Professional Documents
Culture Documents
PART VII
1.
Resident citizens
Resident alien
Special aliens
Irrevocable trust
Co- ownership
2. Resident citizens
4. Resident alien
6. Special aliens
a. multinational Company- refers to 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.
b. the 180 rule does not apply
estate under juridical statement and irrevocable trust considered single individual
8.
9.
10. Personal exemption- these are arbitrary amounts
allowed for personal, living or family expenses of the taxpayer.
They are available only to individual taxpayers and not juridical
persons. They are deducted from gross compensation income
and/or business and/or profession income of taxpayer.
2 kinds of exemption:
RC
NRC including OCW and seamen
RA
NRA engaged in trade or business subject to the principle
of reciprocity
if the taxpayer dies during the taxable year, his estate may
still claim the personal and additional exemption for
himself and his dependent(s) as if he died at the close of
the year.
Non-profit
- 10% on their taxable income except those covered by
subsection D (passive income)
1.
2.
2.
3.
4.
3.
1. Basic Principles
a. Strict Construction Against the Taxpayer
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2. Deductions, defined
These are amounts or expenses allowed by law to be
subtracted from gross income to arrived at the taxable income.
3. Kinds of Deductions
A) Itemized deductions-Secs. 34(A) to (J) and (M).
(A) Expenses
(B) Interest
(C) Taxes
(D) Losses
(E) Bad debts
(F) Depreciation
(G) Depletion of oil and gas wells and mines
(H) Charitable and other contributions
(I) Research and development
(J) Pension trusts
(M) Premium payments on health and/or hospitalization
insurance of an individual taxpayer
B) Optional Standard Deductions (OSD)- - In lieu of the deductions
allowed under the preceding Subsections, an individual subject to
tax under Section 24, other than a nonresident alien, may elect a
standard deduction in an amount not exceeding ten percent (10%)
of his gross income
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order
(1) Ordinary Expense, defined
- those payments which are normal (need not be habitual)
in relation to the business of the taxpayer, or one generally
incurred also by taxpayers in the same or similar line of business
or trade
3) Rentals
aa. Requisites:
1. Payment was made as a condition to the continuous use
of or possession of the property
2. Taxpayer has not taken or is not taking title to the
property or has no equity other than that of a lessee, user or
possessor;
3. Property must be used in the trade or business
4. Subject to withholding tax (5%) if business property the
rental must be at least P500 in case of non-business or residential
property the rental is at least p10,000 subject to 5% tax
aa. Requisites:
1. Service actually rendered
2. Compensation is for such services rendered
3. Reasonable
2) Traveling Expenses not only for transportation fare but
includes meals and lodging in connection with the trade, business
or profession of the taxpayer, whether local or foreign
aa. Requisites:
1. Incurred while away from home
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7. On Interest Expense
a. Interest, defined -the amount paid by a debtor to his
creditor for the use or forbearance of money, goods or credits.
b. Requisites:
1. There is an indebtedness
2. The indebtedness must be that of the taxpayer
3. In connection with taxpayers profession, trade or business
4. There is liability to pay interest on the debt
5. The interest must have been paid or incurred within the year
6. It must not be expressly disallowed by law to be deducted from
taxpayers gross income
7. it must be within the limit set by law
8. The interest payment must not be made between related parties
c. Interest expense as amended by RA 9337
-The tax Code provides that the tax payers otherwise allowable
deduction as interest expense shall be reduced by 42% (previously
38% under RA 8424) of the interest income subjected to final tax.
Provided that effective January 1, 2009 the percentage shall be
33%.
d. Tax Arbitrage, defined
- The simultaneous payment of taxes and income earnings on the
same loan proceeds in order to profit from such price
discrepancies.
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However, a corporation paying the tax for the holder of its bonds
or other obligations containing a tax-free covenant clause cannot
claim deduction for such taxes paid by it pursuant to such
covenant.
c. Requisites for Deductibility:
g. Related Parties
1. Between family members- including taxpayers brother and
sister, whether full or half-blood spouse,, ancestors and lineal
descendants
e. Deductible taxes:
1. Import duties
2. Business, occupation, license, privilege, excise and permits
3. Percentage tax and tax on gross receipts paid or accrue
4. Privilege or occupation taxes
5. Fringe benefit taxes under certain conditions
6. Automobile registration fees (taxes in nature)
7. Documentary stamp taxes
8. Income, war-profits and excess-profits taxes imposed by
the authority of any foreign country only if the taxpayer
does not signify in his return his desire to have any extent
the benefits of the provisions of law allowing credits
against the tax for taxes of foreign countries
9. Any other taxes of every amount and nature paid directly
to the government or any political subdivision
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f. Non-deductible taxes:
1. Income tax (Philippine or foreign)
2. Value Added Tax
3. Estate and donors taxes
4. Special assessment of levies on properties
5. Energy tax
6. Taxes not related with trade, business or profession of the
taxpayer
7. Taxes which are final in nature
8. Stock transfer tax on shares that are listed or traded in the
exchanges which are final in character
9. Taxes assessed against local benefits
10. War profit tax
11. Foreign income taxes imposed by authority of a foreign
country
Tax credit a taxpayers right to deduct from the income tax due
the amount of the tax he has paid to a foreign country subject to
specified limitations
Purpose: to lessen the effects of international double or multiple
taxations
Taxpayers Entitled to Claim Tax Credits
1. Citizens of the Philippines
2. Members of the general professional partnership
3. Beneficiaries of an estate or trust
4. Resident aliens under the Principle of Reciprocity
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9. On Losses
a. Coverage: Such losses which do not come under the category
of bad debts, inventory losses, depreciation and the like and which
arise in taxpayers profession, trade or business.
b. Requisites for Deductibility:
a) The loss must that be of the taxpayer
b) Actually sustained during the taxable year
c) Connected with the business, trade or profession of the
taxpayer
d) No compensated by insurance or other form of indemnity
e) Evidenced by a closed and completed transaction
f) Not claimed as a deduction for estate tax purposes
g) If it is a casualty loss, must be reported to the concerned
authorities with prescribed time
e. Types of Losses:
1. Ordinary losses
2. Capital losses
3. Special losses
I.
Ordinary losses:
a) by individuals losses actually sustained during
the taxable year, not compensated for by
insurance, incurred in connection with trade,
business or profession, or arising from fire, storm,
shipwreck, or other casualties, or from robbery,
theft or embezzlement
b) by resident aliens and foreign corporations losses
actually sustained business, trade or exercise of
profession conducted within the Philippines, when
such losses are not compensated for by insurance
or other forms of indemnity
c) by domestic corporations all losses actually
sustained and charged off within the taxable years
and not compensated for by insurance
II.
Capital Losses
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a) losses from sale or exchange of capital asset shall be allowed only to the extent of the gains
from such sale or exchange
b) losses resulting from securities becoming worthless
and which are capital assets
c) losses from short sales of property shall be
considered as losses from sales or exchanges of
capital assets
d) losses due to failure to exercise privilege or option
to buy or sell property shall be considered as
capital losses
III.
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c)
provided by law
(3) Who may avail of NOLCO?
a) Individual taxpayer (including estate and trust) engaged in
10. On Bad Debts
trade or business
b) Individual taxpayers engaged in the exercise of profession
a. Bad Debts debts resulting from the worthlessness or uncollectibility,
c) Domestic corporation
in whole or in part, of amounts due the taxpayer by others, arising from
d) Resident corporation
money lent or from uncollectible amounts of income from goods sold or
services rendered.
(4) Who may not claim NOLCO?
a) Offshore Banking Unit (OBU) of a foreign banking
b. Requisites for Deductibility:
institution/corporation
b) Foreign Currency Deposit Unit (FCDU) of a domestic or
1. debts due to taxpayer was actually ascertained to be worthless
foreign banking corporation, duly authorized by the BSP
2. debts must be charged off within the taxable year
c) Enterprises registered with the BPOI enjoying tax holiday
3. it must be connected with profession, trade or business
d) Enterprises registered with PEZA enjoying tax holidays
e) Enterprises registered with SBMA enjoying tax holidays
4. debt must be valid, legally demandable and subsisting
f) Foreign corporations engaged in international shipping or
5. must not be sustained in transaction entered into between
air carriage business in the Philippines; and
related parties
g) Any person, entity enjoying tax exemption from income
tax pursuant to the Tax Code and other Special Law
c. Who can Avail?
(5) Relationship of NOLCO to MCIT: Corporations covered by
an MCIT cannot enjoy the benefit of NOLCO for as long as it is
1. Resident Citizens and Domestic Corpos in connection with business
subject to MCIT in any taxable year. The running of the 3-year
connected within and without the Phil.
period for the expiry of the NOLCO is not interrupted by the fact
that such corporation is subject to MCIT in any taxable year during 2. RC, NRC, RA, and NRAETB those arising in the course of trade or
the reglamentary period of the 3 years.
business conducted in the Phil.
(6) Net Operating Loss for Miners Other Than Oil and Gas
d. How Much is Deductible?
Wells
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b.
c.
d.
e.
f.
g.
tangible property resulting from wear and tear, exhaustion and normal
obsolescence.
- applies to the amortization of the value of intangible assets, the use of
which in the trade or business is definitely limited in duration.
b. Capital Expenditures Subject to Depreciation Allowance
a. amounts paid out for new buildings; or
b. for permanent improvements, or
c. betterments made to increase the value of the taxpayers
property, or
d. for any amount expended in restoring property or
e. in making good the exhaustion thereof.
- bad debts written off but subsequently paid are subject to income tax.
11. On Depreciation
a. Depreciation Defined
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Resident citizens, resident aliens, non-resident aliens engaged in trade or f. Properties not subject to depreciation allowance
business, domestic corporations, resident foreign corps.
1. Inventories in stock
e. Kinds of Properties subject to depreciation allowance
2. Land, apart from the improvements or physical developments added to
1. Tangible property susceptible to wear and tear, to decay or
it
decline from natural causes, to exhaustion and to obsolescence due to the
normal process of the art due to inadequacy of the property to meet
3. Bodies of minerals which through the process of removal suffer
growing needs of the business.
depletion they are subject to depletion allowance
2. Intangible property, the use of which in trade or business is of
limited duration like patents, copyrights, royalties and franchises.
Estimated life:
Patents 17 years (RA 165)
Copyrights lifetime of creator plus 50years without
renewal (PD 49)
Processes 25 years
Franchises as provided in the grant
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n. Adjustment of allowance
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Illustration:
A commercial building was constructed with an estimated life
of30years at the cost of 5 million. It had been depreciated for 10 years at q. Depreciation of properties used in mining operations
100,000 per year from 1975 to 1984. But the new estimate shows that
beginning 1985 the building will only be good for another 15 years.
- Depreciation on all properties in mining operations other than
petroleum operations at the normal rate if expected life is less than ten
Cost of building
5 million
years.
Less: accumulated depreciation
1.5 million
- If expected life is more than ten years depreciation shall be any
Book value or unrecovered cost
3.5 million
number of years between five years and the expected life.
12. ON DEPLETION
a. Depletion, definition
- deduction arising from the exhaustion of natural resources as in
mines, oil and gas wells. The amortization is computed in
accordance with the cost- depletion method under the prescribed
rules and regulations. When the allowance for depletion shall equal
the capital invested, no further allowance shall be granted
3,500,000
15 years
=233,333.34
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1. in general
Adjusted cost basis
Mineral unites remaining X Depletion per mineral unit
As of the taxable year
No. of mineral units sold within the taxable year X
Depletion per mineral unit = Cost depletion for the yea
2. Computation for natural gas and oil
See page 273 (LIM)
b.
c.
e. Limitations in amount
1. Amount deductible shall not exceed:
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g.
-
Education
Health
Human settlement
Economic development
Donations to international organizations or foreign
institutions in compliance with agreements or treaties
Exclusively for:
---- scientific
---- research
---- character building
---- youth and sports development
---- health
---- social welfare
---- cultural
---- charitable
---- any combination thereof
Religious
Charitable
Scientific
Cultural
Educational
Rehabilitation of veteran
Social welfare
h.
Valuation
i. Proof of deduction
14. ON RESEARCH AND DEVELOPMENT EXPENSE
A. Amount deductible- amount ratably distributed over a period
of 60 months beginning the month, taxpayer realized benefits from
such expenditures.
B. KINDS OF TAX EXPENDITURES
(1) as revenue expenditures
Requisites:
1. Paid or incurred during the taxable year
2. Ordinary and necessary expenses in connection with
trade, business or profession
3. Not chargeable to capital account
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B. requisite of deductibility
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1. Estate, defined
Refers to the mass of all property, rights and
obligations of a person that are not extinguished upon
his death including those that have accrued thereto
since the opening of the succession.
a.
3. Burden of Income Taxation On Estates
-
b.
c.
d.
8. Trust. Defined
Refers to an arrangement created by will or an
agreement under which title to property, rights of
property, real or personal, is passed to another for
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Fiduciary, defined
Generally, it refers to a team, which applies to all
persons or corporations that occupy positions of
peculiar confidence towards others, such as trustees,
executors or administrators. For income tax purposes,
it refers to any person or corporation that holds in
trust an estate of another person(s). in order that a
fiduciary relationship may exist, it is necessary that a
legal trust be created.
4) Employees Trust
a. Examples of Ordinary Trust
1. A trust where the income is accumulated or held for future
distribution under the terms of a will or trust
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- The items of gross income of estates and trusts are the same
items of gross income of individuals as provided under the Tax
Code (sec. 32) which shall include:
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1) the tax shall be computed upon the taxable income of the trust
and shall be paid by the fiduciary
2. Where two or more trusts are created by the same trustor or
grantor, and in each instance the beneficiary is the same person,
the taxable income of all trusts shall be consolidated and the tax
computed on such consolidated income
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32
1.
2.
b.
c.
d.
Formula of Computation
exchange of pproperty
with
respect
to
FMV
of
property
received................Php xxxxxxx
Less:
basis
of
property
given
in
E/X xxxxxxx
Gain or loss.
xxxxxxx
3.
a.
33
....
....
....
....
c.
d.
b.
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a. Tax rate
(1) If property sold is real property
-6% Capital gains tax on selling price or
zonal
value
whichever
is
higher
plus
1.5%
thereof
for
documentary
stamps tax.
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2)
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2. If it does not form part of the stock in the trade or business but
the asset is used in business
=
ORDINARY ASSET
e. With respect to the person liable for the filing of the tax
return:
1. Sale of capital asset, the seller is responsible. Buyer has no
obligation to deduct creditable withholding tax.
2. Sale of ordinary asset, the buyer is required to deduct the
expanded withholding tax from consideration, file the tax return
and pay the tax within the reglementary period prescribed.
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c) Capital gains from the sale of shares of stocks not traded in the
stock exchange
Net gain not more than P100, 000 . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 5%
On any amount in excess of P100, 000 . . . . . . . . . . . .
. . . . . . . . . . . . . . . 10%
NOTE: the tax on (a) and (b) are final percentage taxes while (c)
and (d) are final income taxes
31. TRANSACTIONS RESULTING TO CAPITAL GAINS AND
LOSSES ALTHOUGH NO SALE OF A CAPITAL ASSET HAD
TAKEN PLACE:
a)
WORTHLESS SHARES OF STOCK- if shares of stock considered
as capital assets become worthless during the taxable year, the
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b)
c)
d)
e)
f)
g)
h)
a)
ON CORPORATE TAXPAYERS
100% of the capital gains and capital loss shall
be recognized or taken into account regardless of
the holding period.
Corporations cannot carry-over a net capital
loss
There is no holding period of a corporation
Losses on the sale of any bonds, debenture,
note, or certificate or other evidence of
indebtedness issued by banks or trust companies
incorporation under Philippine laws shall not be
subject to the deduction of capital losses because
the securities held by such entities are considered
ordinary assets. However, the disposition of other
capital assets of a domestic bank or trust company
shall not be covered by the exceptions. 9 losses
from sales of exchange of capital assets shall be
allowed only to the extent of the gains from such
sales or exchanges)
33. SHORT SALE
a transaction where the seller sells securities that he does not
own and, therefore, cannot himself supply the securities for
delivery, in expectation of the decline in their profit.
39
40
A. General Rule
3. Inventories
D. Method of Accounting
1. Principal Method
a. Cash receipt and disbursement method
- cash method is a method of accounting whereby all items of
gross income received during the year shall be accounted for in
such taxable year and that only expenses actually paid shall be
claimed as deductions during the year. Under this method, income
is realized upon actual or constructive receipt of cash or its
equivalent, and expenses are deductible only upon actual payment
thereof, regardless of the taxable year when the service is
performed or the expense is incurred.
1.
Computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the
income if no such method of accounting has been so employed, or
if the method employed does not clearly reflect the income
a. death of a taxpayer
b. in case of partners of a general professional partnership
c. in case of partners of a corporation or individual
members of a joint account or joint venture or consortium taxable
as a corporation (sec. 24 (
B2) NIRC.
2.
Taxable income shall be computed on the basis of the
calendar year if the TPs annual accounting period is other than a
fiscal year, as defined in Section 22 (Q), or if the taxpayer has no
annual accounting period, or does not keep books or if the
taxpayer is an individual
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1. Rules applicable
2. Exceptions to the accrual method of keeping books
c. Hybrid Method
-Those methods that are neither strictly cash nor strictly accrual
but combine elements of both
d. Crop Year Method
- it is method applicable only for farmers engaged in the
production of crops which take more than a year from the time of
planting to the process of gathering and disposal of the harvest.
Expenses paid or incurred are deductible in the year the gross
income from the sale of the crops is realized.
The method of accounting regularly employed by the taxpayer in
keeping in his books, if such method clearly reflects his income is
to be followed with respect to the time as of which items of gross
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evidence of indebtedness
of the purchaser) during
the taxable year in which
the sale is made.
b.
II. Inventories
A. definition
a.
Percentage
of
completion
method- 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.
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Elements:
44
The term indirect production costs includes all costs which are
incident to and necessary for production or manufacturing
operations or processes other than direct production costs. Indirect
production costs may be classified as to kind or type in accordance
with acceptable accounting principles so as to enable convenient
identification with various production or manufacturing activities or
functions and to facilitate reasonable groupings of such costs for
purposes of determining unit product costs.
1. Corporations
F. Cases where return may be filed for less than a month
1. In the case of change of accounting period
2. The final personal income tax return of a decedent
3. The income tax return of the Estate of a decedent
4. Newly organized corporations
5. Dissolving corporations
A. Definition
B. Kinds
1. Calendar year-starts January 1and ends on December 31
2. Fiscal year- starts on the first day of any month other than
January and ends twelve months thereafter
C. Rule on the accounting period and method of accounting of a
taxpayer
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II.
46
b.
47
IV.
V.
48
For monthly return and payment of taxesa. Within 10 days after the end of each
month, except for taxes withheld for the
month of December of each year, which
shall be on or before Jan. 25 of the
following year
b. For those who avail of electronic filing and
payment- 5 days later than above.
As to filing of ITR
FINAL WITHHOLDING
TAX
gross income
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