Taxation} Tax I

8/12/2019 Taxation} Tax I

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TAX NOTES (LEGAL GROUND)

Lectures of Atty. Japar B. Dimampao

Supplement Bar Material

STATE POLICY

Declared Policy of the State: (CodeRD!"N)

1) to promote sustainable economic growth through the rationalization of the Philippine

internal revenue tax system, incluing tax aministration!") to provie, as much as possible, an e#uitable relief to a greater number of taxpayers in

orer to improve levels of isposable income an increase economic activity!

$) to create a robust environment for business to enable firms to compete better in the

regional as well as the global mar%et!

&) the State ensures that the 'overnment is able to provie for the nees of those uner its

(urisiction an care

T#E !$I$R$

1) Po%er& a'd dtie& of the !IR$

*he B+ shall be uner the supervision an control of the -./ an its powers an uties

shall comprehen: (CODE ACE"P)

1) the assessment!

") collection of all national internal revenue taxes, fees, an charges!

$) the enforcement of all forfeitures, penalties, an fines!

&) execution of (ugments in all cases ecie in favor by the 0* an orinary courts

2) give effect an to aminister the supervisory an police powers conferre to it by the

0oe an other laws

") PO*ERS of the Co++i&&io'er of the I'ter'al Re,e'e$

1) to interpret tax laws an to ecie tax cases 3Sec &)!

") to obtain information an to summon, examine, an ta%e testimony of persons 3Sec 2)!

$) to ma%e assessments an prescribe aitional re#uirements for tax aministration an

enforcement 3Sec 4)!

&) to elegate powers 3Sec 5)!

2) to aminister oaths an ta%e testimony 3Sec 1&)!

4) to ma%e arrests an seizures 3Sec 12)!

5) to assign or re6assign internal revenue officers 3Sec 14 7 15)

RE-UISITES O. A /ALID TAX REGULATION 38+M+**+.9 ./ *; P.<; *.

+9*;P;* *= 8<S)

1) +t must be consistent with the provision of the *ax 0oe") easonable

$) >seful an necessary

&) +t must be publishe in the official gazette or in the newspapers of general circulation

SOURCES O. RE/ENUES

The following taxes, fees and charges are deemed to be national internal revenue taxes :

(CodeIE/PEDO or E/E"PIDO)

1) +ncome tax!

") ;state an onor?s taxes!

$) @alue6ae tax!

&) .ther percentage taxes!

2) ;xcise taxes!

4) -ocumentary stamp taxes! an5) Such other taxes as are or hereafter may be impose an collecte by the Bureau of

+nternal evenue

INCO0E TAX



.EATURES O. OUR PRESENT INCO0E TAXATION

- <hat are the features of our present income taxation in the light of A&"&

A$ <e aopte the so6calle C!"#$%&%'()*% TA+ ()T( D E 0omprehensive in the sense

that we practically apply all possible rules of tax situs

Criteria &ed (Code R$ P$ N$)a) Residency of taxpayer!

Situations where we utilize resiency as basis:

1) <e tax the income of a resient alien erive from sources within the Philippines

") <e also tax the income from sources within of resient foreign corporation in the

Philippines

b) Place/Source

>se as a basis in taxing the income of a non6resient alien iniviual <e can only tax his

income erive from sources within an in taxing the same, we consier the place where the

income is erive

c) Nationality or Citizenship in the case of individual taxpayer <e use that as a basis in imposing tax on the income of a resient citizen Resident citizen

may be taxe from his sources within an without *he source of income here is immaterial what

we consier is the nationality or citizenship of the taxpayer

Domestic corporation E we can tax its income erive from sources within an without

.n Non-resident citizen, they can only be taxe on their income erive from the sources

within E tax situs is the place Fsource of income

Ta12ayer Sorce&

1 0 +F. 3Sec "$ GH)

" 90 + 3Sec "$ GBH)

$ .0< + 3Sec "$ G0H)

& 8+;9

&1 96;*B

&" 969;*B

&$ 8+;9 ;6M90 && 8+;9 .B>s

&2 8+;9 PS0S

+ 3Sec "$ G-H)

2 -omestic 0orp + 3Sec "$ G;H)

4 /oreign 0orp6/0F9/0 + 3Sec "$ G/H)

1) resident citi-en is taxable on all income erive from sources within an without the

Philippines

") nonresident citi-en is taxable only on income erive from sources within the

Philippines

$) n overseas contract wor/er is taxable only on income from sources within the

Philippines! a seaman who is a citizen of the Philippines an who receives compensation

for services renere abroa as a member of the complement of a vessel engage

exclusively in the international trae shall be treate as an overseas contract wor%er

&) n alien individual , whether a resient or not of the Philippines, is taxable only on

income erive from sources within the Philippines

2) domestic corporation is taxable on all income erive from sources within an

without the Philippines! an

4H foreign corporation, whether engage or not in trae or business in the Philippines, is

taxable only on income erive from sources within the Philippines

I'co+e Ta1atio' +ay 3e 4ro2ed i'to

"



1) iniviual income taxation

") corporate income taxation

- What are the basic features of individual taxation (S$P$ .$ E$ 0$)

A

5) +niviual income taxation aopte the Schedlar &y&te+ of ta1atio'

Schedlar Sy&te+ of Ta1atio' E is a system employe where the income tax treatment

varies an mae to epen on the %in or category of the taxpayer?s taxable income (an vs! Del

Rosario"!

Characteristics of schedular system of taxation:

a) +t gives or accors ifferent tax treatment on the income of iniviual taxpayer

b) +t classifies income

#anifestations$ 3that uner the iniviual taxation we aopte the scheular system of

taxation)

6C7 !7 P7 D27 I7 R7 R7 D7 A7 P%7 P7 P8

>ner Sec $"3a), income may be categorize as follows:

1) compensation income,

") business income,

$) professional income,&) income erive from ealings in property,

2) interest income,

4) rent income,

5) royalties,

A) iviens,

I) annuities,

1J) prizes,

11) winnings,1") pensions, an

1$) partner?s istributive share from the net income of the general professional partnership

*his is the manifestation that as far as iniviual income taxation, the income is

categorize

98 *he ta1 rate& are 2ro4re&&i,e i' character *his is clear uner Sec "& 3a) Kou will notice

there that the tax base increases as the tax rate increases

:8 0odified 4ro&& i'co+e a& re4ard& co+2e'&atio' ear'er Moifie because in eterminingthe taxable compensation income, the only allowable euctions are personal an aitional

exemption Kou cannot euct the allowable euctions uner Sec $& from gross compensationincome

But as regars those iniviual taxpayers that erive business, trae or professionalincome, we aopte the 'et i'co+e &y&te+$ *his is so because uner Sec $&, allo%a3le

dedctio'& may be claime by iniviual taxpayers who erive business trae an professional

income

;8 <e employ this CPay a& yo .ileD system

<8 >ner certain cases, we employ the C2ay a& yo ear'D system *his applies to Cincome

su%&ect to 'ithholdin tax)!

-$ <hat are the basic features of corporate income taxationA$

58 Glo3al Co'ce2t has been aopte LLL 'lobal system where the tax treatment views

inifferently the tax base an treats in common all categories of taxable income of taxpayer 3*an

vs -el osario)

Characteri&tic& of Glo3al &y&te+ of Ta1atio'

$



a) *niform tax treatment E this is sub(ect to iminishing corporate tax rates of $& 3Nan 1,

1IIA), $$ 3Nan 1, 1III), $" 3Nan 1, "JJJ) See 0hapter +@, Sec "5)

b) Does not cateorize income

98 orporate taxpayer, particularly domestic corporations are entitled to deductions So, insofar

as omestic corporation an resient foreign corporation is concerne, we aopte here the netincome tax system

9ew provisions uner A&"&: 1J tax on improperly accumulate earningsof a corporate taxpayer

:8 Pay a& yo file &y&te+ has also been employe

0orporate taxpayer is allowe to aopt calenar or fiscal year perio 0orporate

taxpayer files corporate income tax return #uarterly n it also files the so6

calle /+98 -N>S*;- ;*>9

+n the case of iniviual taxpayer, the payment shoul not be later than pril 12

of every taxable year +niviual taxpayers are not allowe to aopt the so6calle

/+S08 K; P;+.-

O +ndividual taxpayers are allowe to aopt only the calenar year perio while corporate

taxpayers have the option either the calenar year perio of the fiscal year perio

Cale'dar year 2eriod E this covers the perio of 1"6month commencing from Nan 1 an ening

-ec $1

.i&cal year 2eriod E this is also a 1"6month perio commencing on any month or ening on any

month other than -ec $1

DE.INITION O. CERTAIN TER0S

GROSS INCO0E TAXATION E is a system of taxation, where the income is taxe at gross

*he taxpayers uner this system are not entitle to any euctions

+n general, we aopte the 'et i'co+e ta1atio' because uner Sec $&, taxpayers are allowe to

claim the so6calle 88.<B8; -;->0*+.9S

GROSS INCO0E E means all income erive whatever source, incluing but not limite to thefollowing: 6STP"IRR"DAP"PS8

1 0ompensation for services!

" 'ross income from trae or business or the exercise of a profession!

$ 'ains erive from ealings in property!

& +nterests!

2 ents!

4 oyalties!

5 -iviens!A nnuities!

I Prizes an winnings!

1J Pensions! an

11 Partner?s istributive share from the net income of the general professional partnership

NET INCO0E TAXATION E income is taxe at net *he taxpayer may claim allowableeuctions

INCO0E E all wealth which flows in the taxpayer other than a mere return of capital +t inclues

all income specifically escribe as gain or profit incluing gain erive from the sale or

isposition of capital asset

,*D+C+. D0+N++1N : +t also means gains erive from 31) capital, 3") labor, or 3$) both labor

an capital incluing gains erive from the sale or exchange of capital asset

.OUR (;) Sorce& of INCO0E= 6Cla!S8

a 0apital

b 8abor

c Both labor an capital

&



Sale of property

;xample of income erive from capital LLL +nterest +ncome

;xample of income erive from labor LLL 0ompensation +ncome

;xample of income erive from both capital an labor LLL +ncome of an inepenentcontractor *he inepenent contractor provies wor% force, provies capital an erives income

from such capital

O +n determinin the profit from the sale of property, you shoul always be guie by this

formula:

mount eceive .r ealize 8;SS 0ost of Property P./+*

TAXA!LE INCO0E E 3the ol term is 9et +ncome) E means all pertinent items of gross

income specifie in the *ax 0oe le&& the euctions anFor personal an aitional exemptions,

if any, authorize for such types of income by this 0oe or other special laws 3Sec $1 of the

* of 1II5)

Shoter @ersion: ll pertinent items of ross income less allo'a%le deductions!

-$ <hat are the avantagesFisavantages of gross income taxation an net income taxation

Advantages of gross income taxation0

1 +t simplifies our income taxation *his is so because since no euctions are allowe, it is very

easy to tax the income Kou on?t have to fin out whether euctions or expenses are legitimate

or not because they are not euctible

" *his will generate more revenue to the government

$ +t minimizes cost

Disadvantages of gross income taxation0

1 s far as the taxpayer is concerne, this is ine#uitable because they cannot claim the expenses,

which are incurre in connection with his trae or business or exercise of his profession

" n if this is the system, in all li%elihoo the taxpayers will lose interest to earn more +t will in

effect reuce the purchasing capacity of the taxpayer

$ Since taxpayers cannot claim those legitimate expenses as euctions, they may resort to

frauulent scheme that will minimize their tax ability an this may be one through the

unerstatement of income So, in effect, this will encourage tax evasion

Advantages of net income taxation0

1 s far as the taxpayer is concerne, they will consier this as e#uitable an (ust system

" *his will minimize tax evasion because examiners will be employe to chec% whether

expenses are correct or not

$ *he conse#uence of no " is that this will generate more revenues

Disadvantages of net income taxation0

1 vulnerable to graft an corruption

" vulnerable to tax evasion

$ will give rise to loss of revenues

SOURCES>SITUS O. INCO0E

n income may be an income from within or without the Philippines *he other term for

income within is .ocal +ncome while income without is sometimes calle 2lo%al +ncome or*niversal +ncome

+n determinin 'hether an income is an income 'ithin or 'ithout3 you have to consider

the classification or 4ind of income!

CLASSI.ICATION O. INCO0E 6C7 !7 P7 I7 R7 R7 D7 A7 P7 P7 P81 0ompensation income from services

2



" +ncome erive from business, trae or profession E in this regar, the common forms of

business are merchanising business, farming business, mining business an manufacturing

business

$ +ncome from sale or exchange of property 3either real or personal property)

& +nterest +ncome2 ent +ncome

4 oyalties5 -iviens, which may be receive from omestic or foreign corporation

A nnuities

I Prizes an winnings

1J Pensions

11 Partner?s istributive share in the net income of general professional partnership 3Professional

income of a partner)

? CO0PENSATION INCO0E

*ax Situs: Place 'here services are rendered So, if services are renere within the Phils, that

is a 8ocal +ncome +f it is a payment for services renere outsie the Phils, that is an income

without

0 E income from within an without are taxable 90 E only compensation income from sources within is taxable

E same as 90

? !USINESS INCO0E 60: .8a) Merchanising Business

b) /arming Business ax Situs$ Place 'here these

c) Mining Business %usiness are underta4en

) Manufacturing Business

ax Situs$

31) if the goos are manufacture in the Phils n sol within the phils *his is consiere as

income derived purely within!

3") 'oos manufacture outsie the Phils an sol outsie E income derived purely without.

3$) 'oos manufacture within the Phils an sol outsie the Phils E income partly within and

partly without.

3&) 'oos manufacture outsie the Phils an sol within the Phils E income partly within and

partly without.

? INCO0E .RO0 SALE OR EXC#ANGE O. PROPERTY

+f it involves personal property, in etermining the tax situs, we have to consier

the place of sale

+n the case of sale of transport documents, tax situs is the place where the

transport ocument is sol 3B.0 0ase)

+f it involves real property, the tax situs is the place or location of the real

property So, if the property sol is situate within the Phils, the income erive

from such sale is consiere as income within

? INTEREST INCO0E

*ax Situs: RS+DNC of the D51R

Case$ *here was this contract regaring the construction of ocean6going vessels *here was this

issuance of letter of creit an the payment of ownpayment ll the elements of the transactionstoo% place in Napan *he payment was mae in Napan *he letter of creit was execute in Napan*he elivery was mae in Napan *he de%tor is a domestic corp

+s the interest income on this loan evience by the letter of creit taxable to the Napanese

corp

4



6.D$ '!, because the tax situs of interest income is not the activity %ut the residence of the

de%tor! he place 'here the contract of loan is executed is immaterial!

? RENT INCO0E*ax Situs: the P.C of property su%&ect of the contract of lease!

? ROYALTIES*ax Situs: the P.C 'here the intani%le property is *SD

? DI/IDENDa Received from domestic corp E this is an income purely within

b Received from forein corp E consier the income of the foreign corp in the Phils uring the

last preceing three 3$) taxable years!

rules$31) *he income is purely 'ithin if the income erive from the Phil sources is more than A2

3") +t is purely 'ithout if the proportion of its Phil income to the total income is less than 4J

3$) here should %e an allocation if it is more than 2J but not exceeing A2

? ANNUITIES

*ax Situs: the P.C 'here the contract 'as made

? PRI@ES AND *INNINGS

Prizes may %e iven on account of services rendered E in which case, the tax

situs is the 2lace %here the &er,ice& %ere re'dered

+f these prizes are not iven on account of services, the tax situs is the 2lace

%here the &a+e %a& 4i,e'

ax situs of 'innins is the place where the same was given

?PENSION*ax Situs: P.C 'here this may %e iven on account of services rendered

?PRO.ESSIONAL INCO0E O. PRO.ESISONAL PARTNERS

*ax Situs: P.C 'here the exercise of profession is underta4en

GROSS INCO0E

GROSS INCO0E E means all income erive from whatever source, incluing but not limite

to the following:

)'L()!'0 6code STP"IRR"DAP"PS8

1 compensation for services

" gross income from trae or business or the exercise of a profession

$ gains erive from ealings in property

& +nterests

2 ents

4 oyalties

5 -iviens

A nnuities

I Prizes an winnings

1J Pensions an

5



11 Partner?s istributive share from the net income of the general professional partnership (Sec!

78 of R of 9::;"

%+L()!'( 6code LAGCIR08

1 procees of life insurance policy" amount receive by the insure as return of premium

$ gifts, be#uests, evises or escent& compensation for in(uries or sic%ness

2 income exempt uner treaty

4 retirement benefits, pensions, gratuities

and others: (.7 /7 R7 S7 S7 G)

a retirement benefits receive from foreign institution whether public or private

b veteran?s benefits

c retirement benefits receive from private firms whether iniviual or corporate

separation pay

e SSS

f 'S+S

5 miscellaneous items:

a prizes an awars given in recognition of religious, charitable, scientific, eucational,artistic, literary, or civic achievements

0.9-+*+.9S:

1 the recipient was selected 'ithout any action on his part to enter the contest or

proceeing" the recipient is not re<uired to render su%stantial future services as a conition to

receiving the prize or awar

b income erive by the government or its political subivisions from the exercise of any

essential governmental function or from any public utility

c income erive from investment in the Philippines by foreign government or financing

institutions

prizes an awars in sports competitions

e gain erive from the reemption of shares of stoc% issue by the mutual fun companyf contributions to 'S+S, SSS, P'6+B+', an union ues

g benefits in the from of 1$th month pay an other benefits

h gain erive from the sale, exchange, retirement of bons ebentures or other certificate of

inebteness with a maturity of more than five 32) years 3Sec $" 3b), * of 1II5)

?ALLO*A!LE DEDUCTIONS

1 1ptional Standard Deduction E of ten percent 31J) of the 'ross +ncome available only to

iniviual other than a non6resient alien provie he signifies in his return his intention to elect

.S-, otherwise, itemize euctions apply ;lection mae shall be irrevocable for the taxableyear 3Sec $& 8)

" +temized Deductions E uner Sec $& 6Q, an M$ Personal and dditional Deductions/xemptions under Sec! 7=

? ITE0I@ED DEDUCTIONS 6code ELIT"!DD"CRC8

1 expenses

" loses

$ interest

& taxes

2 ba ebts

4 epreciation

5 epletion of oil, gas wells an mines

A charitable an other contributions

I research an evelopment1J contribution to pension trust

? NON"DEDUCTI!LE ITE0S

1(ec. 23 A4

1 Personal living or family expenses!

" mount pai for new builings or permanent improvements, or betterment to increase the

value of any property or estate!

A



$ ny amount expene in restoring property or in ma%ing goo the exhaustion thereof for

which an allowance is or has been mae! or

& Premiums pai on any life insurance policy covering the life of any officer or employee, or of

any person financially intereste in any trae or business carrie on by the taxpayer , iniviual

or corporate, when the taxpayer is irectly or inirectly a beneficiary uner such policy

1(ec. 23 B4 .osses from sales or exchanes of property directly or indirectly >1 Between members of a family 3brother, sister of half or full bloo, spouse, ascenant, lineal

escenants)!

" ;xcept in case of istributions in li#uiation, between an iniviual an a corporation E more

than 2J in value of the outstaning stoc% of which is owne irectly, by or for such an

iniviual! or

$ ;xcept in case of istributions in li#uiation, between two corporations E more than 2J in

value of the outstaning stoc% of each of which is owne, irectly or inirectly, by or for same

iniviual, if either one of such corporation is a personal holing company or a foreign personal

holing company! or

& Between the grantor an a fiuciary of any trust! or

2 Between fiuciary of a trust an the fiuciary of another trust, if the same person is a grantor

with respect to each trust! or4 Between a fiuciary of a trust an a beneficiary of such trust

TAXA!LE INDI/IDUALS

RESIDENT CITI@ENS (RC)

+ncome from 'ithin and 'ithout E taxable

NON"RESIDENT CITI@ENS (NRC)

+ncome from 'ithin

When an NRC returns to the Phils!3 his income may also %e taxed as ResidentCitizen or Non-Resident Citizen!

+llustration$ , an .0<, arrive in the Phils sometime in Nune 1IIA e will be taxe as a 9on6

esient 0itizen 390) as regars the income that he earne which covers the perio of Nanuary

to Nune 9ow as regars the income that he will erive upon his arrival from Nune to -ecember,

he will be taxe as esient 0itizen 30)

5ut if he is not in the Phils from the perio of Nanuary to -ecember 1IIA, he will be taxe as

90 for the sai perio

+f he will return to the Phils an stay there from Nanuary t -ecember 1III, he will be taxe as

0 for the same perio

? NRC must prove to the satisfaction of the 5+R Commissioner the fact of physical presence

a%road 'ith the intention to reside therein!

? When an NRC decides to return to the Phils!3 he must prove his intention to reside here

permanently!

? No' NRC includes 1@RSS C1NC W1RARS (1CW"3 +##+2RNS3 and those 'ho

SB 1*S+D the Phils! %y virtue of an employment!

RESIDENT ALIEN (RA)1 n iniviual who is not a citizen of the Phils but a resient of the Phils

O +nclues those who consier the Phils as a secon home

OOO ransient tourist who (ust so(ourn, their stay is merely temporary, thus may not be

consiere as

O +f an alien stays in the Phils! for a period of more than one (9" year3 he is considered as R!

SPECIAL NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"NET!)

I



O e must be an alien iniviual who is not resiing in the Phils an not engage in trae or

business in the Phils

O 6e is one 'hose stay in the Phis!is not more than 9 days

SPECIAL NON"RESIDENT NOT ENGAGED IN TRADE OR !USINESS (SNRA"NET!)

5 Those employed by0 (ROP)1 egional or rea ea#uarters of Multinational corporations!

" .ffshore Ban%ing >nits!

$ Petroleum Service 0ontractors

NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"ET!)

E considered as enaed in trade or %usiness if his stay is more than 9 days

L <e can no longer tax his income from sources without <e can only tax his income from

sources within

ENTITLE0ENT O. DEDUCTIONS

RC E entitle to euctions because the tax base is taxable income

'ross +ncome

8ess: llowable euctions

*axable +ncome

NRC E entitle to euctions because the tax base is taxable income

RA E entitle to euctions because the tax base is taxable income

NRA"T! E entitle to euctions because the tax base is gross income *heir income is sub(ect to"2 tax rate

SNRA"NET! E sub(ect to 12 tax rate on their income in the from of:

S 6 Salaries

# 6 onoraria

O 6 .ther

* 6 <ages

E 6 ;moluments

R 6 emuneration

EXCLUSION .RO0 GROSS INCO0E

PROCEEDS O. LI.E INSURANCEB

(ub6ect to tax if 0

1 the insurer an insure areed that the amount of the procees shall be withhel by the insurer

with the obligation to pay interest in the same, the interest is the one su%&ect to tax!

" there is transfer of the insurance policy!

xample$

transferre to B his life insurance policy *he value of the policy is P1 M B pai a

consieration amounting to P$JJ,JJJ B continue paying the premiums after the transfer suchthat the premiums amounte to P"JJ,JJJ >pon the eath of the insure, the P1 M may be

receive by the heirs

-$ +s the full amount of P1 M exempt

A$ 9., only the consieration given an the total premiums pai may be exclue *hat is, P1 M

less P2JJ,JJJ

1J



Pro%lem$

obtaine a life insurance policy for B B is the presient of ?s corporation 0orp has

an insurable interest in the life of its officers, so premiums may be pai by the employer >pon

the eath of B, his esignate beneficiaries will receive the procees

a +s the amount representing the procees of the life insurance policy taxable

b <hat about the premium pai by the employer -oes this amount form part of thegross compensation income

c -oes the amount representing the procees of life insurance policy from part of the estate

of the eceent

ns'ers$

a 8et us first ma%e t'o (8" assumptions 8et us assume that:

1 the beneficiary esignate is the employer!

" the beneficiary esignate is the heir of the family of the insure

he ax Code ho'ever3 ma4es no distinction! Reardless of the desinated %eneficiary isthe employer or the heirs3 or the family of the insured proceeds of life insurance policy should

al'ays %e excluded!

b Premiums of life insurance policy pai by the employer may form part of compensationincome! hence, taxa%le if the %eneficiary desinated are the heirs or the family or the

employees

+t is not taxa%le compensation income if the desinated %eneficiary is the employer because that is

(ust a mere return of capital

c! Proceeds of life insurance policy may %e excluded from the ross estate of the decedent

under the follo'in cases$1 if the beneficiary esignate is a $r person an the esignation is irrevocable!

" it is a procee of a group insurance policy

owever 3 it is included in the ross estate of the decedent$

1 if the beneficiary esignate in the estate, executor or aministrator of the estate

or the family of heirs of the eceent!" if the beneficiary esignate is a $r person an the esignation is revocable Gsee

Section A2 3e)H

s far as Sec! = (e" is concerned3 an employer may %e considered a 7rd person!

A0OUNT RECEI/ED !Y INSURED AS RETURN O. PRE0IU0Beason for ;xclusion: +t represents a mere return of capital

*he &orce& of thi& retr' of 2re+i+ (L$E$A$)

1 8ife +nsurance Policy

" ;nowment contracts$ nnuity contracts

666Whether the premiums are returned durin or at the maturity of the term mentioned in the

contract or upon surrender of thee contract

Pro%lem$

too% out an enowment policy amounting to P1 M e pai premiums amounting to

PAJJ,JJJ >pon the maturity of the policy, receive that P1Mow much is the taxable amount

ns'er$

*hat is P1,JJJ,JJJ E value of enowment policy

8;SS: P AJJ,JJJ E representing amount of premium

P "JJ,JJJ E taxable amount

11



?GI.TS7 !E-UESTS a'd DE/ISESB

ationale: <hat is contemplate here are onations which are purely ratuitous in character in

orer that it may be exclue

2ifts are exclue because these are sub(ect to donorFs tax

5e<uests and devises are exclue because these may be sub(ect to estate tax

<hat about remuneratory onations Remuneratory donations are su%&ect to

income tax!

%+%#T)!'( to the $ule:LLL the income or fruit of such money given by onation, be#uests

or evise, incluing the income of this gift, be#uest or evise in cases of transfer of ivie

interest

?CO0PENSATION .OR INURIES OR SICNESSBeason for ;xclusion: *his is (ust an indemnification for the in&uries or damaes suffered *his is

compensatory in nature

*he sources are:

1 *he compensation may be paid %y virtue of a suit !

" +t may be paid %y virtue of health insurance3 accident insurance or Wor4menFs Compensation

ct

5ut as reards damaes representin loss of anticipated income3 this is the one that is taxa%le!

+f damaes are in the nature of moral3 exemplary3 nominal3 temperate3 actual and li<uidated

damaes3 as a rule3 these may not %e su%&ect to tax!

;xample:

+f a person suffere in(ury as a result of a vehicular accient, an an action is file in

court, the 0ourt awars the following:

Moral 6 P1JJ,JJJ

;xemplary 6 P1JJ,JJJ

ctual 6 P 4J,JJJ 3hospitalization expenses)

P "J,JJJ 3repair of car)

P 4J,JJJ 3loss of income)

OOO ll damaes a'arded are tax-exempt except damaes of representin loss of income!

Ruestion: re amages aware by the 0ourt on account of breach of contract taxable

nswer: Rualify your answer <ith regars to amages aware on account of loss of earningsof the contracting party, it is taxable

INCO0E EXE0PT UNDER TREATYBeason for the ;xclusion: reaty has o%liatory force of contract

%xception0 s may be provie for in the treaty

?RETIRE0ENT !ENE.ITS7 PENSIONS7 GRATUITIES AND OT#ERSB

*%T%$A'7( B%'%8)T

O *his may be given by the >S ministration

O *he recipient must %e a resident veteran!

B%'%8)T( 9)*%' B: 8!$%)9' A9%')%( !$ )'(T)TT)!'( ;&%T&%$ #BL)

!$ #$)*AT%

'iver: /oreign government agencies or institutions whether public or privateecipient: esient citizen, non6resient citizen or resient alien

1%servation$

1"







O2overnment-o'ned and controlled corporations are no' su%&ect to corporate income tax,

except :

a SSS

b 'S+Sc Phil ealth +nsurance 0orp

P0S.e P'0.

Situation: municipality erive income from holing a fiesta

Rle: *he rule is settle that holing a town fiesta is consiere a proprietary function *herefore,

sai income is sub(ect to tax

Situation: municipality erive income from the operation of public mar%et, electric power

plant an other public utilities

Rle: *hat income is tax exempt

d. )ncome derived from investment in the #hils. 1=4 by foreign government or 1>4

financing institutions, owned, controlled or financed by foreign government, regionalor 124 international financing institutions established by foreign government

;R>+S+*;S:

9! Recipient must %e$a foreign government!

b financing institution owne, finance or controlle by foreign government!

c regional financing institution, international financing institution establishe by

foreign government!

" +t must %e an income derived from investment in the Phils

Sources of such income:

666 +t may be in the nature of bons So, foreign government here may be consiere the creitor E possible income here is the i'tere&t of 3o'd& 9ow, loans may be extene E possible income

here is i'tere&t o' loa'&

666 +f a forein overnment or financin institution mae a eposit in a ban%, Phil currency

eposit E the income here is the nature of i'tere&t i'co+e

666 +f a forein overnment mae an investment in a omestic corporation +t may be consiere a

stoc%holer n a stoc%hler is entitle to ivien ence, the di,ide'd i'co+e receive from

omestic corporation is ta1 e1e+2t

OO +f the recipient of such ivien is a re&ide't forei4' cor2oratio' that is also ta1 e1e+2t +t

is only sub(ect to tax if the recipient of such ivien is a 'o'"re&ide't forei4' cor2oratio'

Ca&e ;=+MB9Q, which is a consortium of Napanese ban%s, extene a loan in the amount of

S"JM to Mitsubishi Metal 0orp, a Napanese corporation *he same amount was extene by

Mitsubishi as a loan to tlas 0orp, a omestic corporation

*he contract entere into between Mitsubishi Metal 0orp is enominate as Ccontract of

loan an saleD +t is a contract of loan because Mitsubishi woul len tlas S"JM +t is a contract

of sale because uner the contract tlas boun itself to sell the concentrates 3this is a mining

corp) that may be prouce by the concentrator machineFe#uipment purchase through the use of

the S"JM for a perio of 12 years

*his being a contract of loan, Mitsubishi is entitle to interest on loan

+SS>;: <hether or not such interest on loan is sub(ect to Phil income tax

R2*#NS : Mitsubishi contene that this is not taxable because:1 *he source of S"JM is a tax exempt entity 3;=+MB9Q is a financing institution controlle

an finance by a foreign government)! an

" Mitsubishi is an agent of ;=+MB9Q, a tax exempt entity

12



;8-: *here was no evience to the effect that Mitsubishi is an agent of ;=+MB9Q +t is a

mere allegation that has not been proven

+n a contract of loan, once the loan is consummate, the amount becomes exclusive property of the borrower +t is no longer consiere the money of ;=+MB9Q ence, the

interest of such loan shoul be sub(ect to tax

*he lener is not a tax exempt entity *he creitor here is Mitsubishi an it is not a tax

exempt entity Such being the case, tax exemption must be strictly construe against the taxpayer

an liberally in favor of the government <hen you claim exemption, you shoul prove it clear

an categorical terms

O *he problem may be moifie by the examiner *he examiner may clearly state the Mitsubishi

is an agent of ;=+MB9Q *he answer is, the interest on loan is tax exempt Mitsubishi then is

consiere as an extension of ;=+MB9Q +t is as if the lener is ;=+MB9Q

e. =2th month #ay and Benefits

O *his applies both to private an public employees

O *otal exclusion shoul not excee P$J,JJJ sub(ect to increase by the Secretary of /inance upon

the recommenation of the B+ 0ommissioner

f. ontributions to 9()(, (((, "%D)A$%, #A9)B)9, and union dues

O *his is a surplusage ;ven if this is not mentione, we cannot tax that

g. (ale, exchange, retirement of bonds, debentures and other certificates of indebtedness

with a maturity of more than 8)*% 1?4 :%A$(

6 +f maturity is less than 2 years, taxable

Rle +nterest on %onds

1 issue by 0B 6 exempt

" if issue by corp6 not exempt

Rle Redemptions of share in mutual funds:

6 only those gains erive from reemption of shares issue by a mutual fun company are

exempt

6 it must emanate from a mutual fun

6 +f the term is not more than 2 years 32 years or less), the gain erive from the sale, exchange

an retirement of the same, may be sub(ect to tax

+llustration:+f you are a creitor, you may sell these bons, ebentures or certificates of inebteness

to another 6indi mo na mahintay an maturity 4asi lon term! +f there is a gain on the sale of the

same, it woul be a tax exempt provie that the bons, etc, have a maturity or term of more than

2 years

etirement of bons, ebenture, etc 666 Na%ayad na Iyun de%tor! *here may be gain

erive from the same, such as interest *his time, since the gain is in the nature of interest, it is

sub(ect to tax But, the gain erive from the sale, exchange or retirement with a term of more

than 2 years, is tax exempt *his is because exemptions are strictly construe against the taxpayer

an liberally in favor of the government +nterests on bons, ebentures, etc are taxable, the

provision is clear +t only covers saleFexchangeFretirement of bons, ebentures an other

certificate of inebteness with a maturity of five years Strict interpretation of tax exemption

TYPES> CLASSI.ICATION O. INCO0E

5$ CO0PENSATION INCO0E an income erive uner an employee6

employer relationship

his may include the follo'in : 3*E!!"DROP)

14



*ages, Emoluments, !onuses, !enefits, Director?s fee, *axable R etirement Benefits, Other

items of income of similar nature, *axable Pensions

O $etirement benefits may be sub6ect to tax , if it oes not comply with the provision of Sec $"

3b) par 4 subpar a

O #ensions may be sub6ect to tax , if it is given not in accorance with the conitions lai ownuner that exclusion provision

O !ther items of income of similar nature may include: (C#A0P)

0lothing allowance, ospitalization allowance, llowances for /oo, Meical allowance, Share

from the Profit sharing plan of the employee

O T%(T( T! D%T%$")'% ;&%T&%$ A' )'!"% )( !"#%'(AT)!' or '!T0

/in out whether it is receive uner an employer6employee relationship

ny payment receive uner an employer6employee relationship is compensation

income

OT%(T( T! D%T%$")'% T&%$% %+)(T( A' %"#L!:%$%"#L!:%% $%LAT)!'(&)#0 1AD4

1 ppointment 3selection an hiring)

" 0ompensation

$ -ismissal power

& 0ontrol test

N$!$ : *he name or esignation of income is immaterial *he basis of the income is immaterial

an the manner by which it is pai, is also not important s lon as it is iven under an

employer-employee relationship3 then that is compensation income

A'%LLAT)!' !8 )'D%BT%D'%(( E 0onsiere as compensation income is the

inebteness ha been cancelle in consieration of the services renere

OOO Share of the employee from the PR10+ S6R+N2 P.N of the employer- 0ompensation

income receive in consieration of services renere

TA+ L)AB)L)T: !8 T&% %"#L!:%% #A)D B: T&% %"#L!:%$ @ 0ompensation income

if pai uner an employer6employee relationship in consieration of services renere

#$%")"( #A)D B: T&% %"#L!:%$ !' T&% )'($A'% #!L): !8 T&%

%"#L!:%% @ 0ompensation income if the beneficiary esignate is the family of heirs of the

employee

OOO he %asis of the income is immaterial ;ven if it is pai in piece wor%, fixe rate or percentage basis as long as it is pai uner an employer6employee relationship

$%<)()T%( 8!$ TA+AB)L)T: !8 !"#%'(AT)!' )'!"% A$%0 (SPR)1 *here must be services, renere uner an employer6employee relationship

" +f payment must be for that services renere

$ +t must be reasonable *he compensation for services renere must be reasonable

#urpose why only a reasonable amount may be taxed as compensation income0

*a%e note on the part of the employer, he can claim such compensation for services aseuction 9ow, only the amount that is reasonable uner the circumstances can be claime as

euction So, if the amount or the value of the services renere is P1J,JJJ but the employee

receive P12,JJJ s far as the employer is concerne, he can only claim the reasonable amountof P1J,JJJ +n the case of an employee, he can consier P1J,JJJ as compensation income *heexcess of P2,JJJ may be treate as other income

OOO Not all payments for services rendered are considered compensation income .nly those

pai uner the employer6employee relationship

T#E .OLLO*ING ARE NOT CO0PENSATION INCO0E (P I)

15



1 0ompensation for services renere by independent service contractor *his may be treate as

trae or business income

" +ncome erive by professionals from the practice of profession uner professional

partnership *his is treate as professional income

OOO 8ringe benefit is considered as compensation income. *his is governe by Sec $$, *

1II5 *his is compensation income in the sense that this is receive uner an employer6employeerelatioship

D!T$)'% !8 A(& %<)*AL%'T

6 you may be pai in cash or in propertyF%in

6 e#uivalent value of property is taxable

? DI..ERENT .OR0S O. CO0PENSATION INCO0E

=. #ropertyind E /air Mar%et @alue (0#@" of the property +f there is a price stipulated3 it is

the price stipulate that will be followe in the absence of contrary evience

>. #romissory 'ote or other evidence of )ndebtedness

a +f it is not discounted , it is the face value of the promissory note b +f it is discounted , it is the fair iscounte value of the promissory note

2. (toc/ @ /M@ of that shares of stoc%

C. ancellation of )ndebtedness @ Cancellation of inde%tedness has the follo'in taxconse<uences$

a +t may amount to taxa%le compensation income if the inebteness has been

cancelle in consieration of the services renere

b +t may amount to taxa%le ift or donation if the inebteness has been

cancelle without any consieration at all *his is not sub(ect to income tax but may amount to taxable gift or onation

c +t may amount to capital transaction if the creitor is a corporation an the

ebtor is a stoc%holer +f creditor corporation condoned the inde%tedness ofthe de%tor stoc4holder , that may amount to taxable capital transaction *his is

the form of irect ivien 9ow, property dividend is su%&ect to tax rates of

HG3 G and 9G! -ivien receive from omestic corporation is nowsub(ect to tax

?. Tax liability of the %mployee paid by the employer in consideration of services

rendered @ amount of tax liability

3. #remiums paid by the employer on the life insurance policy of the employee.

a +t is a taxa%le compensation income if the beneficiary esignate are the heirsof the employee or his family

b +t is not a taxa%le compensation income if the beneficiary esignate is theemployer because it is (ust a mere return of capital

+f the desination of the employer as %eneficiary is indirect 3eg: +t is the creitor

of the employer that is esignate as beneficiary), that is still not taxable compensation

income

xample of +ndirect desination of the employer as a %eneficiary$a Beneficiary is the wife of the Presient of a close corporation

b +f the employer may secure a loan from he insurance policy

1A



Premiums 'ill %e taxed under Sec! 77 par!% no!9 it is state there: C8ife or health

insurance an other non6life insurance premiums or similar amounts in excess of what the

law allows

O +f the payment 'as received %y the employee 'hen he 'as no loner connected 'ith his

employer , it is still consiere compensation income <hat is important here is that itmust be receive uring the existence of the employer6employee relationship ;mployees

may be ismisse by the employer, an they may file complaint for illegal ismissal

against the employer Nugment was renere by the arbiter in favor of the employee llthe wages suppose to be pai 3eg bac%wages) can be taxe as compensation income

<hat about attorney?s fees *hat is exempt

.RINGE !ENE.ITS code (#E/"#I0"E#EL)

8$)'9% B%'%8)T E ny goo, service, or other benefit furnishe or grante in cash or in %in

by an employer to an iniviual employee (except ran4 and file employee" such as but not limiteto the following:

1 ousing!

" ;xpense account!

$ @ehicle of any %in!

& ousehol personnel such as mai, river, others!

2 +nterest on loan at less than mar%et rate to the extent of the ifference between the

mar%et rate an the actual rate grante!

4 Membership fees, ues an other expenses borne by the employer for the employee in

social an athletic clubs or other similar organizations!

5 ;xpenses for foreign travel!

A oliay an vacation expenses!

I ;ucational assistance to the employee or his epenents! an1J 8ife or health insurance an other non6life insurance premiums or similar amounts in

excess of what the law allows!(if contri%ution-exempt"

O &ousing allowance may be exempt from tax if the living uarters are0

a Provie with the premises of the employer

b +t must be mae as a conition of employment

+f sai re#uisites are not present, housing allowance may be taxe as fringe

benefits

O "eal allowance may be exempt from tax if it is provie within the premises of the employer

O #rivilege or purchase discount are tax exempt if it oes not excee of the basic monthly

salary of the employee +f it is more than J3 the excess may be as fringe bene

5 "edical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if

the following reuisites are present0

1 +t must be of relatively small value 3reasonable amount) 3S@)

" +t must be given for the following purposes: 30;')

a *o promote 0ontentment

b *o promote ealth

c *o promote ;fficiency

*o promote 'oowill

O Ta1 E1e+2t fri'4e 3e'efit& (R.7 D07 C7 E17 ECR)

1 5enefits iven to the ran4 and file employees, whether grante uner a collective bargaining

agreement or not

" KDe minimis %enefitsD E means of small amount *hese are benefits relatively of small

amount

1I



$ 0ontributions of the employer for the benefit of the employee to retirement, insurance an

hospitalization benefits plans

& /ringe benefits which are authorize or exempte from tax uner special laws

2 *hose given for the convenience of the employer, incluing those which are re#uire by the

nature of the trae, business or profession of the employer (mployerFs Convenience Rule"

De minimis benefits 3of relatively small value) E limite to facilities or privileges furnishe or

offere by employer to his employees merely as a means of promoting health, goowill,

contentment, or efficiency of employees, such as:

a Monetize unuse vacation leave creits not exceeing ten 31J) ays uring the year!

b Meical cash allowance to epenents of employees not exceeing P52J per semester of

P1"2 per month!

c ice subsiy of P$2J per month!

>niforms!

e Meical benefits

f 8aunry allowance of P12J per month!

g ;mployee achievement awars, for length of service of safety achievement in the form of

tangible personal property other than cash gift certificate, with an annual monetary value

not exceeing month of the basic salary of employee receiving the awar uner an

establishe written plan which oes not iscriminate in favor of highly pai employees!

h 0hristmas an ma(or anniversary celebrations for employees an their guests!

i 0ompany picnics an sports tournaments in the Philippines an are participate in

exclusively by employees! an ( /lowers, fruits, boo%s or similar items given to employees uner special circumstances

on account of illness, marriage, birth of a baby, etc

5#rinciple of %mployer7s onvenience $ule0

6 fringe benefits may be exemptFnot sub(ect to tax if these are given for the benefit

or avantage of the employer

The following are the possible fringe benefits, which may be exempt under the %mployer7s

onvenience $ule0 (# / # 0 T)

a ousing benefit

b @ehiclec ousehol personnel

Membership in a social or athletic club or similar organization

e *raveling expense benefit

O &ousing benefit E in etermining whether the same is exempt uner the employer?s

convenience rule, you have to consier the peculiar nature of the special nees of the employer $euisites for exemption0

1 +t must be mae as a condition for employmentL

" +t must be provided 'ithin the premises of the employer

OOO *his may apply to a supervisor of a plant or a company

O +f the housin or livin <uarters are provided outside the premises of the employer3 even if that

is for the convenience of the employer3 this is only exempt up to =G of the amount So, 2Jtaxable, 2J exempt

O *ehicle E ;xempt but epens upon the peculiar nature of the special nees of the business of

the employer xample$ 8B0 or -8 business

O &ousehold personnel such as maid, driver and others E ;xempt, but epens upon the

peculiar nature of the business of the employer

O "embership in a social club, etc E Peculiar nature re#uirement

"J



O Traveling expense benefit E Peculiar nature re#uirement xample$ ;mployer sent his

employees abroa to atten a particular seminar to improve their technical %now6how

B R>;S*+.9: is a river of 0ongressman Magtanggol an he receive a monthly salary of

P2,JJJ an living #uarter allowance of P",2JJa <hether the P",2JJ living #uarter allowance is exclue or sub(ect to tax

b ssuming the employer is an obstetrician woul your answer be the same

9S<;:

a *hat shoul be sub(ect to tax

b +t shoul be exclue eason: 0onvenience of the employer?s rule

9$ GROSS INCO0E .RO0 !USINESS7 TRADE OR PRO.ESSION

B()'%(( @ ny activity that entails time, attention, effort for purposes of livelihoo or profit

s reards construction %usiness, the taxpayer here must be an inepenent

contractor e may report his income uner the percentage of completion metho

or uner the so6calle complete contract metho

#$!8%(()!'AL )'!"% @ *he recipient of the same must be professionals

ow about those who claim that they are professionals but are not registere in

the P 0, can they still be tax as such

Kes, irrespective of whether they are license or not because of the rule that

gross income erive from whatever source

:$ PASSI/E INCO0E

#A(()*% )'!"% @ *his is the income that is sub(ect to final tax

)ncome sub6ect to final tax are the following0 (codeRPD"*IDS)

1 oyalties

" Prizes

$ <innings

& +nterests on ban% eposit, eposit substitutes, trust funs an

other similar arrangements

2 -ivien receive from omestic corporation, mutual fun insurance company,

regional hea#uarters of multi6national corporation an other corporation

4 Share a partner in the net income after tax of a taxable partnership, (oint account, (oint

venture or concessions

OOO Do not include passive income in the income of your business or profession, or in your

compensation income *his is so because when you receive this income, the tax ha alreay been

impose an eucte

RC7 NRC7 RA NRA"ET! NRA"NET!

"1



ROYALTIES "J except in the

case of literary'or4s3 %oo4s and

musical

compositions 'hich

are su%&ect to 9G final tax

Same as 0, 90,

"2

PRI@ES e1ceedi'4P57$

+f it is P93!

or less3 it is N1 su%&ect to final tax

%ut the same must

%e included in otherincome 3eg

compensation,

business, professional)

"J

"J "2

*INNINGS except

PCS1 M .otto

"J "J "2

INTERESTS ON

!ANDEPOSITS7 etc

"J "J

"2

DI/IDENDS

RECEI/ED fro+do+e&tic cor2$7 etc$

Sub(ect toincreasing rates of

4 if receive in

1IIA! A in 1III!

an 1J in "JJJ

"J "2

S#ARE O. A

PARTNER i' the'et i'co+e after a

ta1 of a ta1a3le

2art'er&hi27 etc

6 o6

4, A 7 1J

"J "2

Ruestion: ow o you treat that share of a professional partner from the net income of a general6

professional partnership

nswer: *his shoul be taxe at the rate provie uner Sec"&, that is, 2 to $&

But as regards the share of a partner in the net income after tax of a taxable or

business partnership, that is one which is sub(ect to final tax

#$)E%( @ may be exempt if given in sports competition an if given primary in recognition ofscientific, artistic, literary, eucational, religious, charitable, or civic achievement

INTEREST

$ules

1 +f it is an interest on forein currency deposit system3 it is exempt

+f the recipient is non6resient iniviual 390, 96;*B, 969;*B)

" +f the recipient is a resident individual (RC3 R"3 that is sub(ect to 52

$ +nterest income is also exempt if it is an interest income on a long6 term eposit or long6term investment 3this must have a term of not less than 2 years)

)f the term is less than ? years it is sub6ect to the following rates:1 & years to less than 2 years 2

" $ years to less than & years 1"

$ 8ess than $ years "J

""



D)*)D%'D $%%)*%D 8$!" D!"%(T) !$#!$AT)!'

1 his is exempt from tax if the recipient is a foreign government, financing institution,

regional financing institution, international financing institution establishe by foreign

government Gsee Sec$" 3B) 35) 3a)H

" +t is also exempt if the recipient of such ivien is another omestic corporation orresient foreign corporation Gsee Sec "A3)35)3)H

A#)TAL 9A)' D%$)*%D 8$!" (AL% !8 (&A$%( !8 (T!

Listed and traded through local stoc/ exchange @ this is not sub(ect to income

tax but sub(ect to percentage tax of of 1 of the gross selling price

'ot listed and traded through local stoc/ exchange E this is the one sub(ect to

income tax

9ot over P1JJ,JJJJJ 2

mount .ver P1JJ,JJJJJ 1J

+f the share of stoc4 is not listed and traded throuh local stoc4 exchane, the

basis of the tax is net capital gain So, you shoul first euct the capital loss

+f listed and traded throuh local exchane, there is no euction allowe

because the basis of the tax rate of of 1 of the gross selling price

he a%ove-mentioned tax rates apply to all individual taxpayers!

5 A#)TAL 9A)' D%$)*%D 8$!" T&% (AL% !8 $%AL #$!#%$T: 6 *he real property involve must be consiere 0P+*8 SS;*

6 *he tax on capital gain erive from the sale of real property is 4 of the gross selling price or

zonal value which ever is higher

O CAPITAL ASSET property held %y the taxpayer 'hether or not connected in his trade or

%usiness except : (code SOUR)

1 Stoc% in trae or other property of any %in which woul be inclue in the inventoryof the taxpayer if on han at the en of the taxable year

" Property primarily hel for sale to customers in the .rinary course of trae or

business

$ Property >se in trae or business sub(ect to epreciation

& eal property use in trae or business

T *he efinition of capital asset says Creal property hel by the taxpayer whether or not

connecte with his trae or business except real property use in trae or businessD So, in

order to %e a capital asset3 the real property must %e one not used in trade or %usiness

T *hat is why, the sale of resiential house an lot is sub(ect to 4 of capital gains because it

is a real property not use in trae or business

T But, sale of real property by a real estate dealer is not a capital transaction because the

property involve is one primarily hel for sale to customer in the orinary course of trae

or business *hat is not a capital asset %ut an ordinary asset

T *his covers not only CsaleD of property! it also covers conitional sale of real property

incluing the so6calle pacto de retro sale uner rt 14J" of the 900, or isposition of property locate in the Phils

T +f the %uyer is the overnment or any of its political su%-divisions or political aencies3

includin overnment o'ned and controlled corporations3 the seller have the option to avail

"$



the 4 or uner Sec "&3), wherein the basis uner sai section is taxable income so

euctions may be allowe *he cost of the property may be eucte but when you avail of

the 4, the basis is gross selling price or zonal value whichever is higher

T +s this a tax on the buyer or the seller +t is a tax on the seller But sometimes, through an agreement, p'ede nilan +-transfer sa

%uyer3 an there?s nothing that can prevent the seller from transferring the tax to the buyer inthe contract of sale

OT#ER INCO0E

O !T&%$ )'!"% includes 6code R$I$D$O$8a ent income other than royalties

b +nterest income other than interest income on ban% eposit

c -ivien income

+ncome from .ther sources an this may inclue: (!IT"CDC)1 Ba ebts recovere

" +llegal gains erive from gambling

$ *ax funs

& 0ompensation for private property expropriate by the

government for public use

2 -amages

4 0ancellation of inebteness

5$ $%'T 6 0ompensation for the use of one?s property

6 *he payment may be in cash or in %in *he property involve is either

personal or real property

6 +n the case of personal intani%le property3 sub(ect to final tax if it involves

intellectual property, copyright, traemar%s etc

T&% 8!LL!;)'9 !'(T)TT%( TA+ABL% $%'T )'!"%0

1 *he re4lar re't may be monthly, semi6annually or annually

" Additio'al re't i'co+e which inclues:

a !bligation of the lessor assumed by the lessee *he following are obligations which

may be assume by the lessee: 6R$I$D$I$O$8a1 eal property taxe on lease premises

a" .bligation to pay insurance premium on the insure lease premises

a$ +f the lessor is a corp, the obligation to istribute -iviens to its stoc%holers

a& .bligation to pay interest on the bons issue by the lessor

a2 .ther obligations of the lessor which may be assume by the lessee

b *alue of permanent improvements on leased premises *his may be reportethrough:

b1 1utriht method at the time of permanent is complete, he may report that as

aitional rent income E /M@ of the builing or permanent improvement

b" Spread out method by allocating the epreciation among throughout the

remaining term of the lease

c. Advance rentals

c1 +f in the nature of the prepai rentals without restriction on the use of the

amount, it is taxa%le

c" +f it is in the nature of security eposit, it is taxa%le rent income if there is aviolation of the term of the lease

c$ +f it is in the nature of a loan to the lessor, it is not taxa%le

>. )'T%$%(T )'!"% E compensation for the use of money6 <hether it is an interest on loan pursuant to the business of a taxpayer or personal

transaction, interest income, except if it is tax exempt, is always taxable *his is so

because the source of income is immaterial, even if it is from an illegal source

"&



6 +nterest income on ban% eposits is sub(ect to final tax

2. D)*)D%'D )'!"% E amount eclare, set asie an istribute by the Boar of -irectors

to stoc%holers, on eman or a fixe perio

lasses of Dividend $ GC$L$I$P$S$S$HCash dividend

.i<uidatin dividend- this is given upon li#uiation of corporate affairs

+ndirect dividend - it is given in other form an this inclues cancellation of

inebteness by the corp of the obligation of stoc%holer

Property dividend - it may be in the form of stoc% other than the stoc% of the corpStoc4 dividend - stoc% issue by the giver corp

Script dividend - +t is given in the form of promissory note or other evience of

inebteness

STOC DI/IDEND @ as a rule not taxable. *his is so because there is no income here +t

merely represents the transfer of surplus account to the capital account

CP+1NS to the Rule:

(toc/ dividend may be sub6ect to tax under the following exceptional cases0 6C OR D8

1 +f there is a 0hange in the stoc%holers interest in the net assets of the corp!

" +f it is one issue by .ther corp <e call that Cdividend stoc/ D

(toc/ dividend vs. dividend stoc/ E Stoc% ivien as a rule is not taxable whereas

ivien in stoc% is taxable

$ eemption of stoc% ivien!

& +f the corp issues -ifferent shares of stoc% +f the corp issues two ifferent classes of

shares of stoc%, the ivien that may be eclare thereafter is taxable

;xample:

!utstanding stoc/ (toc/ dividend Taxable

1 Preferre 0ommon 9*

" 0ommon Preferre 9*

$ Preferre Preferre 9*

& 0ommon 0ommon 9*

2 PreferreF0ommon Preferre *

4 PreferreF0ommon 0ommon *

Disguised dividend @ treasury stoc% ivien eclare out of the outstaning capital stoc%, the

purpose of which is to avoi the effect of taxation 3Commissioner vs! #annin"!

+t is one which is mae to appear as stoc% ivien when the truth of the matter is that it is a

ivien which is illegally eclare, such a case, since the purpose is to evae taxation, it is

taxable

emember, treasury shares of stoc/ are not entitled to dividends.

ALLO*A!LE DEDUCTIONS (SEC$ :;)

As regards individual taxpayers, the following may claim allowable deductions0

1 0

" 90, only those expenses incurre in the Phils because here, we cannot tax his incomeerive from sources without

$ , only those expenses incurre in the Phils

& 96;*B, but only those expenses incurre in the Phils

2 PP 3Professional Partners uner Sec "4)

%xceptions0

1 +* earning 0+ E ;;, ; ;8

"2



" 969*B

$ liens employe

M0

B .B>

0 PS0& 9/0

As regards corporate taxpayers, the following are entitled to claim allowabledeductions0

1 -0, which inclues private eucational institutions, non6profit hospital, government6owne

an controlle corps

" /0

ITE0I@ED DEDUCTIONS 6E7I$T7L7!7D7D7C7R7C81 ;xpenses 4 -epreciation

" +nterests 5 -epletion of oil, gas, wells an mines

$ *axes A 0haritable contributions

& 8osses I esearch 7 -evelopment

2 Ba ebts 1J 0ontribution to Pension *rust

O +n the case of individual taxpayers, they may avail of the optional standard deduction of 9G

of ross income

O Corporate taxpayers are not allowe to claim 1J optional stanar euctions

O ll iniviual taxpayers except the 9 iniviual may claim this optional stanar

euctions

O )temi-ed deduction may apply to corporate taxpayers as well as individual taxpayers

5 8'DA"%'TAL #$)')#L% )' D%DT)!'(

1 *he taxpayer must prove that there is law authorizing euctions

" *he taxpayer must prove that he is entitle to euctionsOOO NR0C are not entitled to claim deductions

5$ EXPENSES

!$D)'A$: F '%%((A$: %+#%'(%(

<hen we spea% of .-+9K, this simply refers to the expenses which are normal, usual orcommon to the business, trae or profession of the taxpayer *his may not be recurring

xample: if an action is file in court, it is but normal to hire the services of a lawyer So, the

taxpayer has to pay attorney?s fees +t is an orinary expense uner this circumstances

9;0;SSK6 +t is one which is useful an appropriate in the conuct of the taxpayer?s trae or profession

.-+9K 7 9;0;SSK ;=P;9S;S

6are those which are incurre or pai in the evelopment, operation management of the business,

trae or profession of the taxpayer

;=*6.-+9K ;=P;9S;S E 'ot Deductible *hese are amortize or in lieu of the same,

you may claim that so6calle allowance for epreciation n if it involves intangible asset, the

wor use is M.*+U*+.9

*here is no har an fast rule n expense may %e ordinary insofar as a particular

taxpayer is concerned and it may not %e an ordinary as reards another taxpayer!

;xample:

+f you have business here in Manila an you also have business in *awi6tawi, what is the

expense that you may incur in *awi6tawi which you may not possibly incur in Manila

+n *awi6tawi, you may nee people to guar your business But here in Manila, you may

nee not because of our new Presient6elect

"4



INDS O. ORDINARY F NECESSARY EXPENSES 6C$A$R$T$E$R$S$8

1 0ompensation for services renere

" vertising 7 promotional expenses

$ ent expenses& *ravelling expenses

2 ;ntertainment expenses4 epairs 7 maintenance expenses

5 Supplies an materials

!""!' $%<)()T%( 8!$ D%DT)B)L)T: of these ordinary F necessary expenses0

6D$I$R$8a #ust %e paid or incurred D*R+N2 the taxa%le year!

+f you incur expenses in 1II5, you cannot carry this over to 1IIA expenses incurre

uring a particular year must be claime as euctions uring this year when the same

were incurre

CP+-D E to signify the fact that the taxpayer uses the 0S

BS+S >ner the 0S BS+S, an expense is recognizewhen it is P+-

C+90>;-D E implies that the taxpayer employs the 00>8

BS+S >ner the 00>8 BS+S, income is recognize

when earne regarless of the receipt of the same an

the expense is recognize when incurre

b #ust %e paid or incurred in connection 'ith the trade3 %usiness or profession of the

taxpayer!

c #ust %e proven %y RC+PS!

SPECIAL RE-UISITES .OR DEDUCTI!ILITY O. T#ESE ORDINARY F

NECESSARY EXPENSES

=. !"#%'(AT)!' 8!$ (%$*)%( $%'D%$%D

*his must be reasona%le, meaning, this must not be ostensible

Ca&e 5: Partnership was sol to a corp an it was agree that the partners will serve the corp an

ma%e it appear that they rener services So, compensation for services was ostensibly mae by

the corp

#eld *hese is a mere ostensible salary or payment for services not actually renere

because that amount really forms part of the properties purchase by the corp

Ca&e 9: 0orporate officers succeee in selling the property of the corp So, profit was erive

therefrom Bonuses were given to these corporate officers

#eld *he rule is settle Bonuses must be given in goo faith *here must be services

renere because bonuses are aitional compensation +n this particular case, there was really no

services renere because that sale was mae through a bro%er *he corp mae it appear that it

was through the efforts of these corporate officers that brought about a successful sale of

property

5onuses must %e iven in ood faith and in determinin 'hether %onuses 'ill form part

of the compensation for services rendered3 you have to consider the 31) nature of the business, 3")the financial capacity of the taxpayer an 3$) the extent of the services renere

>. AD*%$T)()'9 A'D #$!"!T)!'AL %+#%'(%(

6 +t must be reasona%le!

Ca&e: Sugar -ev?t 0orp pai P1"2,JJJJJ to lgue 0orp representing promotional expenses

"5



#eld *his is reasonable uner the circumstances because the particular buget sub(ect for

promotion involves million of pesos n uner that circumstances, the P1"2,JJJJJ is

reasonable as this may coincie with the efforts exerte consiering that the taxpayer has no

venture in that experimental pro(ect to establish that vegetables of investment company an this

involves millions of pesos

2. $%'T %+#%'(% a *he taxpayer must N1 %e the o'ner of the property or he has no e#uitable title over

the property

b *his is su%&ect to 'ithholdin tax! Kou cannot claim that the taxes suppose to be

withhel have not been pai or remitte to B+

C. T$A*%LL)'9 %+#%'(%(

6 *his must be incurred or paid 'hile Ka'ay from home)!

6 K6ome) oes not refer to your resience but to the station assignment or post

xample$ /rom home office to branch office, the traveling expenses incurre are

euctible n this inclues not only the transporatiotion expenses but also meal allowance anhotel accommoations

?. %'T%$TA)'"%'T %+#%'(%(

6 *his must not %e contrary to la'3 morals3 ood customs3 pu%lic policy or pu%lic order

6 ence, %ri%es3 4ic4%ac4s3 and similar payments are not deducti%le

6lso, the expenses incurre by the taxpayer in entertaining gov?t officials in 26star hotel to gain

political influence are not euctible

3. $%#A)$( A'D "A)'T%'A'% %+#%'(%(

6 1nly ordinary or minor repairs are deducti%le!

- xtra-ordinary repairs cannot %e claimed as deduction an in lieu of that, the taxpayer may not

be allowe to claim epreciation

- +f the cost of the repair increases the life of an asset for a period of more than one (9" year3 that

amount is consiere extra6orinary repair 1ther'ise3 it is consiere orinary repair

G. (##L)%( A'D "AT%$)AL(

6his must %e actually consumed durin the taxa%le year!

6 RULE ON SU!STANTIATION simply re<uires that ordinary and necessary expenses must

%e proven *he 2roof& re#uire inclue:

6N$O$R$E$D$8a .fficial receipts

b e#uate ecourse

c mount of ;xpense

-ate an place where such expense is pai or incurre

e 9ature of expense

9$ INTEREST

$%<)()T%( 8!$ D%DT)B)L)T:

1 *his must be pai or incurre ->+9' the taxable year

" *his must be pai or incurre in connection with the trae, business or profession of thetaxpayer

$ *here must be an obligation which is vali an subsisting

& *here must be an agreement in writing to pay interest

Ruestion 1:

<hat about that interest on unclaime salaries of the employees, is that interest

euctions

"A



nswerFel:

9., because there is no obligation or inebteness +t is the fault of the employees in

case they faile to claim their salaries

Ruestion ":

<hat about that interest charge to the capital of the taxpayer, is that euctible

nswer:

+nterest on cost6%eeping purposes is not euctible *his oes not arise uner an interest6

bearing obligation

T&%!$%T)AL )'T%$%(T @ an interest which is compute or calculate, not pai or incurre,

for the purposes of etermining the opportunity cost of investing in a business *his oes not arise

from legally emanable interest6bearing obligation *his is not a deducti%le interest!

Ruestion $:

<hat about interest on preferre stoc%, is this euctible

nswer:

s a rule, interest on preferred stoc/ is not deductible , because there is no obligation to

spea% of +t is in effect an interest on ivien *he reason why it is not euctible is that the

payment is epenent upon the profits of the corp +t will only be pai if the corp earn profitsn woul not be pai of the corp incurs losses

BT if it is not dependent upon corporate profits or earnings, that is deductible +f is

payable on a particular on a particular ate or maturity without regar to the corporate profits, it

is euctible

he Supreme Court mentions W1 (8" 0C1RS$

1 not epenent upon corporate profits! an" agreement as to the ate or term within which payment will be mae

)'T%$%(T !' 9!*7T (%$)T)%( is now taxable.

So, if the taxpayer obtaine a loan from P9B an use the procees in purchasing gov?t

securities, the interest is now taxable 8i%ewise, the interest expense pai on that loan, the

procees of the same, ha been use to purchase gov?t securities is now euctible

-$ <hat about an interest on a loan pai in avance, is this euctible 8et us say that the

taxpayer obtaine a loan from a ban% an it is payable within 2 years *he loan obtaine is

P2J,JJJJJ 9ow, it was eucte in avance, can that be claime as euctions

A$ 9. Kou can only euct the same when the installment is ue a particular year

INTEREST EXPENSES *#IC# ARE NON"DEDUCTI!LE 6PARCAPU81 +nterest expense on P;/;;- S*.0Q!

" <hen there is 9. ';;M;9* in writing to pay interest!

$ +nterest expense on loan entere into between ;8*;- *=PK;S

& +nterest pai or calculate for 0.S*6Q;;P+9' P>P.S;S

2 +nterest pai in -@90;

4 +nterest on obligation to finance P;*.8;>M ;=P8.*+.9

5 +nterest on >908+M;- S8+;S of the employees

$elated taxpayers$

a! mem%ers of the same family 'hich includes$

a1 spouses

"I



a" brothers an sisters

a$ escenants an ascenants

b %et'een t'o (8" corporations o'ned or controlled %y one individual! e must have a

controlling interest over these two corporations ., if one corp is consiere as

personal holing company of another corpc! %et'een a corp! and an individualL that individual o'ns or controls more than =G

of the outstandin capital stoc4 of the such corp! parties to a trust !

1 grant or fiuciary

" fiuciary of one trust an fiuciary of another trust but there is only one

grantor

$ beneficiary an fiuciary

OKour %nowlege of relate taxpayers is also important in etermining whether losses

are euctible or not +f losses 'ere incurred or paid in connections 'ith the

transactions %et'een these related taxpayers3 these are not deducti%le!

Ruestion: ow much interest expense is euctible

nswer: *he interest that may be claime as euctions shall be reuce

by:

a &1 6 Beginning Nanuary 1, 1IIA

b $I 6 Beginning Nanuary 1, 1IIIc $A 6 Beginning Nanuary 1, "JJJ of the income sub(ect to final tax

#P. 10 +NC1# S*5,C 1 0+N. $

1 interest on ban% eposit

" interest on eposit maintaine uner the foreign currency eposit system

So, if the interest income on ban% eposit amounte to P1JJ,JJJJJ n the total interest

expense incurre or pai by the taxpayer is P"JJ,JJJJJ +f this is incurre in 1IIA, &1 ofP1JJ,JJJJJ is P&1,JJJJJ *hat P"JJ,JJJJJ interest expense incurre or pai, shoul be

reuce to P&1 of that P1JJ,JJJJJ to arrive at P12I,JJJJJ which is the interest that may be

claime as euction

P"JJ,JJJJJ

6 &1,JJJJJ

66666666666666666666666 P12I,JJJJJ

*he rule has been establishe that S are N1 1RD+NRB 15.+2+1NS But the

Supreme Court in t'o (8" cases relaxed the distinction %et'een taxes and ordinary o%liations

1 *he interest on deficiency donor7s tax is deductible *he S0 explaine that taxes here areconsiere obligations or inebteness n it rule that we have to relax the istinction

between tax an orinary obligation in this respect

" )nterest on deficiency income tax can also be claimed as deductible interest expense

because taxes here are consiere orinary obligations

:$ TAXES

$%<)()T%( 8!$ D%DT)B)L)T: :

1 *his must be pai or incurre uring the taxable year

" *his must be taxes pai or incurre in connection with the trae, business or profession of thetaxpayer

OOO axes that may %e claimed as deductions may %e national or local taxes!

$J



T&% 8!LL!;)'9 A$% '!'D%DT)BL% TA+%( 6S$I$N$E8

1 SPC+. SSSS#N E tax impose on the improvement of a parcel of lan

" +NC1# E *his inclues foreign income tax +n this regar, the so6calle foreign

income tax may be claime as a euction from gross income or this may be claime as taxcreit against Phil income tax +n the event that he claims that as tax creit, he can no

longer claim the same as euction

$ *axes which are N1 C1NNCD W+6 6 RD3 5*S+NSS 1R PR10SS+1N

10 6 PBR

& S 3 D1N1RFS 3see also iscussion on tax benefit rule)

TA+ A( D%DT)!'( vs. TA+ $%D)T

T *axes as euctions may be claime as euctions from gross income

T *ax creit is a euction from Phil income tax

T *ax as euction inclues those taxes which are pai or incurre in connection with the

trae, business or profession of the taxpayer owever, the sources of a tax creit is foreignincome tax pai, war profit tax, excess profit tax pai to the foreign country

T *he foreign income tax pai to the foreign country is not always the amount that may be

claime as tax creit because uner the limitation provie uner the *ax 0oe, it must not

be more than the ratio of foreign income to the total income multiplie by the Phil income

tax

T *axes are euctible only by the person upon whom the tax is impose

xcept$

1 Share holer

" corporate bons 6 tax free 0ovenant clause

The following are entitled to claim tax credit0

10 " -0

;$ LOSSES

CLASSI.ICATION O. LOSSES 6O$ C$ *$ C$ S$8

1 !$D)'A$: L!((%( E losses sustaine in the course of trae,

business or profession of the taxpayer

" A#)TAL L!((%( E the assets that must be involve there must be

capital assets

Ca2ital Lo&&e& i'clde the follo%i'4a 8oss arising from failure to exercise privilege to sell or buy property

b <orthless securities

c banonment losses in the case of natural resources

8oss from wash sale

$ ;A9%$)'9 !$ 9A"BL)'9 L!((%( E the amount that is euctible

must not excee the gains

%xample0

*he winnings amounte to P1,JJJJJ 8oss is P2JJ *his loss is euctible

+f the winning is P2JJ an if the loss is P1,JJJ *he amount euctible is only P2JJ

because the amount must not excee the gains+f there is no winnings an loss is P2JJ -euction losses here is U;.

& A(ALT: L!((%( E this must be reporte to the B+ earlier than $J

ays but not later than &2 ays following the ate of the loss

Ca&alty lo&&e& i'clde

a /ire

$1



b Storm

c shipwrec%

.ther casualty losses

e obbery

f ;mbezzlementg *heft

2 (#%)AL L!((%( E include the following $

a! loss arisin from voluntary removal of %uildins as an incident to rene'al or replacement

Problem:

Suppose the taxpayer ha a builing constructe on a parcel of lan e owne this

as well as the builing erecte thereon e ha business an his business was

conucte within the premises *hen, he ecie to remove such builing as to

construct a new builing for new business

+s the cost of emolition to give way to a new builing euctible loss YES$

Suppose purchase that parcel of lan of B an inclue in that sale was that of the builing emolish this builing in orer to construct a new builing +s the cost of

emolition euctible insofar as is concerne

NO$ *hat can only be claime as euctions if the one emolishing the same is thetaxpayer *he moment that is sol to another claim that as euctible loss *he

treatment here is, the cost of emolition shoul be capitalize in the selling price

E1ce2tio': may claim that as euctible loss if this was emolishe by value of a

court orer because the gov?t consiere this as a fire hazar, loss of useful value of

property or capital asset

T&% !""!' $%<)()T%( for D%DT)B)L)T: !8 L!((%( are0

1 .osses must %e actually/sustained and not mere anticipated lossesL

" #ust not %e compensated %y insuranceL

666 +f it is partly compensate, only the amount not compensate by insurance is euctible

$ #ust %e evidenced %y a completed transaction

Co+2leted Tra'&actio' this means that the loss must be fixe by ientifiable event

xample: +f it is a loss sustaine from sale, the event that may ientify or complete the

transaction is the consummation of the contract of sale

Suppose it is in the nature of casualty losses li%e fire

*he fire estroye your property in 1II2, no payment has been mae because the insurer

an the insure were still uner negotiation +t was only in 1II5 that they agree on the

amount *he amount agrees upon is P1JJ,JJJ *he taxpayer may claim that casualty lossesonly in 1II5 when payment was actually mae *his is the event that will complete the

transaction

<$ !AD DE!TS

$%<)()T%( 8!$ D%DT)BL)T:0 6CU7 *7 T!P7 /S7 U8

1 Must be chared off and uncollecti%le within the taxable year!

" Must be ascertaine to be 'orthless

$ Must arise from trade3 %usiness or profession of the taxpayer!

& Must be valid and su%sistin inebteness!2 Must be uncollecti%le in the near future

&!; T! #$!*% T&% ;!$T&L%(('%(( !8 !BL)9AT)!'0

ccordin to the Supreme Court3 the follo'in SPS must %e complied :

1 *here must be a statement of account sent to the ebtor!

" collection letter!

$"



$ +f he faile to pay, refer the case to a lawyer!

& +f lawyer may sen a eman letter to the ebtor!

2 +f the ebtor still fails to pay the same, file an action in court for collection

+n provin that the de%tor is insolvent of %an4rupt , mere allegation of the same is notenough Kou shoul prove that the ebtor is inee ban%rupt or insolvent So, you may

secure a copy of that decision %y the SC or other agency as the case may be, eclaringthe ebtor as ban%rupt or insolvent n then there must be a eman letter sent to him

+n case the de%tor 'as ro%%ed , there must be a police report to that effect

*he de%tor may %e a NR0C , so you may argue that he may not be sue here ccoring

to the Supreme 0ourt, as a rule that is not an excuse Kou shoul still send a demand

letter to that NR0C +n other wors, there must %e dilient efforts to collect the

inde%tedness and to prove that in the near future such o%liation is no loner collecti%le

OOO +f the recovery of %ad de%ts3 resulted in a tax %enefit to the taxpayer , that is taxable +f it

did not result in any tax %enefit to the taxpayer , that is not taxable (TAX !ENE.IT

RULE)

9B ea the case of Phil! Refinin Company vs! Commissioner , a 1IAI case

$ DEPRECIATION

he idea here is not to recover profit3 %ut to recover the cost of property invested in

%usiness <hen the properties are use in trae, business or profession of the taxpayer, the law

consiers or recognizes the graual loss or sale of property

D%#$%)AT)!' refers to the graual iminution of the useful value of the property

use in trae, business or profession of the taxpayer, arising from wear an tear ornatural obsolence

$%<)()T%( 8!$ D%DT)B)L)T:0 6U P R A C 8

1 *he property must be used in trade3 %usiness or profession of the taxpayer!

" *here must be deprecia%le properties

*he nondepreciable properties are

a Personal property not use in trae, business or profession of the taxpayer!

b +nventoriable stoc% an securities

c 8an

Mining an other natural resources

$ *he allo'ance for depreciation must %e reasona%le

& *he method in computin the allowance for epreciation must be in accordance 'ith the

method prescri%ed by the Sec of /inance upon the recommenation of the B+

0ommissioner

This prescribed method includes:

a -eclining balance metho b Sum of the years igit metho

c Straight line metho

ny other metho as may be prescribe by the Sec of /inance upon the

recommenation of the B+ 0ommissioner

2 *his must be chared off durin the taxa%le year!

H$ DEPLETION natural resources

T *his involves natural resources such as oil, gas wells an mines *hese are non-replacea%le

$$





K$ RESEARC# F DE/ELOP0ENT PROGRA0

This may not be claimed as deduction if the amount is:

1 Spent for the ac#uisition or improvements of lan or for the improvement or

evelopment of natural resources

" Pai or incurre for the purpose of ascertaining the existence, location, extent or

#uality of any natural resources li%e eposits of ore or other minerals incluing oil or gas

5$ CONTRI!UTION TO PENSION TRUSTS

$%<)()T%( !8 D%DT)B)L)T: $1 *here must be a pension plan establishe by the employer!

" *he pension must be reasonable or soun!

$ 0ontribution must be given by the employer to that pension plan!

& *his must be for the benefit of the employees!

2 *he plan must not be sub(ect to the control of the employer

Contri%ution to pension trust may refer to the current year or past years!

C*RRN BR- this is considered as ordinary M necessary expenses

;mployer may also ma%e a contribution to the pension plan in regar to the

services renere for the past 1J years

PERSONAL EXE0PTIONS

PERSONAL EXE0PTIONS

5$ #ersonal and additional exemptions 39ote: <ala na yung S$A$P$E)

>. #remiums on health and hospital insurance

Limitations$

a$ +t must not be more than P",&JJJJ a year +n other wors, P"JJJJ a month *he

P",&JJJJ is the maximum amount that may be claime as euctions

3 *he family must have an income of not more than P"2J,JJJJJ a year

c *he claimant must be the spouse claiming the aitional exemption

Premiums on life insurance policy is also included here %ecause it is included under the

health insurance policy!

PERSONAL EXE0PTION

*his is an arbitrary amount in the nature of euctions from gross compensation income

+f the taxpayer has no compensation income, this can be claime as euction from gross

income from business, trae or profession

Personal exemption is given to approximate the nees of the taxpayer +t is a substitute

for the isallowance of family, personal an living expenses

)'D( !8 #%$(!'AL %+%"#T)!' $

$2





b -epenent upon the taxpayer for chief support!

c >nmarrie!

9ot gainfully employe!

e 9ot more than "1 years ol except if physically or mentally incapacitate

T -epenent is consiere Cliving with the taxpayer D even if the former or the latter are not

physically together if that is brought about by force of circumstances xample if one of the parents will have to unergo by6pass operation in the >S

TChief S22ort E means more than 2J of the nees of the epenents are provie by the

taxpayer

Pro3le+: +f the chil or the brotherFsister got marrie an then he has foun to be physically or

mentally incapacitate, so bumali% si tatay at epenent sa tatay for chief support, can he #ualify

as epenent

A'&%er 9o, physical or mental defect applies only to ae re<uirement! 1nce the child or

%rother/sister ot married3 he is automatically dis<ualified as dependent!

T &A'9% !8 (TAT( :

1 -eath of spouse uring the taxable year!

" -eath of epenent uring the taxable year!

$ -eath of the taxpayer uring the taxable year! estate of the taxpayer may claim the %asic

personal exemptionL

& itional epenent uring the taxable year!

2 *axpayer got marrie uring the taxable year!

4 'ainful employment of the epenent uring the taxable year

5 -epenent became more than "1 years ol uring the taxable year

T ven if the a%ove-mentioned chane of status happened durin the taxa%le year3 the taxpayermay still claim the %asic personal exemption %ecause it is as if the chane of status happened at

the end of the taxa%le year!

T *here is a provision in the *ax 0oe, which is not so clear /or purposes of head of the

family7 in the case of natural chilren or chil, there is that wor Hac/nowledged or recogni-edI.

T 0or purposes of the definition of head of the family, it is clear that to #ualify as epenent, the

natural chil or legitimate chil must be ac%nowlege or recognize by the taxpayer

T But in the efinition of the epenent, dependent means legitimate, illegitimate or legally

aopte chil or chilren *here is no wor ac%nowlege or recognize

T <as this eliberately omitte by our 0ongressmen -oes this imply that since they have somay illegitimate chilren, they may not be re#uire to ac%nowlege or recognize them an they

can claim this illegitimate chil as their epenent *his is not clear +f we will try to interpret the

law literally, there is no nee of any recognition on the part of the taxpayer

T +s this really the intention of law

T 9o he intention of the la' has al'ays %een to reconize this illeitimate child and this is

one 'ay of compellin the taxpayers to reconize this child!

T *he #resident of the $epublic of the #hils. cannot issue an executive order to increase the

basic personal exemption because the provision uner the .l *ax 0oe authorizing the

Presient to increase the personal an aitional exemption upon the recommenation of the Secof /inance has been remove or elete by A&"&

T No'3 you can only increase the amount of personal and additional exemption %y leislative

enactment

NON"DEDUCTI!LE ITE0S

$5



1 Personal, living or family expenses

" *hose which are consiere capital expenses Capital expenditures may be one that may

increase the value of an asset

$ ;xtra6orinary repair expene to restore the property, or ma%ing goo its exhaustion

xtra-ordinary repair is one that may prolong the life of an asset for more than one 31) year

Kou cannot claim the same as euction +nstea, you may claim it as allowance for

epreciation

& Premiums pai on the life insurance policy of the officer or employee of the employer, when

the employer is irectly or inirectly esignate as beneficiary

2 8osses from sales or exchanges of property between relate taxpayers

RULES

T Premiums paid on the insurance policy of the officer or employee may %e claimed as

deduction %y the employer3 +f the beneficiary is the family or the heirs of the officer or theemployee

T +t is not deducti%le on the part of the employer3 +f the beneficiary esignate irectly or

inirectly is the employer +f the %eneficiary desinated is the creditor or the heirs of the

employer3 the esignation is inirect! hence, that premium is not euctible

T .n the other han, on the part of the employees, these premiums may be a taxable

compensation income +t is taxa%le compensation income on the part of the employee if the

beneficiary esignate is the family of heirs of the employee

T Therefore, if these premiums are deducti%le on the part of the employer3 that is taxa%le on the

part of the employee! +f these premiums are not deducti%le on the part of the employer3 that is not

taxa%le on the part of the employee!

N$!$ Personal3 livin and family expenses are deducti%le for the simple reason that these are not

connecte with the business, trae or profession of the taxpayer +n lieu of the same, the taxpayer

may claim the so6calle CPersonal an itional ;xemptionD in the case of iniviual taxpayers

CORPORATE INCO0E TAXATION

CORPORATE TAXPAYER corporation, includes partnership no matter how create

or organize, (oint account companies, insurance companies an other associations

)t excludes0 GG227 /"c7 C" PGE"GH1 'eneral professional partnership!

" Noint venture for the purpose of unerta%ing construction pro(ects!

$ Noint consortium for the purpose of engaging in petroleum, geothermal another energy operations pursuant to a consortium agreement with the

government

TAX EXE0PT CORPORATIONSThe following organi-ations shall not be taxed in respect to income received by them as

such05 9eneral professional partnership E evote to a common profession, must not engage in

a business!

9 Joint venture for the purpose of unerta%ing construction pro(ects!

: Joint consortium for the purpose of engaging in petroleum, geothermal an other energy

operation pursuant to a consortium agreement uner service contract with the government

E there must be a consortium agreement with the government

$A



;$ 8abor, agricultural or horticultural organization not organize principally for profit

T So, it may erive income from such business as long as it is merely incidental , the

organization is still exempt <hat is important here is that in the articles of incorporation

of this tax6exempt organization, it must be clearly provie that these organizations arenot formed or oranized for profit!

E1a+2le: +n the course of promoting agricultural proucts, the agricultural

organization may sponsor exhibits an income may be erive from the same *hat will

not ma%e this corporation taxable because that is merely inciental *he activity has

connection with the purpose for which the corporation was organize

<$ #utual savins %an4 not having s capital stoc% represente by shares an cooperative

ban% without capital stoc% organize an operate for mutual purposes an without

profit

6 must form an organize for mutual purposes

6 Mutual savings ban% an cooperative ban% must not be organize for

profit So, it must not issue shares of stoc%

$ %eneficiary society3 order or association3 operating for the exclusive benefits of the

members such as a fraternal oranization operating uner the loge system, or a paymentof life, sic%ness, accient, or other benefits exclusively to the members of such society,

orer or association, or non6stoc% corp or their epenents

Lodge system E one which must operate uner a parent an subsiiary associations

H$ Cemetery company owne an operate exclusively for the benefit of its members

6 *his must be non6profit cemetery

;xample: 8ibingan ng mga Bayani

$ Non-stoc4 corporation or association organize an operate exclusively for reliious3

charita%le3 scientific3 athletic3 or cultural purposes3 or for the reha%ilitation of veterans !

no part of its income or asset shall belong to inure to the benefit of any member,

organizer, officer, or any specific person

K$ 5usiness leaue3 cham%er of commerce3 or %oard of trade, not organize for profit, an

no part of the net income of which inures to the benefit of any private stoc%holer or

iniviual

6 #a4ati stoc4 exchane and #anila stoc4 exchane are not covered %ythe exception *hey are sub(ect to tax

$euisites0

a *his must be establishe for common business interest

b 9o part of the income shall inure to the benefit of a particular iniviual

;xample: clearing house corp establishe by member not for profit an such corp is

tax exempt

+f an association is organize by businessmen for the purpose of encouraging prospective

investors to invest in the Phils that association is not tax exempt because the members of

such organization have ifferent business interests

5$ Civic leaue or oranization not organize for profit but operate exclusively for the

promotion of social welfare

;xample: Piso for Pasig /ounation is not for profit *his is a civic organization

omeowners ssociation is sub(ect to tax because that is not organize for profit

55$ 0armers associations or li4e associations, organize an operate as a sales agent, for

$I



the purpose of mar%eting the proucts of its members, an turning bac% to them the

procees of sales, less the necessary selling expenses on the basis of the #uantity of

prouce finishe by them

K<uantity of poduce) means proportionate *his must not be for profit

59 0armers cooperative or other mutual typhoon or fire insurance company3 mutual ditchor irriation company3 or li4e oranization of a purely local character3 the income of

which consists solely of assessments, ues an fees collecte from members for the sole

purpose of meeting its expenses

5:$ 2overnment educational institution *hese are >PMS>

5;$ non-stoc4 and non-profit educational institution

T *a%e note that the last paragraph of Sec $J! it provies, C9ot withstaning the

provisions in the preceing paragraphsD *his means that even thouh they are exempt3 as

reards certain income3 they may %e su%&ect to tax!

OO So, notwithstaning the provisions in the preceing paragraphs, the income of

'hatever 4ind and character of the foreoin oranizations from any of their properties3

real or personal3 or from any of their activities conducted for profit reardless of the

disposition made of such income3 shall %e su%&ect to tax!

OO *he implication is that if these tax exempt corps mentioned under nos! O to 9O3 made

an investment3 the income derived from such investment may %e su%&ect to tax!

T So, if they have real property and lease it to another , the rent income is sub(ect to tax

T+f they have deposit in a %an4 , the interest income on the same is sub(ect to tax

T+f they sell property for profit, that is sub(ect to tax

So, the exemption oes not cover this income erive form such investment *hus, it

must be an income erive from their activities which may be the purpose for which they

are organize

OOO *he insertion of non6stoc%, non6profit eucational institution, to my min, is not in

accorance with the provision of rt1& Sec $ par $, because the 0onstitution provies

for a particular test for exemption an that is CuseD of the property So, if a non6stoc%,

non6profit eucational institution has interest income erive from ban% eposit, in viewof this provision 3Sec $J, 9+0), the B+ may impose a tax on the same, regarless ofthe use or isposition So, even if the interest on such eposit is use to achieve

eucational purposes, that will not exempt it from taxation *he 0onstitution says

Cactually, irectly an exclusively use for eucational purposesD, the meaning of this is,

as the procees or income is actually irectly an exclusively use for eucational

purposes, that may be exempt But uner Sec $J, no *hat must be connecte with the

purposes or purposes for which such institution has been forme or organize Since this

runs counter to rt 1& Sec & par $ of the 0onstitution, this Sec $J shoul be eclare

unconstitutional *he 0onstitution says CuseD but here 3Sec $J) it is regarless of the use

or isposition *his must yiel to that 0onstitutional provision

5<$

(Sec$ 9H 2ar C7 TRA 5KKH)

'S+S 3'overnment Service +nsurance System)

5$ SSS 3Social Security System)

5H$ P+0 3Phil ealth +nsurance 0orp)

&J



5$ P0S. 3Phil 0harity Sweepsta%es .ffice)

5K$ P'0. 3Phil musement 7 'aming 0orp) Eno longer tax exempt as of "JJ56nob

9$ 9P.0. E special law

N$!$ he rule no' is settled3 2ovFt o'ned and controlled corps! re su%&ect to corporateincome tax except those mentioned under Sec! 8; par C!

PARTNERS#IP " *his is an association of two or more persons an they may contribute

money, property, or inustry to a common fun with the intention of

iviing the profits among themselves

Tests that will determine whether a partnership exists or not0

1 *here must be a contribution to a common fun

" *here must be an intention to ivie the profits among themselves

T Co-o'nership is not a partnership 0o6ownership, as a rule is a tax exempt because a co6ownership is forme an organize not for profit but for common en(oyment of the property

or for the preservation of the property

T Partnership is considered a corporate taxpayer *a%e note that this exclues general

professional partnership .nly partnership forme or organize for profit is exclue

T +f it is formed and oranized for the practice of common profession3 it is a tax-exempt

partnership!

T 0or purposes of taxation, this business partnership is taxable irrespective of whether it is

orally constitute or in writing an whether or not it is registere in the S;0

ase0 *he heirs of the ecent inherite the property *here was istribution of share But such

shares are hel uner single management +n fact the income of such property after istribution

was manage by one of the co6heirs

&eld0 *he fact that they agree that the shares shall be hel by the co6heir uner the

single management for profit, this accoring to the S0 convert the co6ownership in to a taxable

unregistere partnership 1na vs. ommissioner @ na doctrine4

ase0 *he heirs inherite the properties from their ecease mother *he property was

uner the aministration of an aministrator *his aministrator of the property was authorize to

sell these properties for profit, or lease properties for profit an engage in an income proucing

activities

&eld0 <hen these heirs inherite the property from their ecease mother, co6ownership exists

t the particular stage, it is exempt from tax when the heirs ecie to invest such property in an

income proucing activity that co6ownership is converte in to a taxable unregistere ownership

1(ea vs. ommissioner @ (ea doctrine4

ase *here was two sisters who form a common fun for the purpose of engaging in a series of

transaction for profit

&eld0 *here is a taxable unregistere partnership here

OOTest that will determine whether coownership is taxable unregistered partnership /in out

whether the heirs mae a substantial improvements on the inherite property *he heirs made a

su%stantial improvement on the inherited property, the implication is that they will engage in a

&1



business for profit, 1%vangelista vs. ommissioner @ %vangelista doctrine4. +f that happens, that

co6ownership will be taxe as unregistere

ase0 .belio Sr entere into a contract with .rtigas limite company >ner that contract,

.rtigas limite company will istribute parcels of lan to the 0hilren of .belio Sr for theirresiential houses fter the subivision of such parcel of lan to the chilren of .belio Sr, these

chilren ecie to sell this parcel of lan to <ie 0ity 0orp <as there a taxable partnershipforme by the chilren of .belio Sr

&eld0 *here was no partnership forme because there was no intention to ivie the profits

among themselves *his was a mere isolated transaction +solate transaction will negate any

intention to ivie the profits among themselves *hus, there was no taxable partnership forme

ase0 Pascual an -ragon purchase $ parcels of lan from Bernarino an " parcels of lan

form Mr o#ue *hereafter, the three parcels of lan which were purchase from Bernarino,

were sol to Marimer 0orp with a profit of P142,"""5J while the parcel of lan purchase from

Mr o#ue were sol at a profit of P4J,JJJ to eyes

&eld0 there was no partnership organize because this is (ust a mere sharin of ross returnn as you have learne in partnership, the law says, Cthe partners share in the net profits of a

taxable partnershipD So, mere sharing of gross return oes not of itself establish a partnership

oi't acco't E <hen two persons form or create a common fun an such persons engage in a

business for profit, this may result in a taxable unregistere association or partnership

Re4i&tratio' is not a re<uisite for purposes of taxation <hat is important here is they mustengage in a business or activity for profit

oi't &toc co+2a'ie& E *his is the miway between corporation an partnership *his has what

you call Khybrid personality)! +t is somewhat a partnership because it is an association, an

persons or members of the same contribute fun, money to a common fun n this us manage by Boar of -irectors! this means: it has that feature of a corporation n these persons may

transfer their share without the consent of others

E+er4e'cy o2eratio' *hese may be forme by two corporations *his two corporations have

separate personalities +f they form that emergency operation 3it is really a special activity) to

engage in a (oint venture, corporation 1 may be taxe only from the income erive from such

business *he income erive from such emergency operation shoul also be inclue in that

taxable income sub(ect to corporate income tax +n the same way, that corporation ", has a

separate an istinct personality! if it a part of that emergency operation, the income erive from

such special activity shoul also be inclue in the income of that corporation ", sub(ect to

corporate income tax, even if it is not registere with the S;0 3Securities an ;xchange

0ommission)

TBut if two corporations are manage by one manager, an this " corporations lease services,

manage by one person an it has " separate accounts, it is not an association forme which is

sub(ect to tax

Do+e&tic Cor2oratio' (DC) E corp forme or organize uner Phil 8aws

Re&ide't .orei4' Cor2oratio' (R.C) E foreign corporation engage in trae or business within

the Phils

No'"Re&ide't .orei4' Cor2oratio' (NR.C) E foreign corp not engage in trae or business

within the Phil

here is no fix criterion as to 'hat constitute enaed in trade or %usiness ;ach case

shall be (uge in the light of peculiar environmental circumstances But Kengaged in businessD

implies continuity of commercial transaction or ealings E continuity of business! there must be

continuity of intention to conuct continuous business

&"



ase0 B.0 is an offline international airline .ffline because it oes not rener any services

an no laning rights in the Phils

B.0 claime that it is not sub(ect to tax with respect to the sale of transport ocuments

or airline tic%ets in the Phils because it is an offline international airline +t oes not rener anyservice an it has no lening rights

&eld $ *he contention of B.0 is not tenable *he income erive from the sale of that

transport ocuments in the Phil is sub(ect to tax *he sub(ect of income may be property, activity

or service that prouce the same /or an income to be consiere as an income erive from

sources within the income must be erive from activity conucte or unerta%en in the Phil

+t is true that B.0 ha no property in the Phil from which its income may be erive

+t is true that B.0 i not rener any service in the Phil from which its income may be

erive But there was that activity that was unerta%en in the Phil from which income was

erive an that refers to the sale of transport ocument ccoring to the Supreme 0ourt, the

sale was mae in the Phil an the payment was mae in the Phil *his particular activity en(oys

protection of the Phil government So, it shoul share the buren of tax B.0 was consiere

oing business in the Phil uner this particular situation because there were series of transactions

mae in the Phil an B.0 was appointe a permanent agent in the Phil *his implies that thePhil an the B.0 ha no intention to establish continuous business here in the Phil 0ontinuity

of conuct is the peculiar circumstance referre to in the case

OO+f these were mere isolate transaction 3let?s moify the facts of the case) an B.0 has no permanent agent in the Phil, such airline is not consiere oing business in the Philippines

emember, international carrier is taxe on gross Philippine billings

ase0 foreign vessel unloae cargoes in the Phil twice

&eld0 <e cannot consier that as resient foreign corp *hese are mere isolate transactions

ase0 +f a corporation made an investment in another corp , the Supreme 0ourt hel that, it willnot ma%e the corp as oing business in the Phil because it has no intention to establish

continuous business

ase$ Marubeni corp is a foreign corp it investe in a omestic corp *his foreign corp has a

branch office in the Phil it mae a irect investment in that omestic corp So, it receive

ivien from that omestic corp

&eld0 *hat will not ma%e such foreign corp a resient foreign corp because of that absence of

intention to establish continues business +t woul be ifferent if it was course through the

branch office of such foreign corp

GENERAL RULES

Cla&&ificatio' Sorce& Ta1 !a&e E'titledDedctio'

Ta1 Rate

DC + F . *axable

+ncome F

$&6 1IIA

$$6 1III

:9J " 9

R.C + *axable

+ncome F

$& 6 1IIA

$$ 6 1III

:9J " 9

NR.C + 'ross +ncome =

<uestion: 0an 0ongress pass a law imposing tax on the income of a /0 erive from sourceswithout

Answer0 9o, because this will violate the principle of territoriality in taxation <e cannot

exten protection to that particular sub(ect of taxation he fundamental %asis of the po'er to taxis the capacity of the taxin authority to extend protection to the su%&ect of taxation!

&$



T he 7OG3 77G 78G tax rates mentioned may not %e applied except if it is lo'er than the 8G

of ross income of such corporate taxpayer *his is calle Kminimum corporate income tax rate

of >K of gross income)!

%xample$ +f a corporate taxpayer has a gross income of P"JM " of that is P&JJ,JJJ +nthis case, the tax to be pai must not be lower than P&JJ,JJJ +f the net income is P"JM an the

euction is P1IM, we only have P1M Kou multiply that by $& because now is 1IIA, so thatwill give you P$&J,JJJ *his is the corporate income tax applying that tax rate 3$&) is lower

than " which is P&JJ,JJJ 3this is the amount suppose to be pai) pplying the minimum

corporate income tax rate of " if the gross income, the amount to be pai as tax is P&JJ,JJJ

T So, the C+i'i++ cor2orate i'co+e ta1 rate of 9J of 4ro&& i'co+eD means that the

corporate taxpayer must pay corporate income tax not lo'er than 8G of its ross income +f the

actual corporate income tax is lower than the " tax that is suppose to be pai, it is the "

minimum But, if the actual corporate income tax applying that $& is P4JJ,JJJ, this is the tax

that shoul be pai

SPECIAL RULES

A$ SPECIAL DC SOURCES Ta1 !a&e Ta1 Rate

1 PRI/ATE

EDUCATIONAL

INSTITUTION

+F. *axable +ncome

1IIA:1Jor$&

1III: $$

9 :9J

'otes0

T ax rate is 9G if its income derived from unrelated trade3 %usiness or activity does N1

exceed =G of its ross total income!

T 5ut its income is su%&ect to 7OG tax rate if its income from unrelated3 trade or %usiness

or activity exceeds =G of its ross income

%xample0 +ts income erive from unrelate trae, business or activity amounte to P"JM n

income erive from relate trae, business or activity is P1JM So, the total income is P$JM +fthe allowable expenses amounte to P1JM, the taxable income now woul be P"JM

$HJ M 90 ,&$ 50 ::$:J

: :

I'co+e deri,ed fro+ I'co+e deri,ed fro+

U'related T!A Related T!A

So, the amount from unrelate *B 34445) is more than 2J of its gross income3P$JM) *hus, this P"JM taxable income is sub(ect to $& tax rate

But, if the income from relate *B is P"JM an its income erive from unrelate *B

is P1JM So:

Related T!A 66666666666666 vs V66666666666666666 U'related T!A

*he income from unrelate *B is not more than 2J of its gross income *hus, this P"JM is

sub(ect to P1J preferential tax rate

)'!"% D%$)*%D 8$!" $%LAT%D T$AD%, B()'%(( !$ AT)*)T:

T *his must be an income derived from an activity 'hich is su%stantially related to the performance of educational functions *his may inclue income from boo%store, canteen or

ormitory

Sorce& Ta1 !a&e Ta1 Rate

"NON"PRO.IT

#OSPITAL +F. *axable +ncome

1IIA61Jor $&

1III6$$

&&



"JJJ6$"

OOO/or purposes of non6profit hospital, this must be income derived from activities 'hich are

su%stantially related in achievin the primary purpose of that hospital , which is to rener services

to the public

*he explanation as to when the 1J or $& tax rate applies is the same as that of private

eucational institution

!$ SPECIAL R.C Sorce& Ta1 !a&e Ta1 Rate

1

INTERNATIONALAIR CARRIER

"

INTERNATIONAL

S#IPPING

I 3+ncome <ithin)

GROSSP#ILIPPINE

!ILLINGS

9$<J

(9$ J)

OOO /or purposes of )nternational Air arrier , GROSS P#IL$ !ILLINGS refer to the amount

of gross revenue erive from carriage of persons, excess baggage, cargo an mail originating

from the Philippines in a continuous an uninterrupte flight irrespective of the place of sale or

issue, an the place of payment of the tic%et or passage ocument

O Gro&& Phil$ 3illi'4& for 2r2o&e& of )nternational (hipping means gross revenue whether

from passenger, cargo or mail originating from the Phils up to final estination, regarless of the

place of sale or payments of the passage or freight ocuments

C$ SPECIAL NR.C Sorce& Ta1 !a&e Ta1 Rate

5$ LESSOR O.

CINE0ATOGRAP#IC

.IL0S

I GROSS 9<J

9$ LESSOR O.

/ESSELSC#ARTERED TO

.ILIPINO

NATIONALS ORCORP$= The harter

Agreement of which is

approved by "aritime

)ndustry Authority

I GROSS ;$<J

:$ LESSOR O.

AIRCRA.T70AC#INERY F

E-UIP0ENT

I GROSS H$<J

OOO Lessor of D and video is not inclue in no 1 So, it is sub(ect to $& tax rate

OOO Lessor of personal properties is not inclue in no ", so, it is also sub(ect to $& tax rate

&2



OT#ER RULES

DC R.C NR.C

5$

INTEREST

INCO0E ON !AN

DEPOSIT

9J 9J

*his shoul be inclue in its gross income

&3ect to :;J ta1$ B>* in the case ofinterest on loans which have been mae on

or after ugust 1, 1IA4, the same is &3ect

to 9J fi'al ta1

9$ INTEREST

INCO0E ON !AN

DEPOSIT UNDERT#E EXPANDED

.OREIGN

CURRENCY

DEPOSIT SYSTE0

H$<J H$<J Ta1"e1e+2t

:$ ROYALTIES

DERI/ED *IT#IN

T#E P#ILIPPINES 9J 9J :;J

;$ CAPITAL GAINS

DERI/ED .RO0

ITS SALE O.

S#ARES O.

STOC

a$ If it i& li&ted

a'd traded

thr local

&toc

e1cha'4e

Of 5J of the Gro&&

Selli'4 Price

3$ If it i& NOT

li&ted or

traded thr

local &toc

e1cha'4e

Not o,er P57$

<J O,er P57

5J

Thi& rle a22lie& !OT# to cor2orate a'd i'di,idal ta12ayer&$

<$ CAPITAL GAINS

DERI/ED .RO0

T#E SALE O.

REAL PROPERTY

*#IC# IS NOT

USED IN TRADE

OR !USINESS

J of the

Gro&& Selli'4

Prie or @o'al

/ale

%hiche,er i&

#i4her

Shold 3e treated a& OT#ER INCO0E SU!ECT to :;J

$ ??? !RANC#

PRO.IT

RE0ITTED !YA

!RANC# O..ICE(thi& o'ly a22lie& to

R.C)

NOT

APPLICA!LE

S3ect to

!ra'ch Profit

Re+itta'ce

Ta1 of 5<JNO*7 the

3a&i& of the

ta1 i& the

a+o't

a22lied for or

ear+ared

for

re+itta'ce

NOT APPLICA!LE

&4



CASE

Marubeni 0orp is a foreign corp it has a branch here +t mae a irect investment in a -omestic

0orp, so it receive cash iviens -o we have to inclue that in that profit to be remitte an sub(ect to

12

#ELD

9. *his is not effectively connecte with the conuct of trae or business of their branch office

*hat shoul be exclue from the profits that shoul be remitte to that Marubeni 0orp *he conition is, it

must be an income or profit effectively connecte with the conuct of trae or business of such corp

through its branch office

H$ DI/IDENDS

RECEI/ED .RO0

DC

EXE0PT EXE0PT

? *hese iviens receive from -0 by

9/0 is &3ect to 5<J .i'al Ta1 I. the

foreign govt of that foreign corp allows ata1 credit at lea&t 5KJ of the taxes eeme

pai in the Philippines by 9/0? So, the implication is that if that foreign

govt oes 'ot allo% a ta1 credit of at lea&t

5KJ7 that is &3ect to :;J a'd 'ot 5<J$

Note: *hese incomes must be erive from the Phils So, this is an interest income on ban% eposit

maintaine .>*S+-; the Phils, that is not sub(ect to final tax but shoul be inclue in the gross income

of the -0

INTRACORPORATE DI/IDENDS EXPLAINED

TAX SPARING CREDIT (Sec$ 9$! (<) 3) QQQ 5KJ

Pr2o&e *o attract investors in the Phils

Sitatio' 9/0 receive ivien, cash or property ivien from -0 *hat ivien

receive from -0 is sub(ect to 12 /+98 <+*.8-+9' *=

*his 12 may be impose on this ivien receive from -0 if the foreign govt of the 9/0

allows a tax creit at least 1I 31IIA), 1A 31III), 15 3"JJJ) +t shoul be creite from the

taxes eeme pai by this 9/0 in the Phils

So, if the foreign govt oes not allow a tax creit of at least 1I, the tax there is not 12 but

$& *hus, the tax spare or save is 1I because normally the tax is $& So, $& less 12

e#uals 1I, that is the tax save an that represents the tax creit allowe by the foreign govt

-e&tio': Must the foreign govt actually grant a tax creit or is it enough that theforeign govt allow such tax creit

A'&%er *here is no statutory provision that re#uires actual grant 9either is there a

evenue egulation re#uiring actual grant +t is clear that the provision of the law says CallowsD

So, it is enough to prove that the foreign corp allows a tax creit +t is not incumbent upon the

foreign corp to prove the amount actually grante

-e&tio': -oes a withholing agent or a subsiiary corp have the personality to file awritten claim or refun

A'&%er *he withholing agent has the personality to file a written claim for refun

withholing agent is technically a taxpayer because it is re#uire to euct an withhol the tax,

an it has the obligation to remit the same to the govt So, withholing agent is liable for tax +t hastherefore the personality to file a written claim for refun

<ithholing agent is not only an agent of the taxpayer but also an agent of thegovt Since it is an agent of the taxpayer, it is ipso facto authorize to file a written claim for

refun

CAPITAL TRANSACTIONS EXPLAINED

&5



0apital *ransaction +nvolves 0apital sset

0P+*8 SS;* means property hel by the taxpayer whether or not connecte with his trae or business

;=0;P*: GS.>H

1 Stoc% in trae or property of the taxpayer which may be properly inclue in the inventory at

the en of the taxable year Ginventoriable property may inclue finishe goos, raw materials or wor% in processH

" Property primarily hel for sale to customers in the .rinary course of trae or business

$ Property >se in trae or business sub(ect to epreciation, which means that this must be

epreciable property

& eal property use in trae or business

*hese & properties enumerate are calle ORDINARY ASSETS$

ASSETS *#IC# ARE CONSIDERED AS CAPITAL ARE

1 Properties not inclue in those above enumerate

" Properties use in trae or business classifie as capital assets:a accounts receivable

b property for investment in stoc% c subivision of lots to tenants at the instance of the government *he sale of these subivie

lots at the instance of the govt to the tenants is consiere as 0apital *ransaction

+nterest of a partner in a partnership *he partner may transfer that interest to another an he

may erive gain therefrom, that is consiere as 0apital *ransaction

9B +t is therefore safe to say that all properties not use in trae or business are consiere as 0apital

ssets

Ca2ital A&&et ca' 3e Co',erted i'to a' Ordi'ary A&&et$

E1a+2le property was inherite by the heirs from their ecease parents *hat property isconsiere as 0apital sset

+n the event that this property 3a parcel of lan) is improve by the heirs substantially an sell the

same at a profit, sai capital property is now converte into an .rinary sset *he profit erive from the

sale of the lan which has been substantially improve by the heirs is consiere as orinary gain

Ordi'ary A&&et ca' 3e co',erted i'to a Ca2ital A&&et$

E1a+2le +f the taxpayer is engage in real estate business, if he ies, these properties will be

transmitte to his heirs n if the heirs will iscontinue the business of that ecease parent, that

properties which are orinarily hel for sale to customers maybe converte into a 0apital sset

.ACTORS that &hold 3e co'&idered i' DETER0INING %hether it i& CAPITAL or NOT

5$ It +ay 3e the ,ocatio' of the ta12ayer$

+n one case, if the taxpayer is engage in hotel management an he inherite (ewelry

from his parents an he?ll sell the same, the 0ourt sai that it is a 0apital *ransaction

+t woul be ifferent if the one selling a parcel of lan is a real estate ealer an he

evelope the same before this property may be sol to another, this time such taxpayer

is engage in a business, in which case that sale of parcel of lan is consiere as

.rinary *ransaction

9$ So+eti+e& the 2eriod or the e1te't of acti,itie& +ay 2lay a' i+2orta't role$

Ca&e

+f a taxpayer is engage in a lumber business an he has been unsuccessful for a perio of 11 yearsan he trie again on the 1" th year *he sale that may be mae on the 1" th year may not be consiere

orinary transaction

But those sales which, woul have been mae uring that 11 th year when such taxpayer is engage

in trae or business may be consiere .rinary sset

+f the taxpayer stop his business an then unerta%e another business, that may be consiere

0apital *ransaction

&A



SPECIAL CAPITAL TRANSACTIONS these transactions are eeme capital transactions

SPECIAL CAPITAL TRANSACTIONS INCLUDE

5$ .ailre to e1erci&e o2tio' or 2ri,ile4e to 3y or &ell 2ro2erty$

E1a+2le B offers his lan to B gives 2 ays within which to ma%e up his min to buy this

parcel of lan for P2JJ,JJJJJ 9ow, pays B P2,JJJ for giving him time to thin% whether he will

buy that uring the 2 ay6perio +f fails to buy the same, he incurre a loss an we call this

0apital 8oss So, the loss of is consiere a gain on the part of B because the latter receive that

P2,JJJ

So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer

s regars the seller, the gain is consiere 0apital 'ain

9$ Di&tri3tio' of a&&et& or &hare& of &toc to &tocholder 2o' liidatio' of a cor2oratio'$

E1a+2le fter li#uiation, the stoc%holers are entitle to the return of their capital if there is still

something left +f mae an investment an the value of his shares of stoc% is P1JJ,JJJ, after li#uiation

of the corporate affairs, the corp gives P12J,JJJ *he gain of which is P2J,JJJ is consiere 0apital'ain

:$ Read&t+e't of 2art'er& i'tere&t i' a 2art'er&hi2$

E1a+2le partnership is earning a profit, let us say, P1JJ,JJJ *hen it increases to P1M So, the

partnership may rea(ust the partner?s interest in the partnership .r it may also arise if for

example, mae an aitional contribution So, ?s interest will change

9ow, in ma%ing rea(ustment of interest, the partner may erive gain therefrom, an that is a

0apital 'ain

;$ Retire+e't of 3o'd&$

E1a+2le *he ebtor issues bons an after one 31) year, he pays the same *he value of the bons

is P1JJ,JJJ >pon reemption, the ebtor pays P1"J,JJJ to the creitor So the P"J,JJJ is a gain to the

creitor an we consier that as a 0apital 'ain But if there is a loss, that is consiere as 0apital 8oss

<$ *a&h Sale *his has been escribe as C41 ays saleD

*he seller here is not a ealer in securities

+t is escribe as 41 ays sale because here, $J ays before the sale, the seller ac#uire

substantially ientical securities . $J ays before the sale, he ac#uire ientical or substantially the same

stoc%s or securities CSaleD may also inclue exchange or option to sell securities

E1a+2le: *oay is Nune 1J, 9ow, here is who is not a ealer in securities or stoc%s e sellssecurities

0an that be classifie as wash sale

Kou must fin out whether $J ays before Nune 1J, he purchase ientical securities .r he ma not have

purchase ientical securities within that $J ay perio before the sale but it is possible that within $J ays

after Nune 1J, he may have purchase ientical securities

*he tax treatment here is, the gain is taxable, meaning that is classifie as 0apital 'ain because the seller is

not engage in such business +f there is a loss, since it is classifie as 0apital *ransaction, that isconsiere 0apital 8oss

*he capital gain is taxable but the capital loss incurre from wash sale transaction is not euctible

$ Short Sale a transaction wherein a person sells securities which he oes not own yet *he seller here is

a mere speculator! he is selling securities which he is yet to ac#uire, provie however, that he has

ownership of the securities at the time of elivery E he has the right to transfer ownership 3See further

iscussion on p 55)

RULES T#AT GO/ERN CAPITAL TRANSACTIONS

&I







Before we answer that, we shoul %now these transactions where the gain is not recognize 3meaning it is

not taxable) an the loss is not recognize 3meaning, it is not euctible)

*he basic rule is, in the sale or exchange of property if there is a gain, the gain taxable! +f there is loss, theloss is euctible)

E1ce2tio' to the 3a&ic rle ('o 4ai' or lo&& &hall 3e reco4'ied)

5$ Tra'&actio'& +ade 2r&a't to 2la' of +er4er or co'&ideratio'$ Sometimes, we call this C Ta1

E1e+2t Tra'&actio'&B or Tra'&actio'& Solely i' i'dB$

a corporation, party to merger or consoliation exchanges its properties solely for stoc% in corp,which is a party to the merger or consoliation

Ill&tratio'

Pro2erty

Cor2$ A Cor2$ ! 2ro2erty for Stoc

Stoc

b stoc%holer of a corp party to a merger or consoliation exchanges his stoc% solely for stoc% in

another corp party to that merger or consoliation

Ill&tratio'

Secrity or Stoc

Stocholder """""""""""""""""""""""" Cor2$ 5$ Stoc for Stoc

9$ Secritie& for &toc

:$ Secritie& for Secritie&

Secrity or Stoc

?? Sometimes, we call the above6mentione transactions as Tra'&actio'& &olely i' i'dB or Ta1

E1e+2t Tra'&actio'&B$

" +f a person alone or together with others or not exceeing four 3&) 3so, the total number shoul be five 32)

exchanges his property for stoc% in a corp an this person or persons, after this exchange, ac#uire

controlling interest over that corp *his means that they ac#uire at least 12 of the shares of stoc% of such

corp

6 *his is also a transaction solely in %in

-e&tio' Suppose these persons, at the time of transaction, alreay ac#uire controlling interest

over such corp, is the transaction or exchange taxable

A'&%er ;ven if these persons ac#uire controlling interest at the time of the transaction, the rule

is still applicable in which case that is still tax exempt

-e&tio' So, if these properties ac#uire uner this tax exempt transactions are subse#uently

ispose of, how will you etermine the basis

A'&%er *he basis of the stoc% or properties ac#uire uner this no gain, no loss recognize shall be the same basis in the hans if the transferor

S22o&e the 2ro2erty %a& acired 'der tra'&actio'& %here 4ai' i& reco4'ied a'd lo&& i& 'otreco4'ied (GAIN RECOGNI@ED7 LOSS NOT RECOGNI@ED)

Tra'&actio' &olely i' i'd this means that there are other consieration given other than those

mentione uner transactions solely in %in 3nos 1 an " above, but cash is ae)

E1a+2le 0orp party merger or consoliation transfers its cash an property to 0orp B, also a

party to such merger or consoliation

0orp B, in exchange, transfers its stoc%s to 0orp

2"





? *he basic istinction is in wash sale, the loss that may be incurre is not euctible, whereas in short sale,

the loss is euctible

TRANS.ER TAXES

;S**; 7 *>S*S

;S**; E refers to the mass of properties left by eceent or testator to his heirs or

beneficiaries

*>S* E is the right to the property, real or personal, exercise by one person for the benefit of another

parties

Parties to a *rust:

a Tr&tor or 4ra'tor 6 one who create the trust

b Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as3e'eficiary$ Sometimes, the fiuciary is also the nbeneficiary$

c Beneficiary

;state may be the sub(ect to tax, if it is uner your aministration +t may only be uner

aministration or settlement if the properties of the eceent are settle uner (uicial

settlement

+f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not

earn income consiering that the heirs agree to settle the estate extra6(uicially

<hen we spea% of (uicial settlement, this may inclue estate or intestate proceeings

Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le

No'"ta1a3le tr&t are

5$ Re,oca3le Tr&t$ *he income here will be taxe in so far as the recipient of the same is concerne

9$ E+2loyee& Tr&t$ +f an employer establishes a pension trust for the benefit of the employees, that

pension trust is not taxable

The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted

1 in the grantor or in con(unction with other person who oes not have the substantial averse interest in

the isposition of the property

" in any person who oes not have substantial averse interest in the isposition of the property

+n irrevocable trust, you cannot transfer or revest the title of the property

C9o substantial interest in the isposition of the propertyD E he must not be the

beneficiary

+f the properties of the estate is not investe in a business, so ten heirs are (ust co6owners

of the property, that is not taxable because co6ownership as a rule is not taxable

+f the heirs ecie to continue the business, such that the aministrator may manage thesame, that will become an unregistere taxable partnership

;state an trust may be taxe on the same manner an on the same basis as in the case of

iniviual taxpayers So, they may claim the euctions uner Section $& as long as these

euctions were pai or incurre in connection with the business of that estate or trust

;state an trust are entitle to personal exemptions P"J,JJJ

SPECIAL DEDUCTIONS (thi& ca' 3e a,ailed of o'ly 3y e&tate a'd tr&t)

1 +n the case of intestate, the executor, or aministrator may euct the income istribute to the heirs

uring the particular year when such estate is still uner settlement

" +n the case of a trust, the income may be istribute to the beneficiaries uring that year may also be

eucte *he trustee or fiuciary may istribute the income or accumulate the income *he trustee has the

iscretion whether to istribute the income to the beneficiaries uring the taxable year or to accumulate thesame an istribute such income after the lapse of certain perio of time or year +n the event that income of

the trust is istribute to the beneficiary, this particular amount may also be claime as euctions

2&



-e&tio'& +f there are two 3") trust create by one trustor or grantor, how o we tax the income of

that trust

A'&%er >ner the law, the taxable income of these two 3") trust must be consoliate *hat trustshoul be taxe as if they constitute one trust

Sitatio'

'rantor = create " trust .ne is trust create an the other is B trust *here is only one

beneficiary name K

8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is

P"J,JJJ *he total taxable income is P$J,JJJ <e will tax these " trust separately but through

consoliation+n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax

ue shoul be apportione to trust an B

So, for purposes of income tax, the taxable income of these " trust shoul be consoliate, but for

purposes of paying the tax, the tax ue shoul be apportione

TRANS.ER TAXES

*axes may be impose on onerous transmission of properties or on the gratuitous transmission of properties

Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie&

1 @* 3value6ae tax)

" Percentage *ax 3exclue this 1IIA Bar)

$ ;xcise *ax 3also exclue)

CONTENTS OF THE BACK PAGES

DIVISION OF GROSS ESTATE:1. INDIVIDUAL WHO DIED SINGLE

- G. E. includes all tat e !"ns at te ti#e !$ deat%. &ARRIED DE'EDENT - is estate includes is e(clusi)e *+!*e+ties and is sa+es in te c!n,ual *+!*e+ties UTNOT te e(clusi)e *+!*e+ties !$ te su+)i)in s*!use

/RO/ERT0 OWNERSHI/ et. S/OUSES- N'' 2 e$!+e Au. 34 15667 '/G- E8'LUSIVE /RO/ERT0 unde+ N.'.'.1. +!ut int! te #a++iae as is9e+ !"n%. acui+ed du+in te #a++iae ; LU'RATIVE TITLE

3. acui+ed ; RIGHT !$ REDE&/TION !+ E8'HANGE "it !te+ e(clusi)e *+!*e+ties<. *u+cased "it e(clusi)e #!ne;- '/G unde+ N.'.'.1. acui+ed ; ONEROUS TITLE- c!##!n $und%. acui+ed ; INDUSTR09WOR=4 SALAR0 !+ eite+3. FRUITS> RENTS !+ INTERESTS ?c!n,ual9e(clusi)e@<. all *+!*e+ties n!t dete+#ined t! e e(clusi)e sall e *+esu#ed t! e c!n,ual

FA&IL0 'ODE - a$te+ Au. 34 1566- A'/

- E8'LUSIVE /RO/ERT0 unde+ te F.'.1. i$t4 d!nati!n4 c!nt+iuti!n e(clusi)el; i)en t! !ne !$ te s*!uses !nl;- i$t and $+uits9inc!#e c!nside+ed e(clusi)e%. INHERITAN'E i)en e(clusi)el; t! !ne s*!use- i$t !+ $+uits9inc!#e c!nside+ed e(clusi)e3. acui+ed !$ *e+s!nal and e(clusi)e use- e(ce*t EWELR0

22



<. e(clusi)el; !"ned e$!+e #a++iae includin $+uits 9inc!#e IF s*!use as cild+en $+!#te $!+#e+ #a++iaeB. *u+cased $+!# e(clusi)e $und.

E8E&/TIONS FRO& ESTATE TA8

- s*ecial la"s1. ene$its +ecei)ed ?GSIS4 SSS@%. *+!ceeds !$ GSIS li$e insu+ance3. ene$its +ecei)ed 2 U. S. Vete+ans<. RE/ARATIONS 2 WW II Vete+ansB. RETIRE&ENT ENEFITS- i$ included in +!ss estateC. *+!ceeds !$ +!u* insu+ance

DE'EDENTS INTEREST assets tat a+e still !"ned ; decedent at te ti#e !$ deat t! te e(tent

!$ is euit; !+ inte+est in an; *+!*e+t; "ete+ as e(clusi)e !"ne+4c!n,ual !"ne+4 !+ c!##!n !"ne+.

'O&/OSITION OF GROSS ESTATE?DI4 T-G/A4 RT4 T-I'4 /-LI4 T-'D@1. DE'EDENTS INTEREST %. TRANSFER ; VIRTUE OF GENERAL /OWER OF A//OINT&ENT 3. REVO'ALE TRANSFER<. TRANSFER $!+ INSUFFI'IENT 'ONSIDERATIONB. /RO'EEDS $+!# LIFE INSURAN'EC. TRANSFER in 'ONTE&/LATION !$ DEATH

FUNERAL E8/ENSES IN'LUDE:1. e(*enses $!+ inte+#ent%. #!u+nin cl!tin ?"id!"4 cild+en@3. e(*enses $!+ "ae e$!+e u+ial<. ca+es $!+ +ites and ce+e#!nies incident t! inte+#entB. c!st !$ u+ial *l!tC. t!#st!ne !+ #!nu#ent. !itua+; !+ deat n!tices

UDI'IAL E8/ENSES

1. acc!untants $ee%. a**+aise+s $ee3. ad#inist+at!+s $ee<. att!+ne;s $eeB. d!cet $eeC. sten!+a*e+s $ee. !te+ e(*enses !$ c!u+t ea+ins

'LAI&S AGAINST THE ESTATE- !liati!ns !$ te decedent c!nt+acted in !!d $ait "ile still ali)e ut +e#ains un*aid atte ti#e !$ deat

UN/AID &ORTGAGES OR INDETEDNESS RULES: clai#ed as deducti!ns1. te said #!+tae9indetedness #ust a)e een c!nt+acted du+in te

decedents li$eti#e in !!d $ait $!+ an adeuate and $ull c!nside+ati!n in #!ne; !+ #!ne;s"!+t

%. te )alue !$ te decedents inte+est in te *+!*e+t; #!+taed is included in te)alue !$ te +!ss estate

24



6 #ust e undi#inised ; said #!+tae9indetedness

3. #ust n!t include:A. an; inc!#e ta( u*!n inc!#e +ecei)ed a$te+ te deat !$ decedent. *+!*e+t; ta(es n!t acc+ued e$!+e is deat

'. an; estate ta(

LOSSES 2 $i+e4 st!+#4 si*"+ec !+ !te+ casualt;4 +!e+;4 te$t4 e#ele#ent

RULES:1. #ust n!t e c!#*ensated ; insu+ance%. #ust a)e een incu++ed du+in te settle#ent !$ te estate UT NOT LATER tan telast da; $!+ te *a;#ent !$ te estate ta( C #!s.3. n!t clai#ed as deducti!n in an inc!#e ta( +etu+n !$ te ta(ale estate

TA8ES "ic a+e n!t DEDU'TILE

1. inc!#e ta( !+ inc!#e +ecei)ed a$te+ deat%. *+!*e+t; ta(es n!t acc+ued e$!+e deat3. estate ta(

'O&/UTATION !$ VANISHING DEDU'TION FOR&ULA:INITIAL ASISGROSS ESTATE 8 E. L. I. T. and t+ans$e+s $!+ *ulic *u+*!ses

SHARE OF SURVIVING S/OUSERULES:1. te +!ss c!n,ual estate sall e di#inised ; e(*enses and ca+es E8'E/T t!se

ca+eale t! te e(clusi)e *+!*e+ties%. te NET a#!unt sall e di)ided int! t"! %3. J !es t! te su+)i)in s*!use and deducted $+!# te estate !$ te decedent

ALLOWALE DEDU'TIONS- NON-RESIDENT DE'EDENT ?ELIT-TVS@1. ELIT e(*enses4 l!sses4 indetedness4 ta(esFOR&ULA:

/HIL. GROSS ESTATEWORLD GROSS ESTATE ( E L I T

%. t+ans$e+ $!+ *ulic *u+*!ses

3. )anisin deducti!ns<. sa+e !$ te su+)i)in s*!use

NOTI'E OF DEATH- i$ )alue e(ceeds /*%K4KKK- FILE n!tice "it IR "itin t"! #!s. O$ decedents deat !+ "itin t"! #!s. A$te+electi!n !$ uali$ied e(ecut!+ !+ ad#inist+at!+

ESTATE TA8 RETURN6 i$ +!ss )alue !$ estate e(ceeds /%KK4KKK !+ i$ +!ss estate c!nsists !$

+eiste+ed *+!*e+t;4 FILE in du*licate and unde+ OATH

6 i$ )alue !$ +!ss estate e(ceeds /%4KKK4KKK4 +etu+n #ust e su**!+ted ; ace+ti$icate !$ './.A.

TI&E FOR FILING RETURN6 "itin C #!s. F+!# decedents deat6 E8TENSION: n!t e(ceed 3K da;s

25



/A0&ENT OF ESTATE TA86 u*!n $ilin !$ te estate ta( +etu+n and e$!+e deli)e+; t! an; ene$icia+;

!$ is dist+iuti!ns sa+e !$ te estate6 E8TENSION: n!t t! e(ceed B ;ea+s6 I$ e(t+a-,udiciall; settled4 % ;ea+s

6 It #ust $ile !nd 2 n!t t! e(ceed d!ule te )alue t! e *aid

SUR'HARGE- %B $!+ late $ilin4 $!+ late *a;#ent- BK $!+ $ilin !$ $alse !+ $+audulent +etu+n

INTEREST 2 %K *e+ annu#

/ARTIES TO A DONATION1. DONOR 2 +atuit!usl; dis*!ses

%. DONEE 2 +ecei)es and acce*ts

=INDS OF DONATION1. /ERSONAL /RO/ERT0 2 #a; e !+all; !+ in "+itinE8'E/T: e(ceeds /B4KKK 2 d!nati!n and acce*tance #ust e in "+itin%. REAL /RO/ERT0 2 /ULI' DO'U&ENT A''E/TAN'E - sa#e deed !$ d!nati!n !+ se*a+ate inst+u#entM d!ne du+in te li$eti#e !$te d!n!+ RULE: HUSAND AND WIFEG.R.: E)e+; d!nati!n et"een Husand and Wi$e du+in te #a++iae is VOID

E8'E/TION:1. d!nati!n #!+tis causa%. #!de+ate i$ts - $a#il; a$$ai+ i$ts c!#in $+!# te c!n,ual *+!*e+t; #ade ; !t s*!uses a+e ta(ale4 J t! eacs*!use

RULE !n INADEUATE 'ONSIDERATION i$ te *+!*e+t; t+ans$e++ed is +eal *+!*e+t; classi$ied as ca*ital asset4 te t+ans$e+ issu,ect t! ca*ital ains ta( !$ C and n!t t! d!n!+s ta( "e+e te c!nside+ati!n is $ictiti!us4 te enti+e )alue !$ te *+!*e+t; t+ans$e+ sall esu,ect t! d!n!+s ta(

te a#!unt ; "ic te )alue !$ te *+!*e+t; e(ceed te a#!unt !$ c!nside+ati!n salle dee#ed a i$t $!+ *u+*!ses !$ te d!n!+s ta(

VALUATION OF GROSS GIFTS- F&V at ti#e !$ d!nati!n1. Real /+!*e+t;- IR !nal )alue !+ F&V $i(ed ; cit;9*+!)incial assess!+ "ice)e+ is ie+%. Sa+es !$ St!cA. I$ listed 2 a)e+ae )alue at te date !$ d!nati!n. I$ n!t listed 2 !! )alue at te date !$ d!nati!n3. /e+s!nal /+!*e+ties 2 F&V at te ti#e !$ d!nati!n

F&V P *a"n )alue ( 3

E8E&/TIONS9ALLOWALE DEDU'TIONS1. DOWRIES

RULES:A. E(e#*t u* t! 1st /1K4KKKM

2A



. Leiti#ate +ec!nied !+ leall; ad!*ted cild+enM'. &ade e$!+e #a++iae !+ "itin !ne ;ea+ te+e!$.2. GIFTS TO NATIONAL GOV’T. or POL. SUB.

- n!t c!nducted $!+ *+!$it3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs.

- n!t #!+e tan 3K used $!+ ad#inist+ati)e *u+*!ses- #a; e a sc!!l !+ n!n-st!c entit;

DEDUCTIONS ALLOWABLE

1. ENCUMBRANCES !+ d!nated *+!*e+t;4 i$ assu#ed ; te d!nee2. DIMINUTION !$ te d!nated *+!*e+t; as s*eci$ied ; te DONOR

RULE (o!r"s#$"% $oor&

1. Sa#e all!"ale deducti!ns as +esident d!n!+s e(ce*t tat te sa#e #ust e c!nnected"it d!nated *+!*e+t; situated in te /ils.%. NO deducti!ns $!+ Qd!"+ies

RULE #' Do"" #s S%rg"r

1. TA8 /A0ALE 2 3K !$ net i$tSTRANGER 2 !ne "! is n!t a +!te+4 siste+ "!le !+ al$-l!!d4 s*!use4 ancest!+4 linealdescendant !+ +elati)e ; 'ONSANGUINIT0 in te 'OLLATERAL LINE "itin te < t

de+ee.

RULE ON /OLITI'AL 'ONTRIUTIONS- c!nside+ed TA8ALE GIFTS- d!nee in tis case is dee#ed t! +ecei)e a $inancial ad)antae +atuit!usl;

AD&INISTRATIVE /ROVISIONS- d!n!+s ta( +etu+n #ust e $iled unde+ !at and in du*licate- $iled "itin 3K da;s $+!# date !$ d!nati!nE8TENSION: n!t e(ceedin 3K da;s- WHEN /AID- ti#e te +etu+n is $iledE8TENSION: n!t e(ceedin C #!s./ROVIDED 2 OND- d!ule te a#!unt !$ TA8

TA8 'REDIT $!+ d!n!+s ta( *aid t! a $!+ein c!unt+;- d!n!+ "as a Fili*in! citien !+ +esident alien at te ti#e !$ $!+ein d!nati!n

- d!n!+s ta(es !$ an; ca+acte+ !+ desc+i*ti!n a+e i#*!sed and *aid ; te aut!+it; !$ a$!+ein c!unt+;LI&ITATIONS:1. Te a#!unt !$ c+edit in +es*ect t! te ta( *aid t! an; c!unt+; sall NOT E8'EED tesa#e *+!*!+ti!ns !$ te ta( aainst "ic suc c+edit "as taen%. Te t!tal a#!unt !$ c+edit sall n!t e(ceed te sa#e *!+ti!n !$ te ta( aainst "icsuc c+edit is taen

Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are

1 ;state tax

" -onor?s *ax

ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of a eceent ortestator

DONORS TAX tax impose on the right or privilege to transmit properties gratuitously in favor of

another who accepts the same *his transmission of properties occurs uring the lifetime of the onor an

the onee

ESTATE TAX

2I



NATURE O. ESTATE TAX E +t is an excise tax since the sub(ect of the tax is the right or privilege to

transmit properties an not the property itself

PURPOSES O. ESTATE TAX to avoi the unue accumulation or concentration of wealth

1 *he primary purpose is to raise revenue in orer to support the government!" *o supplement income tax!

$ *o reuce successive ine#ualities in wealth, meaning, to achieve social e#uality

INDS O. ESTATE TAXPAYER

5$ Re&ide't e&tate ta12ayer inclues citizen of the Phils, resient alien who ie in the Phils, an such

alien, at the time of his eath, is a resient of the Phils!

9$ No'"re&ide't e&tate ta12ayer is limite to non6resient alien iniviual

eal properties, personal tangible properties an personal intangible properties of

resient eceent 3-) are taxe wherever situate

eal an personal tangible properties of non6resient eceent 39-) are taxable only if

they are locate in the Phils

eal an personal tangible properties of 9- are taxable only if they ac#uire tax situs in

the Phils

Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed to ha,e acired Phil$ &it& are 6.7 SO! (DC7 .C"

<J7 .C"SP)7 SR P8

1 /ranchise which is exercise in the Phils

" Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima

$ Shares of stoc%, obligation or bons issue by foreign corp, A2 of the business of which is conucte

in the Phils

& Shares, obligations or bons ac#uire business suits in the Phils

L Such shares, obligations or bons ac#uire business situs in the Phils of they are use by foreigncorp in furtherance of its trae or business

2 Shares or rights in any partnership, business or in any partnership, business or inustry, establishe in the

Phils

T +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration,

they may not form part of his gross income or we may also apply the octrine of mo%ilia se<untur

personam!

T "obilia seuntum personam, accoring to the Supreme 0ourt, is a mere fiction of law So, it must

yiel to the provision of law which provies tax situs

-e&tio'

Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be

exempt from real estate tax

A'&%er

K;S, by applying the rule on reciprocity

RULE ON RECIPROCITY the foreign country of that 9- oes not impose or allows exemption on

tax on the properties of the citizens of the Phils who ie in that foreign country

*he phrase Coes not imposeD an Callows exemptionD are ifferent from each other

<hen we say Coes not imposeD, this means totally exempt Cllows exemptionD means this may

not cover all properties but only certain properties

Ca&e

0ountry of Morocco has no international personality +f it grants exemptions to the intangible

personal properties if /ilipino citizens who ie in that country, will you apply also that rule onreciprocity

#eld K;S +t oes not matter whether the country has international personality or not <hat is important

is it allows or grants exemption from estate tax

Sec$ <7 9ross %state *he value 3/M@) of the gross estate of the eceent shall be etermine byincluing the value, at the time of his eath, of all property, real or personal, tangible or intangible,

wherever situate: Provie, however, *hat in the case of a non6resient eceent who at the time of his

4J



eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the

Philippines shall be inclue in his taxable estateD

The co+2o&itio' of the 4ro&& e&tate +ay i'clde

5$ Decede't& I'tere&t$ 3inclues yiels, fruits an interest)6 *he gross estate may inclue the fruits an income of the properties an that may

constitute the eceent?s interest6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest

may form part of the gross estate

6 +n the case of apartment, the rental of such apartment shoul also be inclue, not only

the value of the property

6 -iviens

6 Partnership profits6 ights of usufruct

9$ Tra'&fer 3y ,irte of 4e'eral 2o%er of a22oi't+e't

6 +t implies that if the transfer is mae uner special power of appointment that shoul be

exclue from gross estate

6 +n general power of appointment, the power is exercisable or in favor of the estate,

executor, aministrator or a creitor of the estate +f the power is exercisable other than

these 3estate, aministrator, aministrator or creitor of the estate), that may beconsiere as special power of appointment

:$ Re,oca3le Tra'&fer ny transfer mae by the eceent uring his lifetime where the eceent has

reserve the right to 8*;, M;9-, *;M+9*;, or ;@.Q; such transfer! it is sufficient that the

eceent ha the power to ;@.Q;, though he i not exercise such power

6 +rrevocable transfers shoul be exclue from gross estate

6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment

or moification by the eceent

;$ Tra'&fer& for I'&fficie't Co'&ideratio'

6 *he amount that may form part of the gross estate is the ifference between the /M@ of

the property an the consieration givenE1a+2le +f the property has a /M@ of P1JJ,JJJ an the consieration given is only

P2J,JJJ, the ifference of P2J,JJJ represents insufficient consieration

<$ Proceed& of Life I'&ra'ce Policy

6 Proceed& of life i'&ra'ce 2olicy +ay 3e i'clded if

a the beneficiary esignate is the estate executor, aministrator or heirs of the eceent E

whether revocable or not revocable

b the beneficiary esignate is a $r person who is revocably esignate as beneficiary

6 Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4

ca&e&

a $r person is irrevocably esignate as beneficiary

b procees of group insurance policy E ta%en out by the co for its employeesc procees of accient insurance policy except accient insurance policy as characteristic

procees of 'S+S 8ife +nsurance Policy 3govt employees)e procees of life insurance payable to the heirs of ecease > S an Phil rmy

Note s regars the estate executor, aministrator or heirs as beneficiary, it is

immaterial whether the esignation is irrevocable or revocable

$ Tra'&fer i' Co'te+2latio' of Death

6 +f such transfer was inuce by the thought of eath principally, ;'-8;SS of

whether the eath is impening forthcoming or not

6 *9S/; may be one before, at the time of or even after the eceent?s eath6 $6K; P;S>MP*+.9 Gelete by P- 15J2 ug 1, 1IA4)

GM>69*, /, *61

S*

6B, B6S00HEXCEPTINS>EXCLUSIONS fro+ GROSS ESTATE

1) merger of >S>/>0* in the MQ;- *+*8;

") /+-;+0.M+SSK

$) transmission from 1st heir to another beneficiary6 will of the testator

&) B;R>;S*, -;@+S;;S, 8;'0+;S or *9S/;

6 S.0+8 <;8/;, 0>8*>8 an 0+*B8; institutions

41



6 no part of net income inures to any iniviual

6 not more than $J for amin purposes

DEDUCTIONS .RO0 GROSS ESTATE

DEDUCTIONS .RO0 GROSS ESTATE T#AT 0AY !E

1 0on(ugal euctions G/, N;, /;, M;, 0;, 8, >3MF+),*, S-, SP, 06+PH" bsolute euctions

$ ;xclusive euctions G@-, *6P>, >M, ;6;PH 3share of SS)

.*;S: GM6>, /, *61S*6B, '60+H

I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde

1 /amily home" Nuicial of funeral expenses

$ 0asualty losses

& +nebtenessFunpai claim against the estate

2 ccrue taxes 3before the eath of the eceent)

4 Stanar -euction

5 Separation pay given to the heirs of the eceent on account of eath

Di&c&&io'

5$ .a+ily ho+e E 3even unmarrie person may have a family home) sub(ect to the following conitions:a there must be only one 31) family home!

b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an

own that family home in that particular locality!

c the amount that is euctible or the /M@ of the family home shoul not be more than P1M!

excess shall be sub(ect to tax

the /M@ must be inclue in the gross estate of the eceent

+f the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent Butwhen you claim euctions, you can only claim up to P1M

9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$

0edical e12e'&e& are also euctible sub(ect to the following conitions:

a the amount euctible, is limite only to P2JJ,JJJ!

b it must be incurre within one 31) year before the eath of the eceent!

c this must be substantiate by receipts

+n the case of funeral expenses, the amount euctible is the actual funeral expenses on the amount

which is not more than 2 of the gross estate whichever is lower, but in no case to excee P"JJ,JJJ

*here is no limitation as to amount with regar to (uicial expenses s long as it is pai or incurre in

connection with the preservation, aministration or settlement of the estate, it may be claime as

euctions Nuicial expenses also inclue extra6(uicial expenses

:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery,

embezzlement, theft an other casualty losses

*hese losses must be sustaine not later than six 34) months after the eath of the eceent

not compensate by insurance

;$ I'de3ted'e&& which parta%e of the nature of the '2aid clai+& a4ai'&t the e&tate$

*hese must be supporte by notarize ocuments *hese obligations must be incurre within three 3$)

years prior to eath of the eceent

nother inebteness which may be claime as euction is claim against insolvent persons ere, the

claimant is the eceent +n orer to be euctible, this claim must be inclue in the gross estate

euction from the gross estate shall be the collectible portion

<$ Ta1e& which must accre 3efore the eath of the eceent

$ Sta'dard dedctio'

4"



*he amount is P1M So, this may only be applie if the gross estate of the eceent is more than

P1M

H$ Se2aratio' 2ay given to the heirs of the eceent on account of eath

*he proceure is to inclue the amount in the gross estate an then claim this thereaftereuctions

II$ EXCLUSI/E DEDUCTIONS

*hese are euctions against exclusive properties

*hese may inclue: 3@P60;)

1 @anishing euctions E whether inherite or ac#uire by -onation

" *ransfer for public use$ .ther charges against the exclusive property

& ;ncumbrance on exclusive property

-iscussion:

5$ /ANIS#ING DEDUCTION 6<7 IP7 I"GE7 PD7 PT7 N"P"/D8

6 is an allowable euction against the exclusive property of the eceent

6 may be claime as euction 'der the follo%i'4 co'ditio'&

a -eath of a eceent which must ta%e place within /+@; K;S from the eath of the priorincient or before gift was given

Sitatio'

ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring

the marriage is classifie as exclusive property

.ne of the properties of which forms part of his gross estate ha alreay been taxe *his

property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties

was ac#uire through inheritance from an that is an exclusive property *his property ha alreay been taxe because that forms part of the gross estate of gain, this same property may be sub(ect

to estate tax because this exclusive property forms part of the gross estate of B *here seems to be

ouble taxation *hat is why, the purpose of vanishing euction is to mitigate the harshness of oubletaxation So, B may be entitle to that vanishing euction which may reuce his estate tax

*he conition set by law is that B must have ie within the 26year perio +f B ie 4 years after

the eath of , B can no longer claim such vanishing euctions

3$ Ide'tity of Pro2erty locate in the PhilsSo, there must be evience to that effect that this is the same property which forms part of the

gross estate of

c$ I'cl&io' of the ta1 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$

d$ Pre,io& ta1atio'

*he estate of which inclue the property sub(ect of vanishing euction ha been

taxe! meaning, that estate tax ha been pai by prior estate

e$ No 2re,io& ,a'i&hi'4 dedctio'&$

-e&tio'

So, if B ie an the property is transmitte to 0, his heir, that property is also consiere as

exclusive property of 0 because it was ac#uire through inheritance

0an 0 claim vanishing euctions

A'&%er

9., because this ha alreay been claime by B Kou can only claim vanishing euction once

+t is impossible that B ac#uire the property not through inheritance but through onation -onor?s

tax ha alreay been pai *his is an exclusive property of B because uner the law, property ac#uireuring the marriage by gratuitous title is an exclusive property an forms part of his gross estate

0an we apply this vanishing euction

K;S ere, B must have ie within the 26year perio from the ate of onation

Aci&itio' a'd tra'&+i&&io' e1e+2t fro+ e&tate ta1 are

4$



a *he merger of usufruct in the owner of the na%e title

b *ransmission or elivery of the inheritance or legacy by the fiuciary heir or legatee of the

fieicommisssary

c *ransmission of the property from the first heir, legatee or onee in favor of another beneficiary,

in accorance with the esire of the preecessor Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no

part of the net income of which inures to the benefit of any iniviual an not more than $J ofsai be#uests, evises, legacies or transfers be use by such institutions for aministrative

purposes

So, transfers to non6stoc%, non6profit eucational institution is not exempt from estate tax because

this is not inclue from the enumeration B>* exempt from onor?s tax

9$ Tra'&fer .or P3lic U&e

*he onee must be the government or any political subivision +t must be use exclusively for

public use

*he transfer must be one orally but testamentary isposition an must be at its present value

:$ Other Char4e& A4ai'&t The E1cl&i,e Pro2erty

So, if the property has been mortgage with a ban%, we consier that as unpai mortgage

;$ E'c+3ra'ce O' E1cl&i,e Pro2erty

/ALUATION O. T#E GROSS ESTATE valuation as of the time of eath

1 Real Pro2erty

*he /M@ e#uivalent to the value as etermine by the B+ or zonal value . that of the value as

etermine by the provincial or city assessor whichever is higher

" Per&o'al Pro2erty

a *angible Personal Property if not being sol! pawn value x $! *he /M@ is e#uivalent to the selling price of the property 3Bran new items)

b +ntangible Property E inclues interest, shares of stoc%

6 +t must be the /M@ of the interest or shares of stoc%6 +f the intangible personal property is account receivable, it shoul be Principal P8>S

interest unpai upon the eath of the eceent except if worthless)

6 +f it is in the nature of usufruct, we must ta%e into consieration the basic stanar of

mortality rate

6 merican tropical experience table6 +/ 8+S*;- E mean or ave value between the highest an lowest stoc% #uotation

6 +/ 9.* 8+S*;- E B..Q value

DONORS TAX

DONORS TAX E is an excise tax because what is being tax here is the right or privilege to transmit or

ispose of property gratuitously in favor of another

6 *ax impose on the privilege of transmitting property by an living person to another byway of onation

6 Prevents avoiance of estate tax

PURPOSE O. DONORS TAX

1 *he primary purpose is to raise revenue!

" *o supplement income tax an estate tax

DONATION the act of liberality whereby a person isposes gratuitously of a *+9' or a +'* in

favor of another who accepts it

DONATIONS SU!ECT TO DONORS TAX

6 trust or not

6 real or personal6 tangible or intangible

1 +nirect onation E ;xample: 0ancellation of inebteness

" -irect onation

-onor?s tax applies to both natural an (uriical persons

*he law says, Conor?s tax apply whether the transfer is in trust or otherwiseD So, property hel in trust may be the sub(ect of onation But, this contemplates of a transfer

where the ominion, the right over such property, use, en(oyment of the same other

rights, must all be transferre to the onee so that it will constitute as taxable onation

4&



ea Section 1J&

C#ARACTERISTICS O. /ALID DONATION 6.7 A7 C7 I7 D8

1 +t must be given uring the lifetime of the onor" +t must be irrevocable

$ +t must comply with the formalities of onation

& cceptance of the onee

RE-UISITES O. /ALID DONATION

1 +t must comply with the for+alitie& of onation

6 +f the amount of personal property is P2,JJJ or less, the onation may be mae orally

6 +f the amount of personal property is more than P2,JJJ the acceptance shall be in writing

6 -onation of real property must be mae in a public instrument irrespective of the amount

" Acce2ta'ce by the onee of the onation

6 cceptance must be mae uring the lifetime of the onor

6 +f the amount of personal property is P2,JJJ or less, acceptance may be mae orally

6 +f the amount of personal property is more than P2,JJJ, the acceptance shall be in

writing

6 +n the case of onation of real property, acceptance must be mae in the same ee of

onation or in a separate public instrument

$ Ca2acity of the onor an the onee:

a *hose mae between persons who were guilty of aultery or concubinage at the time of the

onation

b *hose mae between persons foun guilty of the same criminal offense, in consieration thereof!

c *hose mae to a public officer or his wife, escenants an ascenants by reason of his office

I'ca2acitated do'ee& are 6P7 R"P7 G7 D7 NPL8

a *he priest who hear the confession of the onor uring his illness, or the minister of the gospel

who extene spiritual ai to him uring the same perio

b *he relatives of such priest or minister of the gospel within the &th egree, the church, orer,chapter, community, organization or institution to which such priest or minister belongs

c guarian with respect to onation mae by a war in his favor before the final accounts of theguarianship have been approve, even if onor shoul ie after the approval thereof!

nevertheless, any onation mae by war in favor of the guarian when the latter is his ascenant,

brother an sister, or spouse, shall be vali

ny physician, surgeon, nurse, health officers or ruggist who too% care of the onor uring his

last illness

e +niviuals, association 7 corporations not permitte by the law to receive onations

?The follo%i'4 are al&o i'ca2a3le of recei,i'4 do'atio'& 3y rea&o' of '%orthi'e&&:6P (AC7 ID7 A/)7 C"AL7 A" yr&$7 #"/D7 A or C7 ."D7 .8

a Parents who have abanone their chilren or inuce their aughters to lea a corrupt or immoral

life, or attempte against their virtue

b ny person who has been convicte of an attempt against the life of the onor, his or her spouse,escenants or ascenants

c ny person who has accuse the onor of a crime for which the law prescribes imprisonment for 4

years or more, if the accusation has been foun grounless

ny heir full of age who, having %nowlege of the violent eath of the onor, shoul fail to report

it to an officer of the law within a month unless the authorities have alreay ta%en action, this

prohibition shall not apply to cases wherein, accoring to law, there is no obligation to ma%e an

accusation

e ny person convicte of aultery or concubinage with the spouse of the onor

f ny person who by frau, violation, intimiation, or unue influence shoul cause the onor to

ma%e a onation or to change one alreay mae

g ny person who by the same means prevents another from ma%ing a onation, or from revo%ingone alreay mae, or who supplants, conceals, or alters the latter?s onation

h ny person who falsifies or forges a suppose onation of the eceent

>ner rt A5 of the /0, husban an wife are prohibite from ma%ing onation to each other

;$ I'te'tio' to onate the property of the onee 3or -.9*+@; +9*;9*)E1ce2tio' *ransfer of insufficient consieration in the case of a contract of sale

;xample:

42



+f the /M@ of the property is P1JJ,JJJ an P2J,JJJ was the consieration given *he ifference

of P2J,JJJ is consiere a onation

O *he amount receive by a isinherite heir is sub(ect to onor?s tax because he has no right to such

property an the same was gratuitously given, so there is no onative intent

<$ Deli,eryof the property

9ote: +f there is no vali onation, the recipient is sub(ect to income tax because of the provision C from

'hatever source derived!D

Cla&&ificatio' of do'or &3ect to do'or& ta1

1 Re&ide't do'or (RD) " this inclues citizen of the Phils or a resient alien" No'"re&ide't alie' (NRD) he must be a non6resient alien

RD E eal properties, personal tangible properties, an personal intangible properties of resient onor are

sub(ect to onor?s tax wherever situate

NRD E eal properties an personal tangible properties of a non6resient onor are sub(ect to onor?s tax

only if they are locate in the PhilsW Personal intangible properties of 9- are sub(ect to onor?s tax only

if they ac#uire tax situs in the PhilsW

Per&o'al I'ta'4i3le 2ro2ertie& that are dee+ed &itated or acire &it& i' the Phil&$ are GROSS

GI.TS 6.7 SO! (DC7 .C"<J7 .C"SP)7 SR7 P8

5$ .ra'chi&e which is exercise in the Phils9$ Share& of &toc7 obligation or bons issue by do+e&tic cor2$ or sociedad anonima.

:$ Share& of &toc7 obligations or bons i&&ed 3y forei4' cor2oratio'7 <J of the 3&i'e&& of %hich i&

co'dcted i' the Phil&$

;$ Share&7 obligations, bons i&&ed 3y a forei4' cor2$ %hich acire& 3&i'e&& &it& i' the Phil&$

Such shares, obligations or bons ac#uires business situs in the Phils if they are use by suchforeign corp in furtherance

<$ Share& or rights in any partnership, business or inustry establishe in the Phils

$ Real7 I'ta'4i3le a'd I'ta'4i3le Per&o'al 2ro2erty or 0i1ed

;ven if the personal intangible properties of the 9- ac#uire tax situs in the Phils it may still be

exempt from onor?s tax by applying the rule on reciprocity

Rle o' Reci2rocity +f the foreign country of that 9- oes not impose, or allows exemption

on the onor?s tax on the properties of citizens of the Phils who ie in that foreign country

Sec 1J& is applicable to both estate tax an onor?s tax

TARI.. AND CUSTO0S CODE

0>S*.MS 8< E oes not refer only to the provisions of *ariff an 0ustoms 0oe +t also inclues otherlaws an regulations sub(ect to enforcement by the Bureau of 0ustoms

Other la%& &3ect to e'force+e't 3y the !rea of C&to+&

1 9+0 E Sec 1J5 +mportation of goos or articles sub(ect to @* *he @* must be pai before these

goos are release from 0ustoms 0ustoy

" 9+0 E Sec 1$1 +mportation of rticles sub(ect to excise taxes *he payment of excise tax must be

mae before the goos are release from 0ustoms custoy

$ egulations that may be issue by the 0B, the implementation of such regulation is veste in the Bureau

of 0ustoms

C&to+& dtie& E are uties which are charge upon commoities on their being importe in or exporte

out of a country

Tariff means a boo% of rates! a table or catalogue rawn usually in alphabetical orer containing the

names of several states that hol commerce together

Office& char4ed %ith e'force+e't or ad+i'i&tratio' of C&to+& la%&

1 *ariff 0ommission 3*0)

44



" Bureau of 0ustoms 3B.0)

Po%er& of TC (TRACER)

*he power of the *0 are investigatory in nature: *hey investigate the following matters:

1 Matters relative to *ariff relations between the Philippines an the foreign countries So, that incluescommercial treaties

" elation between the rate on raw materials an finishe proucts$ Matters relative to the rrangement of scheules of values

& Matters pertinent to the 0lassification of articles

2 +t shall also investigate the ;ffects of foreign competition

4 +t shall investigate the operation of the *ariff 8aws an submit eport regaring the same

fter investigation, *0 shall submit its report to the Bureau 0ommissioners or to Secretary of/inance

P.<;S ./ *; B.0: 3P;S)

1 B.0 has the power to Prevent an suppress smuggling an other fraus upon B.0Co'&i&te't %ith thi& 2o%er7 the !OC ha&

a Power to control an supervise the clearance, as well as the entrance of vessels, aircrafts

originating from foreign countries b Police power to exercise over arbor, irport, iver an Port

c *he right of pursuit against vessel sub(ect to seizure even if it is seize beyon the maritime zone*his is calle the e1tra"territorial ri&dictio' of the !OC$ Sometimes, we call this right of

pursuit *he B.0 may exercise this power when:

c1 the vessel was sub(ect to seizure or forfeiture

c" there %a& ,iolatio' of the C&to+& la% co++itted %ithi' the Phil&$

s regars smuggle goos importe not in accorance with the provisions of the 0ustoms law, it

may be pursue by the B.0 even if it is transporte through air, lan or water

0onsistent with this power, the B.0 may enter in a builing, house, structure, enclosure an

warehouse 9o search warrant is re#uire s long as they reasonably believe that the place storesmuggle goos, seizure or search may be mae But it must be shown that the place must not constitute a

welling place or unit *his is also because if it is a welling place that is covere by the 0onstitutional

provision where warrant must be secure

Sitatio' Suppose the watchman or security guar an his family live in that place or builingwhere smuggle goos are store can there be seize without search warrant 0an we consier that a

welling place

A'&%er 9o, that will ma%e the builing a welling place ;ven if it is outsie of its istrict such

that it came from Uamboanga an was unloae at 0ebu, the collector of 0ebu may still seize the goos

<hat is only re#uire is that it came from a port of entry within the Phils

" ;nforcement of the *ariff an 0ustoms 8aw incluing other laws an regulation affecting theaministration of *ariff laws

$ ecommen to the Sec of /inance neee rules an regulations necessary for the effective enforcement

of the provisions of the *00

& ssessment an collection of lawful revenues from importe articles lso, assessment an collection of

fines, penalties, fees an other charges accruing uner the provisions of the *00

2 +t has the exclusive an original (urisiction over Seizure an forfeiture cases Meaning, to the exclusion

of regular courtsArticle& &3ect to C&to+& dtie&

rticles means wares, merchanise, goos an anything which may be mae sub(ect of

importation or exportation rticles inclue Philippine money So, if the Philippine money is transmitte orta%en out of the Phils without authority from the 0entral Ban%, that may be the sub(ect matter of seizure

Article& &3ect to C&to+& dtie&

1 -utiable articles E are articles sub(ect to 0ustom uties

" Prohibite articles:

a A3&oltely 2rohi3ited article& (S*ING)

1 those prohibite by Special 8aws

45



" <eapons of <ar

$ +nsiious, obscene or immoral articles

& 9arcotic or prohibite rugs

2 'ambling evices

b -alifiedly 2rohi3ited meaning sub(ect to restrictions or limitations +/ these limitations arenot complie with *hey will be prohibite

$ -uty free importe articles E these are articles not sub(ect to custom uties

*hese are: (0ASARAP)

a 0eals, bages use as trophies or awars

b Animals an plants for experimental purposes

c Sample articles

A#uatic resourcese R epair materials

f Articles necessary for the ta%e6off an laning of an airplane or for safe

navigation of vessels

g rticles for Public exposition +nclue here are historical boo%s an personal

househol effects

C&to+& dtie& +ay 3e cla&&ified a&

1 Re4lar or ordi'ary c&to+ dtie& these are the a valorem tax an specific tax

/or purposes of etermining the a valorem tax, the basis must be the home consumption value

#o+e co'&+2tio' ,ale is the price state in the commercial, trae or sales invoice +f there is a

reasonable oubt as to this value, recourse may be ha to the commercial an revenue attachX report, the

B.0 shoul refer to the available information that may help the B.0 etermine the applicable a valorem

tax

Ca&e 906Napan has a subsiiary in the Phils which is 906Phil *en aing machines were importe

from 906Napan an they use, for purposes for etermining a valorem, the home consumption value, the price state in the sales invoice +nstea, we shoul refer to the commercial revenue attachY report to

etermine the basis of that a valorem tax

" S2ecial c&to+ dtie& (DC0D)

a -umping uties

b 0ountervailing utiesNote The 2r2o&e of d+2i'4 a'd co'ter,aili'4 dtie& i& to 2rotect or local 2rodct& a4ai'&t

'fair forei4' co+2etitio'

c Mar%ing uties E the purpose of this is to prevent possible public eception

-iscriminatory uties E uties which are impose for the purpose of protecting our national

interest

D+2i'4 dty uty levie on importe goos where it appears that a specific %in or class of foreign

article being importe into or sol is li%ely to be sol in the Phils at a price less than its fair value

+mpose on specific %in or class of foreign article which is being importe into, or solor is li%ely to be sol for exportation to or in the Phils at a price less than its fair value,the importation or sale of which is li%ely to in(ure an inustry imposing li%e goos in the

Philippines

*he uty is e#ual to the ifference between the actual purchase price an the fair value of

the articles in #uestion in the country or exportation as etermine by the Sec of /inance

*hese are special uties impose on importe articles *his may be impose sub(ect to the ff

re#uisites:

1 *here must be a eliberate an continuous sale of importe article in the Philippines as price lower thanthe prices in the exporting country

" *his must pre(uice or cause or li%ely to cause in(ury to our local inustry

Sitatio' *here are articles of foreign origin the prevailing price of which in the >S is e#uivalent to

P1JJ *hese articles are sol or umpe in the Phils at lower than the prevailing price in the >S because

they are saleable in the >S

So, this will pre(uice our local inustries +n orer to protect our local prouct or to iscourage

people from buying this importe prouct, we shoul be impose special uties in aition to the regularuties -umping uties shoul be impose

4A



Co'ter,aili'4 dty uty e#ual to the ascertaine or estimate amount of the subsiy or bounty or

subvention grante by the foreign country on the prouction, manufacture, or exportation into the Phils of

any article li%ely to in(ure an inustry in the Phils or retar or consierably retar the establishment of such

inustry

+mpose on articles, upon the prouction, manufacture or export of which any bounty or

subsiy is irectly or inirectly, grante in the country of origin anFexportation 9o neeto show proof that the imports cause in(uries to omestic inustries proucing the same

proucts *he uty is e#ual to the ascertaine or estimate amount of the bounty or

subsiy given

Sitatio' Sometimes importe proucts en(oys certain subsiy from their government So, they

have an avantage .ur local proucts for example, oes not en(oy similar subsiy <e shoul counter that

avantage by imposing countervailing uties *he purpose there is to protect our local proucts againstunfair competition

*his represents the inlan excise tax on locally manufacture articles of the same %in to off6set

this avantage

s regars umping uties, the extent of the special uty is the amount that represents uner6

pricing

s regars countervailing uties, the extent is the excise inlan tax or the amount of avantage

en(oye by that importe article

0ari'4 dty uty on a valorem basis impose for improperly mar%e articles *he re#uirement that

foreign importation must be mar%e in any official language of the Phils, the name of the country of origin

of the article

*he purpose is to prevent eception of consumers

*he articles must be properly mar%e, otherwise a special uty of 2 of the value shall

be impose

Retaliatory or Di&cri+i'atory dty uty impose on importe goos whenever it is foun as a

fact that the country of origin iscriminates against the commerce of the Philippines in such manner as to place it at a isavantage compare with the commerce of any foreign country

*he amount may be increase in an amount not exceeing 1JJ ad valorem when the

Presient fins the public interest may be serve thereby

*his may be impose by the Presient of the Philippines when our goos are

iscriminate against

s regars umping, countervailing an mar%ing uties, it is the Sec of /inance, upon

recommenation of the *ariff 0ommission, who may impose these uties

-e&tio' <hat is the extent of the flexible power of the Presient of the Phils uner the *00

A'&%er *hat inclues the power to impose iscriminatory uties *he Presient upon

recommenation of the *ariff 0ommission may increase the tariff rates by not more than 2x or meaning

2JJx of the tariff rates e may also ecrease the tariff rates by not less than 2J

e can only exercise these powers in the interest of the national economy, national security an

general welfare of the people

9$ Other dtie&

a Stora4e fee this is charge on the goos or articles store in a warehouse uner the control an

supervision of the B.0

rticles owne by the government are exempt from storage fee is these articles are store

in a government warehouse

b ?*harfa4e de& E

;ven if there is no wharf where the goos may be unloae, wharfage ues may still beimpose because it is not a uty or charge on the use of the wharf ;ven if the goos are unloae

in a private wharf or seashore, wharfage ues still be impose because this is a uty impose on

the cargoes or articles which are unloae *hese are taxes *hese are not really custom uties

*he significance of this is that when tax exemption is grante from all forms of taxes, this may be

inclue +f the exemption is only from custom uties, wharfage ues is not inclue

c Arra&tre char4e& this is a uty impose on goos or articles for hanling, receiving or custoy

of such articles

4I





3i) Beast

3() *hing of value or money which is intene to influence B+ officers

Ta1 Re+edie& 'der the Tariff a'd C&to+& Code

Re+edie& Go,er'+e't I+2orter

31) ministrative or extra6(uicial

3a) ;nforcement of tax lien3b) Seizure

3a) *ax refun3b) banonement

3c) Protest

3") Nuicial 3a) /iling of civil action

3b) /iling of criminal action

if there is frau an it

must be serious

3a) ppeal to 0*, 0, S0

3b) /iling of criminal

action against erring

0ustoms officials

EN.ORCE0ENT O. TAX LIEN

Rei&ite&

31) rticles must neither be prohibite nor irregular

3") *he articles must be in the possession of the B.0

+f the articles are prohibite or irregular, the remey is seizure

banonment may be express or implie

Ca&e& co4'ia3le 3y the !OC

31) Seizure cases on the part of the government an

3") Protest case on the part of the importer

Seire ca&e& *he issue here pertain to the valiity of the importation because you may raise theefense that these are not prohibite importation

Prote&t *he issue here is the valiity of the assessment or collection, or the valiity of theclassification of articles where customs uties are impose

PROCEDURE IN PROTEST

Re+edy *here to file 6I&&e& %hich +ay 3e

rai&ed8

Pre&cri2ti,e Period

31) /ile a protest Collector of C&to+& 3a) @aliity if the

assessment or collection3b) @aliity of

classification of articles

5< day& from the

payment of 0ustomsuties

3") +f protest is enie,A22eal collector?s

ruling

C&to+&

Co++i&&io'er 300)

Ruestions of fact or

Ruestion of law

<ithin 5< day& from

receipt of the 0ollector?s

ruling

3$) +f 00 affirm

collector?s ruling,A22eal

CTA

Ruestion of fact or

Ruestion of law

<ithin : day& from

receipt of the ecision ofthe 00

3&) +f 0* affirm

collector?s ruling,A22eal

CA

Ruestion of fact or

Ruestion of law

<ithin 5< day& from

receipt of 0* ecision

32) +f 0 affirm

0*, A22eal SC Ruestion of law

<ithin 5< day& from

receipt of 0 ecision

TRANS.ER TAXES

ESTATES F TRUSTS

ESTATE E refers to the mass of properties left by eceent or testator to his heirs or

beneficiaries

51



TRUST is the right to the property, real or personal, exercise by one person for the benefit of another

parties

Partie& to a Tr&t

a$ Tr&tor or 4ra'tor " one who create the trust

3$ Tr&tee or fidciary E one who may hol the property for the benefit of other person %nown as3e'eficiary$ Sometimes, the fiuciary is also the beneficiary

c$ !e'eficiary

Z ;state may be the sub(ect to tax if it is uner aministration +t may only be uner aministration or

settlement if the properties of the eceent are settle uner (uicial settlement

Z +f the estate is uner extra6(uicial settlement, it is not sub(ect to tax because that will not earn income

consiering that the heirs agree to settle the estate extra6(uicially

Z <hen we spea% of (uicial settlement, this may inclue estate or intestate proceeings

Z Tr&t +ay 3e &3ect to ta1 if the tr&t i& irre,oca3le$

No'"ta1a3le tr&t are

5$ Re,oca3le Tr&t$ *he income here will be taxe insofar as the recipient of the same is concerne9$ E+2loyee& Tr&t$ So, if an employer establishes a pension trust for the benefit of the employees, that

pension trust is not taxable

The tr&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr&t i& ,e&ted

1 +n the grantor or in con(unction with other person who oes not have substantial averse interest in the

isposition of the property

" +n any person who oes not have substantial averse interest in the isposition of the property

Z +n irrevocable trust, you cannot transfer or revest the title of the property

Z C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary

Z +f the properties of the estate is not veste in a business, so the heirs are (ust co6owners of the property,

that is not taxable because co6ownership as a rule is not taxable

Z +f the heirs ecie to continue the business, such that the aministrator may manage the same, that will

become an unregistere taxable partnership

Z ;state an trust may be taxe on the same manner an on the same basis as in the case of iniviual

taxpayers S, they may claim the euctions uner Section $& as long as these euctions were pai or

incurre in connection with the business of that estate or trust

Z ;state an trust are entitle to personal exemptions to P"J,JJJ

SPECIAL DEDUCTIONS (thi& ca' 3e ,alid of o'ly 3y e&tate a'd tr&t)$ +n the case of estate, the executor or aministrator may euct the income istribute to the heirs uring

the particular year when such estate is still uner settlement

& +n the case of trust, the income may be istribute to the beneficiaries uring that year also be eucte

*he trustee or beneficiary may istribute the income or accumulate the income *he trustee has the

iscretion whether to istribute such income after the lapse of certain perio of time or year +n the eventthat income of the trust is istribute to the beneficiary, this particular amount may also be claime as

euctions

Z -e&tio'

+f these are two 3") trust create by one trustor or grantor, how o we tax the income of that trust

Z A'&%er

>ner the law, the taxable income of these two 3") trust may be consoliate *hat trust shoul be

taxe as if they constitute one trust

Z Sitatio'

'rantor = create " trust .ne is an the other is B *here is only one beneficiary name K

8et us assume that the taxable income of trust is P1J,JJJ *he taxable income of B trust is

P"J,JJJ *he total taxable income is P$J,JJJ <e will tax these " trust separately but through

consoliation

+n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax

ue shoul be apportione to trust an B

5"



So, for purposes of income tax, the taxable income of these " trust shoul be consoliate, but for

purposes of paying the tax, the tax ue shoul be apportione

TRANS.ER TAXES

Ta1e& +ay 3e i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie& or o' the 4ratito&

tra'&+i&&io'& of 2ro2ertie&$

Tra'&fer ta1e& that are i+2o&ed o' the o'ero& tra'&+i&&io' of 2ro2ertie&

1 @* 3value6ae tax) 3exclue this "JJJ Bar)

" Percentage *ax 3also exclue)

$ ;xcise *ax 3also exclue)

Tra'&fer ta1e& i+2o&ed o' 4ratito& tra'&+i&&io' of 2ro2ertie& are

1 ;state *ax

" -onor?s *ax

ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of the eceent or

testator

DONORS TAX E tax impose on the right or privilege to transmit properties gratuitously in favor ofanother who accepts the same *his transmission of properties occurs uring the lifetime of the onor an

the onee

ESTATE TAX

NATURE O. ESTATE TAX

+t is an excise tax since the sub(ect of the tax is the right or privilege to transmit

properties an not the property itself

PURPOSES O. ESTATE TAX

1 *he primary purpose is to raise revenue in orer to support the government!" *o supplement income tax!

$ *o reuce excessive ine#ualities in wealth! meaning, to achieve social e#uality

INDS O. ESTATE TAXPAYER

1 Re&ide't e&tate ta12ayer E inclues citizen of the Phils, resient alien who ie in the Phils, an such

alien, at the time of his eath, is a resient of the Phils!

" No'"re&ide't e&tate ta12ayer E is limite to non6resient alien iniviual

[ eal properties, personal tangible properties an personal intangible properties of resient eceent

3-) are taxe wherever situate

[ eal an personal tangible properties of non6resient eceent 39-) are taxable only if they are

locate in the Phils

[ Personal intangible properties of 9- are taxable only if they ac#uire tax situs in the Phils

[ Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed &itated or dee+ed to ha,e acired Phil$ &it&are

1 /ranchise which is exercise in the Phils

" Shares of stoc%, obligation or bons issue by omestic corporation or sociedad anonima

$ Shares of stoc%, obligations or bons issue by foreign corp A2 of the business of which is conucte

in the Phils

& Shares, obligations, bons issue by a foreign corp which ac#uire business situs in the Phils

Such shares, obligations or bons or in any partnership, business or inustry establishe

in the Phils if they are use by such foreign corp in furtherance of its trae or business

2 Shares or rights in any partnership, business or in any partnership, business or inustry establishe in the

Phils

[ +f the personal intangible properties of a 9- oes not belong to the above6mentione enumeration,

they may not from part of his income or we may also apply the doctrine of mo%ilia se<untur personam!

[ "obilia seuntur personam7 accoring to the Supreme 0ourt, is a mere fiction of law So, it must yiel

to the provision of law which provies tax situs

-e&tio'

Suppose the personal intangible properties of 9- ac#uire tax situs in the Phils, can this be

exempt from estate tax

5$



A'&%er

K;S, by applying the rule on reciprocity

RULE ON RECIPROCITY the foreign country of that 9- oes not impose or allows exemption on

estate tax on the properties of citizens of the Phils who ie in that foreign country

*he phrase Coes not imposeD an Callows exemtionD are ifferent from each other

<hen we say Coes not imposeD, this means totally exempt Cllows exemptionD means this may

not cover all properties but only certain properties

Ca&e

0ountry of Morocco has no international personality or not <hat is important is it allows orgrants exemption from estate tax

Sec$ <$ 9ross %state$ *he value of the gross estate of the eceent shall be etermine by incluing the

value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate

Provie, however, *hat in the case of a non6resient eceent who at the time of his eath was not a

citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall

be inclue in his taxable estateD

The co+2o&itio' of the 4ro&& e&tate +ay i'clde

5$ Decede't& I'tere&t$

6 *he gross estate may inclue the fruits an income of the properties an that may

constitute the eceent?s interest

6 +n the case of parcel of lan, it may prouce income in the form of harvest which harvest

may form part of the gross estate

6 +n the case of apartment, the rental on such apartment shoul also be inclue, not only

the value of the property

9$ Tra'&fer 3y ,irte of 4e'eral 2o%er of a22oi't+e't

6 +t implies that if the transfer is mae uner special power of appointment that shoul be

exclue from gross estate6 *he general power of appointment, the power is exercisable or in favor of the estate,

executor, aministrator or a creitor of the estate +f the power is exercisable other than

these 3estate, aministrator or creitor of the estate), that may be consiere as special

power of appointment

:$ Re,oca3le Tra'&fer

6 +rrevocable transfer shoul be exclue from gross estate

6 evocable transfers are transfers which are sub(ect to alteration, termination, amenment

or moification by the eceent

;$ Tra'&fer for I'&fficie't Co'&ideratio'

6 *he amount that may form part of the gross estate is the ifference between the /M@ of

the property an the consieration given

E1a+2le

+f the property has a /M@ of P1JJ,JJJ an the consieration given is only P2J,JJJ, the

ifference of P2J,JJJ represents that insufficient consieration

<$ Proceed& of Life i'&ra'ce 2olicy$

6 Proceed& of life i'&ra'ce 2olicy +ay 3e i'clded if

a $r person is irrevocably esignate is the estate executor, aministrator or heirs of the

eceent

b the beneficiary esignate is a $r person who is revocably esignate as beneficiary

6 Proceed& of life i'&ra'ce 2olicy i& e1clded fro+ the 4ro&& e&tate i' the follo%i'4

ca&e&1 $r person is irrevocably esignate as beneficiary

" procees of group insurance policy

$ procees of accient insurance policy except if accient insurance policy has a

characteristic

& Procees of 'S+S 8ife +nsurance Policy

6 Note: s regars the estate executor, aministrator or heirs as beneficiary, it is

immaterial whether the esignation is irrevocable or revocable

5&



DEDUCTIONS .RO0 GROSS ESTATE

DEDUCTIONS .RO0 T#E GROSS ESTATE 0AY !E

5$ Con(ugal euctions9$ A bsolute euctions

:$ Exclusive euctions

I$ CONUGAL AND A!SOLUTE DEDUCTIONS i'clde

1 /amily home

" Nuicial or funeral expenses

$ 0asualty losses

& +nebtenessFunpai claim against the estate 2 ccrue taxes 3before the eath of the eceent)

4 Stanar -euction

5 Separation pay given to the heirs of eceent on account of eath

Di&c&&io'

5$ .a+ily ho+e7 sub(ect to the following conitions:

a there must be only one 31) family home! b there must be certification issue by the Barangay 0aptain that the eceent is a resient of an

own that family home, in that particular locality!c the amount that is euctible or the /M@ of the family home shoul not be more than P1M!

the /M@ of the family home is P2M, this shoul be inclue in the gross estate of the eceent

But when you claim euctions, you can only claim up to P1M

9$ ;xpenses which may be in the nature of dicial e12e'&e& or f'eral e12e'&e&$

+n the case of funeral expenses, the amount euctible is the actual funeral expenses or

the amount euctible is limite only to P2JJ,JJJ!

*here is no limitation as to amount with regar to (uicial expenses s long as it is pai

or incurre in connection with the preservation, aministration or settlement of the estate,it may be claime as euctions, (uicial expenses also inclue extra6(uicial expenses

:$ 8osses that may arise from casualty or ca&alty lo&&e& such as fire, storm, shipwrec%, robbery,

embezzlement, theft an other casualty losses

*hese losses must be sustaine not later than six 34) months after the eath of the

eceent

;$ I'de3ted'e&& which parta%e of the nature of '2aid clai+& a4ai'&t the e&tate$

*here must be supporte by notarize ocument *hese obligations must be incurre

within three 3$) years prior to the eath of the eceent

nother inebteness which may be claime as euction is claim against insolvent

persons ere, the claimant is the eceent +n orer to be euctible, this claim must be

inclue in the gross estate

<$ Ta1e& which must accre 3efore the eath of the eceent

$ Sta'dard Dedctio'

*he amount is P1M So, this may only be applie if the gross estate an the eceent is

more than P1M

H$ Se2aratio' 2ay is given to the heirs of the eceent on account of eath

*he proceure is to inclue the amount in the gross estate an then claim this thereafter

as euctions

II$ EXCLUSI/E DEDUCTIONS

*hese are euctions against exclusive properties

The&e +ay i'clde (/P"CE)

1 O /a'i&hi'4 dedctio'

" Tra'&fer for 23lic &e

$ Other char4e& a4ai'&t e1cl&i,e 2ro2erty

& E'c+3ra'ce o' e1cl&i,e 2ro2erty

Di&c&&io'

52



1 O /ANIS#ING DEDUCTION

6 is an allowable euction against the exclusive property of the eceent

6 May be claime as euction 'der the follo%i'4 co'ditio'&

a$ Death of the decede't %hich +&t tae 2lace %ithi' .I/E (<) YEARS fro+ the death of the

2rior i'cide't$

Sitatio'

ie B is the heir 9ow, you may recall that properties ac#uire through gratuitous title uring

the marriage is classifie as exclusive property

.ne of the properties of which forms part of his gross estate ha alreay been taxe *his

property will be transmitte to B by way of succession +f B ie, ta%e note that one of his properties was

ac#uire through inheritance from an that is an exclusive property *his property ha alreay beentaxe because that forms part of the gross estate of again, this same property may be sub(ect to estate tax

because this exclusive property forms part of the gross estate of B *here seems to be ouble taxation *hat

is why, the purpose of vanishing euction is to mitigate the harshness of ouble taxation So, B may be

entitle to that vanishing euction which may reuce his estate tax

*he conition set by law is that B must have ie within the five6year perio +f B ie 4 years

after the eath of , B can no longer claim such vanishing euctions

3$ Ide'tity of Pro2erty

So, there must be evience to the effect that this is the same property which forms part of he gross

estate of

c$ I'cl&io' of the 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$

d$ Pre,io& ta1atio'

*he estate of which inclue the property sub(ect of vanishing euction ha been taxe!

meaning, that estate tax ha been pai by prior estate

e$ No 2re,io& ,a'i&hi'4 dedctio'&$

-e&tio'

So, if B ie an the property is transmitte to 0, his heir, that property is also consiere asexclusive property of 0 because it was ac#uire through inheritance

0an 0 claim vanishing euction

A'&%er

9., because this ha alreay been claime by B Kou can only claim vanishing euction at once

+f it is impossible that B ac#uire the property not through inheritance but through onation-onor?s tax ha alreay been pai *his is an exclusive property of B because uner the law, property

ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate

0an we apply this vanishing euction

K;S ere, B must have ie within 26year perio from the ate of onation

Aci&itio'& a'd tra'&+i&&io'& e1e+2t fro+ e&tate ta1 are1 *he merger of usufruct in the owner of the na%e title

" *ransmission or elivery if the inheritance or legacy by the fiuciary heir or legatee to thefieeeicommissary

$ *ransmissions of the property from the first heir, legatee or onee in favor of another beneficiary in

accorance with the esire of the preecessor

& Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of

the net income of which inures to the benefit of any iniviual an not more than $J of sai be#uests,

evises, legacies or transfers shall be use by such institutions for aministrative purposes

9$ Tra'&fer for P3lic U&e

6 *he onee must be the government or any political subivision +t must be use

exclusively for public use

:$ Other Char4e& A4ai'&t the E1cl&i,e Pro2erty

6 So, if the property has been mortage with a ban%, we consier that as unpai mortgage

;$ E'c+3ra'ce o' E1cl&i,e Pro2erty

/ALUATION O. T#E GROSS ESTATE

5$ Real Pro2erty

54





Le,y of real 2ro2erty

1 *he sub(ect property is real property

" <hat is issue is in the nature of an authenticate certificate escribing the property an stating the name

of the taxpayer as well as the amount ue

$ e#uires not only posting but also publication of the notice of sale in a newspaper of general circulationin $ consecutive wee%s

& +f the bi is not e#ual to the tax liability of there is no bier, the B+ may forfeit such real propertylevie by the government

2 *here is right of reemption within 1 year from the ate of sale plus 12 interest

4 *here is no such remey as constructive levy of property

Co'&trcti,e Di&trai't ca' o'ly 3e re&orted to 'der the follo%i'4 &itatio' Code C$A$R$L$)

1 <hen a taxpayer cancels or hies his property" +f he performs any act which will obstruct the collection efforts of the B+

$ +f he is retiring from business sub(ect to tax

& <hen he is about to leave the Philippines

;nforcement of the tax lien:

+f the taxpayer faile espite receipt of notice to pay the B+, a lien is create against the

properties of the taxpayer

+t is the iscretion of the B+ to avail itself of remeies which may result in the

expeitious collection of taxes

Ca&e <hich is preferre, the claim of the government arising from tax lien or the claim of the wor%ers

preicate on the (ugment renere by the 980

#eld *he claim of the government arising from tax lien is superior to the claim of a private litigant

preicate on a (ugment

E1ce2tio' *he claim of the laborers may be superior uner rt 11J of the 8abor 0oe when theemployer was eclare ban%rupt of (uicial li#uiation

O+n observing the provisions of the tax coe in regar to istraint or levy, the B+ cannot

apply or invo%e the presumption of regularity in aministrative proceeings

So, if the proceure ha been #uestione by the taxpayer, it is not for the

taxpayer to prove that the proceures uner the 980 in regar to istraint on levy ha

been complie with

evenue taxes are self6assessing taxes

Rei&ite& of A&&e&&+e't

1 <ritten notice stating that the amount is ue as tax

" <ritten notice must contain a eman for the payment of such tax

ssessment is not a conition sine #ua non for purposes of collecting taxes *his is so

because eman is not re#uire *he rule uner rt 114I of the 900 that eman isre#uire before a person may incur in elay cannot be applie *axpayer incurre inelay if he fails to pay the tax on ate fixe by *ax 0oe

ssessments, mae by the B+ 0ommissioner are presume correct *he presumption

oes not violate the ue process uner the 0onstitution because the presumption is

merely isputable

9ormally, the B+ may re#uire the taxpayer to submit reports, ocuments, boo%s of

accounts an other report to establish his tax liability +n the absence of these reports,

ocuments, etc, the B+ may etermine the tax liability by using other methos

O*he B+ can etermine the tax liability of the taxpayer on the basis of that so6calle best

evience obtainable in the absence of sai reports etc +n one case, agents of the B+ usethe boo%s of account seize as a result of rai by means of search warrant

NET *ORT# OR IN/ENTORY 0ET#OD (al&o called Net I',e&ti4atory 0ethod)

5A



6 *his is another metho that may be employe by the B+ in etermining the tax liability

of the taxpayer *his is an expansion of that accounting principle, a&&et& le&& lia3ilitie&

eal& 'et %orth

A&&e&&+e't i& +ade %he' it i& +ailed7 relea&ed or &e't$

E1a+2le+f it was receive by the taxpayer in a particular ate 3-ec 2, 1II5), you shoul count the prescriptive perio for ma%ing an assessment from the ate it was maile, release or sent by the B+ an

not from the receipt of the notice of assessment by the taxpayer

*he assessment may be sub(ect to revision by the B+ +f revise, the prescriptive perio will

commence to run from the safe when such revise assessment is maile, release or sent So, it is not from

the ate the original assessment is maile etc but from the ate the revise assessment has been maile*he ma%ing of assessment is prescriptible

The rle i&7 the !IR +ay collect ta1e& %ith or %ithot 2rior a&&e&&+e't$

PRESCRIPTI/E PERIOD .OR 0AING

AN ASSESS0ENT F COLLECTION

*ith 2rior a&&e&&+e't *ithot 2rior a&&e&&+e't

+ eturn file is not false or

frauulent

a eturn was file but there

exist a eficiency

b eturn was file but no

payment has been mae

: year& fro+ the date of actal

fili'4$ +f it was file earlier than

the ate fixe by the *ax 0oe

0.88;0*+.9: <ithin : year&

from the ate of assessment

: year& fro+ the date of actal

fili'4 or from the last ay fixe

by law for filing such return

++ /ailureF/alsifyF/rauulent

a +ntentional failure to file

a return b /alse return

c /rauulent return

5 year& fro+ the di&co,ery of

such omission of failure, falsityor frau

COLLECTION : year& from

the ate of assessment

*axes may be collecte even

without prior assessment an prescriptive perio is 5 year&

from the iscovery of failure or

omission, falsity or frau

Note& *he rule is if prior assessment has been mae, the B+ can avail of the aministrative an

(uicial remey But if without prior assessment, the B+ can only avail of the (uicial remeies

eturn must be the one prescribe by the B+ S., if you file your Boo%s of ccounts in

lieu of that return, that oes not constitute return

PRINCIPLES GO/ERNING T#E .ILING O. AN ACTION .OR COLLECTION

!Y T#E !IR

Collectio' i& 2ro2er 'der the follo%i'4 &itatio'&

a B+ assessment is consiere final an executory, if no protest or ispute has been mae by the

taxpayer +/ proteste by the taxpayer but he i not appeal, the B+ ecision on such protest, the

effect is that the B+ ecision shall be consiere final an executory b +/ he appeal the ecision of the B+ of the 0ommissioner to the 0* but he i not appeal the

ecision of the 0* to 0, the ecision of the 0* shall be final an executory

c +f he appeal to the 0 but the 0 ecision affirming that ecision of the B+ was not appeale tothe S0, 0 ecision shall be final an executory

+f appeale to S0 but S0 affirm the ecision of the 0, S0 ecision is final an executory

+f the ecision of the B+ is final an executory, the assessment mae cannot be

#uestione *he issue of prescription can no longer be raise except if the B+ submitte

the particular issue for the resolution of the 0ourt, that is consiere as waiver on the part

of the B+ an such issue of prescription may be sub(ect to resolution

*here is no provision in the *= 0oe that prohibits the B+ from filing an action for

collection even if the resolution on the motion for reconsieration on the assessment

mae is still pening <hen the case is pening before the 0*, collection may also be mae by filing of an

answer to the petition for review with the 0* *his is tantamount to a filing of

collection of tax *his will also stop the running of the prescriptive perio for collection

of taxes

0ollection of taxes is prescriptible

5I





<;; *. /+8;: 3a) 7 3b) LLLLL B+ 0ommissioner

+SS>;S which may be raise LLLLL Ruestion of law or fact

or both #uestions of law an fact

<;9 LLLLLLLLLLLLLLLLLLLLLLL *ithi' : day& fromreceipt of such assessment

I. the ree&t for i',e&ti4atio' or reco'&ideratio' ha& 3ee' de'ied 3y the !IR

1 /ile a motion for reconsieration of the ecision with the B+! .

" ppeal the ecision with the 0*

OOO Motion for reconsieration must raise new grouns, meaning grouns which have not been raise in

that re#uest for reconsieration or reinvestigation .therwise, it is (ust a pro6forma motion, it will notsuspen the perio within which to appeal the B+ ecision to the 0* which is $J ays from receipt of

the B+ ecision

+SS>;S that may be raise on appeal with the 0* LLL Ruestions of

8aw or fact . both

If CTA affir+& the deci&io' of the !IR

ppeal the 0* ecision to 0

ISSUES LLLLLLLLLLLLLLLLLLLLLLLLLLLLLL Ruestions of law

*#EN QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ <ithin 12 ays from receipt of the

0 ecision

*he taxpayer may, instea of filing a protest, file a written claim for refun

RE-UISITES .OR .ILING RE.UND

1 *his must be file within the two 3") year perio from the ate of payment!

" *he fact of withholing must be proven!

$ *his must be inclue in the income tax return of the taxpayer!& +t must be shown that the payment or the amount state in the return was receive by the government

<;; *. /+8; ;/>9-: 666 B+

+SS>;S: 666 Ruestions of law or fact .

666 both .

666 the taxes are illegally or erroneously collecte

ILLEGALLY COLLECTED TAX ,&$ ERRONEOUSLY COLLECTED TAX

Ille4ally collected ta1 means it violates certain provision of the law +t may not be authorize by a

peculiar *ax 8aw or statuteErro'eo&ly collected ta1 means there may be a law passe but there was a mista%e in the

collection

*#EN TO .ILE *ithi' 9 year& from the ate of payment

L Payment must be proven in contemplation of *ax 8aw, there is payment when the tax liability is fully pai So, if it is payable in installment, there can only be payment when the final installment has been pai

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