCOME FROM SOURCES WITHIN THE PHILIPPINES. (Section 42[a])
1. Interest from sources within the Philippines
Interests derived from sources within the Philippines
Interest earned from domestic bank deposits
Interests on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise.
The determining factor is the residence of the obligor, whether individual or corporation.
2. Dividends
Any distribution made by a corporation to its shareholders out of its earnings or profits and payable to its shareholders, whether in money or property.
Dividends issued by foreign corporations are considered income from sources within provided the 2 requisites are present:
At Least 50% of its gross income is from sources within the Phils.
Such gross income must be for the 3-year period ending with the close of the taxable year.
3. Services
This is the compensation for labor or personal services performed in the Phils.
The determining factor is the place of performance. The place of payments is IRRELEVANT!
4. Rentals and Royalties from property located in the Phils.
Use of copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right in the Phils.
Use of industrial, commercial or scientific equipment in the Phils.
The supply of scientific, technical, industrial or commercial info.
The supply of services by a non-resident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person. Technical advise, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking.
The use or right to use motion picture films, films or video tapes for use or in connection with TV, & tapes use in connection with radio broadcasting.
5. Sale of Real Property
Gains, profits and income from sale of real property located in the Phils.
Location of the property is the controlling factor to determine the source of the income.
6. Sale of Personal Property
B. GROSS INCOME FROM SOURCES WITHOUT THE PHILS.
Any income not falling under any of the 6 above is an income derived from sources outside the Philippines.
C. INCOME FROM SOURCES PARTLY WITHIN & PARTLY WITHOUT THE PHILIPPINES
The taxable income is computed by first deducting the expenses, losses or other deductions apportioned or allocated thereto and ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income; and the portion of such taxable income attributable to sources within the Phils.
Basic Formula:
Gross Income Within
Gross Income World
= Rate X Expenses World
= Expenses to be allowed
To illustrate: Suppose the Gross Income Within is P10k; the Gross Income World is P100K; and the Expenses-World is P50k, thus:
P10k_ =10% X P50K = P5K.
P100k
In this illustration, only P5k should be allowed as deduction against the gross income derived in the Phils.
D. SALE OF PERSONAL PROPERTY
Guidelines:
1. For those produced, in whole or in part, by the taxpayer within and sold without the Philippines, or produced in whole or in part, by the taxpayer without and sold within the Philippines the income shall be treated as partly within and partly without from sources within the Philippines and partly from sources without the Phils.
2. For those purchased within and sold without the Philippines, or for purchase of personal property without and sold without the gains, profits or income shall be treated as derived entirely from sources within the country where the property is sold; EXCEPT gains from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Phils., regardless of the place where the shares were sold.
V. CAPITAL GAINS AND LOSSES
What is a capital asset?
Capital assets are property held by the taxpayer, but does not include:
1. Stock in trade of the taxpayer / inventory on hand at the close of the taxable year
2. Property held primarily for sale to customers in the ordinary course of his business
3. Property used in the business, of a character which is subject to the allowance for depreciation.
4. Real property used in business of the taxpayer.
What is the relevance for the determination?
1. Holding period percentage taken into account
2. Loss Limitation Rule limitation on Capital Losses
3. Net Capital Loss Carry Over Rule
A. PERCENTAGE TAKEN INTO ACCOUNT
Holding period (percentage taken into account) is defined as the length of time or duration by which an individual held the capital asset.
In sale of exchange of a capital asset, there are 2 percentages which should be taken into account in recognizing the gain or loss from such sale or exchange:
1. 100% if the capital asset has been held for not more than 12 months (ST)
2. 50%, if held for more than 12 months (LT)3. Capital Assets held by Corporation not included
Sales not subject to the rule:
1. Sale or exchange of shares of stocks which is a capital asset.
2. Sale or exchange of real property held as a capital asset.
Notes: Capital gain is included in the gross income subject to net income tax.
A capital gain or loss is included in the gross incomeB. LIMITATIONS ON CAPITAL LOSSES
Loss Limitation Rule provides that losses from sales of exchanges of capital assets shall be allowed only to the extent of the capital gains from such sale or exchange.
A capital loss can only be deducted from capital gains but never from an ordinary gain, while an ordinary loss may de deducted from both capital and ordinary gain. Applicable to individual and corporations.Rationale:
1. Ordinarily, a capital gain is included in the gross income. The items included in the gross income are ordinary gains and losses those related to the ordinary business.
2. With respect to capital losses, these are not related to the ordinary business of the taxpayer.
C. NET CAPITAL LOSS CARRY-OVER
A capital loss may only be deducted from a capital gain, if there is any. What then is the remedy of the taxpayer where is capital loss but there is no capital gain?
Apply the NOLCO Rule.
NOLCO Rule:
Any capital loss sustained by the taxpayer during a taxable year shall be treated in the succeeding taxable year as a loss from sale or exchange of capital asset held for not more than 12 months.
Requisites
Amount of loss should not exceed net income for the taxable year when the loss was incurred.
There should be capital gain from which the carried over loss can be deducted
Can only be availed by individuals!
D. GAINS AND LOSSES FROM SHORT SALES
Short Sale is defined as a sale where the seller is selling a property without distinction of what kind of property he is selling, whether a share of stock or not. The seller is selling property which he is not in his possession.
Any gains or losses are considered as capital gains or losses.
E. CAPITAL TO ORDINARY ASSET, VICE VERSA
Calasanz V CIR A conversion from capital to ordinary asset is allowed provided that it is:
In furtherance of the taxpayers business
Substantially improved or very actively sold or both.
RR 7-2003
Properties classified as ordinary assets are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than 2 years prior to the consummation of the taxable transactions involving said properties.
VI. TAX ON INDIVIDUALSThe RC is the only individual taxpayer who is liable for income derived from all sources, within and without the Philippines.
A. RESIDENT CITIZEN, NON-RESIDENT CITIZEN, OCW AND SEAMEN AND RESIDENT ALIEN
1. Net Income Tax
a. Defined as the pertinent items of gross income less deductions and/or personal and additional exemptions.
b. This is the only kind of income tax which admits of deductions, personal and additional exemptions.
c. Married individuals shall compute separately their individual income tax. However, this is applicable only for individuals earning purely compensation income.
d. Married individuals who do not derive income purely from compensation, shall file a consolidated return to include income of both spouses, except where it is impracticable.
e. RA 9504 exempts minimum wage earners from the payment of net income tax.
2. Final Income Tax ( for Passive income)
a. Interest, Royalties, Prizes and other Winning
i. Applicable tax is 20%
ii. Passive income should be derived from sources within the Philippines
iii. FCDU deposits apply 7.5%
iv. Long Term deposits or investments exempt from final tax
4 to < 5 years 5%
3 to < 4 years 12%
< 3 years 20%
For prizes, before tax is imposed:
Must be derived from sources within the Phils.
Must be >P10k
Must be pursuant to a promotion or contest
Prizes exempted from tax:
Received primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement
The recipient was selected without any action on his part to enter the contest or proceeding
The recipient is not required to render substantial future services as a condition to receiving the prize or award.Winnings are subject to FWHT of 20% including winnings pursuant to gambling (except PCSO).
b. Cash and/or Property Dividends
i. Only cash and property dividends are subject to 10% final income tax
ii. Stock dividends are not taxable since such dividends are only a transfer of the surplus profit from the retained earnings to the authorized capital stock.
iii. Share of an individual in the distributable net income after tax of a partnership of which he is a partner is subject to final income tax
c. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
i. The net capital gains from sale, barter, exchange or other disposition of shares of stock in a domestic corporation not listed and traded is subject to a final tax rate of 5% for the first P100k of the net capital gain; and 10% of the net capital gain of any amount in > P100k.
ii. Elements required
1. Shares must be shares in a domestic corporation.
2. Shares are capital assets.
3. The shares are not listed and traded in the local bourse.
iii. For listed shares, the gains are not subject to income tax but subject to a business tax (percentage tax) at the rate of of 1% of the gross selling price.
d. Capital Gains from Sale of Real Property
i. A final income tax of 6% based on the gross selling price or FMV, whichever is higher shall be imposed on CG provided:
1. the property sold is real property
2. located in the Philippines
3. classified as a capital asset
ii. Sale of a natural persons principal residence maybe exempted from payment of the 6% CGT when the proceeds of the sale are fully utilized in acquiring or constructing a new principal residence within 18 months from the date of notarization of the Deed of Sale.iii. Sale of mortgaged property taxable only if the buyer is other than a financial institution.
B. NON RESIDENT ALIEN ENGAGED IN TRADE OF BUSINESS IN THE PHILIPPINES
1. Net Income Tax
An NRA ETB is subject to the net income tax.
Liable only for income derived from sources within the Phils.
2. Final Income Tax
a. Cash and/or property dividends or share in the distributable net income of a partnership (not general partnership), Interests, Royalties and Other winnings.
20% final income tax levied on letter a.
For prizes less than P10k, the applicable tax is the net income tax. Prizes from PCSO and Lotto are exempt from income tax.
Royalties for literary work subject to tax rate of only 10%.
Interest income from LT deposits and investments are exempt fro final income tax.
b. Capital Gains
Same as RA ETB in the Phils.
C. NON RESIDENT ALIENS NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILS.
1. Net Income Tax
NRA NETB shall be liable for the entire income he received from all sources within the Philippines by way of the gross income tax.
Tax rate is 25% on gross income
2. Final Income Tax
Sale of shares of stock or sale of real property which are capital assets, use tax rate in the next section which is 15% final income tax.
D. ALIENS EMPLOYED BY MNCS, OBUS AND PETREOLEUM SERVICE CONTRACTORS
1. Income Tax Liability for Salaries and Compensation These alien individuals are liable for final income tax at a rate of 15% on their gross income
Same tax treatment is applicable to Filipinos employed and occupying the same position as the aliens employed therein.
The 15% final income tax does not apply R&F employees both aliens and Filipinos.
2. Income Tax Liability for Other Income
Depends upon the taxpayers classification or status.VII. TAX ON CORPORATIONS
A. DOMESTIC CORPORATIONS
1. In General
a. A domestic corporation is generally liable for net income tax because the NIRC says:taxable income.
b. The net income tax is imposed at a rate of 35% on all income derived from sources within and without the Phils.
2. Optional Corporate Income Tax
a. The tax rate is 15%
b. Immaterial since the President has not yet implemented this option.
3. Proprietary Educational Institutions and Hospitals
Liable for net income tax at a rate of only 10% provided:
a. It must a stock and non-profit institutions
b. It must be a private educations institution or hospital
c. Their gross income from unrelated activity does not exceed 50%.
d. Must have been issued a permit to operate from the government.
Note: Non-stock and non-profit educational institution is exempt from income tax4. GOCCs, Agencies or Instrumentalities
The 35% net income tax rate is applicable to all GOCCs except the following:
a. SSS
b. Philhealth
c. PCSO
d. GSIS
5. Final Income Tax
Interest from deposits and yield from deposit substitutes and from trust funds and similar arrangements, and royalties from sources within the Philippines are subject to 20% final income tax.
If these are derived from sources without , these shall be subject to the net income tax and not the final income tax.
6. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange
Apply rules on individuals
7. Tax on Income Derived under the Expanded Foreign Currency Deposit System
The depository bank is the income earner and is subject to the net income tax of 35%
However, when the depository bank under the system transacts with the following, its income is exempt from net income tax:
a. Non-residents
b. OBUs
c. Local commercial banks
d. bBranches of foreign banks authorized by the BSP
e. Other depository banks under the system
With regard to FX loans, income derived therefrom shall be subject to a final tax at the rate of 10%
8. Inter-corporate Dividends
The domestic corporation is the stockholder of another domestic corporation. Being a stockholder, it is entitled to dividends. The dividends received by it shall not be subject to tax, in other words, exempt.
9. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings
Apply final income tax rate of 6% is imposed on the gain presumed to have been realized
B. RESIDENT FOREIGN CORPORATIONS
1. In General
Like a domestic corporation, a resident foreign corporation is subject to the net income tax at a rate of 35%.
However, unlike a domestic corporation, a resident foreign corporation is only liable for income derive by it from sources within the Philippines.
2. Optional Corporate Income Tax of 15%
Tax rate is 15% of Gross Income
3. MCIT
Compare the 2% of Gross Income versus net income, choose higher of the 2.
4. International Carrier Doing business in the Philippines
Liable to pay tax of 2% on its Gross Philippine Billings (GPB)
For international air carriers, the following requisites must be present:
The persons, excess baggage, cargo, and the mail must be originating in the Philippines
In a continuous and uninterrupted flight or shipment Irrespective of the place of sale or issue and the place of payment of the ticket.
For international shipping carriers, the following are the pre-requisites:
It must originate from the Philippines
It must be up to the final destination
Regardless of the place of sale or payments of the passage or freight documents
5. Offshore Banking Units
A final income tax at the rate of 10% is imposed on income derived by OBUs authorized by the BSP from its foreign currency transactions (e.g branches of commercial banks).
Transactions of these OBUs are exempt from final income tax provided it is with the following:
a. Nonresidents
b. Other OBUs
c. Local commercial banks
d. Branches of foreign banks
6. Tax on Branch Profit Remittance
A 15% final income tax based on the total profits applied or earmarked for remittance is imposed on any profit remitted by a branch to its head office.
If the profit remitted us nor from activities connected with the conduct of its business in the Phils., the net income tax rate of 35% shall apply.
This tax does not apply to local subsidiaries of foreign corps. (for branch offices only)7. Regional Area Headquarters and Regional Operating Headquarters of MNCs
RAH a branch established in the Phils by MNC and which headquarters do not earn or derive income from the Philippines and which acts supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Regions and other foreign markets.
ROH a branch established in the Philippines by MNCs which are engaged in any of the following: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing and control and sales promotion; training and personnel management; logistic services; R & D; product development; technical support and maintenance; data processing and communication; and business development.
RAH is exempt from income tax ROH is subject to a net income tax of 15%.
8. Final Income Tax
Interest income and Royalties subject to 20% final income tax Income derived from Expanded Foreign Currency Deposit Systems The income earner is a resident foreign corporation depository bank . The tax rate is 35%.
Intercorporate Dividends The income received by the foreign corporation from the domestic corporation shall be exempt from income tax.
C. NON-RESIDENT FOREIGN CORPORATIONS
1. In General
Liable for gross income tax at the rate of 35% on income derived from sources within the Philippines.
2. Interest on foreign loans
A final WHT at the rate of 20% is imposed on the amount of interest on foreign loans.
Contemplated transaction here is one where the lender is a non-resident foreign corporation and the borrower is a domestic corporation.
Exemption applies only when the lender is a foreign government or any of its GFI, international and regional financial institutions (supra-nationals).
3. Intercorporate Dividends
Among the three corporate taxpayers, only the NR foreign corporation is liable for dividends received by it from a domestic corporation at the rate of 35%.
Tax deemed paid credit rule (tax sparing rule) The country of domicile of the non-resident foreign corporation allows a tax credit of 20% for taxes deemed paid in he Philippines to be entitled to the lower rate of 15%.
4. CGT from Sale of Shares not Traded in the Stock Exchange
Rules on individuals apply.
VII. MINIMUM CORPORATE INCOME TAX
Nota Bene:
This tax is imposed on two types of corporations: the domestic corporation and the resident foreign corporation.
To discourage these corporations from claiming too many deduction to avoid payment of tax, the MCIT of 2% on the gross income is imposed in lieu of the net income tax of 35%
A. IMPOSITION OF THE TAX
The 2% MCIT cannot be imposed simultaneously with the net income tax of 35%. Impose whichever is higher!
The MCIT can be imposed only at the beginning of 4th taxable year immediately following the year in which the corporation commenced its operations.
B. CARRY FORWARD IF EXCESS MINIMUM TAX
This is the 2nd carry over tax under the NIRC. The first is the NOLCO.
Any excess of the MCIT over the net income tax shall be carried forward and credited against the net income tax over the net income tax shall be carried forwards and credited against the net income tax for the 3 immediately succeeding taxable years. Unlike the NOLCO, the MCIT can be carried over for the 3 immediately succeeding years.
C. RELIEF FROM THE MCIT
The Secretary of Finance is authorized to suspend the MCIT on any corporation who suffers losses on account of:
Prolonged labor dispute
Force majeure
Legitimate business reverses
IX. IMPROPERLY ACCUMULATED EARNINGS TAX
A. IN GENERAL
Generally, a tax of 10% is imposed on the improperly accumulated income for the purpose of avoiding the income tax with respect to its shareholders.
The tax compels the corporations to declare dividends.
Inclusion: only domestic corporations and closely-held corporations.
Closely held corporations are those with 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.
B. EXEMPTED CORPORATIONS
Under the NIRC, the following are exempted from the application of this tax without qualification:
Publicly-held corporations
Banks and NBFIs
Insurance companies
Under the RR 2-2001, the following were added to the list with the proviso that the improperly accumulated earnings must be for reasonable needs of the business:
Taxable partnerships
General professional partnerships
Non-taxable joint ventures
Enterprises located within economic zones.
C. IMPROPERLY ACCUMULATED TAXABLE INCOME
IATI is taxable income adjusted by:
Income exempt from tax
Income excluded from tax
Income subject to final income tax
The amount of NOLCO deducted, and reduced by the sum of dividends actually or constructively paid and income tax paid for the year.
D. EVIDENCE OF PRUPOSE TO AVOID INCOME TAX
There are 2 instanced which are to be considered:
The fact that the company is a mere holding company or investment company
The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business.
The presence of either brings a prima facie evidence of the purpose to avoid payment of this tax.
The intention of the taxpayer at the time of accumulation is controlling to determine whether the profits are accumulated beyond the reasonable needs of the business.
Definiteness of plans coupled with actions taken towards its consummation are essential.
X. EXEMPT CORPORATIONSA. GENERAL PROFESSIONAL PARTNERSHIPSA GPP is a partnership formed by persons for the sole purpose of exercising their common profession, no part of income of which is derived from engaging in any trade or business. Any other partnership is liable for corporate income tax.
A GPP may be exempted from corporate income tax if these 2 requisites are met:
1. It is formed by persons for the sole purpose of exercising their common profession.
2. No part of the income of which is derived from engaging in any trade or business.
Notes:
If the GPP is exempt from corporate income tax, the share of each partner is subject to income tax. Each partner is liable in his separate and individual capacity.
If the 2 requisites are absent, the partnership is deemed a corporation and is subject to corporate income tax. The share of each partner, whether actually or constructively received, is deemed as a dividend which is SUBJECT to final income tax. If there is other income but the income derived is passive (e.g. interest income, which is subject to final income tax of 20%), still the partnership can be exempt from the corporate income tax. Passive income is not included in the partnerships annual return.
B. JOINT VENTURE UNDER A SERVICE CONTRACT WITH THE GOVERNMENT
The JV which is exempt from corporate income tax, is a merger of two or more corporations for the purpose of engaging in construction projects or energy operations pursuant to a consortium agreement or a service contract with the government. The corporations must be engaged in the same line of business.Notes:
It is only the JV which is exempt from corporate income tax, not the income of each corporation from the JV.
Thus, each corporation is liable for corporate income tax.
C. GOVERNMEN-OWNED OR CONTROLLED CORPORATIONS
The net income tax is applicable to all GOCCs except the following:
SSS
PHIC
PCSO
GSIS
D. OTHER EXEMPT CORPORATIONS
The following are exempt under Section 30 of the NIRC:
1. Labor and agricultural organizations not organized principally for profit.
2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit.
3. A beneficiary society operating for the exclusive benefit of the members, such as a fraternal organization operating under a lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society or their dependents.
4. Cemetery companies owned and operated exclusively for the benefits of its members.
5. Non-stock corporations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person.6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the income of which inures to the benefit of any private stockholder or individual.
7. A non-stock and non-profit educational institution.
8. Government educational institution.
9. Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company , or like organization satisfying the following requirements:
a. The organization must be operating within a localityb. The income of such organization must be used to meet the necessary expenses.
10. Farmers associations for organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales less necessary selling expenses on the basis of quantity of produce.
Notes: An exempt corporation can be held liable for corporate income tax if it derives income from any of their property or any of their activities conducted for profit regardless of the disposition made of such income. Above corporations are only exempt from income tax under Section 30 but this same section doe not bar the applicability of other axes to these corporations.CHAPTER XI. GROSS INCOME AND EXCLUSIONS
Section 32 of the NIRC speaks of gross income and exclusions. To arrive at the gross income, the exclusions must be deducted from all the income, hence the formula is:
All income Exclusions = Gross Income
A. GROSS INCOME INCLUSIONSGross income is defined by Section 32 quite broadly, as all income derived from whatever source. This is an open ended definition, suggestive of an intention to include rather exclude. The following items comprise the gross income subject to income tax:
1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions, and similar items., EXCEPT for the following:a. Those received by taxpayers who are subject to the Gross Income Tax
b. Those received by Aliens employed by MNCs, OBUs and Petroleum Service Contractors because their compensation are subject to the 15% Final tax unless they choose pay by way of final income tax.2. Gross income derived from the conduct of trade or business or the exercise of a profession.
3. Gains derived from dealings in property.
a. If the real property is capital, the gain therefrom is subject to income tax and not included as gross income.
b. If the real property is ordinary, it should be included.
4. Interest incomea. Interests from loans are always included in the gross income.
b. Interests from bank deposits are not included since they are subject to final income tax.
5. Rental income
6. Royalties
a. The royalty is subject to final income tax if it is derived from sources within the Philippines.
b. If the source is outside the Philippines, the net income tax is applicable.
7. Dividends
8. Annuities
9. Prizes and winnings, instances to be included in the gross income:a. It should be derived from sources within the Philippines and should be less than or equal to P10k
b. The prize is derived from sources without the Philippines
c. The taxpayer is a corporation.
10. Pensions (unless excluded)11. Partners distributive share from the net income of the GPPB. EXCLUSIONS
Classes of income not included in the gross income: Passive income, since this is already subject to final income tax.
Incomes which are exempt under the income tax law.
Income classified as exclusions under Section 32(b).
The following are the exclusions provided in section 32(b):
1. Life Insurance payable upon death of the insured.2. Amount received by Insured a Return of Premium
3. Gifts, bequests and Devises
These are gratuitous in nature. Hence, exempt from gross income tax but is subject to donors tax.
4. Compensation for Injuries and Sickness
5. Income exempt under treaty
6. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement Pay
i. Retirement benefits under RA 7641 (retirement benefits of private firms without retirement plan)
1. The retiring employee is between 60 to 65 years old.
2. He must have served the company for at least 5 years.
ii. Retirement benefits pursuant to RA 4917 (retirement under private retirement plan)
1. Retiring employee must not be less than 50 years old.
2. Must have been in the service for at least 10 years.
3. Exemption must be availed only once.
4. The private benefit plan must be approved by the BIR.
iii. Retirement pay given by GSIS, SSS and PVAO are exempted from income tax without any qualification
iv. Retirement gratuities, pensions and other similar benefits given by foreign government agencies and other institutions, private or public to residents, nonresident citizens of the Philippines or aliens who come to reside in the Phils., without any qualification.
b. Separation Pay
i. Exempted from income tax as long as the cause for separation from service is death, sickness, physical disability or for any cause beyond the control of the employee.
ii. If from foreign government agencies and other institutions, tax exempt also.
c. Terminal Leave Benefits
i. EO 291 provides that terminal leave benefits of government employees are exempt from tax
ii. For private employees, if terminal leave benefits are paid upon retirement, such benefits are exempt from income tax.
iii. However, if given annually, RR 2-98 provides:
1. If sick leave not exempt
2. If less than 10 days VL exempt3. If more than 10 days VL subject to income tax.
7. Miscellaneous items
a. Income derived by foreign government.
i. Foreign government
ii. Financing institutions owned or controlled by foreign government
iii. International or regional financial institutions established by foreign governments.
b. Income derived by the Government or its political subdivisions from:
i. Any public utility
ii. The exercise of any essential government function
c. Prizes and Awards
i. Primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement.
ii. The recipient was selected without any action on his part to join the contest.
iii. The recipient is not required to render future service as a condition to receive the prize or award.
d. Prizes and Awards in Sports Competition
i. Held locally or internationally and
ii. Sanctioned by national sports association
e. 13th Month Pay and other Benefits
i. Applied both to the government and the private sector
ii. Exemption covers only the maximum amount of P30,000
f. GSIS, SSS, Philhealth, and Pag-ibig contributions
g. Gains from sale of bonds, debentures or other certificate of indebtedness
i. Maturity must be more than 5 years to be exempt
ii. If less than 5 years, subject to final income tax.
h. Gains from redemption of shares in Mutual fundXII. FRINGE BENEFITS TAX
This tax was introduced in 1998. A final income tax of 32% is imposed on the grossed-up monetary value of the fringe benefit furnished or granted to the employee by the employer.
Who is liable to pay the final income tax on fringe benefits?
The employee shall be liable because:
The law did not say that it is the liability of the employer but it says that is payable.
The law did not say that it is the of the employer period, but the law referred to Section 57(a) Withholding of Final Tax on Certain Incomes
The law admits that is the liability of the managerial employee
A. EXCLUSIONS
By way of exception, the following benefits are not subject to final income tax:
Those received by R&F employees
The fringe benefit is necessary for business
The fringe benefit is for the convenience or advantage of the employer.
If the fringe benefit is exempted from income tax under the code.
Employer contributions to employee retirement, insurance, and hospitalization benefit plans.
De minimis benefits which limited to facilities or privileges furnished or offered by an employer to his employees that are relatively small value and are given as a means of promoting health, goodwill, contentment, or efficiency of his employees.B. INCLUSIONS
Fringe benefit is any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee such as but not limited to:
1. Housing, except:
RR 3-98 provides that a housing unit situated inside or adjacent to the premises of a business within maximum of 50 meters shall not be considered as a taxable fringe benefit.
Temporary housing for an employee who stays in the housing unit for 3 months or less shall not be considered a taxable fringe benefit.
2. Expense Account refers those incurred by the managerial worker which are to be reimbursed by management.
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others.
5. Interest on loans at less than prevailing market rate to the extent of the difference between the market rate and actual rate granted.
6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations.
7. Expenses fore foreign travel
8. Holiday and vacation expenses.
9. Educational assistance to the employee or his dependents.
10. Life or health insurance and other non-life insurance premiums in excess of GSIS and SSS.
XIII. ALLOWABLE DEDUCTIONSThis provision is applicable only to net income since it is only income tax which allows deductions.
Deductions are allowed because they are necessary to generate income
Pure compensation earners are not allowed under Section 34 for any deduction
Exception is for premium paid for health and/or hospitalization insurance.
The following deductions are allowed for a taxpayer under the net income tax:
A. EXPENSES
1. Ordinary and necessary trade, business or professional expenses.In General, requirements are:
The expenses are incurred within the taxable year
These are ordinary and necessary
The expenses are incurred pursuant to the trade or business or the exercise of profession
These should be supported by evidence.
a. A reasonable wages and salary, other forms of compensation for personal services actually rendered, and the grossed-up monetary value of fringe benefits provided the final income tax thereof has been paid.
b. A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession.
c. A reasonable allowance for rentals and/or other payments which are required as a condition for the continued use or possession, for purposes of trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than a lessee, user or possessor.
d. A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer.Conditions for an expense to be deductible:
The expense must be ordinary and necessary.
It must be paid or incurred within the taxable year.
It must be paid or incurred while carrying on a trade or business.
Note: Bribes, Kickbacks and other similar payments are not ordinary and necessary to the trade, business or profession of the taxpayer, therefore not deductible!
2. Expenses allowable to Private Educational Institutions
a. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during a taxable year for the expansion of school facilities; or
b. To deduct allowance for depreciation thereof.
NIRC expressly prohibits the deduction of:
Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property.
Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.
B. INTEREST
1. The amount of interest paid and incurred by the taxpayer within the taxable year shall be allowed as a deduction from gross income.
Interest expense to be deducted is limited by the proviso which provides that the allowable deduction shall be reduced by 42% of the interest income which was previously subjected to final income tax.
2. By way of exception, the NIRC enumerated several instances where the interest expense incurred by a taxpayer is allowed as a deduction but such is subject to qualifications:
a. If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on an interest paid in advance through discount or otherwise, provided:
i. That such interest shall be allowed as a deduction in the year the indebtedness is paid.
ii. That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the taxable year shall be allowed as deduction in such taxable year.
b. If both the taxpayer and the person to whom payment has been made or is to be made are persons specified under Section 36(b).
3. The interest expense may be treated as part of the value of the property acquired which property will be treated as a capital expenditure which is subject to the allowance for depreciation.
C. TAXES
There are 2 ways to minimize a taxpayers liability:
Tax Deductions (deducted from gross income)
Tax Credits (deducted from the income tax due)
Formula:
Gross Income
Less: Deductions
Net Income
X Tax Rate
Les: Tax Credits
Net Income Tax Payable
The taxes paid or incurred by a taxpayer during the taxable year in connection with his trade or business, shall be allowed as deduction, except:
Income Tax
Income taxes imposed by authority of any foreign country, but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire o have any extent of the benefits of Section 34(c)[3]. The tax credit for taxes paid or incurred in any foreign country should not exceed the taxes from which the tax credit is taken.
Said tax should be compared with the tax to be paid in the Philippines by the taxpayer and such credit should not exceed the amount of tax to be paid in the Philippines
Estate and donors taxes
Taxes assesses against local benefits of a kind tending to increase the value of the property assesses.
D. LOSSES
Losses may be deducted from the gross income provided the following requisites are present:
The losses are actually sustained during the taxable year.
Said losses are not compensated for by insurance or other forms of indemnity
Losses must be incurred from the exercise of business or from property connected with the business or profession
Loss shall not be allowed as deduction if such loss has been claimed as a deduction for estate tax purposes in the estate tax return.
NOLCO RULE
This rule provides that the net operating loss of the business for the taxable year preceeding the current taxable year can be carried over as a deduction from the gross income for the next 3 consecutive years immediately following the year the loss was incurred.
For mining companies, net operating loss incurred during the first 10 years may be carried over as a deduction from taxable income for the next 5 years.
Not allowed if there was substantial change in ownership of the business for corporations.
E. BAD DEBTS
Bad debts result from the unpaid receivables of the taxpayers from its customers in the exercise of his trade, business or profession. These can be deducted and charged off within the taxable year, EXCEPT in the following instances:
Those not connected with the profession, trade or business of the taxpayer
Those between related parties
Tax Benefit Rule
The rule provides that where the creditor was allowed a deduction of bad debts but said debts are subsequently recovered, the previous deduction will not be cancelled but the recovered amount will be added in the computation of the gross income.
F. DEPRECIATION
Depreciation is the expense which can be deducted by the taxpayer for several years as the case may be. This deduction is an exception to the rule that expenses to be deducted should have been incurred during the taxable year.
Incurred due to the ordinary exhaustion, wear and tear, including allowance for obsolescence of property used in business.
Since the property is used for more than a year, it is only reasonable that the expense be spread over the usual life of the property.
Every property can be subject to depreciation EXCEPT land.
Method of depreciation allowed under the NIRC:
Straight line method
Declining balance method
Sum-of-the-years digit method.
Any other method prescribed by the DOF and BIR
G. DEPLETION OF OIL & GAS WELLS AND MINES
A reasonable allowance for depletion or amortization is allowed as deduction from gross income in accordance with the cost-depletion method. The provision is not self-executing. This needs approval of the BIR and DOF.
H. CHARITABLE & OHER CONTRIBUTIONS
This deduction is deducted from the net income, not from the gross income since one of the bases of the amount to be deducted is a percentage of the net income.
Who is entitled to claim the deduction for charitable contributions?
The donor is the one entitled to this deduction since, obviously, he was the one who incurred this expense.
A pure compensation earner cannot claim this deduction
There are 2 types of deduction:
Partial deduction may be claimed if the donee is ay of the following:
GOP
Accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehab of veterans.
Social welfare institutions
NGOs
Deduction should not exceed 10% of the taxable income for individuals and should not exceed 5% of its taxable income for corporations.
Full deduction
GOP, exclusively to finance undertakings in educations, health, youth and sports development, human settlements, science and culture and in economic development.
Foreign institutions or international organizations in compliance with treaties, agreements or special laws.
NGOs accredited by the government certifying body
I. RESEARCH & DEVELOPMENT
Generally, expenses incurred for R&D are treated as ordinary and necessary expenses which are not chargeable to the capital account. These expenses can only be allowed and claimed during the taxable year when such expenses are incurred or paid.
R & D expenses can be treated as deferred expenses over a period of 6o months:
Those incurred in connection with the business or profession
Those not treated as expense under Section 34(I)1.
Those chargeable to the capital account but not chargeable to a property of a character which is subject to depreciation or depletion.
This deduction is NOT ALLOWED for:
Any acquisition or improvement of land (except for private educational institutions in case of school expansion)
Any expenditure related to ascertaining the existence, location, extent or quality of mineral or oil deposits.
J. PENSION TRUSTS
The deduction refers to the reasonable amount transferred or paid by the employer into the pension trusts of the employees. Prerequisites:
Not have been previously allowed as a deduction
Be apportioned in equal parts over a period of 10 consecutive years.
K. OPTIONAL STANDARD DEDUCTION as amended by RA 5904
Individual and corporate taxpayers, instead of availing the itemized deductions, can claim a deduction in an amount not exceeding 40% of their gross income. Once this option is chosen, this will be irrevocable for the taxable year. Note that an NRA NETB is excluded since his liability is by way of the gross income tax where deductions are not allowed.
L. PREMIUM PAYMENTS ON HEALTH & HOSPITALIZATION INSURANCE
This is the only deduction which can be claimed by a pure compensation earner. Life insurance premium is not included as a deduction.
Limitations:
Amount to be deducted shall not exceed P2,400.00 per family
Allowed only if the said family has a gross income of not more than P250,000.00
For married couple, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
XIV. ALLOWANCE FOR PERSONAL EXEMPTIONS
The exemption provided in Section 35 is available to the following taxpayers: RC; NRC; OCW & Seamen; RA ETB; and NRA ETB.
A. SECTION 35A AS AMENDED BY RA 9504
For purposes of determining the net income of the taxpayer, a personal exemption of P50,000 shall be allowed for single individuals, legally separated, head of the family, and married individuals.
Note that individual taxpayers are no longer classified as such. The P50,000 exemption is regardless of status. For married individuals, only the earning spouse shall be allowed personal exemption
B. ADDITIONAL EXEMPTIONS FOR DEPENDENTS
An additional exemption of P25,000 shall be allowed for each dependent not to exceed 4. Applicable only for married individuals and shall be claimed by only one of the spouses. They must be legally married. In case of legally separated spouses, the one who has custody of the children can claim.
Dependent is a child chiefly dependent upon and living with the taxpayer, not more than 21 years of age, unmarried and not gainfully employed, or is incapable of self-support because of mental or physical defect.
With the passage of RA 9504, a family of 6 can now claim a total of P200,000.
C. CHANGE OF STATUS
The change of status of the taxpayers shall be effective only if such change will benefit the taxpayer. Thus, the rule is the higher exemption will be the applicable exemption for the taxpayer.
D. PERSONAL EXEMPTION ALLOWABLE TO NRA
NRA ETB shall be allowed personal exemptions in the amount equal to the exemptions allowed in the income tax law in the country of which they are citizens.
XV. ITEMS NOT DEDUCTIBLE
These items are usually not related to the trade, business or profession of the taxpayer.
A. SECTION 26(A) IN GENERAL
The following items are not deductible:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements
3. Property restoration
4. Premiums paid on any life insurance policy covering the life of any officer or employee and when the taxpayer is directly or indirectly a beneficiary of such policy.
B. LOSSES FROM SALES OR EXCHANGE OF PROPERTY
Such losses are not allowed as deduction:
1. Between members of the family
2. Between an individual and a corporation more than 50% in value is owned by or for such individual
3. Between 2 related corporations (more than 50% of each owned by the same individual)
4. Between a grantor and a fiduciary of any trust
5. Between a fiduciary of a trust and a beneficiary of such trust
For number 4 to 6, the law presumes irregularity.
XVI. DETERMINATION OF AMOUNT & RECOGNITION OF GAIN OR LOSS
This shall be applicable to the income tax only since it is the only tax where the determination of gain or loss is material.
A. COMPUTATION OF GAIN OR LOSS
For this purpose, the amount realized from the sale or other disposition of the property is defined as the sum of money received plus the FMV of the property received.
Notes:
With respect to personal property, the gain or loss should always be determined since any gain or loss from the sale of such property is subject to the net income tax (except gain from sale of shares not traded which is a capital asset which is subject to final income tax.
As regards real property, determine first whether the property is a capital asset or not. If it is a capital asset, the gain or loss is immaterial since the basis of the tax is the FMV or assessed value of the property. The sale is subject to final income tax. If the property is an ordinary asset, the gain or loss is material since it is subject to net income tax.
B. BASIS OF DETERMINING GAIN OR LOSS
The following are the rules to be considered:
1. If the property was acquired by purchase, the acquisition cost shall be the basis of determining the gain or loss. (Cost = purchase price + expenses)
2. If acquired through inheritance, the cost at the time of acquisition should be determined.
3. If acquired by gift, the basis shall be the same as if the property was in the hands of the donor who did not acquire the property by gift. Thus, the basis may either be the acquisition cost or the FMV at the time of acquisition.
4. If property was acquired for less than adequate consideration, the basis is the amount paid by the transferee for the property.
C. EXCHANGE OF PROPERTY
As a rule, the entire amount of the gain or loss shall be recognized subject to the following exceptions under Section 40(C):
1. It is a contract if exchange
2. The parties are parties to the merger and consolidation
3. The subject matter is the one specifically provided by law.
Basic elements in order for the gain to be not taxable and loss not deductible:
1. The parties are not members of a merger or consolidation
2. Property is given in exchange of stocks, if cash is given, this is not applicable
3. After the exchange, said giver, alone or together with others not exceeding 4, gains control over the corporation.
XVII. SITUS OF ESTATE AND DONORS TAX
The following are the taxpayers under the estate tax:
RC
NRC
RA
NRA
Under the donors tax, the taxpayers are the following:
RC
NRC
RA
NRA
Domestic corporations
Foreign corporations
Note that a corporation is incapable of death, hence not a taxpayer under estate tax. It is subject to donors tax since it is a juridical person who can enter into contract of donations, thus may be subject to donors tax.
Only the NRAs and foreign corporations are liable for property within the Philippines. Others are liable for properties located within and without the Philippines.
The following are intangibles deemed located in the Philippines:
Franchise exercised in the Phils.
Shares issued in the Phils.
Shares of foreign corporations, 85% of the business of which is located in the Phils.
Shares of any corporation which have acquired a business situs in the Phils.
Shares r rights in any partnership established in the Phils.
The enumeration is relevant to NRA and foreign corporations only.
Exceptions:
1. When the national law of the decedent does not impost a transfer tax in respect of intangible personal property of citizens of the Philippines residing in that foreign country
2. If the laws of the foreign country allow similar exemption from transfer taxes.
XVIII. ESTATE TAX
The formula for this tax is:
Gross Estate
Less: Deductions__
Net Estate
X Rate__________
Taxable Net Estate
Less: Tax Credit___
Estate Tax Payable
A. GROSS ESTATE
This shall consist of the value of all the property, real or personal, tangible or intangible, wherever situated with the exception of non-resident aliens since they are only liable for property located in the Philippines.
In addition to the property owned by the decedent, there are certain properties which although are not owned by the decedent, still form part of the gross estate:
1. Decedents interest at the time of his death
2. Transfer in contemplation of death (TICOD)
3. Revocable transfer (because of the tremendous power and control which the transferor can exercise, he can revoke the transfer anytime)
4. Property passing under General Power of Appointment (executed by the decedent similar to TICOD)
5. Proceeds of life insurance in which the beneficiary is the estate.
6. Prior interests
7. Transfers of insufficient consideration, EXCEPT in case of a bona fide sale.
8. Capital of surviving spouse This is an exclusion in the gross estate.
Note: Transfer is a TICOD if:
The decedent still retained the possession
Notwithstanding the transfer, the decedent continued to receive the income of the fruits
The decedent retained the right to designate the person who shall possess or enjoy the property or the income there from.
B. COMPUTATION OF NET ESTATE
B(a) Deductions Allowed to the Estate of a Citizen or Resident
1. Expenses, Losses, Indebtedness, and Taxes
a. Funeral expenses not to exceed 5% of the gross estate not to exceed P200,000
i. Mourning apparel of spouse and unmarried minor children
ii. Catering and food expenses during the wake
iii. Publication charges for death notices
iv. Telecommunication expenses incurred in informing relatives of the deceased
v. Cost of burial plot, tombstones, mausoleum
vi. Interment and/or cremation fees.
vii. Expenses incurred for the performance of interment rites EXCLUDE expenses incurred during 40 days, kalag luksa and death anniversary.
b. Judicial Expenses
i. Expenses incurred in the testamentary or intestate proceedings for he settlement of estate
ii. Also include EJ expenses for the settlement of the estate of he deceased
c. Claims Against the Estate; the following requisites must be present:
i. Amount of the indebtedness
ii. The debt instrument must be notarized at the time of indebtedness
iii. Statement showing the disposition of the proceeds of loan
iv. Certification on the unpaid balance of loan
d. Claim Against Insolvent Persons
e. Mortgage Indebtedness, Taxes which accrued before the death of the decedent (exclude Estate Tax) and Losses by virtue of natural calamities (no insurance coverage)
2. Vanishing Deduction
a. This refers to a property which forms part of the gross estate of any person who died within 5 years prior to his death.
b. The following percentages should be taken into account in the computation of the net estate
i. 100% - Within 1 year
ii. 80% - 1 to 2 years
iii. 60% - 2 to 3 years
iv. 40% - 3 to 4 years
v. 20% - 4 to 5 years
3. Transfers for Public Use
a. Include the amount of all bequests, legacies, devises or transfers to the GOP
b. The property should be used for public purpose.
4. Family Home, conditions:
a. The amount to be deducted should not exceed P1.0M, excess is subject to estate tax
b. Certification from the Barangay Captain that the family home is the actual residence of the decedent.
c. Legally married or head of the family
d. The amount of the family home must be included in the gross estate.
5. Standard Deduction
a. The standard deduction is P1.0 Million
b. Automatic, no conditions attached.
6. Medical Expenses
a. Must be incurred within 1 year prior to death of decedent
b. Must be substantiated by official receipts
c. Maximum limit: P500,000.00
7. Retirement Pay
a. Received under RA 4917
b. Must satisfy the 50 and 10 Rule
B(b) Deductions allowed to NRAs are the following:
1. Expenses, losses, indebtedness and taxes
2. Vanishing deduction
3. Transfers for Public Use
The rules deductions on residents and citizens are applicable to NRAs except the following:
1. Family home
2. Standard deduction
3. Hospitalization expenses
4. Retirement pay
B(c) Share in the conjugal property
The net share of the surviving spouse in the conjugal partnership is considered as a deduction from the gross estate. The relevance lies in determining whether or not it is necessary to comply with the requirements under Sections 89 and 90:
1. Written notice to the Commissioner
2. Filing of an estate return
3. A statement duly certified by a CPA
B(d) Miscelaneous Provisions
In cases of NRAs, for purposes of the estate tax return, all the properties of such NRA, whether situated in the Philippines or outside, shall be included in the return. Failure to comply will bar the estate to claim any deduction!
C. Exemption of Certain Acquisitions and Transmission
The following shall not be taxed:
1. The merger of the usufruct in the owner of the naked title
a. The decedent is the usufructuary (no fixed period)
b. Property is not included in his estate
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
a. The decedent is the fiduciary heir
b. Upon his death, the property is transferred to the heir of the decedent.
3. The transmission from the first heir, legatee or donee in favour of another beneficiary, in accordance with the desire of the predecessor
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided:
a. No part of the income of such institution inures to the benefit of the individual
b. Not more than 30% of said bequest, devise, legacy or transfer shall be used by such institutions for administration purposes.
D. Determination of the Value of the Estate
1. Usufruct for a fixed period
a. This forms part of the estate since the period has not yet lapsed
b. The value is determined by taking into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality table, to be approved by the DOF, upon recommendation of the IC.
2. Properties
a. Personal Property
i. Use FMV at the time of death
ii. Listed shares highest value immediately before the death
iii. Unlisted Preferreds Use par value
iv. Unlisted Commons Book value
b. Real Property, us higher of the two:
i. FMV as determined by the BIR (Zonal Value)
ii. FMV as determined by the Assessors Office (Assessed Value)
E. Notice of Death to be FiledGuidelines:
1. File the notice if the gross estate exceeds P20,000
2. Executor, administrator or any legal heir may file
3. Filing period is within 60 days after decedents death
E. Estate Tax Returns
Guidelines:
1. Filing is required when the gross estate exceeds P200,000.00
2. File even if below P200k when the gross estate consists of real property, motor vehicle, shares of stock or other similar property
3. When the gross estate exceeds P2.0 Million, estate tax return shall be supported by a CPA certification
4. The estate tax return shall be filed within 6 months from the decedents death.
5. In meritorious cases, CIR may grant 30 day extension.
6. Where to file?
a. Authorized Agent Bank
b. RDO
c. Collection Officer
d. City or Municipal Treasurer
e. If there is no legal residence in the Philippines, file with the CIR
G. Payment of Tax
Guidelines
1. General Rule: Pay-as-you-file system
2. CIR may give 5-year extension in case of judicial settlement
3. CIR may give 2-year extension in case of EJF
4. Acceptable ground for extension: if payment of tax would impose undue hardship upon the estate or any of the heirs.
5. Requirement for extension: Bond and/or surety.
H. Discharge of Executor or Administrator from Personal Liability
This will take place upon payment of the estate tax.
I. Deficiency
Definitions:
1. The amount by which the state tax exceeds the amount shown in the estate tax return
2. If no amount is shown upon the return or if there is no return, the amount by which the tax exceeds the amounts previously assessed.
J. Payment before delivery by Executor or Administrator
Before a judge can authorize the delivery of the distributive shares, there must be first a certification from the Commissioner that the estate tax has been paid.
K. Duties of Certain Officers and Debtors
Register of Deeds must register the transfer upon showing a certification from the CIR that the estate tax has been paid
Attorney the one who executed the settlement if obliged to file a petition or pleading with the court
Notary Public the who will notarize the settlement
City or Provincial Engineer the one who makes the cadastral survey for purposes of partition
Debtor obliged to pay only after a certification of the CIR that the tax has been paid.
L. Restitution of Tax upon Satisfaction of Outstanding Obligations
Note: Even if the estate tax has been paid but new obligations of the decedent has appeared and been settled by the estate, the tax corresponding to that amount of the new debt shall be restituted to the estate.
M. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights
Notes:
Show certification from the Commissioner that the estate tax has been paid before allowing transfer to the new owner.
Banks shall not allows withdrawal from deposits f deceased depositors without the clearance from the BIR
CIR may authorize the administrator or any one of the heirs to withdraw an amount not exceeding P20,000.
XIX. DONORS TAX
Donors tax shall be imposed upon any transfer by any person or any property by gift. Applicable whether the transfer is by trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.
The formula for this tax is:
Gross Gifts
Less: Deductions___
Net Gifts
X Rate___________
Taxable Net Gifts
Less: Tax Credit____
Donors Tax Payable
A. Stranger vs. Relative
1. Relatives
a. Brother, sister (whether full or half blood), spouse, ancestor and lineal descendant
b. Relative by consanguinity in the collateral line within the 4th degree
2. Strangers (30% donors tax)
those not listed as relatives above
B. Cumulative vs. Splitting Method
a. Cumulative Method When the donor makes 2 or more donations within the same calendar year, it is required that said donations be included in the returns for the last deduction
b. Splitting Method Applicable if the donor makes two or more donations during different calendar years
C. Donations to any candidate, political party or coalition
a. The Election Code exempts donation to a candidate, a political prty or a coalition of parties
b. Requirement: Report donation to the COMELEC
D. Transfer for Inadequate Considerations
Note: if the subject property is located in the Philippines and is a capital asset, apply 6% final income tax on the FMV or gross selling price whichever is higher.
E. Exemption of Certain Gifts
1. Gifts made by residents
a. Dowries
i. Donation propter nuptias
ii. Within 1 year after the celebration of marriage
iii. Donor is the parent
iv. Donee is the legitimate, recognized, adopted child of the donor
v. Exempt only to the extent of the first P10,000
b. Gifts to the Government (exclude proprietary agencies)
c. Gifts in favour of a qualifed non-profit organization
2. Gifts made by a non-resident, not a citizen of the Philippines
- Requirement: Not more than 30% of the gift should be used for administration purposes
3. Tax Credit for Donors Tax Paid to a Foreign Country
- Shall not exceed the same proportion of the tax against such credit is taken
F. Valuation of Gifts Made in Property
a. Personal Property use FMV at the time of donation
b. Real Properties higher of Zonal Value or Assessed Value
G. Filing of Returns and Payment of Tax
a. File within 30 days after the the date the gift was made
b. Pay as you file system is used
c. No extension allowed (unlike estate tax)
XX. VALUE ADDED TAX
VAT indirect tax
Indirect Tax the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, property or services.
Input Tax means the VAT due from or paid by a VAT-registered person in the course of his trade or business from a VAT-registered person.
Output Tax refers to the VAT due on the sale or lease of taxable goods or properties or services by any person registered or required to register under VAT.
Note: The input tax paid by the taxpayer is to be deducted from his output tax to arrive at his VAT payable or creditable.
Output Tax
Less: Input Tax________
VAT Payable (Creditable)
A. Persons Liable
1. Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties
2. Any person who renders services
3. Any person who imports goods
4. Any person who is engaged in exportation
VAT Transactions
Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business
Distribution of transfer to:
Shareholders or investors as shares in the profits of VAT-registered persons
Creditors in payments of debt
Consignment of goods if actual sale is not made within 60 days
Retirement from or cessation of business, with respect to inventories
B. VAT on Sale of Goods or Properties
1. Rate and Base 12% of the gross selling price or gross value in money shall be imposed on the following:
Real properties for sale or lease
Right to use patent, copyright, design or model plan, secret formula or process, goodwill, trademark, trade brand or the like
The privilege to use in the Philippines any industrial, commercial or scientific equipment
The right to use motion picture, films, tapes and discs.
Radio, TV, satellite transmission and cable TV time
Formula: Gross Selling Price X 12% = Output Tax
2. Zero Rated
An entity that is VAT-registered is subject to 0%, meaning the gross selling price of his goods or properties shall be multiplied by 0%, hence, his output tax shall be equivalent to P0.00.
On the other hand, since he is VAT-registered, he may claim input tax for the purchases he made from VAT-registered entities.
The result will be a VAT creditable amount or a creditable input tax which can serve as a tax credit which can be deducted from any tax under the NIRC.
Advantage of being subject to 0% rather than being tax-exempt is obvious the input tax can be credited against any NIRC tax.
The following are subject to 0% VAT:
Export Sales
Shipment of goods from the Philippines to a foreign country
Sale of goods to a non-resident for delivery to the Philippines
Sale of raw materials or packaging materials to export-oriented enterprise whose sales exceed 70% of total annual production
Sale of gold to the BSP
Those considered export sales under the Omnibus Investment Code
Sale to persons engaged in international shipping or international air transport operations
Foreign Currency Denominated Sale
This is a sale to a non-resident of goods assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid in acceptable foreign currency
Sales to persons exempted under special laws or international agreements
C. VAT on Importation of Goods
12% VAT based on the total value used by the BOC shall be assessed and collected
D. VAT on Sale of Services and Use or Lease of Properties
1. Rate and Base of Tax 12%VAT on the gross receipts derived from the sale of exchange of services, including the use or lease of properties:
Construction and service contractors
Stock, real estate, commercial, customs and immigration brokers
Lessors of property
Warehouse services
Lessors or distributors of cinematographic film
Persons engaged in milling, processing, manufacturing or repackaging goods for others
Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts
Proprietors or restaurants, cafes and other eating places, clubs and caterers
Dealers in securities
Lending investors
Transportation contractors
Services of franchise grantees of telephone and telegraph, radio and TV broadcasting and all other franchise grantees.
2. Transactions Subject to 0%
Shipment of goods from the Philippines (export) paid for by any acceptable foreign currency
Services paid in acceptable foreign currency (e.g. recruitment agencies)
Services rendered to persons or entities rated zero by special laws or international agreements
Services rendered to vessels engaged exclusively in international trade
Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceeds 70% of total annual production
Transport of passengers and cargo by air or sea from vessels from the Philippines to a foreign country
Sale of power or fuel generated through renewable energy sources
E. Exempt Transactions
E(a) Exempt Transactions Part 1 (Section 109[1])
The following transactions are exempt from the coverage of VAT
1. Sale of importation or agricultural and marine products in the original state
2. Sale of importation of fertilizers, seeds, seedlings and fingerlings, fish prawn, poultry and livestock feeds.
3. Importation of personal and household effects belonging t the residents of the Philippines returning from abroad and NRCs coming to settle in the Philippines
4. Importation of professional instruments and implements, apparel, domestic animals and personal household effects (except any vehicle or machinery) belonging to persons coming to settle in the Philippines, for their own se and not for sale.
5. Services subject to percentage tax under Title V of the NIRC
6. Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar.
7. Medical, dental, hospital and veterinary services except those rendered by professional
8. Educational services
9. Services rendered by individuals pursuant to an employer-employee relationship
10. Services rendered by regional or area headquarters established by MNCs in the Philippines (do not earn income from the Philippines
11. Transactions which are exempt under special laws and international agreements
12. Sales by agricultural cooperatives duly registered with the CDA
13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the CDA
14. Sales by non-agricultural, non-electric and non-credit cooperative duly registered with the CDA provided that the share capital contribution of each member does not exceed P15,000
15. Export sales by persons who not VAT registered
16. Sale of low-cost housing (Below P1.5 Million for residential lots and P2.5 million for house and lot and other residential dwellings)
17. Lease of a residential unit with a monthly rental not exceeding P10,000
18. Sale or publication of books and newspapers, magazines which appear at regular interval nor devoted principally to the publication of paid advertisements.
19. Sale, importation or lease of passenger or cargo vessels
20. Importation of fuel, goods and supplies by persons engaged in shipping or air transport
21. Services of financial intermediaries
22. Sale or lease of goods or performance of services other that those mentioned above and the gross receipts and/or annual sales must not exceed P1.5 million
E (b) Options available Part II (Section 109[2])
A VAT-registered person is given the option to be VAT-exempt or be subject to VAT.
Rationale: Such VAT-exempt person may incur a large amount of input tax in excess of his output tax, and such input tax can be credited against any tax under the NIRC.
Such election is irrevocable for a period of 3 years from the quarter the election was made.
E (c) Creditable Input Tax
Note: The input tax shall be creditable against the output tax incurred by a VAT-registered person. The rule is that only purchases from VAT-registered persons have input tax.
E (d) Transitional/Presumption Input Tax Credits
1. Transitional Input Tax Credit
- A person who becomes liable to VAT or any person who elects to be VAT-registered is allowed to claim input tax on his beginning inventory of goods, materials and supplies equivalent to 2% of the value of such inventory or the actual VAT paid on such goods, materials and supplies, whichever is higher.
2. Presumptive Tax Input Credits
- For persons or firms engaged in the processing of sardines, mackerel or milk, manufacturing refined sugar and cooking oil, and manufacturing packed noodle-based instant meals, a presumptive input tax equivalent to 4% of the gross value in money of their purchases of primary agricultural products are used as inputs to their production.
E (e) Refunds or Tax Credits of Input Tax
- 2 Available options (period: within 2 years)
- Apply for tax credit
- Apply for a refund of the creditable input tax
E (f) Invoicing and Accounting Requirements
VAT-registered
