2017 FINALS
1. How is the ff defined for income tax purposes?
a. Person - means an individual, a trust, estate or
corporation
b. Corporation - shall include partnerships, no matter
how created or organized, joint stock companies, joint
accounts, association, or insurance companies, but
does not include GPP and joint venture or consortium
formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal,
and other energy operations pursuant to an operating
consortium agreement under a service contract with
the Govt
c. Resident Alien – means an individual whose
residence is within the PH and who is not a citizen
thereof
2. Joint Venture
Joint venture as an entity is not considered as a taxable entity.
Jurisprudence provides that in order for this to be applicable,
the ff requisites must be followed:
a. Must be created for purposes of joint undertaking of a
construction project
b. Involve pooling of resources by licensed contractors,
licensed by PH Contractors Accreditation Board
(PCAB) of the DTI
c. Local contractors are engaged in construction business
d. Joint venture itself must likewise be duly licensed as
such by the PCAB
The non-taxibility of joint ventures created for the undertaking
of a construction project is not dependent on the number of
projects they engaged in, as the provision is silent on this
matter. Jurisprudence tells us that such privilege granted to
local construction business was meant to help them compete
with foreign construction companies by pooling their
resources.
The position of one of the partners as regards setting up a
corporation instead: he distributive share in the profits would
be the one subject to tax and would be part of their gross
income as corporations.
3.
A company is not a resident foreign corporation when it set up
a subsidiary in the PH. Such subsidiary is a distinct entity from
its parent company.
Company’s personnel stay in the PH for the first 3 months of
operations is considered as short and definite. Based on
jurisprudence, short and definite stay in the country does not
make them resident aliens for purpose of taxation. (NRA –
short and definite)
For the first year, f expenses amounted to more than $100k,
parent company will charge subsidiary for the expenses plus a
10% mark up. If it does not exceed, parent company will only
bill subsidiary at cost or without mark-up. For the 2nd
subsequent years, subsidiary agreed that it would provide
parent company a portion (10%) of its total gross sales. If the
total cost of its personnel was $150k, then there’s mark-up
which is a realized gain on the part of the parent company
upon which it has complete dominion. There is gross income of
$15k to be reported by the parent company. As this is service
income, its source of income is within the PH, which is taxable
income for non-resident foreign corporation based on their
gross income.
The agreement of the parent company and the subsidiary
provides the former 10% on its gross sales. Gross sales is the
amount of sales received by a corporation. Cost of goods sold
(all direct costs and expenses incurred to provide services)
such as personnel cost, has not yet been factored in the
determination of the 10% gross sales. Therefore, regardless of
whether the 2nd year of operation would amount to gross loss,
the 10% is based on the gross sales and not on the total gross
income/loss of the subsidiary.
Since the services were performed in the PH, the salaries of the
personnel are income sources from within the PH. These must
be subjected to withholding tax on compensation, which would
be properly withhold by the payor. But in this case, the
subsidiary who is in control of the payment of compensation
should withhold the same.
4.
All gains or losses from exchange or other disposition of
property shall be recognized except in pursuance of plan or
merger or consolidation:
a. A corporation exchanges property for stock of another
corporation which is a party to merger
b. A shareholder exchange stock for stock of another
corporation which is a party to merger
c. A security holder exchanges his securities for stock of
another corporation which is a party to merger
The basis of the shares on the hands of the transferor shall be
the basis of the property exchanged, decreased by:
a. Amount received by transferor
b. FMV of property received with the stocks
Increased by:
a. Gain realized by the transferor upon such exchange
provided that any liability assumed by the transferee shall
be considered as cash amount received by the transferor
If the infusion of funds was made pursuant to a loan
agreement, with stipulated interest in writing, then this would
qualify as interest expense deductible for the HeirsCo,
considering that such expense was ordinary and necessary,
made in accordance with a legally demandable debt. However,
if the abovementioned were not attendant to the infusion
schemed payment based on earnings would instead qualify as
dividend payment to ParentCo and the infused funds would
then be capital investment. Dividend payments are not
deductible as expense on the part of the distributing company.
The transfer pricing to be applicable must be between related
parties. However, in the case of Filinvest, BIR does not have the
power to impute theoretical interest rate on loan transactions
when such was not intended by the parties. Despite the BIR
being authorized by the Tax Cose to distribute, allocate,
apportion, and shift income and expenses, the surrounding
circumstances attending the transaction should be considered
in determining reasonable ness of the transaction whether
such shall be the subject matter of transfer pricing.
5.
Depreciation can be claim if the ff requisites are satisfied:
a. Reasonable
b. Incurred within the taxable year
c. Depreciable property used in the taxpayer’s trade or
business
As the car is being used in his trade or business, the car is
considered as an ordinary asset, which is subject to
depreciation allowance.
Even if the person has not income for the year, he is till require
to file an income tax return. Under the tax code, an indivudal
engaged in business, trade or profession, is always require to
file income tax return regardless on whether he had no income
for the year. It’s claimed deductions shall always be under
scrutiny of the tax authorities whether such were properly
applied or claimed.
6.
BIR RMC provides that stock options exercised by the
employee is a taxable compensation on the part of the
employee. However, since the recipient was a top executive, it
is a fringe benefit subject to 35% tax computed on the gross-up
monetary value of stock options at the time of exercise.
Since the shares are not listed in the stock exchange and it is a
capital stock, it will be subject to the final tax of 15%.
7. Capital Asset v Ordinary Asset
A capital asset is defined in the tax code in a negative way. It is
any asset except:
a. Stock in trade or property included in the inventory of the
taxpayer
b. Primarily held for sale to customers in the ordinary course
of his trade or business
c. Property used in trade or business which is subject to
allowance for depreciation
d. Real property used in trade or business
The classification is essential in determining the proper tax
rates and treatment to be applied.
In the hands of an individual, a capital asset, if a real property
shall be subject to 6% CGT based on the selling price or FMV,
whichever is higher. If it is an ordinary asset, the gain/loss is
determined by subtracting the cost from the selling price (SP-
cost), and such gain is treated as part of gross income, while
the loss is treated as deduction.
If the individual however, is a dealer in property, real
properties are usually held by such individual as inventory,
and therefore, ordinary income. Gain or loss from transactions
over such property will form part of his gross income subject
to allowable deductions.
2016 FINALS
1. Capital Asset v Ordinary Asset
In the hands of an individual, a capital asset, if a real property
shall be subject to 6% CGT based on the selling price or FMV,
whichever is higher. If it is an ordinary asset, the gain/loss is
determined by subtracting the cost from the selling price (SP-
cost), and such gain is treated as part of gross income, while
the loss is treated as deduction.
If the selling price would be lower than the cost of property or
equal to cost, I will suggest that it he treats it as an ordinary
asset so that the loss will be treated as deduction to gross
income and therefore, taxable income will be lower and taxes
will be lower.
2.
The treatment for the payment of lease rentals will depend on
the accounting method that he is using.
For the 3 months security deposit, this will not be considered
taxable since this is not an income or a gain on his part. Hence,
no income tax.
Under accrual method, income is recognized when it earned
regardless of whether or not cash is received. In this case, only
2 months is earned and it would be taxable. The last month
was not rented out therefore not considered as gain.
Under cash method, income is recognized when cash is
received regardless if there is performance or not. The whole 3
months will be taxable immediately. But since there was a
cancellation, the previously recognized income must be
deducted for the amount of the rent for the last month.
3.
The architect is a non-resident, thus he will be only taxable for
income arising from sources within the PH.
The tax code provides that for income arising from services,
the source of income is the country where the services were
performed. So if the architect who is in Canada designs the
plains in Canada, he will not be taxable in the PH for service
fees. For royalties, he will be subject to final tax of 20% if the
income will come from sources within the PH.
4. Requirements for business expense to be deductible
a. Must be in relation to trade, business, or profession of
taxpayer
b. Ordinary and necessary expenses
c. Reasonable amount
d. Paid or incurred/accrued during the taxable year
e. Substantiated by sufficient evidence
f. Not against law, morality, public order, public policy
g. Withholding taxed paid to BIR
5. Branch v Subsidiary
If there will be a branch, the foreign entity will considered as a
resident foreign corporation and the income of the branch will
be subjected to corporate income tax rates. Remittances made
by the branch to the head office will be subject to branch profit
remittance tax. Since it is a resident foreign corporation, the
income that will be taxable are those sourced from within the
PH . BPRT is 15%.
If they will set-up a subsidiary, the foreign entity will be a non-
resident foreign corporation. The subsidiary will be treated as
a domestic corporation and it will be subject to corporate
income taxes provided in the law. Dividend payments by the
subsidiary to the foreign entity will be subject to treaty rates, if
any, or 15% if there is sparing or 30% if no tax sparing. (The
tax sparing provision was basically to equalize the burden for
foreign entities who establishes branch or subsidiary in the PH.
This happens when foreign country where the foreign entity
came from allows tax credit for income earned in the PH.
6. Tax Free Transaction
If an individual exchanges property to a corporation for
shares of stock of such corporation, it will be exempt from
tax if he alone or together with others not exceeding four,
will gain control of the corporation and provided that it is
for a legitimate business purpose and not merely to avoid
taxes.
In this case, since property was exchanged for stock and he
gained control, assuming it is for legitimate business
purpose, and then it is exempt from tax.
The subsequent sale will yield to a taxable gain. The cost
basis will remain to be the original cost and will not be
adjusted because the first transaction was not taxable.
7. Improperly Accumulates Earnings Tax
IAET is imposed to corporations that permit earnings and
profit to accumulate instead of being divided or
distributed. It is designed to compel corporations to
distribute earnings so that the said earnings by
shareholders could turn be taxed.
 Applicable to: All domestic corporations which are
classified as closely-held corporations: (1) at least 50% of
OCS or (2) 50% of the total combined voting power of all
classes of stock is owned directly/indirectly by not more
than 20 individuals.
Not applicable to: Publicly held corporations, banks,
insurance companies, taxable partnerships, GPP, non-
taxable joint ventures, entities registered with PEZA or
other special economic zone
Amount that may be retained =100% of paid up capital +
reasonable needs
Prima facie evidence of IAE: Corporation is mere holding
company or investment company, permitted to accumulate
beyond, unrelated business or in stock or securities of an
unrelated business, investment in bonds and other long
term securities, in excess of 100% paid up capital.
Computation:
Taxable income
Income Exempt from Tax
Income Excluded from GI
Income Subject to Final Tax
NOLCO deducted
Gross Income which could have been distributed
(Dividends actually or constructively paid)
(Income Tax Paid)
(Amount reserved for reasonable needs of the business)
Total
Multiply by: IEAT rate of 10%
IAET
8. Creditable Withholding Tax v Final Withholding Tax
If an individual is a non-resident alien not engaged in
business in the PH, his gross income will be subject to final
withholding tax of 25%, otherwise the rent income is not
subject to final tax since rent is not among the
enumerations provided by the Tax Code subject to final
tax. It will be subject to CWT if the source of income is a
required withholding agent. The rent income will be
included in full in the computation of the income subject to
the graduated tax rate. The taxes withheld may be claimed
as tax credit, which will be deducted to his income tax still
payable.
If in the end, he finds out that he has no tax due, he may
ask for a refund or a tax credit from the BIR. For refund,
cash will be returned to him and for credit, it will be
deducted to future payments of tax.
9. Filing of returns
Minimum wage earners are generally not required to file
ITR and for employees, the employers usually file for them
through substituted filing. General rule is that individuals
who earn pure compensation income is not required to
file. However, if an individual deriving compensation
concurrently from two or more employers during taxable
year shall file income tax return.
10. Things to change in tax code
For fringe benefits tax, supervisory and managerial
employees are subject to fringe benefits tax to be paid by
the employer. The employee therefore need not include
the monetary value in his income tax return. But if fringe
benefit is received by rank and file, it is not subject to
fringe benefit tax but the employee must include it in
income tax return and subject it to tax. In short, the
supervisory and managerial will enjoy the full monetary
value of fringe benefits but rank and file will be subjected
to tax. Proper legislation is to be done to equalize the
treatment.

For de minimis benefits must be amended in a sense that

the limits must be increased. In present economy, the
values are very small and not updated.