TAXATION EX.

1
1. What is the meaning of the term De minimis benefits?
De minimis benefits are benefits of relatively small value or of minimum amount
provided by the employer in favor of the employee for the promotion of health,
goodwill and efficiency.

2. Are corporations allowed to avail OSD? If yes, how much?
YES. Corporations are allowed Optional Standard Deductions in case of corporations
subject to tax under sec. 27 (A) and sec. 28 (A) it may elect standard deduction in the
amount not exceeding 40% of the gross income.

3. Does the principle of pre-dominance test apply to hospitals?
YES. Sec. 27 (b). Proprietary educational institutions and HOSPITALS which are non-
profit shall pay 10% of tax, provided, however, that if gross income from unrelated
trade, business or activities exceeds 50% of total gross income a tax of 30% shall be
imposed on the entire taxable income.

4. Are dividends subject to income tax?
NO. General rule is that stock dividends are not subject to tax since; the mere issuance
thereof is not yet subject to income tax as they are nothing but enrichment through
increase in value of capital investment.

Exceptions are:
a. Change in the stockholders equity, right or interest in the net
assets of the corporation;
b. Cancellation or redemption of shares of stock.
c. Distribution of treasury share.

5. Are corporations subject to tax on compensation?
Corporations are not subject to tax on compensation because compensation income
refers to all income payments in money or in kind, arising from personal services under
ee-er relationship HOWEVER if dividends ,whether in cash or stock, are given to
shareholders not as a return on investment but in payment of services rendered, then
they are taxable as part of compensation income, or income derived from self-
employment or exercise of profession but NOT PASSIVE INCOME.

6. When is an investment considered long term for the purpose of income tax exemption?
For an investment to be considered long term it shall have a maturity period of not less
than 5 years, form of which shall be prescribed by BSP and issued by banks to
individuals and other denominations prescribed by BSP.

7. Why gifts, bequest and devices excluded from gross income?
Because such transfers shall be subject to Donors or Estate tax.

8. Are retirement benefits subject to income tax?
It DEPENDS. Generally, retirement benefits are subject to tax. However, Sec. 32 B of the
tax code provides that retirement benefits received by officials and employees may not
be subject to tax if:
i. Retiring official or employee has been in the service of the same employer for
at least 10 years,
ii. That he is not less than 50 years of age at the time of retirement,
iii. That it has been availed only ONCE.

9. Are termination pay taxable?
It DEPENDS. If such termination is voluntary then that would be taxable. However, if it is
caused due to the death, sickness/ other physical disabilities for any caused beyond the
control of said employee or official then it shall be exempt from tax.

10. What are the methods of income taxation?
The NET INCOME TAXATION and the GROSS INCOME TAXATION.
NET INCOME TAXATION, it is taxation based on net income after you are allowed to
deduct some items.
GROSS INCOME TAXATION, income is taxed without the benefit of deductions and
expenses.

11. How shall the Fringe Benefit Tax be computed?



Taxation of Fringe Benefit received by certain individuals
25 % shall be imposed on the GMV received by NRA-NEBT.
i. MV divided by 75% = GMV X 25% = FBT
15 % for :
i. An alien indiv. Employed :
a. By regional or area head-quarters and regional operating head-
quarters of a multinational company;
b. By an offshore banking unit in a foreign bank established in the
Philippines;
c. By a foreign service contractor or subcontractor engaged in
petroleum operations in the Philippines; and
ii. Any Filipino employees employed and occupying the same position as those
occupied or held by aforesaid alien employees.

12. Are gains from redemption of shares in mutual fund subject to income tax?
NO. Gains realized by the investors upon redemption of shares of stock in mutual fund
company are exempt from tax, as provided for by the tax code enumerated under
exclusions from gross income Sec. 32 (B)(7)( h).

13. What is the income tax treatment of dividends if the same are paid to a non-resident alien
engaged in trade or business in the Philippines?
The income tax treatment of dividends of NRA engaged in trade or business in the
Philippines shall be subject to 20% on the total amount thereof.
i. Except: Royalties on books as well as other literary works and royalties on
musical compositions shall be subject to final tax of 10%.
ii. For interest on long-term investments that are pre-terminated;
a. 4 yrs. To less than 5 years ---- 5 %
b. 3 yrs. To less than 4 years ---- 12 %
c. Less than 3 years ---- 20 %
14. What are the conditions for expenses to be deductible from gross income?
Expenses that are allowable as deductions to gross income are those
i. Ordinary and Necessary Expenses
Ordinary when it is commonly incurred in the trade or
business of the taxpayer as distinguished from capital
expenditure
Necessary If it is appropriate and helpful to the taxpayers
business and necessary to increase revenue or in the profit-
making

ii. Paid and incurred during the taxable year
iii. And those that are directly attributable to the development, management,
operation and conduct of the trade, business or exercise of profession.

15. Can a taxpayer deduct his grocery expenses from his gross income from trade, business or
exercise of profession?
YES. Provided that such expenses are not used for personal, living or family expense
and that such expenses contained the requisites required for its exemption.
(enumerate - requisites for expenses to be deductible).





16. What are the extent of tax exemption granted to a general professional partnership?
30% since a partnership other than a GPP shall be considered as a corporation and
corporations are taxed 30%. A GPP shall not be subject to income tax under the chapter
of taxes on individuals. Persons engaging in business as partners in GPP shall be liable
for income tax only in their separate and individual capacity.

17. Are the shares of the individual partners from general partnership subject to income tax? If
yes, will it not constitute double taxation?
YES. Persons engaging in business as partners in GPP shall be liable for income tax only
in their separate and individual capacity. It will NOT constitute double taxation on the
ground that shares of the partners will be taxed as ordinary income.

18. What are the acceptable supporting documents for expenses to be deductible from gross
income?
The tax code provides that expenses shall not be allowed unless taxpayer complies the
ff. requirements:
i. It must be substantiated with sufficient evidence
a. Such as Official receipts or other adequate records
Amount of expenses being deducted
The direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of
trade, business or exercise of profession of the
taxpayer
ii. In relation to Sec. 34 (K), that the tax required to be deducted and withheld
therefrom has been paid to the Bureau of Internal Revenue.

19. Are bad debts actually written off but subsequently recovered subject to income tax?
It DEPENDS. TAX BENEFIT RULE. The recovery of bad debts previously allowed as
deduction in the preceding years shall be included as part of the gross income in the
year of recovery only up to the extent of the income tax benefit of said deduction.
i. If the taxpayer was benefited from the previous write off of such debt then it
must be included as part of the gross income only up to that extent which
benefited him.

20. Is tax refund subject to income tax?
It DEPENDS. A tax refund may or may not constitute taxable income depending on
whether or not the tax was previously deducted in computing income tax. Rule is that a
tax w/c was previously deducted as an expense should be reported as income when
refund of the same was received in a subsequent year.


21. What is the treatment of the cancellation of debts by the creditor?
The cancellation of debt by creditor shall be tax exempt if there is no services to the
creditor by debtor is rendered. It is considered as taxable gift and not income.
However, if there is service by the debtor to the creditor then it shall be considered as
taxable income to the debtor.

22. May a taxpayer who opted to avail of the OSD change his mind and instead claim for itemized
deduction during the taxable year?
NO, once an option is made it will already become irrevocable during the taxable year.

23. What are the rules for NOL to be deductible from the gross income of a taxpayer?
NOLCO
i. That the loss must be business related
ii. That the loss must not be compensated for by insurance
a. i.e. casualty losses
i. must first be reported to the BIR for deduction to be
allowed.
(TN: NOL not deducted from gross income shall be carried over as a deduction from GI for the next 3
consecutive years, provided :
that the taxpayer was not exempt from income tax in the year of such NOL
no substantial change in the ownership or business or enterprise.)

24. What is a passive income?
It is when an individual just let his wealth create more wealth with it and he doesnt
have to exert effort to earn more wealth. i.e, bank deposits, rents, pensions.
i. Active income you have to work hard to earn it.

25. Is withholding tax a tax?
NO. It is not one of the items enumerated under sec. 21 of the tax code which classifies
the sources of income. It is only a mode. The means employed to collect the tax at the
very source.
Kinds of withholding tax:
1. On compensation
2. Expanded
3. Final withholding taxes
4. Withholding taxes on govt payment