Professional Documents
Culture Documents
PROFESSOR: GRUBA
1st Semester AY 2010-2011
TAX QUIZZLER
INCOME TAXATION
INSTRUCTIONS
This Tax Quizzler covers the study of the law on Income Taxation which
includes:
1. Title II of the National Internal Revenue Code (NIRC)
2. Statutes related or amending the NIRC
3. Related Revenue Regulations, BIR Rulings and other
administrative issuances
4. Cases decided by the Supreme Court
Study the Quizzler alongside the Tax Digests for Income Taxation. As a
complement to this reviewer, use any book containing the complete
codal provisions of the NIRC (either the green codal from Rex Bookstore
or the NIRC annotated codal by Casasola and Bernaldo. As for reference
books, use Income Taxation by Mamalateo or Tax Law and Jurisprudence
by Vitug and Acosta.
INCOME TAX
Q: What is an Income Tax?
A: Income Tax has been defined as a tax on all yearly profits arising from
property, professions, trades or offices, or as a tax on a persons income,
emoluments, profits and the like.
Illustration
Q: Are stock dividends income or capital?
A: Stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. Mere issuance thereof is not yet
subject to income tax as they are nothing but an enrichment through
increase in value of capital investment. Such are considered unrealized
gain and cannot be subjected to income tax until that gain has been
realized
An income tax is a national tax imposed on the net or the gross income
realized in a taxable year. It is subject to withholding. A percentage tax is
a national tax measured by a certain percentage of the gross selling price
or gross value in money of goods sold, bartered or imported or of the
gross receipts or earnings derived by any person engaged in the sale of
services. Unlike income tax, it is not subject to withholding. (see CIR VS.
SOLIDBANK CORPORATION)
The redemption converts into money the stock dividends which become
a realized profit or gain and consequently, the stockholder's separate
property. Profits derived from the capital invested cannot escape
income tax. As realized income, the proceeds of the redeemed stock
dividends can be reached by income taxation regardless of the existence
of any business purpose for the redemption. (see CIR VS. CA)
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COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
3.
tax only from his income from Philippine sources but is taxexempt from foreign-source income
Source of income principle An alien is subject to Philippine
income tax because he derives income from sources within
the Philippines. Thus, a non-resident alien or non-resident
foreign corporation is liable to pay Philippine income tax on
income from sources within the Philippines.
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General Professional
Partnerships
Domestic
Foreign
Nonresident citizen
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
Resident alien
Nonresident alien
Resident
foreign
corporation
Nonresident foreign
corporation
Fiduciary
Withholding agent
Shares of stock
Shareholder
Taxpayer
Including
includes
and
Taxable year
Fiscal year
Paid or incurred
and
paid
or
accrued
Trade or business
Securities
Dealer in securities
Bank
Non-bank
institution
financial
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Quasi-banking
activities
Deposit substitutes
Ordinary Income
Ordinary loss
Rank
and
employees
file
Mutual
fund
company
Trade, business or
profession
Regional or area
headquarters
Long-term deposit or
investment
certificate
Statutory Minimum
Wage
Minimum
earner
Wage
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
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B.
a.
Revocable trust
b. Irrevocable trust
Corporations
1. Domestic Corporations (Section 27, NIRC)
2. Foreign Corporations (Section 28, NIRC)
a.
Resident foreign corporations
b. Nonresident foreign corporations
3. Partnerships
a.
Taxable partnership (Section 73(D), NIRC)
b. Exempt partnership
i.
General Professional Partnership (Section 26,
NIRC)
ii.
Joint venture or consortium undertaking
construction activity or engaged in
petroleum operations with operating
contract with the government
(Note that the definitions of all the kinds of taxpayers mentioned above
can be found in Section 22, NIRC. This is why it is important to memorize
them!)
INDIVIDUAL TAXPAYERS
Q: Who are the individual taxpayers?
A: They are:
1. Citizens
a.
Resident Citizens
b. Nonresident Citizens
2. Aliens
a.
Resident Aliens
b. Nonresident Aliens
i.
Engaged in trade or business in the Philippines
ii.
Not engaged in trade or business in the Philippines
RESIDENT CITIZENS
Q: Who are citizens of the Philippines?
A: The following are considered Citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of the
adoption of the Constitution
2. Those whose fathers or mothers are citizens of the Philippines
3. Those born before January 17, 1973 of Filipino mothers, who
elect Philippine Citizenship upon reaching the age of majority;
and
4. Those who are naturalized in accordance with law
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
NON-RESIDENT CITIZENS
Q: Who is a non-resident citizen?
A: The term means a citizen of the Philippines:
1. who establishes to the satisfaction of the Commissioner the
fact of his physical presence abroad with intention to reside
therein
2. who leaves the Philippines during the taxable year to reside
abroad either as an immigrant or for employment on a
permanent basis
3. 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. who has been previously considered a non-resident citizen
and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines with
respect to his income derived from sources abroad until date
of his arrival in the Philippines
Illustration
Q: A and B are Filipino citizens and employees of P&G
Philippines, a subsidiary of Procter & Gamble, a foreign
corporation based in the US. They were assigned for certain
periods to other subsidiaries of P&G outside the Philippines,
during which they were paid US Dollars as compensation. Is the
income taxable?
A: YES. They are not exempted from this. Petitioners forget that they are
citizens of the Philippines, and their income, within or without, and in
these cases wholly without, are subject to income tax. Note that
although they worked abroad. It was for a certain period which did not
qualify them to be a non-resident as provided in the definition of a nonresident citizen.
RESIDENT ALIENS
Q: Who is a resident alien?
A: A Resident alien is an individual whose residence is within the
Philippines and who is not a citizen thereof. He is taxed in the same
manner as a resident citizen, except that only his income from Philippine
sources is taxable. His income from foreign sources is not liable to
Philippine income tax.
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Illustration
Q: A, a non-resident citizen, was engaged by a domestic
corporation as a commission agent. It was agreed that A will
receive 10% sales commission on all sales actually concluded
and collected through As efforts. A argues that the income is
not taxable as A does not reside in the Philippines and that the
place of payment of the income is outside the Philippines. Is As
contention correct?
A: NO. Pursuant to Section 25(A) (Nonresident Alien Engaged in Trade or
Business Within the Philippines) and Section 25(B) (Nonresident Alien
Individual Not Engaged in Trade or Business Within the Philippines), nonresident aliens, whether or not engaged in trade or business, are subject
to Philippine income taxation on their income received from all sources
within the Philippines. Thus, the keyword in determining the taxability of
non-resident aliens is the incomes "source." In construing the meaning
of "source" in Section 25 of the NIRC, resort must be had on the origin of
the provision.
The source of an income is the property, activity or service that
produced the income. With respect of rendition of labor or personal
service, as in the instant case, it is the place where the labor or service
is performed that determines the source of income. There is therefore
no merit in petitioners interpretation which equates source of income in
labor or personal service with the residence of the payor or the place of
payment of the income (see CIR VS. BAIER-NICKEL).
CORPORATIONS
Q: What is a corporation under the NIRC?
A: A corporation includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts, associations, or
insurance companies but does not include:
a.
b.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
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COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
FORMING
Over P500,000
A
2.
5%
P500 + 10% of excess over
P10,000
P2,500 + 15% of the excess
over P30,000
P8,500 + 20% of the excess
over P70,000
P22,500 + 25% of the excess
over P140,000
P50,000 + 30% of the excess
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over P250,000
P125,000 + 32% of the
excess over P500,000
3.
Q: What are the incomes subject to final tax rates and what are
the tax rates applicable to each?
A: As a general rule, income, gain or profit derived by an individual
during the taxable year shall be subject to the graduated income tax
rates. As exceptions, certain income subject to tax are not subject to the
graduated tax rates stated previously and are subject to final tax rates.
They are:
1.
2.
3.
4.
NOTE: See Income Tax Table for the final tax rates.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
A: NO. Since these passive incomes are already subject to different rates
and taxed finally at source, they are no longer included in the
computation of gross income, which determines taxable income (see
Commissioner vs. PAL)
Q: Seller (S) and Buyer (B) entered into a sale. B gave S a check
so that S could pay the CGT. The TCT was still registered in the
name of S. B demanded that it be registered in his name before
B pays the balance of the purchase price. S tore up the Deed of
Sale. B stopped payment of the check for the CGT. B filed a
complaint for specific performance against S. Whether the
withholding of the payment of the balance on the part of B was
justified by the circumstances?
A: NO. Customarily, in the absence of a contrary agreement, the
submission by an individual seller to the buyer of the following papers
would complete a sale of real estate:
(1) owner's duplicate copy of the Torrens title;
(2) signed deed of absolute sale;
(3) tax declaration; and
(4) latest realty tax receipt.
The buyer can retain the amount for the capital gains tax and pay it upon
authority of the seller, or the seller can pay the tax, depending on the
agreement of the parties.
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new Torrens
title in his name. Nevertheless, as far as the government is concerned,
the capital gains tax remains a liability of the seller since it is a tax on the
seller's gain from the sale of the real estate. Payment of the capital gains
tax, however, is not a pre-requisite to the transfer of ownership to the
buyer. The transfer of ownership takes effect upon the signing and
notarization of the deed of absolute sale. The recording of the sale with
the proper Registry of Deeds and the transfer of the certificate of title in
the name of the buyer are necessary only to bind third parties to the
transfer of ownership. As between the seller and the buyer, the transfer
of ownership takes effect upon the execution of a public instrument
conveying the real estate. Registration of the sale with the Registry of
Deeds, or the issuance of a new certificate of title, does not confer
ownership on the buyer. Such registration or issuance of a new
certificate of title is not one of the modes of acquiring ownership.
In this case, S was ready, able and willing to submit to B all the papers
that customarily would complete the sale, and to pay as well the capital
gains tax. On the other hand, Bs condition that a new TCT be first issued
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in his name before he pays the balance is not customary in a sale of real
estate. (see Chua vs. Court of Appeals)
Q: A bought a land from ABC corporation with the condition that no lot
may be resold by the buyer unless a residential house has been
constructed thereon and upon full payment. A entered into a contract to
sell with B but B did not construct a house thereon. B decided to sell it to
C but was confronted with the conditions imposed by ABC. Hence, B
made it appear that the property was sold directly by A to C. Did this
agreement violate the law as it deprived the government of capital gains
tax?
A: NO. The issue is wholly irrelevant. Capital gains taxes, after all, are
only imposed on gains presumed to have been realized from sales,
exchanges or dispositions of property. Having declared that the contract
to sell in this case was aborted by petitioners failure to comply with the
twin suspensive conditions of full payment and construction of a
residence, the obligation to pay taxes never arose (see TORCUATOR VS.
BERNABE)
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
1.
2.
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This option is available to firms whose ratio of cost of sales to gross sales
or receipts from all sources does not exceed 55%. Upon election of the
gross income tax option, it shall be irrevocable for 3 consecutive taxable
years during which the corporation is qualified.
MCIT
Q: What is the minimum corporate income tax?
A: As provided in Section 27(E) and Section 28(A)(2), a minimum
corporate income tax of 2% of gross income shall be imposed on a
domestic corporation and resident foreign corporation beginning on the
fourth taxable year immediately following the year in which such
corporation commenced its business operations when the MCIT is
greater than the RCIT for the taxable year.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
7.
A: As provided in RR No. 9-98, the MCIT will be imposed whenever (1)
such operation has zero or negative taxable income or (2) whenever the
amount of MCIT is greater than the normal income tax due from such
operation.
8.
9.
2.
3.
NOTE: See Income Tax Table for the final tax rates.
1.
2.
3.
4.
5.
4.
1.
2.
3.
4.
NOTE: See Income Tax Table for the final tax rates.
5.
2.
3.
4.
5.
6.
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6.
NOTE: See Income Tax Table for the final tax rates.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
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A: The 2.5% tax on gross Philippine billings is an income tax levied on the
presumed gain of the airline and shipping companies. It ensures that
they are taxed on the income they derive from Philippine sources. For an
international air carrier, Gross Philippine Billings refers to the amount
of gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document. For International
Shipping, Gross Philippine Billings means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or
freight documents.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
EXEMPT CORPORATIONS
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COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
amended.
(see CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATION, INC. V. ROMULO)
A: YES. The 20% FWT on a bank's interest income forms part of the
taxable gross receipts for the purpose of computing the 5% GRT. As
commonly understood, the term gross receipts means the entire
receipts without any deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net receipts. Any
deduction from gross receipts is inconsistent with a law that mandates
a tax on gross receipts, unless the law itself makes an exception. (see
CIR VS. CITYTRUST INVESTMENT PHILS, INC, COMMISSIONER VS. SOLIDBANK CORP
and CHINA BANKING CORP. VS. COURT OF APPEALS )
Subject matter
Scope
Taxing Authority
Taxing period
Kind/Character
FWT
passive
income
generated in the form
of interest on deposits
and yield on deposit
substitutes
national
National government
deducted
and
withheld as soon as
the income is earned,
and is paid after
every calendar quarter
in which it is earned
The FWT is an income
tax
subject
to
withholding
GRT
the privilege of engaging
in the business of banking
national
National government
GRT is neither deducted
nor withheld, but is paid
only
after
every taxable quarter in
which it is earned
The GRT is a percentage
tax not subject to
withholding.
CWT
a) Taxes withheld on certain
income payments are intended
to equal or at least approximate
the tax due of the payee on said
income.
b) Payee of income is required to
report the income and/or pay
the difference between the tax
withheld and the tax due on the
income. The payee also has the
right to ask for a refund if the tax
withheld is more than the tax
due.
c) The income recipient is still
required to file an income tax
return, as prescribed in Sec. 51
and Sec. 52 of the NIRC, as
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COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
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7.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
Illustrations
Q: A, government employee, retired from service. Upon
retirement, he received, among other benefits, terminal leave
pay which the CIR withheld a portion allegedly representing
income tax thereon. Is terminal leave pay considered part of
gross income of the recipient?
A: NO. Terminal leave pay received by a government official or employee
is not subject to withholding (income) tax. The rationale behind the
employees entitlement to an exemption from withholding tax on his
terminal leave is that commutation of leave credits, more commonly
known as terminal leave, is applied for by an officer or employee who
retires, resigns or is separated from the service through no fault of his
own. In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government
recognizes that for most public servants, retirement pay is always less
than generous if not meager and scrimpy. Terminal leave payments are
given not only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not being part of
the gross salary or income of a government official or employee but a
retirement benefit, terminal leave pay is not subject to income tax (see
COMMISSIONER OF INTERNAL REVENUE VS. CA & EFREN CASTANEDA)
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documentary stamp tax and the interest derived from such bonds. (see
E. RODRIGUEZ INC. VS. COLLECTOR)
Housing;
Expense account;
Vehicle of any kind;
Household personnel, such as maid, driver and others;
Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted;
6. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents;
and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows.
COURSE: TAXATION I
PROFESSOR: GRUBA
1st Semester AY 2010-2011
2.
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