Professional Documents
Culture Documents
STATE POLICY
THE B.I.R.
REQUISITES OF A VALID TAX REGULATION (LIMITATION OF THE POWER TO INTERPRET TAX LAWS)
1) It must be consistent with the provision of the Tax Code
2) Reasonable
3) Useful and necessary
4) It must be published in the official gazette or in the newspapers of general circulation.
SOURCES OF REVENUES
The following taxes, fees and charges are deemed to be national internal revenue taxes: (Code:IEVPEDO or EVE-
PIDO)
1) Income tax;
2) Estate and donor’s taxes;
3) Value-added tax;
4) Other percentage taxes;
5) Excise taxes;
6) Documentary stamp taxes; and
7) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue
INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION
Q. What are the features of our present income taxation in the light of R.A 8424?
A. We adopted the so-called “COMPREHENSIVE TAX SITUS” – Comprehensive in the sense that we practically apply all
possible rules of tax situs.
Domestic corporation – we can tax its income derived from sources within and without.
On Non-resident citizen, they can only be taxed on their income derived from the sources within – tax situs is the
place /source of income.
Taxpayer Sources
1. RC I/O (Sec. 23 [A])
2. NRC I (Sec. 23 [B])
3. OCW I (Sec. 23 [C])
4. ALIEN I (Sec. 23 [D])
4.1 NRA-ETB
4.2 NRA-NETB
4.3 ALIEN ERA-MNC
4.4 ALIEN OBUs
4.5 ALIEN PSCS
5. Domestic Corp. I (Sec. 23 [E])
6. Foreign Corp-RFC/NRFC I (Sec. 23 [F])
1) A resident citizen is taxable on all income derived from sources within and without the Philippines.
2) A non-resident citizen is taxable only on income derived from sources within the Philippines.
3) An overseas contract worker is taxable only on income from sources within the Philippines; 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 the international trade shall be treated as an overseas contract
worker.
4) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines.
5) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
6] 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.
Schedular System of Taxation – is a system employed where the income tax treatment varies and made to depend on
the kind or category of the taxpayer’s taxable income (Tan vs. Del Rosario).
Manifestations: (that under the individual taxation we adopted the schedular system of taxation)
[C, B, P, Dp, I, R, R, D, A, Pw, P, P]
This is the manifestation that as far as individual income taxation, the income is categorized.
2] The tax rates are progressive in character. This is clear under Sec. 24 (a). You will notice there that the tax base
increases as the tax rate increases.
3] Modified gross income as regards compensation earner. Modified because in determining the taxable compensation
income, the only allowable deductions are personal and additional exemption. You cannot deduct the allowable
deductions under Sec. 34 from gross compensation income.
But as regards those individual taxpayers that derived business, trade or professional income, we adopted the net
income system. This is so because under Sec. 34, allowable deductions may be claimed by individual taxpayers who
derived business trade and professional income.
5] Under certain cases, we employ the “pay as you earn” system. This applies to “income subject to withholding tax”.
* Individual taxpayers are allowed to adopt only the calendar year period while corporate taxpayers have the option either
the calendar year period of the fiscal year period.
Calendar year period – this covers the period of 12-month commencing from Jan. 1 and ending Dec. 31.
Fiscal year period – this is also a 12-month period commencing on any month or ending on any month other than Dec.
31.
GROSS INCOME TAXATION – is a system of taxation, where the income is taxed at gross. The taxpayers under this
system are not entitled to any deductions.
In general, we adopted the net income taxation because under Sec. 34, taxpayers are allowed to claim the so-called
ALLOWABLE DEDUCTIONS.
GROSS INCOME – means all income derived whatever source, including but not limited to the following: [STP-IRR-DAP-PS]
1. Compensation for services;
2. Gross income from trade or business or the exercise of a profession;
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3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
NET INCOME TAXATION – income is taxed at net. The taxpayer may claim allowable deductions.
INCOME – all wealth which flows in the taxpayer other than a mere return of capital. It includes all income specifically
described as gain or profit including gain derived from the sale or disposition of capital asset.
JUDICIAL DEFINITION: It also means gains derived from (1) capital, (2) labor, or (3) both labor and capital including gains
derived from the sale or exchange of capital asset.
Example of income derived from both capital and labor >>> Income of an independent contractor. The independent
contractor provides work force, provides capital and derives income from such capital.
* In determining the profit from the sale of property, you should always be guided by this formula:
TAXABLE INCOME – (the old term is Net Income) – means all pertinent items of gross income specified in the Tax Code
less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code
or other special laws. (Sec. 31 of the TRA of 1997).
Shoter Version: All pertinent items of gross income less allowable deductions.
Q. What are the advantages/disadvantages of gross income taxation and net income taxation?
Advantages of gross income taxation:
1. It simplifies our income taxation. This is so because since no deductions are allowed, it is very easy to tax the income.
You don’t have to find out whether deductions or expenses are legitimate or not because they are not deductible.
2. This will generate more revenue to the government.
3. It minimizes cost.
SOURCES/SITUS OF INCOME
An income may be an income from within or without the Philippines. The other term for income within is Local
Income while income without is sometimes called Global Income or Universal Income.
In determining whether an income is an income within or without, you have to consider the classification or kind of income.
* COMPENSATION INCOME
Tax Situs: Place where services are rendered. So, if services are rendered within the Phils., that is a Local Income. If it is a
payment for services rendered outside the Phils., that is an income without.
RC – income from within and without are taxable.
NRC – only compensation income from sources within is taxable.
RA – same as NRC.
Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within the phils. This is considered as income derived purely
within.
(2) Goods manufactured outside the Phils. and sold outside – income derived purely without.
(3) Goods manufactured within the Phils. and sold outside the Phils. – income partly within and partly without.
(4) Goods manufactured outside the Phils. and sold within the Phils. – income partly within and partly without.
In the case of sale of transport documents, tax situs is the place where the transport document is sold
(BOAC Case).
If it involves real property, the tax situs is the place or location of the real property. So, if the property sold
is situated within the Phils., the income derived from such sale is considered as income within.
* INTEREST INCOME
Tax Situs: RESIDENCE of the DEBTOR
Case: There was this contract regarding the construction of ocean-going vessels. There was this issuance of letter of credit
and the payment of downpayment. All the elements of the transactions took place in Japan. The payment was made in
Japan. The letter of credit was executed in Japan. The delivery was made in Japan. The debtor is a domestic corp.
Is the interest income on this loan evidenced by the letter of credit taxable to the Japanese corp.?
HELD: NO, because the tax situs of interest income is not the activity but the residence of the debtor. The place where the
contract of loan is executed is immaterial.
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* RENT INCOME
Tax Situs: the PLACE of property subject of the contract of lease.
* ROYALTIES
Tax Situs: the PLACE where the intangible property is USED
* DIVIDEND
a. Received from domestic corp. – this is an income purely within.
b. Received from foreign corp. – consider the income of the foreign corp. in the Phils. during the last preceding three (3)
taxable years;
rules:
(1) The income is purely within if the income derived from the Phil. sources is more than 85%
(2) It is purely without if the proportion of its Phil. income to the total income is less than 60%
(3) There should be an allocation if it is more than 50% but not exceeding 85%
* ANNUITIES
Tax Situs: the PLACE where the contract was made
If these prizes are not given on account of services, the tax situs is the place where the same was given.
Tax situs of winnings is the place where the same was given.
*PENSION
Tax Situs: PLACE where this may be given on account of services rendered
GROSS INCOME
GROSS INCOME – means all income derived from whatever source, including but not limited to the following:
*ALLOWABLE DEDUCTIONS
1. Optional Standard Deduction – of ten percent (10%) of the Gross Income available only to individual other than a non-
resident alien provided he signifies in his return his intention to elect OSD, otherwise, itemized deductions apply. Election
made shall be irrevocable for the taxable year (Sec. 34 L)
2. Itemized Deductions – under Sec. 34 A-K, and M
3. Personal and Additional Deductions/Exemptions under Sec. 35
* NON-DEDUCTIBLE ITEMS
(Sec. 36 A)
1. Personal living or family expenses;
2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or
estate;
3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has
been made; or
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially
interested in any trade or business carried on by the taxpayer , individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.
TAXABLE INDIVIDUALS
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RESIDENT CITIZENS (RC)
Income from within and without – taxable
When an NRC returns to the Phils., his income may also be taxed as Resident Citizen or Non-Resident
Citizen.
Illustration: A, an OCW, arrived in the Phils. sometime in June 1998. He will be taxed as a Non-Resident Citizen (NRC) as
regards the income that he earned which covers the period of January to June. Now as regards the income that he will
derive upon his arrival from June to December, he will be taxed as Resident Citizen (RC).
But if he is not in the Phils. from the period of January to December 1998, he will be taxed as NRC for the said period.
If he will return to the Phils. and stay there from January t December 1999, he will be taxed as RC for the same period.
* NRC must prove to the satisfaction of the BIR Commissioner the fact of physical presence abroad with the intention to
reside therein.
* When an NRC decides to return to the Phils., he must prove his intention to reside here permanently.
* Now NRC includes OVERSEAS CONTACT WORKERS (OCW), IMMIGRANTS, and those who STAY OUTSIDE the Phils. by
virtue of an employment.
* If an alien stays in the Phils. for a period of more than one (1) year, he is considered as RA.
* He is one whose stay in the Phis.is not more than 180 days
> We can no longer tax his income from sources without. We can only tax his income from sources within.
ENTITLEMENT OF DEDUCTIONS
Gross Income
Less: Allowable deductions
=======================
Taxable Income
NRA-TB – entitled to deductions because the tax base is gross income. Their income is subject to 25% tax rate.
SNRA-NETB – subject to 15% tax rate on their income in the from of:
S - Salaries
H - Honoraria
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O - Other
W - Wages
E - Emoluments
R - Remuneration
Subject to tax if :
1. the insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to
pay interest in the same, the interest is the one subject to tax;
Example:
A transferred to B his life insurance policy. The value of the policy is P1 M. B paid a consideration amounting to
P300,000. B continued paying the premiums after the transfer such that the premiums amounted to P200,000. Upon the
death of the insured, the P1 M may be received by the heirs.
Problem:
A obtained a life insurance policy for B. B is the president of A’s corporation. Corp. has an insurable interest in
the life of its officers, so premiums may be paid by the employer A. Upon the death of B, his designated beneficiaries will
receive the proceeds.
a. Is the amount representing the proceeds of the life insurance policy taxable?
b. What about the premium paid by the employer A? Does this amount form part of the gross compensation income?
c. Does the amount representing the proceeds of life insurance policy from part of the estate of the decedent?
Answers:
The Tax Code however, makes no distinction. Regardless of the designated beneficiary is the employer or the heirs,
or the family of the insured proceeds of life insurance policy should always be excluded.
b. Premiums of life insurance policy paid by the employer may form part of compensation income; hence, taxable if
the beneficiary designated are the heirs or the family or the employees.
It is not taxable compensation income if the designated beneficiary is the employer because that is just a mere return of
capital.
c. Proceeds of life insurance policy may be excluded from the gross estate of the decedent under the following cases:
1. if the beneficiary designated is a 3rd person and the designation is irrevocable;
2. it is a proceed of a group insurance policy.
Problem:
A took out an endowment policy amounting to P1 M. He paid premiums amounting to P800,000. Upon the
maturity of the policy, A received that P1M.
How much is the taxable amount?
Answer:
That is P1,000,000. – value of endowment policy
LESS: P 800,000. – representing amount of premium
===============================================
P 200,000. – taxable amount
But as regards damages representing loss of anticipated income, this is the one that is taxable.
If damages are in the nature of moral, exemplary, nominal, temperate, actual and liquidated damages, as a rule, these may
not be subject to tax.
Example:
If a person suffered injury as a result of a vehicular accident, and an action is filed in court, the Court awards the
following:
Moral - P100,000.
Exemplary - P100,000.
Actual - P 60,000. (hospitalization expenses)
P 20,000. (repair of car)
P 60,000. (loss of income)
*** All damages awarded are tax-exempt except damages of representing loss of income.
Question: Are damages awarded by the Court on account of breach of contract taxable?
Answer: Qualify your answer. With regards to damages awarded on account of loss of earnings of the contracting party, it
is taxable.
- VETERAN’S BENEFIT
* This may be given by the US Administration.
* The recipient must be a resident veteran.
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- BENEFITS GIVEN BY FOREIGN AGENCIES OR INSTITUTIONS WHETHER PUBLIC OR PRIVATE
The same is true with resident alien because we can only tax his income from sources within.
The inclusion of NRC and RA in the enumeration are mere surplusage.
REQUISITES:
1. The private employee or official must be at least 50 years of age at the time of his requirement;
2. He must have rendered at least 10 years of service to the employer at the time of the retirement;
3. There must be reasonable private benefit plan – established by the employer;
4. The reasonable private benefit plan must be approved by the BIR.
5. Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock bonus plan, or
gratuity;
6. The employer must give contribution and no amount shall inure to the benefit of a particular employee or official. This
must be established for the common benefit of the employees or officials;
7. This can be availed of ONCE.
* The subsequent retirement benefits received from another private employer is no longer exempt but subject to tax.
* If the second employer is a government entity or institution, in which case, that is exempt because the giver here is not a
private firm. The limitation applies only when the giver of the subsequent retirement benefits is another private employer.
Example of no.3
a. Retrenchment of employees;
b. Installation of labor saving devises;
c. Dissolution of law firm.
*“MISCELLANEOUS ITEMS”
a. Prizes and Awards in Awards Competitions
REQUISITES:
1. Competition and tournament must be sanctioned or approved by the National Sports Association;
2. The competition and tournament must also be approved by the Philippine Olympic Committee, whether
local or international; whether held in the Phils or outside.(if not accredited- 20% tax)
Example: P1 M reward given to Mr. Advincula for his exemplary honesty. This may be excluded from his gross income
because it is given in recognition of civic achievement. He was (1) selected without any action on his part to enter a
contest or proceeding; and (2) he is not required to render substantial future services as a condition to receiving the
award.
c. Income derived from public utility or from the exercise of essential government function by the
Government or political subdivisions of the Phils.
* Government of the Republic of the Phils or Government of the Phils vs. National Government
Government of the Republic of the Phils. is synonymous with Government of the Phils.
Government of the Phils. or government of the Phils. – refers to the government corporate entity through which the
functions of the government are exercised throughout the Phils., including save as the contrary appears from the context,
the various arms through which political authority is made effective in the Phils., whether pertaining to the autonomous
regions, cities, provinces, municipalities, barangays or other forms of local government. These autonomous regions,
provincial, city, municipal or barangay subdivisions are the political subdivisions.
National government - refers to the entire machinery of the central government. This includes the three (3) major
departments of the government: the Executive, the Legislative and the Judiciary (Mactan Cebu International Airport Authority vs.
Marcos, Sept. 11, 1996).
It is clear that government-owned and controlled corporations is within the contemplation of the term
“national government”.
We need this distinctions because the particular item of exclusion emphasizes the fact that political
subdivisions of the State form part of the Government of the Phils.
You must have noticed that there is no provision regarding government-owned and controlled
corporations. Also, there are no provisions on agencies or instrumentalities of the government. The item
or income here is exempt if the recipient is either the Government of the Republic of the Phils. or the
provincial subdivisions of the State such as provinces, cities, etc.
* Income derived by a government-owned and controlled corporation, agency or instrumentality of the government may be
subject to tax.
*Government-owned and controlled corporations are now subject to corporate income tax, except:
a. SSS
b. GSIS
c. Phil. Health Insurance Corp.
d. PCSO
e. PAGCOR
Situation: A municipality derived income from the operation of public market, electric power plant and other public
utilities.
Rule: That income is tax exempt.
d. Income derived from investment in the Phils. (1) by foreign government or (2) financing institutions,
owned, controlled or financed by foreign government, regional or (3) international financing institutions
established by foreign government
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REQUISITES:
1. Recipient must be:
a. foreign government;
b. financing institution owned, financed or controlled by foreign government;
c. regional financing institution, international financing institution established by foreign government;
2. It must be an income derived from investment in the Phils.
--- If a foreign government or financing institution made a deposit in a bank, Phil. currency deposit – the income here is the
nature of interest income.
--- If a foreign government made an investment in a domestic corporation. It may be considered a stockholder. And a
stockhlder is entitled to dividend. Hence, the dividend income received from domestic corporation is tax exempt.
** If the recipient of such dividend is a resident foreign corporation that is also tax exempt. It is only subject to tax if
the recipient of such dividend is a non-resident foreign corporation.
Case: EXIMBANK, which is a consortium of Japanese banks, extended a loan in the amount of S20M to Mitsubishi Metal
Corp., a Japanese corporation. The same amount was extended by Mitsubishi as a loan to Atlas Corp., a domestic
corporation.
The contract entered into between Mitsubishi Metal Corp. is denominated as “contract of loan and sale”. It is a
contract of loan because Mitsubishi would lend Atlas S20M. It is a contract of sale because under the contract Atlas
bound itself to sell the concentrates (this is a mining corp.) that may be produced by the concentrator
machine/equipment purchased through the use of the S20M for a period of 15 years.
ISSUE: Whether or not such interest on loan is subject to Phil. income tax
HELD: There was no evidence to the effect that Mitsubishi is an agent of EXIMBANK. It is a mere allegation that has not
been proven.
In a contract of loan, once the loan is consummated, the amount becomes exclusive property of the borrower. It is
no longer considered the money of EXIMBANK. Hence, the interest of such loan should be subject to tax.
The lender is not a tax exempt entity. The creditor here is Mitsubishi and it is not a tax exempt entity. Such being
the case, tax exemption must be strictly construed against the taxpayer and liberally in favor of the government. When
you claim exemption, you should prove it clear and categorical terms.
* The problem may be modified by the examiner. The examiner may clearly state the Mitsubishi is an agent of EXIMBANK.
The answer is, the interest on loan is tax exempt. Mitsubishi then is considered as an extension of EXIMBANK. It is as if
the lender is EXIMBANK.
* Total exclusion should not exceed P30,000 subject to increase by the Secretary of Finance upon the recommendation of
the BIR Commissioner.
g. Sale, exchange, retirement of bonds, debentures and other certificates of indebtedness with a maturity
of more than FIVE (5) YEARS
- If maturity is less than 5 years, taxable.
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Rule: Interest on bonds
1. issued by C.B - exempt
2. if issued by corp.- not exempt
Illustration:
If you are a creditor, you may sell these bonds, debentures or certificates of indebtedness to another. Hindi mo na
mahintay ang maturity kasi long term. If there is a gain on the sale of the same, it would be a tax exempt provided that the
bonds, etc., have a maturity or term of more than 5 years.
Retirement of bonds, debenture, etc. --- Nagbayad na ‘yung debtor. There may be gain derived from the same,
such as interest. This time, since the gain is in the nature of interest, it is subject to tax. But, the gain derived from the
sale, exchange or retirement with a term of more than 5 years, is tax exempt. This is because exemptions are strictly
construed against the taxpayer and liberally in favor of the government. Interests on bonds, debentures, etc. are taxable,
the provision is clear. It only covers sale/exchange/retirement of bonds, debentures and other certificate of indebtedness
with a maturity of five years. Strict interpretation of tax exemption.
* Retirement benefits may be subject to tax, if it does not comply with the provision of Sec. 32 (b) par. 6 sub.par a.
* Pensions may be subject to tax, if it is given not in accordance with the conditions laid down under that exclusion
provision.
N.B. : The name or designation of income is immaterial. The basis of the income is immaterial and the manner by which it
is paid, is also not important. As long as it is given under an employer-employee relationship, then that is compensation
income.
CANCELLATION OF INDEBTEDNESS – Considered as compensation income is the indebtedness had been cancelled in
consideration of the services rendered.
*** Share of the employee from the PROFIT SHARING PLAN of the employer- Compensation income received in consideration
of services rendered.
TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER – Compensation income if paid under an employer-
employee relationship in consideration of services rendered.
PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF THE EMPLOYEE – Compensation income if the
beneficiary designated is the family of heirs of the employee.
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*** The basis of the income is immaterial. Even if it is paid in piece work, fixed rate or percentage basis as long as it is paid
under an employer-employee relationship.
*** Not all payments for services rendered are considered compensation income. Only those paid under the employer-
employee relationship.
*** Fringe benefit is considered as compensation income. This is governed by Sec. 33, TRA 1997. This is
compensation income in the sense that this is received under an employer-employee relatioship.
b. It may amount to taxable gift or donation if the indebtedness has been cancelled without any
consideration at all. This is not subject to income tax but may amount to taxable gift or donation.
c. It may amount to capital transaction if the creditor is a corporation and the debtor is a
stockholder. If creditor corporation condoned the indebtedness of the debtor stockholder, that may
amount to taxable capital transaction. This is the form of direct dividend. Now, property dividend
is subject to tax rates of 6%, 8% and 10%. Dividend received from domestic corporation is now
subject to tax.
5. Tax liability of the Employee paid by the employer in consideration of services rendered – amount
of tax liability
6. Premiums paid by the employer on the life insurance policy of the employee.
a. It is a taxable compensation income if the beneficiary designated are the heirs of the employee or
his family.
b. It is not a taxable compensation income if the beneficiary designated is the employer because it is
just a mere return of capital.
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If the designation of the employer as beneficiary is indirect (e.g.: It is the creditor of the employer that is
designated as beneficiary), that is still not taxable compensation income.
Premiums will be taxed under Sec. 33 par.b no.10. it is stated there: “Life or health insurance and other non-
life insurance premiums or similar amounts in excess of what the law allows.
* If the payment was received by the employee when he was no longer connected with his employer , it is still
considered compensation income. What is important here is that it must be received during the existence of
the employer-employee relationship. Employees may be dismissed by the employer, and they may file
complaint for illegal dismissal against the employer. Judgment was rendered by the arbiter in favor of the
employee. All the wages supposed to be paid (e.g. backwages) can be taxed as compensation income. What
about attorney’s fees? That is exempt.
FRINGE BENEFIT – Any good, service, or other benefit furnished or granted in cash or in kind by an employer to an
individual employee (except rank and file employee) such as but not limited to the following:
1. Housing;
2. Expense account;
3 Vehicle of any kind;
4. Household personnel such as maid, driver, others;
5. Interest on loan at less than market rate to the extent of the difference between the
market rate and the 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.(if contribution-exempt)
* Housing allowance may be exempt from tax if the living quarters are:
a. Provided with the premises of the employer.
b. It must be made as a condition of employment.
If said requisites are not present, housing allowance may be taxed as fringe benefits.
* Meal allowance may be exempt from tax if it is provided within the premises of the employer.
* Privilege or purchase discount are tax exempt if it does not exceed ½ of the basic monthly salary of the employee. If it is more
than ½, the excess may be as fringe bene
* Medical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if the following
requisites are present:
1. It must be of relatively small value (reasonable amount). (RSV)
2. It must be given for the following purposes: (CHEG)
a. To promote Contentment
b. To promote Health
c. To promote Efficiency
d. To promote Goodwill
3. Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefits plans.
4. Fringe benefits which are authorized or exempted from tax under special laws.
5. Those given for the convenience of the employer, including those which are required by the
nature of the trade, business or profession of the employer (Employer’s Convenience Rule)
De minimis benefits (of relatively small value) – limited to facilities or privileges furnished or offered by employer to his
employees merely as a means of promoting health, goodwill, contentment, or efficiency of employees, such as:
a. Monetized unused vacation leave credits not exceeding ten (10) days during the year;
b. Medical cash allowance to dependents of employees not exceeding P750 per semester of
P125 per month;
c. Rice subsidy of P350 per month;
d. Uniforms;
e. Medical benefits
f. Laundry allowance of P150 per month;
g. Employee achievement awards, for length of service of safety achievement in the form of
tangible personal property other than cash gift certificate, with an annual monetary value
not exceeding ½ month of the basic salary of employee receiving the award under an
established written plan which does not discriminate in favor of highly paid employees;
h. Christmas and major anniversary celebrations for employees and their guests;
i. Company picnics and sports tournaments in the Philippines and are participated in
exclusively by employees; and
j. Flowers, fruits, books or similar items given to employees under special circumstances
on account of illness, marriage, birth of a baby, etc.
The following are the possible fringe benefits, which may be exempt under the Employer’s Convenience Rule: (H V H M T)
a. Housing benefit
b. Vehicle
c. Household personnel
d. Membership in a social or athletic club or similar organization
e. Traveling expense benefit
* Housing benefit – in determining whether the same is exempt under the employer’s convenience rule, you have to
consider the peculiar nature of the special needs of the employer.
Requisites for exemption:
1. It must be made as a condition for employment;
2. It must be provided within the premises of the employer
* If the housing or living quarters are provided outside the premises of the employer, even if that is for the convenience of the
employer, this is only exempt up to 50% of the amount. So, 50% taxable, 50% exempt.
* Vehicle – Exempt but depends upon the peculiar nature of the special needs of the business of the employer.
Example: LBC or DHL business
* Household personnel such as maid, driver and others – Exempt, but depends upon the peculiar nature of the
business of the employer.
* Traveling expense benefit – Peculiar nature requirement. Example: Employer sent his employees abroad to attend a
particular seminar to improve their technical know-how.
BAR QUESTION: A is a driver of Congressman Magtanggol and he received a monthly salary of P5,000 and living quarter
allowance of P2,500.
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a. Whether the P2,500 living quarter allowance is excluded or subject to tax?
b. Assuming the employer is an obstetrician would your answer be the same?
ANSWER:
a. That should be subject to tax.
b. It should be excluded. Reason: Convenience of the employer’s rule.
BUSINESS – Any activity that entails time, attention, effort for purposes of livelihood or profit.
As regards construction business, the taxpayer here must be an independent contractor. He may report
his income under the percentage of completion method or under the so-called completed contract
method.
How about those who claim that they are professionals but are not registered in the P. R. C., can they still
be tax as such?
Yes, irrespective of whether they are licensed or not because of the rule that gross income derived from
whatever source.
3. PASSIVE INCOME
1. Royalties
2. Prizes
3. Winnings
6. Share a partner in the net income after tax of a taxable partnership, joint account,
joint venture or concessions.
*** Do not include passive income in the income of your business or profession, or in your compensation income . This is so because when
you receive this income, the tax had already been imposed and deducted.
Question: How do you treat that share of a professional partner from the net income of a general-professional
partnership?
Answer: This should be taxed at the rate provided under Sec.24, that is, 5% to 34%.
But as regards the share of a partner in the net income after tax of a taxable or business partnership, that is one which is subject
to final tax.
PRIZES – may be exempt if given in sports competition and if given primary in recognition of scientific, artistic, literary,
educational, religious, charitable, or civic achievement.
INTEREST
Rules
1. If it is an interest on foreign currency deposit system, it is exempt.
If the recipient is non-resident individual (NRC, NRA-ETB, NRA-NETB).
2. If the recipient is a resident individual (RC, RA), that is subject to 7.5 %.
3. Interest income is also exempt if it is an interest income on a long- term deposit or long-
term investment (this must have a term of not less than 5 years).
Listed and traded through local stock exchange – this is not subject to income tax but subject to percentage tax
of ½ of 1% of the gross selling price.
Not listed and traded through local stock exchange – this is the one subject to income tax.
If the share of stock is not listed and traded through local stock exchange , the basis of the tax is net capital
gain. So, you should first deduct the capital loss.
If listed and traded through local exchange, there is no deduction allowed because the basis of the tax rate
of ½ of 1% of the gross selling price.
- The tax on capital gain derived from the sale of real property is 6% of the gross selling price or zonal value which ever is
higher.
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* CAPITAL ASSET – property held by the taxpayer whether or not connected in his trade or business except: (code: SOUR)
1. Stock in trade or other property of any kind which would be included in the inventory
of the taxpayer if on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the Ordinary course of trade or
business.
3. Property Used in trade or business subject to depreciation
4. Real property used in trade or business.
► The definition of capital asset says “real property held by the taxpayer whether or not
connected with his trade or business except real property used in trade or business.” So, in
order to be a capital asset, the real property must be one not used in trade or business.
► That is why, the sale of residential house and lot is subject to 6% of capital gains because it
is a real property not used in trade or business.
► But, sale of real property by a real estate dealer is not a capital transaction because the property
involved is one primarily held for sale to customer in the ordinary course of trade or
business. That is not a capital asset but an ordinary asset.
► This covers not only “sale” of property; it also covers conditional sale of real property
including the so-called pacto de retro sale under Art. 1602 of the NCC, or disposition of
property located in the Phils.
► If the buyer is the government or any of its political sub-divisions or political agencies,
including government owned and controlled corporations, the seller have the option to avail
the 6% or under Sec. 24(A), wherein the basis under said section is taxable income so
deductions may be allowed. The cost of the property may be deducted but when you avail of
the 6%, the basis is gross selling price or zonal value whichever is higher.
OTHER INCOME
c. Advance rentals
c.1. If in the nature of the prepaid rentals without restriction on the use of the
amount, it is taxable.
c.2. If it is in the nature of security deposit, it is taxable rent income if there is a
violation of the term of the lease.
c.3. If it is in the nature of a loan to the lessor, it is not taxable.
3. DIVIDEND INCOME – amount declared, set aside and distributed by the Board of Directors to stockholders, on demand
or a fixed period.
STOCK DIVIDEND – as a rule not taxable. This is so because there is no income here. It merely represents the transfer of
surplus account to the capital account.
Example:
Outstanding stock Stock dividend Taxable
1. Preferred Common NT
2. Common Preferred NT
3. Preferred Preferred NT
4. Common Common NT
5. Preferred/Common Preferred T
6. Preferred/Common Common T
Disguised dividend – treasury stock dividend declared out of the outstanding capital stock, the purpose of which is to avoid
the effect of taxation (Commissioner vs. Manning).
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It is one which is made to appear as stock dividend when the truth of the matter is that it is a dividend which is illegally
declared, such a case, since the purpose is to evade taxation, it is taxable.
Exceptions:
1. IT earning CI – EE, ER REL
2. NRA-NTB
3. Aliens employed
A. RMC
B. OBU
C. PSC
4. NRFC
As regards corporate taxpayers, the following are entitled to claim allowable deductions:
1. DC, which includes private educational institutions, non-profit hospital, government-owned and controlled corps.
2. RFC
* In the case of individual taxpayers, they may avail of the optional standard deduction of 10% of gross income
* Corporate taxpayers are not allowed to claim 10% optional standard deductions.
* All individual taxpayers except the NRA individual may claim this optional standard deductions.
1. EXPENSES
Example: if an action is filed in court, it is but normal to hire the services of a lawyer. So, the taxpayer has to pay
attorney’s fees. It is an ordinary expense under this circumstances.
NECESSARY- It is one which is useful and appropriate in the conduct of the taxpayer’s trade or profession.
EXTRA-ORDINARY EXPENSES – Not Deductible. These are amortized or in lieu of the same, you may claim that so-called
allowance for depreciation. And if it involves intangible asset, the word used is AMORTIZATION.
There is no hard and fast rule. An expense may be ordinary insofar as a particular
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taxpayer is concerned and it may not be an ordinary as regards another taxpayer.
Example:
If you have business here in Manila and you also have business in Tawi-tawi, what is the expense that you may
incur in Tawi-tawi which you may not possibly incur in Manila?
In Tawi-tawi, you may need people to guard your business. But here in Manila, you may need not because of our
new President-elect.
COMMON REQUISITES FOR DEDUCTIBILITY of these ordinary & necessary expenses: [D.I.R.]
a. Must be paid or incurred DURING the taxable year.
If you incur expenses in 1997, you cannot carry this over to 1998. expenses incurred
during a particular year must be claimed as deductions during this year when the same
were incurred.
“PAID” – to signify the fact that the taxpayer uses the CASH
BASIS. Under the CASH BASIS, an expense is recognized
when it is PAID.
b. Must be paid or incurred in connection with the trade, business or profession of the
taxpayer.
Case 1: Partnership was sold to a corp. and it was agreed that the partners will serve the corp. and make it appear that
they render services. So, compensation for services was ostensibly made by the corp.
Held: These is a mere ostensible salary or payment for services not actually rendered because that amount
really forms part of the properties purchased by the corp.
Case 2: Corporate officers succeeded in selling the property of the corp. So, profit was derived therefrom. Bonuses were
given to these corporate officers.
Held: The rule is settled. Bonuses must be given in good faith. There must be services rendered because
bonuses are additional compensation. In this particular case, there was really no services rendered because that sale was
made through a broker. The corp. made it appear that it was through the efforts of these corporate officers that brought
about a successful sale of property.
Bonuses must be given in good faith and in determining whether bonuses will form part of the compensation for
services rendered, you have to consider the (1) nature of the business, (2) the financial capacity of the taxpayer and (3) the
extent of the services rendered.
Case: Sugar Dev’t. Corp paid P125,000.00 to Algue Corp. representing promotional expenses.
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Held: This is reasonable under the circumstances because the particular budget subject for promotion involves million
of pesos. And under that circumstances, the P125,000.00 is reasonable as this may coincide with the efforts exerted
considering that the taxpayer has no venture in that experimental project to establish that vegetables of investment
company and this involves millions of pesos.
3. RENT EXPENSE
a. The taxpayer must NOT be the owner of the property or he has no equitable title over the
property.
b. This is subject to withholding tax. You cannot claim that the taxes supposed to be
withheld have not been paid or remitted to BIR.
4. TRAVELLING EXPENSES
- This must be incurred or paid while “away from home”.
- “Home” does not refer to your residence but to the station assignment or post.
Example: From home office to branch office, the traveling expenses incurred are deductible. And this includes not
only the transporatiotion expenses but also meal allowance and hotel accommodations.
5. ENTERTAINMENT EXPENSES
- This must not be contrary to law, morals, good customs, public policy or public order.
- Extra-ordinary repairs cannot be claimed as deduction and in lieu of that, the taxpayer may not be allowed to claim
depreciation.
- If the cost of the repair increases the life of an asset for a period of more than one (1) year, that amount is considered
extra-ordinary repair. Otherwise, it is considered ordinary repair.
- RULE ON SUBSTANTIATION simply requires that ordinary and necessary expenses must be proven. The proofs required
include:
[N.O.R.E.D.]
a. Official receipts
b. Adequate Recourse
c. Amount of Expense
d. Date and place where such expense is paid or incurred
e. Nature of expense
2. INTEREST
Question 1:
What about that interest on unclaimed salaries of the employees, is that interest deductions?
Answer/Held:
NO, because there is no obligation or indebtedness. It is the fault of the employees in case they failed to claim
their salaries.
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Question 2:
What about that interest charged to the capital of the taxpayer, is that deductible?
Answer:
Interest on cost-keeping purposes is not deductible. This does not arise under an interest-bearing obligation.
THEORETICAL INTEREST – an interest which is computed or calculated, not paid or incurred, for the purposes of
determining the opportunity cost of investing in a business. This does not arise from legally demandable interest-bearing
obligation. This is not a deductible interest.
Question 3:
What about interest on preferred stock, is this deductible?
Answer:
As a rule, interest on preferred stock is not deductible, because there is no obligation to speak of. It is in effect an interest
on dividend. The reason why it is not deductible is that the payment is dependent upon the profits of the corp. It will only
be paid if the corp. earn profits. And would not be paid of the corp. incurs losses.
BUT if it is not dependent upon corporate profits or earnings, that is deductible. If is payable on a particular on a particular
date or maturity without regard to the corporate profits, it is deductible.
Q. What about an interest on a loan paid in advance, is this deductible? Let us say that the taxpayer obtained a loan from
a bank and it is payable within 5 years. The loan obtained is P50,000.00. Now, it was deducted in advance, can that be
claimed as deductions?
A. NO. You can only deduct the same when the installment is due a particular year.
Related taxpayers:
a. members of the same family which includes:
a.1. spouses
a.2. brothers and sisters
a.3. descendants and ascendants
b. between two (2) corporations owned or controlled by one individual. He must have a controlling interest over
these two corporations. OR, if one corp. is considered as personal holding company of another corp.
c. between a corp. and an individual; that individual owns or controls more than 50% of the outstanding capital
stock of the such corp.
d. parties to a trust;
d.1. grant or fiduciary
d.2. fiduciary of one trust and fiduciary of another trust but there is only one
grantor
d.3. beneficiary and fiduciary
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*Your knowledge of related taxpayers is also important in determining whether losses
are deductible or not. If losses were incurred or paid in connections with the transactions
between these related taxpayers, these are not deductible.
So, if the interest income on bank deposit amounted to P100,000.00. And the total interest expense incurred or paid by
the taxpayer is P200,000.00. If this is incurred in 1998, 41% of P100,000.00 is P41,000.00. That P200,000.00 interest
expense incurred or paid, should be reduced to P41% of that P100,000.00 to arrive at P159,000.00 which is the interest
that may be claimed as deduction.
P200,000.00
- 41,000.00
-----------------------
P159,000.00
The rule has been established that TAXES are NOT ORDINARY OBLIGATIONS. But the Supreme Court in two (2)
cases relaxed the distinction between taxes and ordinary obligations.
1. The interest on deficiency donor’s tax is deductible. The SC explained that taxes here are
considered obligations or indebtedness. And it ruled that we have to relax the distinction
between tax and ordinary obligation in this respect.
2. Interest on deficiency income tax can also be claimed as deductible interest expense because taxes here
are considered ordinary obligations.
3. TAXES
2. This must be taxes paid or incurred in connection with the trade, business or profession of the taxpayer.
*** Taxes that may be claimed as deductions may be national or local taxes.
2. INCOME TAX – This includes foreign income tax. In this regard, the so-called foreign
income tax may be claimed as a deduction from gross income or this may be claimed as tax
credit against Phil. income tax. In the event that he claims that as tax credit, he can no
longer claim the same as deduction.
3. Taxes which are NOT CONNECTED WITH THE TRADE, BUSINESS OR PROFESSION OF THE
TAXPAYER
4. ESTATE TAX, DONOR’S TAX (see also discussion on tax benefit rule)
► The foreign income tax paid to the foreign country is not always the amount that may be
claimed as tax credit because under the limitation provided under the Tax Code, it must
not be more than the ratio of foreign income to the total income multiplied by the Phil.
income tax.
► Taxes are deductible only by the person upon whom the tax is imposed
Except:
1. Share holder
2. corporate bonds - tax free Covenant clause
4. LOSSES
Problem:
Supposed the taxpayer had a building constructed on a parcel of land. He owned this
as well as the building erected thereon. He had business and his business was
conducted within the premises. Then, he decided to remove such building as to
construct a new building for new business.
Is the cost of demolition to give way to a new building deductible loss? YES.
Suppose A purchased that parcel of land of B and included in that sale was that of the
building. A demolish this building in order to construct a new building. Is the cost of
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demolition deductible insofar as A is concerned?
NO. That can only be claimed as deductions if the one demolishing the same is the
taxpayer. The moment that is sold to another claim that as deductible loss. The
treatment here is, the cost of demolition should be capitalized in the selling price.
Exception:A may claim that as deductible loss if this was demolished by value of a
court order because the gov’t considered this as a fire hazard, loss of useful value of
property or capital asset.
Completed Transaction – this means that the loss must be fixed by identifiable event.
Example: If it is a loss sustained from sale, the event that may identify or complete the
transaction is the consummation of the contract of sale.
The fire destroyed your property in 1995, no payment has been made because the insurer
and the insured were still under negotiation. It was only in 1997 that they agreed on the
amount. The amount agrees upon is P100,000. The taxpayer may claim that casualty losses
only in 1997 when payment was actually made. This is the event that will complete the
transaction.
5. BAD DEBTS
In proving that the debtor is insolvent of bankrupt, mere allegation of the same is not enough.
You should prove that the debtor is indeed bankrupt or insolvent. So, you may secure a
copy of that decision by the SEC or other agency as the case may be, declaring the debtor as
bankrupt or insolvent. And then there must be a demand letter sent to him. In case the
debtor was robbed, there must be a police report to that effect.
The debtor may be a NRFC, so you may argue that he may not be sued here. According to
the Supreme Court, as a rule that is not an excuse. You should still send a demand letter to
that NRFC. In other words, there must be diligent efforts to collect the indebtedness and to
prove that in the near future such obligation is no longer collectible.
*** If the recovery of bad debts, resulted in a tax benefit to the taxpayer, that is taxable. If it did
not result in any tax benefit to the taxpayer, that is not taxable. (TAX BENEFIT RULE)
N.B. Read the case of Phil. Refining Company vs. Commissioner, a 1989 case.
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6. DEPRECIATION
The idea here is not to recover profit, but to recover the cost of property invested in business. When the properties
are used in trade, business or profession of the taxpayer, the law considers or recognizes the gradual loss or sale of
property.
DEPRECIATION refers to the gradual diminution of the useful value of the property
used in trade, business or profession of the taxpayer, arising from wear and tear or
natural obsolence.
4. The method in computing the allowance for depreciation must be in accordance with the
method prescribed by the Sec. of Finance upon the recommendation of the BIR
Commissioner.
This prescribed method includes:
a. Declining balance method
b. Sum of the years digit method
c. Straight line method
d. Any other method as may be prescribed by the Sec. of Finance upon the
recommendation of the BIR Commissioner
► This involves natural resources such as oil, gas wells and mines. These are non-replaceable
assets.
► The requisites for deductibility are the same as that of depreciation except that the properties
involved are natural resources
► The idea here is not for profit but to recover the cost of investment through this allowance for
depletion.
* These are fully deductible if the contributions are given to the following: [F. A. G.]
1. Government or its political subdivisions, agencies or instrumentalities, for the purpose of
undertaking priority projects of the government;
These priority projects include: [S.H.E.]
a. Sports development, science and invention
b. Health and human settlement
c. Educational and economic development
3. Accredited NGO
N.G.O. means non-profit domestic corporation which are formed and organized for any of the
following purposes: [C.H.E.R.S.]
a. Research
b. Health
c. Education
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d. Charitable, cultural, character building
e. Sports development and social welfare
The amount of charitable contribution that may be claimed as deduction may be:
►IF the recipient of such contribution is any of the following DC formed or organized for: [R.E.C.S.]
1. Religious purpose and rehabilitation of veterans
2. Educational purpose like educational corporations which are not qualified as NGO
3. Charitable, cultural purpose
4. Scientific, sports development an social welfare purpose
Example:
If an individual taxpayer has a gross income of P100,000 and the allowable deduction, except charitable
contribution, is P50,000. The Charitable contribution is P5,000.
This P50,000 is the basis of that “10% or 5% of net income before charitable contribution”. So, 10% of the
P50,000 is P5,000. Hence, the actual contribution of P5,000 may be fully claimed as deduction.
But let us say, the amount of charitable contribution is P10,000. So, he can only deduct P5,000 as charitable
contribution, and not the actual amount of P10,000 because the law imposes a limitation that the amount that may be
claimed as deduction must not be more than 10% of net income before charitable contribution.
2. Paid or incurred for the purpose of ascertaining the existence, location, extent or
quality of any natural resources like deposits of ore or other minerals including oil or gas.
REQUISITES OF DEDUCTIBILITY:
1. There must be a pension plan established by the employer;
2. The pension must be reasonable or sound;
3. Contribution must be given by the employer to that pension plan;
4. This must be for the benefit of the employees;
5. The plan must not be subject to the control of the employer.
Contribution to pension trust may refer to the current year or past years.
CURRENT YEAR- this is considered as ordinary & necessary expenses
Employer may also make a contribution to the pension plan in regard to the services rendered for the past 10 years.
PERSONAL EXEMPTIONS
PERSONAL EXEMPTIONS
b. The family must have an income of not more than P250,000.00 a year.
Premiums on life insurance policy is also included here because it is included under the health insurance policy.
PERSONAL EXEMPTION
This is an arbitrary amount in the nature of deductions from gross compensation income.
If the taxpayer has no compensation income, this can be claimed as deduction from gross income from business,
trade or profession.
Personal exemption is given to approximate the needs of the taxpayer. It is a substitute for the disallowance of
family, personal and living expenses.
2. Additional exemption
- This only applies to qualified dependent child and children Php8,000.00 for every
such as legitimate and illegitimate children. qualified dependent child but
not to exceed 4
► Personal Exemption – only individual taxpayers, including estate and trust, are entitled.
1. Parents - One or both parents. Must be living with the taxpayer and dependent
upon the taxpayer for chief support.
- Parents must be natural parents.
► Dependent is considered “living with the taxpayer” even if the former or the latter are not
physically together if that is brought about by force of circumstances. Example if one of the
parents will have to undergo by-pass operation in the U.S.
►Chief Support – means more than 50% of the needs of the dependents are provided by the
taxpayer.
Problem: If the child or the brother/sister got married and then he has found to be physically or
mentally incapacitated, so bumalik si tatay at dependent sa tatay for chief support, can he qualify
as dependent?
Answer: No, physical or mental defect applies only to age requirement. Once the child or
brother/sister got married, he is automatically disqualified as dependent.
► CHANGE OF STATUS:
1. Death of spouse during the taxable year;
2. Death of dependent during the taxable year;
3. Death of the taxpayer during the taxable year; estate of the taxpayer may claim the basic
personal exemption;
4. Additional dependent during the taxable year;
5. Taxpayer got married during the taxable year;
6. Gainful employment of the dependent during the taxable year
7. Dependent became more than 21 years old during the taxable year.
► Even if the above-mentioned change of status happened during the taxable year, the taxpayer may still claim the basic
personal exemption because it is as if the change of status happened at the end of the taxable year.
► There is a provision in the Tax Code, which is not so clear. For purposes of head of the family, in the case of natural
children or child, there is that word “acknowledged or recognized”.
► For purposes of the definition of head of the family, it is clear that to qualify as dependent, the natural child or legitimate
child must be acknowledged or recognized by the taxpayer.
► But in the definition of the dependent, dependent means legitimate, illegitimate or legally adopted child or children.
There is no word acknowledged or recognized.
► Was this deliberately omitted by our Congressmen? Does this imply that since they have so may illegitimate children,
they may not be required to acknowledge or recognize them and they can claim this illegitimate child as their dependent?
This is not clear. If we will try to interpret the law literally, there is no need of any recognition on the part of the taxpayer.
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► Is this really the intention of law?
► No. The intention of the law has always been to recognize this illegitimate child and this is one way of compelling the
taxpayers to recognize this child.
► The President of the Republic of the Phils. cannot issue an executive order to increase the basic personal exemption because the
provision under the Old Tax Code authorizing the President to increase the personal and additional exemption upon the
recommendation of the Sec. of Finance has been removed or deleted by RA 8424.
► Now, you can only increase the amount of personal and additional exemption by legislative enactment.
NON-DEDUCTIBLE ITEMS
2. Those which are considered capital expenses. Capital expenditures may be one that may
increase the value of an asset.
3. Extra-ordinary repair expended to restore the property, or making good its exhaustion.
Extra-ordinary repair is one that may prolong the life of an asset for more than one (1) year.
You cannot claim the same as deduction. Instead, you may claim it as allowance for
depreciation.
4. Premiums paid on the life insurance policy of the officer or employee of the employer, when
the employer is directly or indirectly designated as beneficiary.
RULES:
► Premiums paid on the insurance policy of the officer or employee may be claimed as deduction by the employer, If the
beneficiary is the family or the heirs of the officer or the employee.
► It is not deductible on the part of the employer, If the beneficiary designated directly or indirectly is the employer. If the
beneficiary designated is the creditor or the heirs of the employer, the designation is indirect; hence, that premium is not
deductible.
► On the other hand, on the part of the employees, these premiums may be a taxable compensation income. It is taxable
compensation income on the part of the employee if the beneficiary designated is the family of heirs of the employee.
► Therefore, if these premiums are deductible on the part of the employer, that is taxable on the part of the employee. If
these premiums are not deductible on the part of the employer, that is not taxable on the part of the employee.
N.B. Personal, living and family expenses are deductible for the simple reason that these are not connected with the
business, trade or profession of the taxpayer. In lieu of the same, the taxpayer may claim the so-called “Personal and
Additional Exemption” in the case of individual taxpayers.
CORPORATE TAXPAYER – corporation, includes partnership no matter how created or organized, joint
account companies, insurance companies and other associations.
It excludes: [Gpp, JV-c, JC- PGE-G]
1. General professional partnership;
2. Joint venture for the purpose of undertaking construction projects;
3. Joint consortium for the purpose of engaging in petroleum, geothermal and
other energy operations pursuant to a consortium agreement with the
government
3. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy
operation pursuant to a consortium agreement under service contract with the
government – there must be a consortium agreement with the government
► So, it may derive income from such business as long as it is merely incidental, the
organization is still exempt. What is important here is that in the articles of incorporation
of this tax-exempt organization, it must be clearly provided that these organizations are
not formed or organized for profit.
5. Mutual savings bank not having s capital stock represented by shares and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit.
- must form and organize for mutual purposes
- Mutual savings bank and cooperative bank must not be organized for
profit. So, it must not issue shares of stock.
6. A beneficiary society, order or association, operating for the exclusive benefits of the
members such as a fraternal organization operating under the lodge system, or a payment
of life, sickness, accident, or other benefits exclusively to the members of such society,
order or association, or non-stock corp. or their dependents.
Lodge system – one which must operate under a parent and subsidiary associations
7. Cemetery company owned and operated exclusively for the benefit of its members.
- This must be non-profit cemetery.
Example: Libingan ng mga Bayani
9. Business league, chamber of commerce, or board of trade, not organized for profit, and no
part of the net income of which inures to the benefit of any private stockholder or
individual.
- Makati stock exchange and Manila stock exchange are not covered by the
exception. They are subject to tax.
Requisites:
a. This must be established for common business interest.
b. No part of the income shall inure to the benefit of a particular individual.
Example: A clearing house corp. established by member not for profit and such corp. is
tax exempt.
10. Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare.
Example: Piso for Pasig Foundation is not for profit. This is a civic organization.
Homeowners Association is subject to tax because that is not organized for profit.
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11. Farmers associations or like associations, organized and operated as a sales agent, for the
purpose of marketing the products of its members, and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them.
“Quantity of poduce” means proportionate. This must not be for profit.
12 Farmers cooperative or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, or like organization of a purely local character, the income of which
consists solely of assessments, dues and fees collected from members for the sole
purpose of meeting its expenses.
► Take note that the last paragraph of Sec. 30; it provides, “Not withstanding the
provisions in the preceding paragraphs.” This means that even though they are exempt,
as regards certain income, they may be subject to tax.
** The implication is that if these tax exempt corps mentioned under nos. 4 to 14, made an
investment, the income derived from such investment may be subject to tax.
► So, if they have real property and lease it to another, the rent income is subject to tax.
►If they have deposit in a bank, the interest income on the same is subject to tax.
So, the exemption does not cover this income derived form such investment. Thus, it
must be an income derived from their activities which may be the purpose for which they
are organized.
N.B.: The rule now is settled, Gov’t owned and controlled corps. Are subject to corporate income tax except those
mentioned under Sec. 27 par C.
PARTNERSHIP - This is an association of two or more persons and they may contribute
money, property, or industry to a common fund with the intention of
dividing the profits among themselves.
► Partnership is considered a corporate taxpayer. Take note that this excludes general
professional partnership. Only partnership formed or organized for profit is excluded.
Case: The heirs of the decent inherited the property. There was distribution of share. But such shares are held under
single management. In fact the income of such property after distribution was managed by one of the co-heirs.
Held: The fact that they agreed that the shares shall be held by the co-heir under the single management for
profit, this according to the SC convert the co-ownership in to a taxable unregistered partnership. (Una vs. Commissioner –
Una doctrine)
Case: The heirs inherited the properties from their deceased mother. The property was under the administration
of an administrator. This administrator of the property was authorized to sell these properties for profit, or leased
properties for profit and engaged in an income producing activities.
Held: When these heirs inherited the property from their deceased mother, co-ownership exists. At the particular stage,
it is exempt from tax when the heirs decided to invest such property in an income producing activity that co-ownership is
converted in to a taxable unregistered ownership (Seña vs. Commissioner – Seña doctrine)
Case: There was two sisters who form a common fund for the purpose of engaging in a series of transaction for profit.
**Test that will determine whether co-ownership is taxable unregistered partnership – Find out whether the heirs
made a substantial improvements on the inherited property. The heirs made a substantial improvement on the inherited
property, the implication is that they will engage in a business for profit, (Evangelista vs. Commissioner – Evangelista
doctrine). If that happens, that co-ownership will be taxed as unregistered.
Case: Obelio Sr. entered into a contract with Ortigas limited company. Under that contract, Ortigas limited company will
distribute parcels of land to the Children of Obelio Sr. for their residential houses. After the subdivision of such parcel of
land to the children of Obelio Sr., these children decided to sell this parcel of land to Wide City Corp. Was there a taxable
partnership formed by the children of Obelio Sr.?
Held: There was no partnership formed because there was no intention to divide the profits among themselves. This was
a mere isolated transaction. Isolated transaction will negate any intention to divide the profits among themselves. Thus,
there was no taxable partnership formed.
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Case: Pascual and Dragon purchased 3 parcels of land from Bernardino and 2 parcels of land form Mr. Roque.
Thereafter, the three parcels of land which were purchased from Bernardino, were sold to Marimer Corp. with a profit of
P165,222.70 while the parcel of land purchased from Mr. Roque were sold at a profit of P60,000 to Reyes.
Held: there was no partnership organized because this is just a mere sharing of gross return. And as you have learned in
partnership, the law says, “the partners share in the net profits of a taxable partnership”. So, mere sharing of gross return
does not of itself establish a partnership.
Joint account – When two persons form or create a common fund and such persons engaged in a business for profit, this
may result in a taxable unregistered association or partnership .
Registration is not a requisite for purposes of taxation. What is important here is they must engage in a business or
activity for profit.
Joint stock companies – This is the midway between corporation and partnership. This has what you call “hybrid
personality”. It is somewhat a partnership because it is an association, and persons or members of the same contribute
fund, money to a common fund. And this us managed by Board of Directors; this means: it has that feature of a
corporation. And these persons may transfer their share without the consent of others.
Emergency operation – These may be formed by two corporations. This two corporations have separate personalities. If
they form that emergency operation (it is really a special activity) to engage in a joint venture, corporation 1 may be taxed
only from the income derived from such business. The income derived from such emergency operation should also be
included in that taxable income subject to corporate income tax. In the same way, that corporation 2, has a separate and
distinct personality; if it a part of that emergency operation, the income derived from such special activity should also be
included in the income of that corporation 2, subject to corporate income tax, even if it is not registered with the SEC
(Securities and Exchange Commission).
►But if two corporations are managed by one manager, and this 2 corporations leased services, managed by one person
and it has 2 separate accounts, it is not an association formed which is subject to tax.
Resident Foreign Corporation (RFC) – foreign corporation engaged in trade or business within the Phils.
Non-Resident Foreign Corporation (NRFC) – foreign corp. not engaged in trade or business within the Phil.
There is no fix criterion as to what constitute engaged in trade or business . Each case shall be judged in the light of
peculiar environmental circumstances. But “engaged in business” implies continuity of commercial transaction or
dealings – continuity of business; there must be continuity of intention to conduct continuous business.
Case: BOAC is an offline international airline. Offline because it does not render any services and no landing rights in
the Phils.
BOAC claimed that it is not subject to tax with respect to the sale of transport documents or airline tickets in the
Phils because it is an offline international airline. It does not render any service and it has no lending rights.
Held: The contention of BOAC is not tenable. The income derived from the sale of that transport documents in
the Phil. is subject to tax. The subject of income may be property, activity or service that produce the same. For an income
to be considered as an income derived from sources within the income must be derived from activity conducted or
undertaken in the Phil.
It is true that BOAC had no property in the Phil. from which its income may be derived. It is true that BOAC did
not render any service in the Phil. from which its income may be derived. But there was that activity that was undertaken
in the Phil. from which income was derived and that refers to the sale of transport document. According to the Supreme
Court, the sale was made in the Phil. and the payment was made in the Phil. This particular activity enjoys protection of
the Phil. government. So, it should share the burden of tax. BOAC was considered doing business in the Phil. under this
particular situation because there were series of transactions made in the Phil. and BOAC was appointed a permanent
agent in the Phil. This implies that the Phil. and the BOAC had no intention to establish continuous business here in the
Phil. Continuity of conduct is the peculiar circumstance referred to in the case.
**If these were mere isolated transaction (let’s modify the facts of the case) and BOAC has no permanent agent in the
Phil., such airline is not considered doing business in the Philippines. Remember, international carrier is taxed on gross
Philippine billings.
Case: If a corporation made an investment in another corp., the Supreme Court held that, it will not make the corp. as
doing business in the Phil. because it has no intention to establish continuous business.
Case: Marubeni corp. is a foreign corp. it invested in a domestic corp. This foreign corp. has a branch office in the Phil.
it made a direct investment in that domestic corp. So, it received dividend from that domestic corp.
Held: That will not make such foreign corp. a resident foreign corp. because of that absence of intention to establish
continues business. It would be different if it was coursed through the branch office of such foreign corp.
GENERAL RULES
Question: Can Congress pass a law imposing tax on the income of a RFC derived from sources without?
Answer: No, because this will violate the principle of territoriality in taxation. We cannot extend protection to that
particular subject of taxation. The fundamental basis of the power to tax is the capacity of the taxing authority to extend
protection to the subject of taxation.
► The 34%, 33% 32% tax rates mentioned may not be applied except if it is lower than the 2% of gross income of such
corporate taxpayer. This is called “minimum corporate income tax rate of 2% of gross income”.
Example: If a corporate taxpayer has a gross income of P20M. 2% of that is P400,000. In this case, the tax to be
paid must not be lower than P400,000. If the net income is P20M and the deduction is P19M, we only have P1M . You
multiply that by 34% because now is 1998, so that will give you P340,000. This is the corporate income tax applying that
tax rate (34%) is lower than 2% which is P400,000 (this is the amount supposed to be paid). Applying the minimum
corporate income tax rate of 2% if the gross income, the amount to be paid as tax is P400,000.
► So, the “minimum corporate income tax rate of 2% of gross income” means that the corporate taxpayer must pay
corporate income tax not lower than 2% of its gross income. If the actual corporate income tax is lower than the 2% tax that
is supposed to be paid, it is the 2% minimum. But, if the actual corporate income tax applying that 34% is P600,000, this
is the tax that should be paid.
SPECIAL RULES
Notes:
► Tax rate is 10% if its income derived from unrelated trade, business or activity does NOT exceed 50% of its gross
total income.
► But its income is subject to 34% tax rate if its income from unrelated, trade or business or activity exceeds 50% of its
gross income.
Example: Its income derived from unrelated trade, business or activity amounted to P20M. And income derived from
related trade, business or activity is P10M. So, the total income is P30M. If the allowable expenses amounted to P10M, the
taxable income now would be P20M.
But, if the income from related TBA is P20M and its income derived from unrelated TBA is P10M. So:
The income from unrelated TBA is not more than 50% of its gross income. Thus, this P20M is subject to P10% preferential
tax rate.
► This must be an income derived from an activity which is substantially related to the performance of educational
functions. This may include income from bookstore, canteen or dormitory.
***For purposes of non-profit hospital, this must be income derived from activities which are substantially related in
achieving the primary purpose of that hospital, which is to render services to the public.
The explanation as to when the 10% or 34% tax rate applies is the same as that of private educational institution.
*** For purposes of International Air Carrier, GROSS PHIL. BILLINGS refer 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.
* Gross Phil. billings for purposes of International Shipping means gross revenue whether from passenger, cargo or
mail originating from the Phils. up to final destination, regardless of the place of sale or payments of the passage or freight
documents.
*** Lessor of CD and video is not included in no. 1. So, it is subject to 34% tax rate.
*** Lessor of personal properties is not included in no. 2, so, it is also subject to 34% tax rate.
OTHER RULES
DC RFC NRFC
1. This should be included in its gross income subject to
INTEREST INCOME ON 20% 20% 34% tax. BUT in the case of interest on loans which have
BANK DEPOSIT been made on or after August 1, 1986, the same is
subject to 20% final tax.
2. INTEREST INCOME ON
BANK DEPOSIT UNDER THE
EXPANDED FOREIGN
CURRENCY DEPOSIT
SYSTEM 7.5% 7.5% Tax-exempt
3. ROYALTIES DERIVED
WITHIN THE PHILIPPINES 30%
20% 20%
CASE:
Marubeni Corp. is a foreign corp. it has a branch here. It made a direct investment in a Domestic Corp., so it received cash
dividends. Do we have to include that in that profit to be remitted and subject to 15%?
HELD:
NO. This is not effectively connected with the conduct of trade or business of their branch office. That should be excluded from
the profits that should be remitted to that Marubeni Corp. The condition is, it must be an income or profit effectively connected with the
conduct of trade or business of such corp. through its branch office.
Note: These incomes must be derived from the Phils. So, this is an interest income on bank deposit maintained OUTSIDE the Phils.,
that is not subject to final tax but should be included in the gross income of the DC.
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Situation: NRFC received dividend, cash or property dividend from DC. That dividend
received from DC is subject to 15% FINAL WITHOLDING TAX.
This 15% may be imposed on this dividend received from DC if the foreign govt. of the NRFC allows a tax credit at least 19% (1998), 18% (1999), 17%
(2000). It should be credited from the taxes deemed paid by this NRFC in the Phils.
So, if the foreign govt. does not allow a tax credit of at least 19%, the tax there is not 15% but 34%. Thus, the tax spared or
saved is 19% because normally the tax is 34%. So, 34% less 15% equals 19%, that is the tax saved and that represents the tax
credit allowed by the foreign govt.
Question: Must the foreign govt. actually grant a tax credit or is it enough that the
foreign govt. allow such tax credit?
Answer: There is no statutory provision that requires actual grant. Neither is there a
Revenue Regulation requiring actual grant. It is clear that the provision of the law says “allows”. So, it is enough to prove that
the foreign corp. allows a tax credit. It is not incumbent upon the foreign corp. to prove the amount actually granted.
Question: Does a withholding agent or a subsidiary corp. have the personality to file a
written claim or refund?
Answer: The withholding agent has the personality to file a written claim for refund. A
withholding agent is technically a taxpayer because it is required to deduct and withhold the tax, and it has the obligation to
remit the same to the govt. So, withholding agent is liable for tax. It has therefore the personality to file a written claim for
refund.
Withholding agent is not only an agent of the taxpayer but also an agent of the
govt. Since it is an agent of the taxpayer, it is ipso facto authorized to file a written claim for refund.
CAPITAL ASSET means property held by the taxpayer whether or not connected with his trade or business EXCEPT: [S.O.U.R.]
1. Stock in trade or property of the taxpayer which may be properly included in the inventory at the end of the taxable year
[inventoriable property may include finished goods, raw materials or work in process.]
2. Property primarily held for sale to customers in the Ordinary course of trade or business.
3. Property Used in trade or business subject to depreciation, which means that this must be depreciable property.
N.B. It is therefore safe to say that all properties not used in trade or business are considered as Capital Assets.
Example: A property was inherited by the heirs from their deceased parents. That property is considered as Capital Asset.
In the event that this property (a parcel of land) is improved by the heirs substantially and sell the same at a profit, said capital
property is now converted into an Ordinary Asset. The profit derived from the sale of the land which has been substantially improved by
the heirs is considered as ordinary gain.
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Ordinary Asset can be converted into a Capital Asset.
Example: If the taxpayer is engaged in real estate business, if he dies, these properties will be transmitted to his heirs. And if the
heirs will discontinue the business of that deceased parent, that properties which are ordinarily held for sale to customers maybe
converted into a Capital Asset.
It would be different if the one selling a parcel of land is a real estate dealer and he developed the same before this
property may be sold to another, this time such taxpayer is engaged in a business, in which case that sale of parcel of
land is considered as Ordinary Transaction.
2. Sometimes the period or the extent of activities may play an important role.
Case:
If a taxpayer is engaged in a lumber business and he has been unsuccessful for a period of 11 years and he tried again on the
12th year. The sale that may be made on the 12 th year may not be considered ordinary transaction.
But those sales which, would have been made during that 11 th year when such taxpayer is engaged in trade or business may be
considered Ordinary Asset.
If the taxpayer stop his business and then undertake another business, that may be considered Capital Transaction.
Example: B offers his land to A. B gives A 5 days within which to make up his mind to buy this parcel of land for P500,000.00
Now, A pays B P5,000 for giving him time to think whether he will buy that during the 5 day-period. If A fails to buy the same,
he incurred a loss and we call this Capital Loss. So, the loss of A is considered a gain on the part of B because the latter
received that P5,000.
So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer. As regards the seller, the
gain is considered Capital Gain.
Example: After liquidation, the stockholders are entitled to the return of their capital if there is still something left. If A made an
investment and the value of his shares of stock is P100,000, after liquidation of the corporate affairs, the corp. gives A P150,000. The
gain of A which is P50,000 is considered Capital Gain.
Example: A partnership is earning a profit, let us say, P100,000. Then it increases to P1M. So, the partnership may readjust the
partner’s interest in the partnership. Or it may also arise if for example, A made an additional contribution. So, A’s interest will
change.
Now, in making readjustment of interest, the partner may derive gain therefrom, and that is a Capital Gain.
4. Retirement of bonds.
Example: The debtor issues bonds and after one (1) year, he pays the same. The value of the bonds is P100,000. Upon
redemption, the debtor pays P120,000 to the creditor. So the P20,000 is a gain to the creditor and we consider that as a Capital Gain.
But if there is a loss, that is considered as Capital Loss.
It is described as 61 days sale because here, 30 days before the sale, the seller acquired substantially identical securities OR 30
days before the sale, he acquired identical or substantially the same stocks or securities. “Sale” may also include exchange or option to
sell securities.
Example: Today is June 10, Now, here is A who is not a dealer in securities or stocks. He sells securities.
You must find out whether 30 days before June 10, he purchased identical securities. Or he ma not have purchased identical securities
within that 30 day period before the sale but it is possible that within 30 days after June 10, he may have purchased identical securities.
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The tax treatment here is, the gain is taxable, meaning that is classified as Capital Gain because the seller is not engaged in such
business. If there is a loss, since it is classified as Capital Transaction, that is considered Capital Loss.
The capital gain is taxable but the capital loss incurred from wash sale transaction is not deductible.
6. Short Sale – a transaction wherein a person sells securities which he does not own yet. The seller here is a mere speculator; he is
selling securities which he is yet to acquire, provided however, that he has ownership of the securities at the time of delivery – he has the
right to transfer ownership. (See further discussion on p. 77).
So, the gain or loss may be 100% or 50% taxable deductible as the case may be.
Example: You sell your personal car. This is a capital transaction because the asset involved is a capital asset. Let us say that
you sell the car at P200,000 and the cost of the car is P150,000. Here, there is a gain of P50,000.
You must find out the date of the acquisition and the date of sale or disposition. If the date of acquisition and the date of sale
fall within the 12 month period, this P50,000 is P100,000 taxable. But if exceeding 12 months, this P50,000 is only tacable up to
P25,000. This is an example of tax avoidance.
N.B. This rule is applicable only to individual taxpayers. This is so because the capital gain derived from capital transaction of
corporate taxpayers is always 100% recognized respective of the number of months during which the property was in the possession of
the corp. taxpayer.
N.B. This rule applies to individual and corporate taxpayers EXCEPT on banks and trust companies because they are considered
as dealer in securities as far as issuance of bond and evidence of indebtedness are concerned.
Example: In 1996, the capital gain is P100,000 and capital loss is P200,000. SO, there is a capital loss of P100,000 which may
be carried over in 1997 by the taxpayer. This net capital loss in 1996 may be claimed as deductions from the capital gain in 1997.
But if in 1996 the net income is P150,000 and the net capital loss is P100,000, so the net capital loss does not exceed the net
income. Thus, the entire amount of P100,000 net capital loss can be carried over in 1997.
NO, because the law says during the “succeeding taxable year”. Tax exemption must be strictly construed against the taxpayer and
liberally in favor of the govt.
N.B. This rule applies to individual taxpayers.
In this regard, there is such a thing as no operating loss carry over. OPERATING LOSS are losses incurred in the course of trade
or business of the taxpayer. Net operating loss may be carried over by the taxpayer, whether corporate or individual, to the next three (3)
consecutive years provided that during that year, such taxpayer is not exempt from taxation and there must be no substantial change in
ownership of the corporation, in the case of the corporation. Substantial change may arise if less than 75% of the outstanding capital
stock or paid up capital stock is held by the same person.
Case: The BOI registered industries are allowed to carry over operating losses. This time, those losses that were incurred during that
period of 16 years operation may be carried over to succeeding taxable year.
The rule that we have established is: expenses must be paid or incurred during the taxable year. You can claim those
expenses as deduction during the year when the same were incurred or paid. The exception to this rule are net operating loss carry-over
and net capital loss carry-over.
Meaning of Terms:
In determining the gain or loss in the sale or exchange of property, this is the basic formula:
Example:
I sell a property in the amount of P100,000. It is previously purchased the same at P60,000, this P60,000 is the cost of property.
2. If the property sold was previously acquired through inheritance, it is the fair market value (FMV) of the property at the time
of the acquisition.
“At the time of acquisition” means at the time of the death of the decedent or testator.
3. If the property sold was acquired through donation, the basis shall be the same as if it would be in the hands of the donor.
Situation:
A, the donor donated property to B, the donee. Subsequently, such donated property was sold by the donee for P200,000. What must be
the cost?
Answer:
The law says, the same basis in the hands of the donor. So, the donee should ask the donor the basis.
It is also that A, the donor acquired the property from another either through purchase or donation. So, you should ask A, the last donor,
his basis.
4. If the property sold was acquired for less than an adequate consideration in money or money’s worth, the basis of such
property is the amount paid by the transferee for the property.
Situation:
The seller acquired the property from A in the amount of P70,000. The FMV of said property is P100,000. So, the seller here is the
transferee and A is the transferor. The seller sold the property at P200,000. What must be the cost?
Answer:
It is the amount paid by the transferee. And the amount paid by the transferee who subsequently sold the property is P70,000. So, he will
have a gain of P130,000.
*** Remember, it is not the FMV of the property but the amount paid bv the transferee.
Suppose the property was acquired in a transaction where gain or loss is not recognized? (NO GAIN, NO LOSS RECOGNIZED)
Before we answer that, we should know these transactions where the gain is not recognized (meaning it is not taxable) and the loss is not
recognized (meaning, it is not deductible).
The basic rule is, in the sale or exchange of property if there is a gain, the gain taxable; If there is loss, the loss is deductible).
1. Transactions made pursuant to plan of merger or consideration. Sometimes, we call this “Tax Exempt Transactions” or
“Transactions Solely in Kind”.
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a. A corporation, party to merger or consolidation exchanges its properties solely for stock in corp., which is a party to the merger
or consolidation.
Illustration:
Property
Stock
b. A stockholder of a corp. party to a merger or consolidation exchanges his stock solely for stock in another corp. party to that
merger or consolidation.
Illustration:
Security or Stock
Security or Stock
** Sometimes, we call the above-mentioned transactions as “Transactions solely in kind” or “Tax Exempt Transactions”.
2. If a person alone or together with others or not exceeding four (4) (so, the total number should be five (5) exchanges his property for
stock in a corp. and this person or persons, after this exchange, acquired controlling interest over that corp. This means that they
acquired at least 15% of the shares of stock of such corp.
Question: Suppose these persons, at the time of transaction, already acquired controlling interest over such corp., is the
transaction or exchange taxable?
Answer: Even if these persons acquired controlling interest at the time of the transaction, the rule is still applicable in which case that is
still tax exempt.
Question: So, if these properties acquired under this tax exempt transactions are subsequently disposed of, how will you
determine the basis?
Answer: The basis of the stock or properties acquired under this no gain, no loss recognized shall be the same basis in the hands if the
transferor.
Suppose the property was acquired under transactions where gain is recognized and loss is not recognized? (GAIN RECOGNIZED,
LOSS NOT RECOGNIZED)
Transaction solely in kind – this means that there are other consideration given other than those mentioned under transactions solely
in kind (nos. 1 and 2 above, but cash is added).
Example: Corp. A party merger or consolidation transfers its cash and property to Corp. B, also a party to such merger or
consolidation.
Corp. B, in exchange, transfers its stocks to Corp. A.
Illustration:
Property and Cash
Property: P50,000
Cash: P50,000
Corp. A Corp. B P100,000
Let us say that FMV of stock given by Corp. B is P100,000. The value of the property transferred by Corp. A is P50,000 while cash is also
P50,000.
Now, you deduct the cost of the stock disposed of. Let us say that the cost of stock is P80,000. So, Corp. B derived gain of P120,000. I s
this taxable?
Answer:
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YES, but only P100,000 is the amount that is taxable. This is so because of the limitation that it must not exceed the total cash and the
FMV of the property. And if you add the FMV of the property and the total cash given, the total is P100,000.
Under the law, there is that limitation in transactions which involves not only the property but also cash. The gain is recognized or
taxable but the taxable gain must not exceed the cash given and the FMV of the property which forms part of the consideration.
On the other hand, supposed the cost of stock disposed of or transferred to Corp. A is P250,000. So, there is a loss of P50,000, is this
recognized or deductible? NO.
If this property received under this transactions which is not solely in kind is subsequently disposed of, how do you determine
the basis of that?
Answer: The basis of the property in the hands of the transferor less the FMV of the property, less cash received plus the gain
recognized, if any, plus the dividend that may be treated as such, if there is any.
Transactions were gain is recognized and loss is not recognized (meaning, if there is a gain, the gain is taxable and if the loss is
not deductible) are: [W.I.R.N.]
1. Wash Sale
2. Illegal transactions
3. Those transactions involving Related taxpayers
4. Transactions Not solely in kind.
SHORT SALE
- this is also considered as Capital Transaction.
- Short sale is really an obligation payable not in cash but in goods. The seller of securities or stock will decline. And
if it declines, he earns profit. However, if the price of securities increases, he incurs loss.
- Example: I borrow your securities on June 10 and I’ll pay it on June 15. The price of securities on June 10 is
P50 and you speculate that said price will decline on June 15. On June 15, the price has been lowered to P40. So, you
earn a profit of P10 because I will pay my obligation at P50 on June 15 and not P40.
TRANSFER TAXES
ESTATE – refers to the mass of properties left by decedent or testator to his heirs or
beneficiaries.
TRUST – is the right to the property, real or personal, exercised by one person for the benefit of another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust
b. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the
fiduciary is also the nbeneficiary.
c. Beneficiary
Estate may be the subject to tax, if it is under your administration. It may only be under administration or settlement
if the properties of the decedent are settled under judicial settlement.
If the estate is under extra-judicial settlement, it is not subject to tax because that will not earn income considering
that the heirs agreed to settle the estate extra-judicially.
When we speak of judicial settlement, this may include estate or intestate proceedings.
In irrevocable trust, you cannot transfer or revest the title of the property.
“No substantial interest in the disposition of the property” – he must not be the beneficiary.
If the properties of the estate is not invested in a business, so ten heirs are just co-owners of the property, that is not
taxable because co-ownership as a rule is not taxable.
If the heirs decide to continue the business, such that the administrator may manage the same, that will become an
unregistered taxable partnership.
Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. So,
they may claim the deductions under Section 34 as long as these deductions were paid or incurred in connection with
the business of that estate or trust.
Questions: If there are two (2) trust created by one trustor or grantor, how do we tax the income of that trust?
Answer: Under the law, the taxable income of these two (2) trust must be consolidated. That trust should be taxed as if they constitute
one trust.
Situation:
Grantor X created 2 trust. One is A trust created and the other is B trust. There is only one beneficiary named Y.
Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income
is P30,000. We will tax these 2 trust separately but through consolidation.
In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to
trust A and B.
So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax,
the tax due should be apportioned.
TRANSFER TAXES
Taxes may be imposed on onerous transmission of properties or on the gratuitous transmission of properties.
DECEDENT’S INTEREST
assets that are still owned by decedent at the time of death to the extent of his equity or interest in any property whether
as exclusive owner, conjugal owner, or common owner.
JUDICIAL EXPENSES
1. accountants fee
2. appraisers fee
3. administrator’s fee
4. attorney’s fee
5. docket fee
6. stenographers’ fee
7. other expenses of court hearings
RULES:
1. must not be compensated by insurance
2. must have been incurred during the settlement of the estate BUT NOT LATER than the last day for the payment of the estate tax (6 mos.)
3. not claimed as deduction in an income tax return of the taxable estate
ALLOWABLE DEDUCTIONS
- NON-RESIDENT DECEDENT [ELIT-TVS]
1. ELIT (expenses, losses, indebtedness, taxes)
FORMULA:
PHIL. GROSS ESTATE
WORLD GROSS ESTATE x ELIT
2. transfer for public purposes
3. vanishing deductions
4. share of the surviving spouse
NOTICE OF DEATH
- if value exceeds Php20,000
- FILE notice with BIR within two mos. Of decedent’s death or within two mos. After election of qualified executor or administrator
PARTIES TO A DONATION
1. DONOR – gratuitously disposes
2. DONEE – receives and accepts
KINDS OF DONATION
1. PERSONAL PROPERTY – may be orally or in writing
EXCEPT: exceeds P5,000 – donation and acceptance must be in writing
2. REAL PROPERTY – PUBLIC DOCUMENT
ACCEPTANCE - same deed of donation or separate instrument; done during the lifetime of the donor
EXEMPTIONS/ALLOWABLE DEDUCTIONS
1. DOWRIES
RULES:
A. Exempt up to 1st P10,000;
B. Legitimate recognized or legally adopted children;
C. Made before marriage or within one year thereof.
2. GIFTS TO NATIONAL GOV’T. or POL. SUB.
- not conducted for profit
3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs.
- not more than 30% used for administrative purposes
- may be a school or non-stock entity
DEDUCTIONS ALLOWABLE
1. ENCUMBRANCES or donated property, if assumed by the donee
2. DIMINUTION of the donated property as specified by the DONOR
ADMINISTRATIVE PROVISIONS
- donor’s tax return must be filed under oath and in duplicate
- filed within 30 days from date of donation
EXTENSION: not exceeding 30 days
- WHEN PAID
- time the return is filed
EXTENSION: not exceeding 6 mos.
PROVIDED – BOND- double the amount of TAX
ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of a decedent or testator
DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This
transmission of properties occurs during the lifetime of the donor and the donee.
ESTATE TAX
NATURE OF ESTATE TAX – It is an excise tax since the subject of the tax is the right or privilege to transmit properties and not the
property itself.
1. Resident estate taxpayer – includes citizen of the Phils., resident alien who died in the Phils., and such alien, at the time of his
death, is a resident of the Phils;
2. Non-resident estate taxpayer – is limited to non-resident alien individual.
Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed
wherever situated.
Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils.
Real and personal tangible properties of NRD are taxable only if they acquire tax situs in the Phils.
Personal intangible properties that are deemed to have acquired Phil. situs are: [F, SOB (DC, FC-85%, FC-SP), SR – P]
► If the personal intangible properties of a NRD does not belong to the above-mentioned enumeration, they may not form part of his
gross income or we may also apply the doctrine of mobilia sequntur personam.
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► Mobilia sequntum personam, according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which
provides tax situs.
Question:
Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from real estate tax?
Answer:
YES, by applying the rule on reciprocity.
RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on tax on the properties of the citizens
of the Phils. who died in that foreign country.
The phrase “does not impose” and “allows exemption” are different from each other.
When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover all properties but only
certain properties.
Case:
Country of Morocco has no international personality. If it grants exemptions to the intangible personal properties if Filipino
citizens who died in that country, will you apply also that rule on reciprocity?
Held: YES. It does not matter whether the country has international personality or not. What is important is it allows or grants
exemption from estate tax.
“Sec. 85, Gross Estate – The value (FMV) of the gross estate of the decedent shall be determined by including the value, at the time of
his death, of all property, real or personal, tangible or intangible, wherever situated: Provided, however, That in the case of a non-resident
decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the
Philippines shall be included in his taxable estate.”
3. Revocable Transfer – Any transfer made by the decedent during his lifetime where the decedent has reserved the right to ALTER,
AMEND, TERMINATE, or REVOKE. such transfer; it is sufficient that the decedent had the power to REVOKE, though he did not exercise
such power.
- Irrevocable transfers should be excluded from gross estate.
- Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the
decedent.
Discussion:
1. Family home – (even unmarried person may have a family home) subject to the following conditions:
a. there must be only one (1) family home;
b. there must be certification issued by the Barangay Captain that the decedent is a resident of and own that family home in that
particular locality;
c. the amount that is deductible or the FMV of the family home should not be more than P1M; excess shall be subject to tax
d. the FMV must be included in the gross estate of the decedent.
If the FMV of the family home is P5M, this should be included in the gross estate of the decedent. But when you claim deductions,
you can only claim up to P1M.
► In the case of funeral expenses, the amount deductible is the actual funeral expenses on the amount which is not more than 5% of the
gross estate whichever is lower, but in no case to exceed P200,000.
► There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection with the
preservation, administration or settlement of the estate, it may be claimed as deductions. Judicial expenses also include extra-judicial
expenses.
3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other
casualty losses.
► These losses must be sustained not later than six (6) months after the death of the decedent.
4. Indebtedness which partake of the nature of the unpaid claims against the estate.
► These must be supported by notarized documents. These obligations must be incurred within three (3) years prior to death of the
decedent.
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► Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the decedent. In
order to be deductible, this claim must be included in the gross estate.
6. Standard deduction
► The amount is P1M. So, this may only be applied if the gross estate of the decedent is more than P1M.
Discussion:
a. Death of a decedent which must take place within FIVE YEARS from the death of the prior incident or before gift was given.
Situation:
A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as
exclusive property.
One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by
way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive
property. This property had already been taxed because that forms part of the gross estate of A. Again, this same property may be
subject to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is
why, the purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing
deduction which may reduce his estate tax.
The condition set by law is that B must have died within the 5-year period. If B died 6 years after the death of A, B can no longer
claim such vanishing deductions.
c. Inclusion of the tax property in the gross estate of the prior decedent.
d. Previous taxation
The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax
had been paid by prior estate.
Question:
So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it
was acquired through inheritance.
Answer:
NO, because this had already been claimed by B. You can only claim vanishing deduction once.
It is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been paid.
This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive
property and forms part of his gross estate.
YES. Here, B must have died within the 5-year period from the date of donation.
So, transfers to non-stock, non-profit educational institution is not exempt from estate tax because this is not included from the
enumeration BUT exempt from donor’s tax.
1. Real Property
The FMV equivalent to the value as determined by the BIR or zonal value OR that of the value as determined by the provincial or
city assessor whichever is higher.
2. Personal Property
a. Tangible Personal Property if not being sold; pawn value x 3; The FMV is equivalent to the selling price of the property. (Brand
new items)
b. Intangible Property – includes interest, shares of stock
- It must be the FMV of the interest or shares of stock.
- If the intangible personal property is account receivable, it should be Principal PLUS interest unpaid upon the death of
the decedent except if worthless)
- If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate.
- American tropical experience table
- IF LISTED – mean or ave. value between the highest and lowest stock quotation
- IF NOT LISTED – BOOK value
DONOR’S TAX
DONOR’S TAX – is an excise tax because what is being tax here is the right or privilege to transmit or dispose of property gratuitously in
favor of another.
- Tax imposed on the privilege of transmitting property by and living person to another by way of donation
- Prevents avoidance of estate tax
DONATION – the act of liberality whereby a person disposes gratuitously of a THING or a RIGHT in favor of another who accepts it.
a. Parents who have abandoned their children or induced their daughters to lead a corrupt or immoral life, or attempted against
their virtue.
b. Any person who has been convicted of an attempt against the life of the donor, his or her spouse, descendants or ascendants.
c. Any person who has accused the donor of a crime for which the law prescribes imprisonment for 6 years or more, if the
accusation has been found groundless.
d. Any heir full of age who, having knowledge of the violent death of the donor, should fail to report it to an officer of the law within
a month unless the authorities have already taken action, this prohibition shall not apply to cases wherein, according to law,
there is no obligation to make an accusation.
e. Any person convicted of adultery or concubinage with the spouse of the donor.
f. Any person who by fraud, violation, intimidation, or undue influence should cause the donor to make a donation or to change
one already made.
g. Any person who by the same means prevents another from making a donation, or from revoking one already made, or who
supplants, conceals, or alters the latter’s donation.
h. Any person who falsifies or forges a supposed donation of the decedent.
Under Art. 87 of the F.C., husband and wife are prohibited from making donation to each other.
Example:
If the FMV of the property is P100,000 and P50,000 was the consideration given. The difference of P50,000 is considered a
donation.
* The amount received by a disinherited heir is subject to donor’s tax because he has no right to such property and the same was
gratuitously given, so there is no donative intent.
Note: If there is no valid donation, the recipient is subject to income tax because of the provision “from whatever source derived.”
RD – Real properties, personal tangible properties, and personal intangible properties of resident donor are subject to donor’s tax
wherever situated.
NRD – Real properties and personal tangible properties of a non-resident donor are subject to donor’s tax only if they are located in the
Phils… Personal intangible properties of NRD are subject to donor’s tax only if they acquire tax situs in the Phils…
Personal Intangible properties that are deemed situated or acquire situs in the Phils. are: GROSS GIFTS [F, SOB (DC, FC-85%,
FC-SP), SR, P]
1. Franchise which is exercised in the Phils.
2. Shares of stock, obligation or bonds issued by domestic corp. or sociedad anonima.
3. Shares of stock, obligations or bonds issued by foreign corporation, 85% of the business of which is conducted in the Phils.
4. Shares, obligations, bonds issued by a foreign corp. which acquires business situs in the Phils.
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Such shares, obligations or bonds acquires business situs in the Phils. if they are used by such foreign corp. in furtherance
Rule on Reciprocity – If the foreign country of that NRD does not impose, or allows exemption on the donor’s tax on the
properties of citizens of the Phils. who died in that foreign country.
CUSTOMS LAW – does not refer only to the provisions of Tariff and Customs Code. It also includes other laws and regulations subject to
enforcement by the Bureau of Customs.
1. NIRC – Sec. 107. Importation of goods or articles subject to VAT. The VAT must be paid before these goods are released from Customs
Custody.
2. NIRC – Sec. 131. Importation of Articles subject to excise taxes. The payment of excise tax must be made before the goods are released
from Customs custody.
3. Regulations that may be issued by the CB, the implementation of such regulation is vested in the Bureau of Customs.
Customs duties – are duties which are charged upon commodities on their being imported in or exported out of a country.
Tariff – means a book of rates; a table or catalogue drawn usually in alphabetical order containing the names of several states that hold
commerce together.
After investigation, TC shall submit its report to the Bureau Commissioners or to Secretary of Finance.
1. BOC has the power to Prevent and suppress smuggling and other frauds upon BOC.
Consistent with this power, the BOC has:
a. Power to control and supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries.
b. Police power to exercise over Harbor, Airport, River and Port.
c. The right of pursuit against vessel subject to seizure even if it is seized beyond the maritime zone. This is called the extra-
territorial jurisdiction of the BOC. Sometimes, we call this right of pursuit. The BOC may exercise this power when:
As regards smuggled goods imported not in accordance with the provisions of the Customs law, it may be pursued by the BOC
even if it is transported through air, land or water.
Consistent with this power, the BOC may enter in a building, house, structure, enclosure and warehouse. No search warrant is
required. As long as they reasonably believed that the place store smuggled goods, seizure or search may be made. But it must be shown
that the place must not constitute a dwelling place or unit. This is also because if it is a dwelling place that is covered by the
Constitutional provision where warrant must be secured.
Situation: Suppose the watchman or security guard and his family live in that place or building where smuggled goods are stored
can there be seized without search warrant? Can we consider that a dwelling place?
Answer: No, that will make the building a dwelling place. Even if it is outside of its district such that it came from Zamboanga and was
unloaded at Cebu, the collector of Cebu may still seize the goods. What is only required is that it came from a port of entry within the
Phils.
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2. Enforcement of the Tariff and Customs Law including other laws and regulation affecting the administration of Tariff laws.
3. Recommend to the Sec. of Finance needed rules and regulations necessary for the effective enforcement of the provisions of the TCC.
4. Assessment and collection of lawful revenues from imported articles. Also, assessment and collection of fines, penalties, fees and other
charges accruing under the provisions of the TCC.
5. It has the exclusive and original jurisdiction over Seizure and forfeiture cases. Meaning, to the exclusion of regular courts.
Articles subject to Customs duties:
Articles means wares, merchandise, goods and anything which may be made subject of importation or exportation. Articles
include Philippine money. So, if the Philippine money is transmitted or taken out of the Phils. without authority from the Central Bank,
that may be the subject matter of seizure.
2. Prohibited articles:
a. Absolutely prohibited articles: (SWING)
1. those prohibited by Special Laws
2. Weapons of War
3. Insidious, obscene or immoral articles
4. Narcotic or prohibited drugs
5. Gambling devices
b. Qualifiedly prohibited – meaning subject to restrictions or limitations. IF these limitations are not complied with. They will be
prohibited.
3. Duty free imported articles – these are articles not subject to custom duties.
These are: (MASARAP)
a. Medals, badges used as trophies or awards
b. Animals and plants for experimental purposes
c. Sample articles
d. Aquatic resources
e. Repair materials
f. Articles necessary for the take-off and landing of an airplane or for safe
navigation of vessels
g. Articles for Public exposition. Included here are historical books and personal
household effects
1. Regular or ordinary custom duties – these are the ad valorem tax and specific tax.
For purposes of determining the ad valorem tax, the basis must be the home consumption value. Home consumption value is
the price stated in the commercial, trade or sales invoice. If there is a reasonable doubt as to this value, recourse may be had to the
commercial and revenue attachė report, the BOC should refer to the available information that may help the BOC determine the
applicable ad valorem tax.
Case: NCR-Japan has a subsidiary in the Phils. which is NCR-Phil. Ten adding machines were imported from NCR-Japan and they
used, for purposes for determining ad valorem, the home consumption value, the price stated in the sales invoice. Instead, we should
refer to the commercial revenue attaché report to determine the basis of that ad valorem tax.
Dumping duty – duty levied on imported goods where it appears that a specific kind or class of foreign article being imported into or sold
is likely to be sold in the Phils. at a price less than its fair value.
Imposed on specific kind or class of foreign article which is being imported into, or sold or is likely to be sold for
exportation to or in the Phils. at a price less than its fair value, the importation or sale of which is likely to injure an
industry imposing like goods in the Philippines.
The duty is equal to the difference between the actual purchase price and the fair value of the articles in question in
the country or exportation as determined by the Sec. of Finance.
These are special duties imposed on imported articles. This may be imposed subject to the ff. requisites:
1. There must be a deliberate and continuous sale of imported article in the Philippines as price lower than the prices in the exporting
country.
2. This must prejudice or cause or likely to cause injury to our local industry.
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Situation: There are articles of foreign origin the prevailing price of which in the US is equivalent to P100. These articles are sold
or dumped in the Phils. at lower than the prevailing price in the US because they are saleable in the U.S.
So, this will prejudice our local industries. In order to protect our local product or to discourage people from buying this
imported product, we should be impose special duties in addition to the regular duties. Dumping duties should be imposed.
Countervailing duty – duty equal to the ascertained or estimated amount of the subdsidy or bounty or subvention granted by the foreign
country on the production, manufacture, or exportation into the Phils. of any article likely to injure an industry in the Phils. or retard or
considerably retard the establishment of such industry.
Imposed on articles, upon the production, manufacture or export of which any bounty or subsidy is directly or
indirectly, granted in the country of origin and/exportation. No need to show proof that the imports cause injuries to
domestic industries producing the same products. The duty is equal to the ascertained or estimated amount of the
bounty or subsidy given.
Situation: Sometimes imported products enjoys certain subsidy from their government. So, they have an advantage. Our local
products for example, does not enjoy similar subsidy. We should counter that advantage by imposing countervailing duties. The purpose
there is to protect our local products against unfair competition.
This represents the inland excise tax on locally manufactured articles of the same kind to off-set this advantage.
As regards dumping duties, the extent of the special duty is the amount that represents under-pricing.
As regards countervailing duties, the extent is the excise inland tax or the amount of advantage enjoyed by that imported article.
Marking duty – duty on ad valorem basis imposed for improperly marked articles. The requirement that foreign importation must be
marked in any official language of the Phils., the name of the country of origin of the article.
Retaliatory or Discriminatory duty – duty imposed on imported goods whenever it is found as a fact that the country of origin
discriminates against the commerce of the Philippines in such manner as to place it at a disadvantage compared with the commerce of
any foreign country.
The amount may be increased in an amount not exceeding 100% ad valorem when the President finds the public
interest may be served thereby.
This may be imposed by the President of the Philippines when our goods are discriminated against.
As regards dumping, countervailing and marking duties, it is the Sec of Finance, upon recommendation of the Tariff
Commission, who may impose these duties.
Question: What is the extent of the flexible power of the President of the Phils. under the TCC?
Answer: That includes the power to impose discriminatory duties. The President upon recommendation of the Tariff Commission may
increase the tariff rates by not more than 5x or meaning 500x of the tariff rates. He may also decrease the tariff rates by not less than
50%.
He can only exercise these powers in the interest of the national economy, national security and general welfare of the people.
2. Other duties:
a. Storage fee – this is charged on the goods or articles stored in a warehouse under the control and supervision of the BOC.
Articles owned by the government are exempt from storage fee is these articles are stored in a government warehouse.
b. *Wharfage dues –
Even if there is no wharf where the goods may be unloaded, wharfage dues may still be imposed because it is not a
duty or charge on the use of the wharf. Even if the goods are unloaded in a private wharf or seashore, wharfage dues still be
imposed because this is a duty imposed on the cargoes or articles which are unloaded. These are taxes. These are not really
custom duties. The significance of this is that when tax exemption is granted from all forms of taxes, this may be included. If the
exemption is only from custom duties, wharfage dues is not included.
c. Arrastre charges – this is a duty imposed on goods or articles for handling, receiving or custody of such articles.
e. Harbor fees
f. Berthing fees – this is imposed on the vessel for mooring berthing at a particular pier or port.
Berthing fees may only be imposed if the vessel is wharfed or berthed at national port. So, if it is wharfed at privately
owned port, that is not subject to berthing fees.
If these duties are not paid by the taxpayer, the government or the BOC has the power to impose the following administrative
sanctions:
(a) Articles, vessels, aircraft may be the subject matter of seizure if they are unlawfully used in the importation of foods into the
Philippines or exportation of goods form the Phils.
Case:
Jose had a vessel, M/V Maria Victoria. It was unlawfully used for the importation of cargo. When this was seized by
the government, Jose raised the defense of good faith.
Held:
(1) It is an action directed against the articles and in fact, the caption of the case is Republic of the Phils. vs. M/V Maria
Victoria. It is a proceeding in rem, so good faith is not a defense.
(2) Even if the vessel did not carry the contraband, that may be the subject matter of seizure if the vessel facilities the
importation of that contraband.
It is not also required that the vessel must come from the foreign country.
Case: Cruz was caught carrying a bulk of foreign currencies. These were seized by the government because she had no
license issued by the CB to carry said sum of foreign currency.
Held: Cruz must prove that she had a license otherwise seizure was proper.
The burden of proof lies on the importer.
(d) Unlawful transfer of cargoes from one vessel to another before reaching the point of destination.
(i) Beast
(2) Judicial (a) Filing of civil action (a) Appeal to CTA, CA, SC
(b) Filing of criminal action (b) Filing of criminal
if there is fraud and it action against erring
must be serious Customs officials
Seizure cases: The issue here pertain to the validity of the importation because you may raise the defense that these are not
prohibited importation.
Protest: The issue here is the validity of the assessment or collection, or the validity of the classification of articles where customs duties
are imposed.
PROCEDURE IN PROTEST
TRANSFER TAXES
ESTATES & TRUSTS
ESTATE – refers to the mass of properties left by decedent or testator to his heirs or
beneficiaries.
TRUST – is the right to the property, real or personal, exercised by one person for the benefit of another parties.
Parties to a Trust:
a. Trustor or grantor - one who created the trust.
b. Trustee or fiduciary – one who may hold the property for the benefit of other person known as beneficiary. Sometimes, the
fiduciary is also the beneficiary.
c. Beneficiary
☺ Estate may be the subject to tax if it is under administration. It may only be under administration or settlement if the properties of
the decedent are settled under judicial settlement.
☺ If the estate is under extra-judicial settlement, it is not subject to tax because that will not earn income considering that the heirs
agreed to settle the estate extra-judicially.
☺ When we speak of judicial settlement, this may include estate or intestate proceedings.
The trust is revocable if the power to revest the title to the property of the trust is vested:
1. In the grantor or in conjunction with other person who does not have substantial adverse interest in the disposition of the property.
2. In any person who does not have substantial adverse interest in the disposition of the property.
☺ In irrevocable trust, you cannot transfer or revest the title of the property.
☺ “No substantial interest in the disposition of the property” – he must not be the beneficiary.
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☺ If the properties of the estate is not vested in a business, so the heirs are just co-owners of the property, that is not taxable because
co-ownership as a rule is not taxable.
☺ If the heirs decide to continue the business, such that the administrator may manage the same, that will become an unregistered
taxable partnership.
☺ Estate and trust may be taxed on the same manner and on the same basis as in the case of individual taxpayers. S, they may claim
the deductions under Section 34 as long as these deductions were paid or incurred in connection with the business of that estate or
trust.
☺ Question:
If these are two (2) trust created by one trustor or grantor, how do we tax the income of that trust?
☺ Answer:
Under the law, the taxable income of these two (2) trust may be consolidated. That trust should be taxed as if they constitute
one trust.
☺ Situation:
Grantor X created 2 trust. One is A and the other is B. There is only one beneficiary named Y.
Let us assume that the taxable income of trust A is P10,000. The taxable income of B trust is P20,000. The total taxable income
is P30,000. We will tax these 2 trust separately but through consolidation.
In paying the tax after applying the applicable tax rate to the taxable income of P30,000, the tax due should be apportioned to
trust A and B.
So, for purposes of income tax, the taxable income of these 2 trust should be consolidated, but for purposes of paying the tax,
the tax due should be apportioned.
TRANSFER TAXES
Taxes may be imposed on the onerous transmission of properties or on the gratuitous transmissions of properties.
ESTATE TAX – tax imposed on the right or privilege to transmit properties upon death of the decedent or testator.
DONOR’S TAX – tax imposed on the right or privilege to transmit properties gratuitously in favor of another who accepts the same. This
transmission of properties occurs during the lifetime of the donor and the donee.
ESTATE TAX
→ Real properties, personal tangible properties and personal intangible properties of resident decedent (RD) are taxed wherever situated.
→ Real and personal tangible properties of non-resident decedent (NRD) are taxable only if they are located in the Phils.
→ Personal intangible properties of NRD are taxable only if they acquire tax situs in the Phils.
→ Personal intangible properties that are deemed situated or deemed to have acquired Phil. situs are:
1. Franchise which is exercise in the Phils.
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2. Shares of stock, obligation or bonds issued by domestic corporation or sociedad anonima
3. Shares of stock, obligations or bonds issued by foreign corp. 85% of the business of which is conducted in the Phils.
4. Shares, obligations, bonds issued by a foreign corp. which acquired business situs in the Phils.
Such shares, obligations or bonds or in any partnership, business or industry established in the Phils. if they are used
by such foreign corp. in furtherance of its trade or business.
5. Shares or rights in any partnership, business or in any partnership, business or industry established in the Phils.
→ If the personal intangible properties of a NRD does not belong to the above-mentioned enumeration, they may not from part of his
income or we may also apply the doctrine of mobilia sequntur personam.
→ Mobilia sequntur personam, according to the Supreme Court, is a mere fiction of law. So, it must yield to the provision of law which
provides tax situs.
Question:
Suppose the personal intangible properties of NRD acquired tax situs in the Phils., can this be exempt from estate tax?
Answer:
YES, by applying the rule on reciprocity.
RULE ON RECIPROCITY – the foreign country of that NRD does not impose or allows exemption on estate tax on the properties of
citizens of the Phils. who died in that foreign country.
The phrase “does not impose” and “allows exemtion” are different from each other.
When we say “does not impose”, this means totally exempt. “Allows exemption” means this may not cover all properties but only
certain properties.
Case:
Country of Morocco has no international personality or not. What is important is it allows or grants exemption from estate tax.
“Sec. 85. Gross Estate. – The value of the gross estate of the decedent shall be determined by including the value, at the time of his
death, of all property, real or personal, tangible or intangible, wherever situated. Provided, however, That in the case of a non-resident
decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the
Philippines shall be included in his taxable estate.”
1. Decedent’s Interest.
- The gross estate may include the fruits and income of the properties and that may constitute the decedent’s interest.
- In the case of parcel of land, it may produce income in the form of harvest which harvest may form part of the gross
estate.
- In the case of apartment, the rental on such apartment should also be included, not only the value of the property.
3. Revocable Transfer
- Irrevocable transfer should be excluded from gross estate.
- Revocable transfers are transfers which are subject to alteration, termination, amendment or modification by the
decedent.
Example:
If the property has a FMV of P100,000 and the consideration given is only P50,000, the difference of P50,000 represents
that insufficient consideration.
- Proceeds of life insurance policy is excluded from the gross estate in the following cases:
1. 3rd person is irrevocably designated as beneficiary
2. proceeds of group insurance policy
3. proceeds of accident insurance policy except if accident insurance policy has a characteristic
4. Proceeds of GSIS Life Insurance Policy
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- Note: As regards the estate executor, administrator or heirs as beneficiary, it is immaterial whether the designation is
irrevocable or revocable.
Discussion:
In the case of funeral expenses, the amount deductible is the actual funeral expenses or the amount deductible is
limited only to P500,000;
There is no limitation as to amount with regard to judicial expenses. As long as it is paid or incurred in connection
with the preservation, administration or settlement of the estate, it may be claimed as deductions, judicial expenses
also include extra-judicial expenses.
3. Losses that may arise from casualty or casualty losses such as fire, storm, shipwreck, robbery, embezzlement, theft and other
casualty losses.
These losses must be sustained not later than six (6) months after the death of the decedent.
4. Indebtedness which partake of the nature of unpaid claims against the estate.
There must be supported by notarized document. These obligations must be incurred within three (3) years prior to the
death of the decedent.
Another indebtedness which may be claimed as deduction is claim against insolvent persons. Here, the claimant is the
decedent. In order to be deductible, this claim must be included in the gross estate.
6. Standard Deduction
The amount is P1M. So, this may only be applied if the gross estate and the decedent is more than P1M.
1. * VANISHING DEDUCTION
- is an allowable deduction against the exclusive property of the decedent.
- May be claimed as deduction under the following conditions:
a. Death of the decedent which must take place within FIVE (5) YEARS from the death of the prior incident.
Situation:
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A died. B is the heir. Now, you may recall that properties acquired through gratuitous title during the marriage is classified as
exclusive property.
One of the properties of A which forms part of his gross estate had already been taxed. This property will be transmitted to B by
way of succession. If B died, take note that one of his properties was acquired through inheritance from A and that is an exclusive
property. This property had already been taxed because that forms part of the gross estate of A. again, this same property may be subject
to estate tax because this exclusive property forms part of the gross estate of B. There seems to be double taxation. That is why, the
purpose of vanishing deduction is to mitigate the harshness of double taxation. So, B may be entitled to that vanishing deduction which
may reduce his estate tax.
The condition set by law is that B must have died within the five-year period. If B died 6 years after the death of A, B can no
longer claim such vanishing deductions.
b. Identity of Property
So, there must be evidence to the effect that this is the same property which forms part of he gross estate of A.
d. Previous taxation
The estate of A which included the property subject of vanishing deduction had been taxed; meaning, that estate tax had been
paid by prior estate.
Question:
So, if B died and the property is transmitted to C, his heir, that property is also considered as exclusive property of C because it
was acquired through inheritance.
Can C claim vanishing deduction?
Answer:
NO, because this had already been claimed by B. You can only claim vanishing deduction at once.
If it is impossible that B acquired the property not through inheritance but through donation. Donor’s tax had already been
paid. This is an exclusive property of B because under the law, property acquired during the marriage by gratuitous title is an exclusive
property and forms part of his gross estate.
YES. Here, B must have died within 5-year period from the date of donation.
2. Personal Property
a. Tangible Personal Property – The FMV is equivalent to the selling price of the property.
b. Intangible Personal Property – includes interest, shares of stock.
- it must be the FMV of the interest or shares of stock
- If the intangible personal property is account receivable, it should be Principal PLLUS interest unpaid upon the death
of the decedent.
- If it is in the nature of usufruct, we must take into consideration the basic standard of mortality rate.
TAX REMEDIES
According to the SC, government and taxpayers must stand on reasonably equal terms.
Basically, the remedies that may be availed of by the Government or the taxpayer may be grouped into:
a. Administrative remedies
b. Judicial remedies
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If the tax law is silent on administrative remedies, the government may still avail of the usual administrative remedies
such as Distraint of personal property, or Levy on real property. But that may be resorted to by the government in the
collection of taxes are:
a. Distraint of personal property
b. Enforcement of tax lien
c. Levy on real property.
- Distrain and levy can only be done if notice is given.
If the tax law is silent on administrative remedies, the taxpayer may still avail of the usual administrative remedies of
protest and refund for purposes of convenience and expediency.
If the tax law is explicit on administrative remedies, the taxpayer must observe the principle of exhaustion of
administrative remedies. Under the Tax Code, if an assessment is made by the BIR, the remedy of the taxpayer is to
protest first the assessment. It is the decision of the BIR on that disputed assessment that is being appealed to the
CTA.
In claiming for tax refund, the taxpayer have to file first a written claim for refund with the BIR Commissioner.
Judicial Remedies:
IF the tax law is silent on judicial remedies, the government can still avail of the usual judicial remedy. Example: filing
an action for collection with the court.
If the tax is silent on judicial remedies, the taxpayer may file a special civil action for declaratory relief. But this does
not apply as far as the NLRC or the TCC is concerned because these particular tax laws are explicit on this judicial
remedies.
If the tax law is explicit on judicial remedies, the government should observe the provisions of the law.
Example:
The filing of an action for collection with the Court must be
approved by the BIR Commissioner.
Constructive Distraint can only be resorted to under the following situation: Code: C.A.R.L.)
1. When a taxpayer cancels or hides his property
2. If he performs any act which will obstruct the collection efforts of the BIR
3. If he is retiring from business subject to tax
4. When he is about to leave the Philippines
It is the discretion of the BIR to avail itself of remedies which may result in the expeditious collection of taxes.
Case: Which is preferred, the claim of the government arising from tax lien or the claim of the workers predicated on the judgment
rendered by the NLRC?
Held: The claim of the government arising from tax lien is superior to the claim of a private litigant predicated on a judgment.
Exception: The claim of the laborers may be superior under Art. 110 of the Labor Code when the employer was declared bankrupt
of judicial liquidation.
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*In observing the provisions of the tax code in regard to distraint or levy, the BIR cannot apply or invoke the
presumption of regularity in administrative proceedings.
So, if the procedure had been questioned by the taxpayer, it is not for the taxpayer to prove that the
procedures under the NLRC in regard to distraint on levy had been complied with.
Requisites of Assessment:
1. Written notice stating that the amount is due as tax.
2. Written notice must contain a demand for the payment of such tax.
Assessment is not a condition sine qua non for purposes of collecting taxes. This is so because demand is not required.
The rule under Art. 1169 of the NCC that demand is required before a person may incur in delay cannot be applied.
Taxpayer incurred in delay if he fails to pay the tax on date fixed by Tax Code.
Assessments, made by the BIR Commissioner are presumed correct. The presumption does not violate the due process
under the Constitution because the presumption is merely disputable.
Normally, the BIR may require the taxpayer to submit reports, documents, books of accounts and other report to
establish his tax liability. In the absence of these reports, documents, etc., the BIR may determine the tax liability by
using other methods.
*The BIR can determine the tax liability of the taxpayer on the basis of that so-called best evidence obtainable in the
absence of said reports etc. In one case, agents of the BIR used the books of account seized as a result of raid by
means of search warrant.
Example: If it was received by the taxpayer in a particular date (Dec. 5, 1997), you should count the prescriptive period for
making an assessment from the date it was mailed, released or sent by the BIR and not from the receipt of the notice of assessment by
the taxpayer.
The assessment may be subject to revision by the BIR. If revised, the prescriptive period will commence to run from the safe
when such revised assessment is mailed, released or sent. So, it is not from the date the original assessment is mailed etc. but from the
date the revised assessment has been mailed.
The making of assessment is prescriptible.
The rule is, the BIR may collect taxes with or without prior assessment.
Notes: The rule is if prior assessment has been made, the BIR can avail of the administrative and judicial remedy. But if
without prior assessment, the BIR can only avail of the judicial remedies.
Return must be the one prescribed by the BIR. SO, if you file your Books of Accounts in lieu of that return, that does
not constitute return.
If the decision of the BIR is final and executory, the assessment made cannot be questioned. The issue of prescription
can no longer be raised except if the BIR submitted the particular issue for the resolution of the Court, that is
considered as waiver on the part of the BIR and such issue of prescription may be subject to resolution.
There is no provision in the TAX Code that prohibits the BIR from filing an action for collection even if the resolution on
the motion for reconsideration on the assessment made is still pending.
When the case is pending before the CTA, collection may also be made by filing of an answer to the petition for review
with the CTA. This is tantamount to a filing of collection of tax. This will also stop the running of the prescriptive period
for collection of taxes.
Collection of taxes is prescriptible.
GROUNDS FOR THE SUSPENSION OF PRESCRIPTIVE PERIOD IN THE COLLECTION OF TAXES: (Code: N.A.P.O.C.A.R.)
1. No property could be allocated;
2. Agreement between the BIR and the taxpayer to the effect that the prescriptive period shall be suspended pending the negotiation;
3. If the BIR is Prohibited from a distraint or levy of real property;
4. If the taxpayer is Out of the Philippines;
5. If the address of the taxpayer Cannot be located;
6. The filing of an Answer to the petition for review executed by a taxpayer with the CTA;
7. When a Request for reinvestigation has been granted by the BIR.
1. The filing of an action requires the approval of the BIR Commissioner. Also, the filing of civil action requires the approval of the BIR
Commissioner. BUT this is not jurisdictional. This is merely a formal defect which can be cured.
2. The purpose of filing criminal action is to impose statutory penalties.
3. The payment of tax liability does not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the
Tax Code. This is so because the civil liability arises from the failure of the taxpayer to pay and this does not arise from felonious act.
4. The acquittal of the taxpayer from criminal liability does not carry with it the extinguishments of civil liability.
5. The penalty of subsidiary imprisonment applies only to the failure of the taxpayer to pay the penalties. But, the Tax Law is silent on
the failure of the taxpayer to pay his deficiency or delinquency tax.
In deficiency, the taxpayer filed a return but the same was deficient. Deficiency is the difference between the tax due
and the tax paid.
Criminal action may be suspended if the taxpayer is absent from the Philippines.
FIVE (5) years – the prescriptive period for filing a criminal action for violations of the provision of the Tax Code.
In the case of refusal to pay the tax, the 5-year prescriptive period will commence to run from the date final notice or
demand has been served upon the taxpayer.
As regards violation of the Tax Code, if the violation is known the 5-year prescriptive period shall commence to run
from the date of the discovery of the violation and the institution of judicial proceedings for investigation and
punishment. The law uses the conjunction “and”. So, it will commence to run only from the time the BIR referred the
case to the Fiscal’s Office or City Prosecutor. In effect, it is always in the control of the BIR.
BEFORE PAYMENT, the taxpayer may dispute or protest the assessment. He ma also invoke the power of the BIR Commissioner to
compromise tax liability.
IF the request for investigation or reconsideration has been denied by the BIR:
1. File a motion for reconsideration of the decision with the BIR; OR
2. Appeal the decision with the CTA.
*** Motion for reconsideration must raise new grounds, meaning grounds which have not been raised in that request for reconsideration
or reinvestigation. Otherwise, it is just a pro-forma motion, it will not suspend the period within which to appeal the BIR decision to the
CTA which is 30 days from receipt of the BIR decision.
ISSUES that may be raised on appeal with the CTA >>> Questions of Law or fact OR both
The taxpayer may, instead of filing a protest, file a written claim for refund.