National Internal Revenue Code of 1997 (NIRC) Finals Reviewer A.

Income Taxation Income means all wealth that flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits including gains derived from the sale or other disposition of capital assets. 1. Income Tax System Global Tax System all items of income earned during a taxable period is paid under a single set of income tax rate. Schedular Tax System- different types of income are subject to different set of tax rates, thus requiring separate tax returns; tax is computed on per return or per schedule basis. Semi-Schedular or Semi-Global Tax system the compensation income, business or professional income, capital income, and after deducting the sum of allowable deductions from business or professional income, capital gain and passive income not subject to final tax, and other income, in the case of corporations, a well as personal and additional exemptions, in the case of individual taxpayers, the taxable income is subjected to one set of graduated tax rate; method of taxation under NIRC 2. Features of the Philippine Income Tax Law / Characteristics of Philippine Income Tax Law a. Direct Tax Tax I imposed on the income-earner b. Progressive tax base increase as the tax rate increases c. Comprehensive The Philippines adopts the citizenship principle, residence principle, and the source principle d. Semi- Schedular more schedular with respect to individual taxpayers but more global treatment on corporation 3. Criteria in Imposing Philippine Income Tax / Basis of Taxability of Income a. Citizenship Principle A citizen taxpayer is subject to income tax : a.a On his worldwide income, if he resides in the Philippines. a.b Only on his income from sources within the Philippines, if he qualifies as nonresident citizen.

NIRC - SEC. 23. General Principles of Income Taxation in the Philippines- Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines b. Residence Principle - a resident alien is liable to pay income tax on his income from sources within the Philippines but exempt from tax on his income from sources outside the Philippines. Source Principle a non resident alien is subject to Philippine income tax because

c.

he derives income from such sources within the Philippines such as dividend, interest, rent or royalty. SPECIAL TOPICS IN INCOME TAXATION A. DETERMINATION OF SOURCE ACCORDING TO KIND OF INCOME KINDS OF INCOME 1. Service of Compensation Income 2. Rent 3. Royalties (copyright, patent, Design trademark, etc.) 4. Merchandising 5. Gain on Sale or personal property 6. Gain on sale of real property 7. Mining Income 8. Farming Income 9. Gain on sale of domestic stock (DC) 10. Interest (from borrowing) SOURCE (Tax Situs) Place of Performance of service Location of Property (R or P) Place of use of intangibles Place of Sale Place of Sale Location of property Location of the mines Place of farming activities Income within the Philippines Residence of the debtor

TAX SITUS OF THREE POSSIBLE SOURCES OF INCOME Income from labor (services) the place where the labor is done Income from capital the place where the capital is employed Income from the sale of capital assets the place where the sale is made Test for Determination that Income is Earned (therefore taxable) There is income, Gain or Profit The Income, gain or profit is received, realized, or accrued during the taxable year The income, gain or profit is not exempt from income tax

4. Types of Philippine Income Tax Compensation Income Business income derived by self-employed Professional income derived by professionals Passive investment income Gains derived from dealings in property 5. Taxable Period a. Calendar Period (individual / corporation) Accounting Period from Jan 1 to Dec 31 b. Fiscal Year Period(corporation) Accounting period of 12 months ending on the last day of any month other than Dec. Note: Taxable Year for individual taxpayers, period is twelve months ending Dec. 31 of every year; Corporations are taxed on a fiscal year basis.

Note: Corporate taxpayers have the option whether to adopt fiscal year or calendar year period. On the other hand, an individual taxpayer can only adopt calendar year period. Note: A taxpayer may have a taxable period of less than 12 months where : DiNe-ChaD Taxpayer Dies Corporation is Newly Organized Corporation Changes its accounting period Corporation in Dissolved Note: if a corporate taxpayer, changes its accounting period from fiscal year to calendar year, from calendar year to fiscal year , or from one fiscal year to another, the net income shall with the approval of the CIR, be computed on the basis of such new accounting period, subject to the provisions of Sec 27. (Sec. 46 , NIRC)

6. Kinds of Taxpayers a. Individual Taxpayers CAS 1. Citizens a. Resident Citizens basis is taxable income (gross income less deduction) b. Non-resident Citizens basis is taxable income (allows deduction) floating intention. Sec 22. NIRC(E) The term "nonresident citizen" means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. 2. Aliens a. Resident Aliens Sec. 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. b. Non-Resident Aliens Sec. 22 (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. (1) Engaged in Trade or Business Sec. 25 - (1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Not engaged in Trade or Business Sec. 25 - There shall be levied, collected and paid for each taxable year upon the entire income received from all

sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twentyfive percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24. XPN: Sec. 25- C,D,E(15% only) (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. cralaw (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. cralaw (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. cralaw Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code. RA Tax Treatment Personal and additional exemption 5-32% Schedular Rate Entitled NRA ETB NETB 5-32% scheduler 25% Final Tax Rate Entitled Not Entitled Subject to the rule on reciprocity

3.Special Class of Individual Employees a. Minimum Wage Earner shall refer to a worker in the private sector paid the statutory minimum wage, or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. (Sec. 22(HH) NIRC, as added by RA 9504) Note: the earnings of Minimum Wage Earners are exempted from income Tax. ( sec 24 A [2], NIRC as amended by RA 9504

b. Corporations artificial being created by operation of law having the right of succession and the powers attributed on the properties. 1. Domestic Corporation - Sec. 22 (C) The term "domestic", when applied to a corporation, means created or organized in the Philippines or under its laws. 2. Foreign Corporation - Sec. 22 (D) The term "foreign", when applied to a corporation, means a corporation which is not domestic.

(1) Resident Foreign Corporations Sec. 22 (H) The term "resident foreign corporation" applies to a foreign corporation engaged in trade or business within the Philippines. (2) Non-resident Foreign Corporations Sec. 22 (I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged in trade or business within the

c.

Partnerships Corporation includes partnerships, no matter how created or organized, joint stock companies, joint accounts, associations or insurance companies except: Joint construction venture General professional partnership Joint venture for engaging in petroleum , coal, geothermal and other energy operations pursuant to a consortium agreement with the government.

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Note: unregistered or Registered Partnership are taxable provided that there is an agreement oral or writing to contribute money, property or industry to a common fund; and Intention to divide the Profits. Note : Co-ownership 1. When two or more heirs inherit an undivided property from a decedent. 2. When a donor makes a gift of undivided property in favor of two or more donees. Gen rule: It shall not be subject to income tax if the activities of the co-owners are limited to the preservation of the property and the collection of income therefrom. In such case, the co-owners shall be taxed individually on their distributive share in the income of the co-ownership. XPN: If the co-owners invest the income in a business for profit they would constitute themselves into a partnership and such shall be taxable as a corporation.

Note: Estate and Trust is entitled to personal exemption of P 20,000 d. General Professional Partnrships a partnership formed by persons for te sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. e. Estate and Trusts refer to the mass of properties left by a deceased person; taxed as an individual. Taxable : 1. Under administration 2.Judicial Settlement Trusts it is a right to the property, whether real or personal, held by one person for the benefit of another; of fiduciary nature, based on trusts and confidence. Classifications of Trusts 1. Taxable and tax-exempt trust Rules of Taxability: a. Taxable to the beneficiary income of the trust for the taxable year which is to be distributed to the beneficiaries b. Taxable to trustee of fiduciary income of the trust which is to be accumulated or held for future distribution, whether consisting or ordinary income or gain from sa le of assets included in the corpus of the estate (revocable trust) 2. Revocable trust a kind of trust where the power to revert (return) to grantor title to any part of the corpus (body) of the trust is vested. a. In the grantor, either alone or in conjuction with any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom; or b. In any person not having a substantial adverse interest in the disposition of the corpus or the income therefrom. 3. Irrevocable trust (pass through entity) a kind of trust which cannot be altered without the consent of the beneficiary Co-ownership 3. When two or more heirs inherit an undivided property from a decedent. 4. When a donor makes a gift of undivided property in favor of two or more donees. Gen rule: It shall not be subject to income tax if the activities of the co-owners are limited to the preservation of the property and the collection of income therefrom. In such case, the co-owners shall be taxed individually on their distributive share in the income of the co-ownership. XPN: If the co-owners invest the income in a business for profit they would constitute themselves into a partnership and such shall be taxable as a corporation. f.

7. Income Taxation a. Income means all wealth that flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits including gains derived from the sale or other disposition of capital assets. b. Nature- excise tax, on the privilege of receiving said income or profit. c. When income is taxable 1. Existence of income 2. Realization of Income a. Test of Realization unless income is deemed realized, then there is no taxable income. Usually recognized when: 1. The earning process is complete or virtually complete 2. An exchange has taken place b. Actual vis--vis Constructive Receipt Actual Receipt income may be actual receipt of physical receipt Constructive Receipt income which is credited to the account of and set apart for a taxpayer and which may be drawn by him at any time without any substantial limitation or condition upon which payment is to be made. Purpose: to prevent taxpayer using cash basis from deferring or delaying recognition of income; to protect the government.

Cash Method recognition of income and expense dependent on inflow or outflow of cash Accrual Method gains and profits are included in gross income when earned whther received or not, and expenses are allowed as deductions when incurred, although not yet paid. It is the right to receive and not the actual receipt that determines the inclusion of the amount in the gross income.

a. Installment payment vis--vis Deferred Payment vis--vis Percentage Completion (in long term contracts Installment Payment is appropriate when collections extend over relatively long periods of time and there is a strong possibility that full collection will not be made. Four Instances Sec. 49 NIRC SEC. 49. Installment Basis. (A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed, bears to the total contract price. cralaw (B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or other disposition of real property, if in

either case the initial payments do not exceed twenty-five percent (25%) of the selling price, the income may, under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be returned on the basis and in the manner above prescribed in this Section. As used in this Section, the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. (C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual who sells or disposes of real property, considered as capital asset, and is otherwise qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax in installments under rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. (D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of Subsection (A) elects for any taxable year to report his taxable income on the installment basis, then in computing his income for the year of change or any subsequent year, amounts actually received during any such year on account of sales or other dispositions of property made in any prior year shall not be excluded. Sec. 56, par. (2) Installment of Payment. - When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments in which case, the first installment shall be paid at the time the return is filed and the second installment, on or before July 15 following the close of the calendar year. If any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable, together with the delinquency penalties. Deferred Payment initial payments exceed 25% of the gross selling price and such transaction shall be treated as cash sale which makes the entire selling price taxable in the month of sale. Percentage completion Sec.49. Persons whose gross income is derived in whole or in part from such contracts shall report such income upon the basis of percentage of completion. Long term contracts means building, installation or construction contracts covering a period in excess of one year. Sec. 74 (B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4) installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before April 15 of the following calendar year when the final adjusted income tax return is due to be filed. b. Tests in determining whether income is earned for tax purposes 1. Realization Test 2. Claim of Right doctrine or Doctrine of ownership, command, or control 3. Economic benefit test, Doctrine of proprietary interest 4. Severance test Realization Test unless income is deemed realized, then there is no taxable income. Revenue is generally recognized when both conditions are met: a. The earning process is complete of virtually complete; b. An exchange has taken place. Requisites for income to be taxable: 3 test:

a. Gain or profit b. Gain must be realized or received c. Gain not excluded by law or treaty Claim of Right doctrine a taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the absence of a definite unconditional obligation to return or repay. - Illegally acquired income constitutes realized gain Economic Benefit Test, Doctrine of Proprietary Interest taking into consideration the pertinent provisions of law, income realized is taxable onto the extent that the taxpayer is economically benefited. Severance Test income is recognized when there is separation of something which is of exchangeable value. General Principles Partnership Theory the basis of the right of the government to tax income emanates from its partnership in the production of income by providing the protection, resources, incentive and proper climate for such production. Protection Theory it dictates that when the flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government, the same, in consideration of such protection should share the burden of supporting the government. Theory of Favorable Business Climate domestic corporations benefit from the efforts of the government o improve the financial market and to ensure a favorable business climate. It is therefore fair for the government to require them to make a reasonable contribution to the public expenses. (applicable only to domestic corporation, American origin) Gross Income all income derived from whatever source, including but not limited to the following: 1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items; 2. Gross income derived from the conduct of trade or business or the exercise of profession; 3. Gains derived from dealings in property; 4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities 9. Prizes and winnings 10. Pensions 11. Partners distributive share from the net income of the general professional partnership Gross Income = all income less exclusions Net of Taxable Income = gross income less allowable deductions Taxable Compensation Income = gross compensation less personal and additional exemptions (Individual Taxpayers) Income Tax Due = Taxable or net income multiplied by income tax rate Imcome Tax Payable = Income Tax due less creditable withholding tax or tax credit GROSS INCOME TAXATION AND NET INCOME TAXATION; DISTINCTIONS; ADVANTAGES AND DISADVANTAGES Gross Income Taxation Allows no deductions Grants no exemptions Tax base: Gross income Advantages of Gross Income Taxation Simplifies the income tax system Net Income Taxation Deductions are allowed Exemptions are granted Tax base: Net Income Advantages of Net Income Taxation Fair and just due to grant of deductions

Does away with wastage of manpower and supplies Substantial reduction in corruption and tax evasion exercise of discretion to allow or disallow deductions dispensed with Disadvantages of Gross Income Taxation No deductions and exemptions allowed

Tax audit minimizes fraud Provides equitable reliefs in the form of deductions, exemptions and tax credits

Disadvantages of Net Income Taxation Vulnerable to corruption on account of Discretion in the grant of deductions

Susceptible of fraud in the absence of general audit Taxpayers lose interest to earn more Thereby lessening their purchasing capacity

Confusing and complex process of filing income tax return Difficult/costly to administer

d. Classification of Income as to Source 1) Gross Income and taxable income from sources within the Philippines 2) Gross Income and taxable income from sources outside the Philippines 3) Income partly within or outside the Philippines Income from whatever source all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income. Cost of Goods Sold it includes all business expenses directly incurred to produce the merchandise and bring them to their present location such as direct labor, materials and overhead expenses.

Cost of Services all direct costs and expenses necessarily incurred to provide the service required by the customers and clients including: 1. Salaries and employee benefits of personnel, consultants, and specialists directly rendering the service 2. Cost of facilities directly utilized in providing the service. Sec. 27, E (4) Gross Income Defined - For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold"Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, "cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of "goods manufactured and sold" shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services "Cost of services" shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, "cost of services" shall include interest expense.

Gross Receipts includes all income whether actually or constructively received Net Income Taxation it is a system of taxation where the income subject to tax may be reduced by allowable deductions. Taxable Income or Net Income all pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. e. Sources of Income subject to tax 1) Compensation Income all remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code. -it includes salaries, wages, emoluments, honoraria, bonuses, allowances (transportation, representation, entertainment and the like) fringe benefits (monetary and non-monetary fees) including directors fee, taxable pensions and retirement pay and other income similar nature including compensation paid in kind. - income of similar nature proceeds from property sharing; COLA, PERA, housing allowance, overtime pay, emergency pay, hazard pay, rice and clothing allowance, medical allowance, grocery allowance. BASIS/TEST : WON such income is received by virtue of an employer-employee relationship. Requisites for Taxability of Compensation Income 1. Personal service actually rendered 2. Payment is for such services rendered 3. Payment is reasonable Payment for services of Independent contractor and partners of GPP not considered CI 2) Fringe Benefits is any good, service or other benefit furnished or granted by an employer in cash or in kind in addition to basic salaries, to an individual employee, except a rank and file employee, such as but not limited to: HEV-HIM-HEEL: a. Housing b. Expense account c. Vehicle of any kind d. Household personnel such as maid, driver and other e. Interest on loans at less than market rate to the extent of the difference between the market rate and the other actual rate granted f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations g. Expenses for foreign travel h. Holiday and vacation expenses i. Educational assistance to the employee or his dependents j. Life o health insurance other non life insurance premiums or similar amounts in excess of what the law allows (Sec. 33(B) NIRC)

Rule on taxation of fringe benefits received by different employees

A Fringe Benefit Tax (FBT) is imposed on the grossed-up monetary value of the fringe benefit furnished, granted or paid by the employer to managerial and supervisory employees. SEC. 33. Special Treatment of Fringe Benefit. (A) Imposition of Tax.- A final tax of thirty-four percent (34%) effective January 1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee (except rank and file employees as defined herein) by the employer, whether an individual or a corporation (unless the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the convenience or advantage of the employer). The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code. The grossed-up monetary value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall be taxed at the applicable rates imposed thereat: Provided, further, That the grossed -Up value of the fringe benefit shall be determined by dividing the actual monetary value of the fringe benefit by the difference between one hundred percent (100%) and the applicable rates of income tax under Subsections (B), (C), (D), and (E) of Section 25. Kinds of Fringe Benefits that are not subject to the FBT 1. Fringe benefits which are authorized and exempted from tax under special laws 2. Contributions of the employer for the benefit of the employer for te benefit of the employee to retirement, insurance and hospitalization benefit plans; 3. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; 4. De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of finance, upon recommendation of the CIR 5. When the fringe benefit is required by the nature of, or necessary to the trade, business or profession of the employer 6. When the fringe benefit is for the convenience of the employer, this is known as Employers Convenience Rule De minimis Benefits refer to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting health, goodwill, contentment or efficiency of his employees. Doctrine of Cash Equivalent it provides that any economic benefit to the employee whatever may have been the mode by which it is effected is compensation income. In stock option, for instance, the difference between the FMV of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee. 3) Professional Income it refers to the fees received by a professional from the practice of his profession, provided that there is no employer-employee relationship between him and his clients. 4) Income from Business it refers to income derived from merchandising, mining, manufacturing and farming operations. Note: Business is any activity that entails time and effort of an individual or group of individuals for purposes of livelihood or profit. 5) Income from Dealings in Property all income derived from the disposition of property whether real, personal or mixed for: a. Money, in case of sale

b. Property, in case of exchange c. Combination of both sales and exchange, which results in gain Note: Gain is the difference between the proceeds of the sale of exchange and the acquisition value of the property disposed by the taxpayer. Proceeds = AV Gain Types of Properties Tax treatment of the following in the preparation of annual income tax returns: income realized from the sale of: (1) Capital Assets exclusion of all ordinary assets. Thus, those properties not specifically excluded in the statutory definition constitute capital assets, the profits or losses, on the sale or the exchange of which are treated as capital gains or losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains ordinary losses. Generally, income realized from the sale of capital assets are not reported in the income tax return as they are already subject to final taxes (capital gains tax on real property and shares of stocks.) What are to be reported in the annual income tax return are the capital gains derived from the disposition of capital assets other than real property or shares of stocks in domestic corporations which are not subject to final tax. (2) Ordinary Assets income realized from sale of ordinary assets is part of Gross income, included in the Income Tax Return. Sec. 32 A(3) NIRC SOUR 1. Stock in trade of the taxpayer or other property of a kind which would property be included in the inventory of the taxpayer if on hand at the close of the taxable year 2. Property held by the taxpayer primarily for sale to customers in the Ordinary of trade or business 3. Property Used in the trade or business of a character which is subject to the allowance for depreciation provided in the NIRC 4. Real property used in trade or business of the taxpayer. 7. Types of Gains from dealings in Property (1) Ordinary Income vis--vis Capital Gain Ordinary Gain is a gain derived from the sale or exchange of ordinary assets such as SOUR Capital Gain is a gain derived from the sale or exchange of capital assets or property not connected with the trade or business of the taxpayer other than SOUR. (2)Actual gain vis--vis Presumed Gain Actual Gain excess of the cost from a sale of asset Presumed Gain presumption of law that the seller realized gains, which is taxed at 6% of the selling price or fair market value, whichever is higher. Ordinary Income includes the gain derived from the sale or exchange of an asset not connected with the trade or business Ordinary Loss is the loss that may be sustained from the sale or exchange of ordinary asset. Capital Loss loss that may be sustained from the sale or exchange of an asset not connected with the trade or business. Capital loss may not exceed capital gains when used as a deduction to income. 8. Dealings in shares of stock of Philippine Corporation