But it must be in such manner or such time that it will
FINALS be essentially equivalent to a taxable dividend
August 17, 2012
Intra Corporate dividend principle (what are
included)
1.DC to DC
2.SC to RFC
If RFC to DC: taxable; not included as an
intra corporate dividend
CIR V. ANSCOR
Main issue: WON the amount distributed in the
redemption of shares is considered taxable dividends.
SC: under American jurisprudence there are certain
criteria if redemption is taxable
Criteria enumerated by American jurisprudence:
1.presence or absence of real business purpose
2.amount of earnings available for declaration of
dividends and company’s past records in so far as
declaration of dividends
3.effect of distribution
4.lapse of Time between the issuance and redemption
5.Presence of substantial surplus and generous supply
of cash to stock holders
If there is no. 5, this might raise the suspicion that the
redemption of stock is just used to distribute cash
dividends
Redemption: purchase of SOS by the corporation
from the SH through the distribution of either cash or
property in exchange of these stocks; As if
corporation is purchasing back shares of stocks
Ex. A SH purchased SOS from a Corporation
Corporation declared stock dividends
If Corporation buys back the SOS
Thus redemption
In the case
If what is being redeemed is the capital/initial
investment: not taxable dividend
If what is being redeemed is distributed stock
dividend: taxable
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
If redemption is already in effect, the distribution of
cash dividend to SH will be subject to tax
2nd issue: Legitimate business purpose
Legitimate business purpose according to ANSCOR
1.for Filipinization program of the company
2.reduction of FOREX (foreign exchange)
remittances
SC: presence of legitimate business purpose is not
material in determining taxability of stock dividends
#1 in criteria: not applicable to Philippines therefore
Bona fide business purpose is not material
What matters is flow of wealth
Consider 3 requisites of taxability of income: gain,
realization of gain and the gain is not excluded by
law
If all are present, there is flow of wealth
Thus taxable income
In the case, there are more than 25k SOS as original
investment of Don Andres
Thereafter There were stock declarations by
corporation and by reason thereof, there are 108k
shares by Don Andres
Anscor redeemed these SOS
In redeeming, they have paid cash to heirs of Don
Andres
SC: taxable dividend because:
1.the source of redemption came from declared and
distributed stock dividends
2.there is a flow of wealth on part of heirs
3rd issue: Reclassification of SOS
Reclassification of SOS
In a certain Corporation, their capital is distributed
through SOS
2 types of SOS: Common and preferred
If common: a SH does not have any preferred right
over dividend declaration
If Preferred: SH has preference during distribution of
dividends
Ex. Corporation declares 1M cash dividends
These will 1st distributed to preferred
Remainder: to common shares
In the case: classified from common to preferred Example 3
shares I have a House and lot
No flow of wealth I am residing in this place
Thus Not taxable I am contemplating to sell it because i do not want it
anymore
Capital Asset
SALE OF REAL PROPERTY because not used for business
Thus if classified as such: apply sec. 24 (d)
Know if property is capital asset or ordinary asset
SECTION 24 (D)
CAPITAL ASSET: “a tax of 6% (CGT), in the nature of FWT, of FMV
or GSP whichever is higher
Defined under Sec. 39 (A): property held by tax FMV must be in accordance with sec. 6 (e)
payer but does NOT include: (SIS Read)
Under Sec. 6(e)
1. Stocks in trade 2 tax FMV’s:
2. Inventoriable property 1.FMV declared by the assessors office
But only considered as capital asset if held at end of 2.zonal value issued by the BIR
taxable period Only 2 offices concerned
3. property held by Tax Payer (TP) for Sale in
ordinary course of business Example
4. Real property used in business The Gross Selling Price (GSP) is 3M; zonal value is
5. Depreciable property used in business 2M; FMV by assessors office is 1M
Tax base is 3M (this is the highest)
Example 1
I am a REAL ESTATE BROKER and i have several Next to consider:“this tax shall be imposed upon
lots in my name gains PRESUMED to have been realized from the
I sold 1 lot in my name sale, exchange or disposition of property”
This is an inventoriable property in so far as a real Actual gain NOT material
estate broker is concerned Here there is PRESUMPTIVE GAIN
Also No. 3
Lots are NOT subject to depreciation, they appreciate Next to consider:“Sale, Exchange, or other
in value disposition of property”
Therefore not capital asset
Barter: exchange of goods for goods
Example 2
I am engaged in trucking business I have a lot and he has a lot, we swap
i have a truck to deliver vegetables Considered an exchange
Will you apply sec. 39 or sec. 24 (d)?
a.not apply 24 (d): refers to sale of real property Expropriation
classified as capital asset I have a lot, the government needs it because they
in the example, truck not a real property will construct a road
b.ordinary: depreciable property used in business; Considered as a sale
thus truck is an ordinary asset Taxable
Covered by sec. 24 (d)
as long as it falls within the enumeration, then it will Because sales can either be voluntary or involuntary
be classified as an ordinary asset
outside the enumeration: capital asset Pacto de retro sales
Sale with right of repurchase
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Cosidered as Sale apply 3 month period
Main Question: When will seller be liable to pay Pay CGT after lapse of 3 month period or registration
CGT? of certificate of sale whichever is earlier
Answer: Upon execution of the Pacto de Retro sale
Because Transfer of ownership had happenedupon RMC 5-2011
execution of pacto de retro sale Pertains to payment of CGT concerning the 3 month
period
Conditional sales
Why do we need to know the date / point of when
Conditional Contract to tax will accrue?
Sale sell This is the reckoning point for payment of CGT
Transfer of Upon fulfillment Upon When shall it be paid: within 30 days from date of
Ownership of the condition execution of sale
the agreement If not paid within 30 days: tax due is subject to
Necessity of 2ndNot necessary to Necessary to interest, surcharge and penalties
deed of sale execute contract execute “Deed
of sale because of Absolute When is the filing of CGT returns:
upon the sale” In the Philippines,we use “pay as you file system”
fulfillment of the If payment is to be made within 30 days, then that is
conditional deed the date of filing
of sale Date of payment is date of filing
When seller Upon fulfillment Upon
required to pay of the condition execution of EXCEPTIONS TO 6% IMPOSITION OF CGT:
CGT Deed of (UNDER SEC. 24)
Absolute Sale
I.sale ofprincipal residence where proceeds will be
In reality: used to buy a new principal residence
Most lawyers use as caption “Conditional Sale” when
in fact it is a “Contract to Sell” Requisites (5):
Impact of this mistake: most often than not, BIR will a.for the TP to be fully exempt from payment of
capitalize on the caption of your deed CGT: proceeds of sale must also be fully utilized in
Thus if conditional sale: pay CGT immediately acquiring a new principal residence
Be sure to indicate the correct caption b.period of acquisition for a new principal residence:
within 18 months from date of sale (tax code)
Foreclosures: c.basis of new principal residence: the historical cost
Considered a Sale or the adjusted basis of the real property sold shall be
Involuntary sales carried over to the new principal residence
Happens upon non payment of debt d.(very important) notification addressed to
When does CGT accrue: upon lapse of 1 year period Comission within 30 days from date of sale
of redemption (for individuals as judgment debtor); 3 indicating his intention to avail of exemption
months (for corporation) through filing of a CGT return
e.availment of exemption once every 10 years
Case:
Supreme transliner v. BPI family... (feb. 25, 2011) Example 1:
SC: the CGT will be paid only after 1 year I will sell my H and L worth 1M; i will use proceeds
redemption period to purchase another principal residence
That is, after consolidation of ownership i sold it for 2M; i acquired new residence for 4M
i have fully utilized proceeds of the sale
What if mortgagor is a juridical entity / a bank:
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Example 2:
I sold my H and L for 2M
what if i bought 1M worth new residence
not fully utilized
entirety of amount not taxable?
No.
only a portion is not taxable; another portion is
taxable
how to determine taxable amount:
under tax code
GSP/FMV whichever is higher x unutilized portion
that bears divided by the GSP
SALE OF REAL PROPERTY CLASSIFIED AS
CAPITAL ASSET IN FAVOR OF THE
GOVERNMENT, POLITICAL SUBDIVISIONS,
GOCC’s, AGENIES
If you read provisions for domestic corporation, not
applicable; APPLY ONLY IF THE SELLER IS AN
INDIVIDUAL
What happens if an individual TP sells his real
property CLASSIFIED AS CAPITAL ASSET to the
above:
Subject to optional tax treatment
At the option of TP, he can pay tax under sec. 24 (a)
or sec. 24 (d)
Sec. 24 a: schedular tax
Normal tax
TP can deduct cost of sales
Sec 24 d: FMV/ GSP whichever is higher
And individual tax payers are also subject to optional
tax treatment if sale of real property classified as
Capital Asset is made in favor of the government, its
political subdivisions, agencies or GOCC’s
FOR CORPORATIONS
Q: is a DC subject to 6% CGT in the event that it
sells its capital asset, real property?
A: Yes
DC: subject to 6% CGT
However, if we take a look at the provision
applicable to corporations, there is actually no such
thing as optional treatment of taxation
So this particular provision (optional Tax treatment)
will onlybe applicable to individual tax payers
RFC: Not subject to 6% CGT
Unders sec. 28 of NIRC, a RFC is not subject to CGT
Subject to CGT only in so far as sale of Shares of
Stocks not listed
Therefore, if there is sale of real property classified
as a capital asset it will not be subject to 6% CGT
However, it may be subject to 30% NCIT
NRFC:
Not subject to 6% CGT
Subject to 30% GI tax
Exception to GI definition insofar as NRFC are
concerned: Capital Gains for sale of shares of stocks
not listed in trade
If it sells real property classified as capital asset in
the Philippines: 30% Final Tax
Same reason for NRANETB: 25% FT

Example: WAYS TO AVOID CGT

I am selling my lot in favor of the government for 2
million 1.sale of principal residence in order to acquire
my lot costs 1M new principal residence
Under sec. 24a: 1M;difference between 2M and 1M
(tax base) If in the bar, this is asked, include: “in order to
Under sec.24d: 2M (tax base) acquire or construct new principal residence”

August 18, 2012 2.Optional Treatment

TP has option either to apply CGT or NT
Remember: Tax Base of NT: GI (meaning you have to deduct the
6% CGT applies to all types of individual tax cost of sales)
payers
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Q: True or false
Expropriation is subject to CGT: False
Because Expropriation is not subject to CGT but
May be subject
In expropriation seller is the property owner and the
buyer is the Government
So considered a Sale to the government
So if sale to the government: not automatically
subject to CGT
May be subject to CGT at the option of the TP
3.Sale under Comprehensive Agrarian Reform
Law (CARL)
If sale was made by reason of CARL, means not
subject to CGT
4.if transaction falls under Sec. 40 (c) of the tax
code
Sec. 40 (c): “exchange of property” and the
“exchange” results to gain of control of the
corporation by persons not exceeding 4
Elements:
1.there is exchange of property and the
exchange of property can either be
a.property for stocks (exchange
property to obtain, purchase or acquire shares
of stocks);
b.exhange of stocks for stocks;
c.or giving in securities in exchange
for stocks; or
d.securities
Services for stocks: not covered under Sec. 40
(c)
Because 40 (c) contemplates property under
a,b,c,d
2.exchange of property must be pursuant to a
plan of merger or consolidation
Merger v. Consolidation
2 corporations combine their assets or
properties to form a either a new corporation or to
either absorb 1 corporation
3.by reason of the exchange, a gain of control
over the said corporation has been obtained by
persons not exceeding 4
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
If all the elements are present, exchange is not
subject to CGT
In summary, there are 4 was to avoid CGT:
1.sale of principal residence for the purpose of
acquiring or constructing a new principal residence
2.sale in favor of the government
3.salepursuant to CARL
4.Sec. 40 (c) if all 3 elements are present
**The moment that you have seen these 4, then
automatically not subject to CGT
How will government ensure the collection of
taxes?
By mandating that a Cert.Authorizing Registration
(CAR) be issued first by BIR before transferring
property from one person to another
Issued if all taxes have been paid
Pre requisite before transfer of title
Process
If there is a sale of real property classified as capital
asset
You know that there is a a title under name of
original owner
Will this title be cancelled and a new title be issued in
favor of buyer? Yes
Before issuance of new title in favor of buyer, this
title cannot be cancelled if there is no CAR
What entity will issue CAR? BIR
BIR will only issue if all taxes had already been paid
If CGT and Documentary Stamps Tax have not been
paid, it will not issue CAR
If without CAR, the buyer cannot transfer title under
his name
CAR is prerequisite
SWAPPING OF PROPERTY/BARTER
A RC owns a land located in the Philippines
A Non Stock Non Profit Educational Institution also
owns a land in the Philippines
Both agreed that the NSNP EI delivers land to the
Resident citizen
In exchange, RC will deliver its lot to the NSNP EI
Q: is this Subject to CGT?
Assume that the lot will be used ADE for Educational
purposes
 SALES OF SHARES OF STOCKS
2 tax implications
There are two sales Not all sale of SOS are subject to CGT
Determine WON SOS are traded and listed in the
1.RC sells to NSNP EI: Philippine stocks exchange
Income earner: RC as the seller
Assume that the lot will be used ADE for Educational If shares are listed:
purposes not subject to income tax;
income tax referred to is NT of 5% to 32%
a.As to CGT
Do not apply constitutional provision also not subject to CGT; CGT is in the nature of
since CGT is an excise tax and not a property tax income tax
Therefore subject to CGT
Subject to percentage tax of ½ of 1%
Apply constitutional provision if question refers to Tax base: GSP
property tax Under presumptive receipt of gain (it is GSP)
Law presumes gain to be derived by the TP
b.As to Income tax equivalent to the amount of the GSP
As to the revenue: RC is the income gainer
Subject to income tax If not listed:
subject to CGT
2.NSNP EI sells to RC: Percentage:
Income earner: NSNP EI as the seller For the first 100k gain: 5%
Assume that the lot will be used ADE for Educational In excess of 100k: 10%
purposes
Q: The gain derived by TP from SOS not listed to
Income tax: qualify amounted to 150k, is it subject to 5% or 10% tax
If revenue is used for educational purposes: exempt rate?
In the problem, the lot is ADE used for educational A: Subject to both
purposes First 100k: 5%
Excess of 50k: 10%
No CGT Thus over all tax: 10k

First to consider in order to determine Principle:For sale of SOS , tax implication will be
applicability of a constitutional exemption: nature dependent on Whether the SOS is listed or not listed
of the tax
CGT: Excise tax; tax imposed upon a privilege If listed AND traded: percentage tax of ½ of 1%
Thus, cannot apply “assets ADE”: applies only to Tax base is GSP
property taxes
But can use revenues ADE: because applies to If SOS are not listed: subject to CGT
income by NSNP EI 5%
10%
Q: Is actual proof necessary: Yes. Tax base: gain
1.strictissimi juris
Entity must prove that it is exempt Q: What if SOS not listed and traded is sold for 100k
2.exemption is not automatic Acquisition cost (value that it has been acquired) is
There must be proof of exemption P110k
Proof: property is ADE used for educational purposes Is this subject to CGT?
A: No
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
No gain
Thus tax tax base is the presence of a gain
Not subject to CGT
Method for realizing income: actual receipt of gain
Because for it to be subject to tax, there must be
actual receipt of gain
OTHER RULES IN DETERMINGING INCOME
Cancellation of indebtedness
Presupposes that their is a loan entered into between
the parties
Example:
Loan
A(debtor) B(creditor)
B will cancel A’s indebtedness in the amount of
P100k
Reason for cancellation is liberality or generosity
GR: subject to tax
Subject to donor’s tax
But not subject to income tax
If:
B agreed to cancel A’s indebtedness provided that A
will render services to B
Subject to income tax
There is rendition of services
Considered a remuneratory donation: subject to
income tax
Example 2:
A is stock holder of B corporation
B is the creditor, A is the debtor
Corporation cancelled the indebtedness in the amount
of 100k pesos
Will it be subject to tax?
(Hindi ko sinasabing taxable to noh because under
donor’s tax, 100k and below tax exempt; but anong
gagamitin mong rules? Donors tax, not income tax by
reason of the amount)
What type of tax? Considered as distribution of
dividends
If considered distribution of dividends, Considered
for income tax
What type of income tax? Dividends tax
If A is a RC: Dividends tax of10%
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
All are 10%
Except NRAETB: 20%; NRANETB: 25%
Example 3:
B corporation is debtor
A is creditor
A cancels B corporation’s indebtedness
Reason for cancellation: liberality
Subject to tax: donor’s tax
If reason is to purchase additional SOS (i will cancel
indebtedness however i will get additional SOS):
considered an investment: thus not taxable since no
income; mere acqusition of investment
INCOME FROM LEASE AND LEASEHOLD
IMPROVEMENTS
Lessor and Lessee agreed that lesee will pay the Real
property tax of the land rented. Is this considered as
rental/lease income on part of lessor? Yes
Because it should have been the lessor who would
pay the RPT.
Q: Lessor and lessee agreed that lessor will collect
5% of the gross sales of the lessee for a particular
period. Rental income? Yes. Income arises from the
lease agreement between the lessor and the lessee.
Advance and Deposit
Advance: considered as income in the year collected
Presupposes the fact that it must be consumed
if not consumed,it will be forfeited in favor of lessor
But if there is a condition with respect to the advance
or a restriction:Not considered an income at the year
of receipt
Deposit:received in a taxable period 1
Will it be income taxable in taxable period 1?
No, it depends upon the restrictions.
If there is a restriction then not considered an income
on the part of the lessor.
LEASEHOLD IMPROVEMENTS
Defintion: structure or improvement shouldered by
the lessee with the condition that lessor will own the
improvement at the end of lease period
 Meaning at the start of the lease period, there was
Example: already an improvement on the land
A is the lessor FMV is 10M; life of the property is 20 years
B is the lessee
Under outright method
A owns the lot 10M tax base (FMV of the improvement)
A and B agreed that A will allow B to construct a When will income be recognized: 2002 (date of
building on this lot completion of the construction)
However, A stipulated and accepted by B, that the
improvement shall belong to A at the end of the lease Under spread out method
period (25 years) tax base/value of income: value of improvement at
So B constructed the building the end of 2012
How to know value of improvement at the end of
Q:Considered as leasehold improvement? Yes 2012: you know that the value of building depreciates
through wear and tear
Q: Considered an income on A? Yes, there is flow of At end of 2012, no longer pegged at 10M
wealth You have to consider depreciation of the building
Kanya na yan, hindi naman siya gumastos
For depreciation: divide 10M by estimated life of the
Q: Is it taxable on the part of A: Yes building
Depreciation expense: value reduced per year
There are two methods to report an income for a LH 10M/20M: 500k (depreciation expense)
improvement: To be deducted from 10M per year
500k x 10 years: 5M
2 methods to report an income for a LH At the end of 10 years, value then is just 5M, no
improvement longer 10M
1.outright method (OM) How much is the income to be spread over during the
2.spread out (SOM) term of the lease: 5M
Because tax base is the value of the improvement at
Outright Method the end of lease term
Recognition of an income at the completion of the Recognize in year 2002 to 2012
contruction of the leasehold improvement based on You will Spread over during entire duration of
FMV contract of lease (10 years)

Spread out Method Do not internalize how to compute, internalize the

Recognition of income will be equivalent to value of tax base, analyze the manner on how to recognize
improvement at the end of the lease period, to be the income
spread over the term of the lease Under OM, how to recognize income: lump sum; at
the completion of construction
Example: Under SO: how to recognize income: FMV at the
A and B agreed that B will construct a building on date of completion of during entire term of the lease
A’s land
Lease term: begin at 2002 and 2012 (lease period is Outright Spread Out
10 years) Method Method
They agreed that the lease term will not begin unless How to Lump Sum During the entire
2012 arrives Recognize term of lease
Beginning 2011: B already constructed a structure Income
Finished after 2 months Tax Base FMV on date of Value of the
completion of improvement at
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
 construction the end of the Lessee is the withholding agent
lease term that
has been spread Technically, the lessor will only receiveP9,500 (net
over the entire amount received by lessor)
duration of the
lease period Q: P500, tax paid by lessor or tax paid by the lessee?
When to At the Paid by Lessor
recognize completion of Lessee is just the withholding agent
contruction
Example:
10k has been received by lessor every month and has
Example: been subjected to 5% CWT
Assume that using the SO Method, both A and B also Assume that for 10 months, the lessee withheld and
agreed that A will receive rental income of 10k per remitted P500 from the income of lessor in 10
month for the use of lot months:
Q: What are the incomes that are considered taxable 5k will be withheld
income of A for the taxable period; Lessor did not receive 10k, lessor only received
A uses SO Method P9,500
Consider: 10K every month x 12 = 120k (rental Will you still include 10k in the income of the lessor
income) at end of taxable period, subject to normal tax?
Income on part of A every year In the nature of CWT
Rental payments and the value of LH improvement: So include as part of GI at end of taxable period
considered rental income Include what has been received for the entire taxable
year
If question: is it subject to CWT?
Is it considered from an income from BTP? Yes If:
rental income, is this considered income from BTP? The total income is 220k
Yes Tax due assumed after deducting personal
since income from BTP, subject to normal tax: exemptions and deductions: to be 6k
Thus subject to CWT Can the 5k withheld for the 10 month period be
CWT is in nature of advanced payments considered as tax credit to reduce tax due? Yes
Nature of an advanced payment
Example: TP can withhold CWT to reduce tax due
Total amount of rent is 120k So TP will only pay 1k not 6k
LH improvement Spread over during duration of
lease: 100k August 25, 2012
What method has been used? SO Method
Every month, the rental income obtained by lessor is Midterm Exams
10k
Can this 10k be subject to CWT? Yes, 5%. MCQ
1.
Why is it called CWT? 2.
Because Lessee withholds a certain amount from the 3.
income before it remits the amount of rent to the 4.
lessor 5. Nowel Santos is a very bright con...

Under the law, it is subject to 5% tax 11. can compensation earners deduct expenses? No
5% is P500: to be taken by lessee They are governed by GI
P500 to be remitted by lessee to BIR Only deduction: special deduction under sec. 34 (m)
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Premium payments on health and hospitalization
insurance
Can compensation earner deduct travel expense?
No
12. ac doctor by profession in 2000
This provision, has been placed for the primary
reason that it gives leeway to TP who does not have
enough cash
To fully understand the rationale, we need to know
its conditions
Conditions for installment payments

August 25 (2nd Hour) does it involve sale of RP or Personal property?

Sale If RP on installment basis: may be subject to

Subject to CGT: as long as property is located in the installment payment tax
Philippines However, the following conditions must be present or
only one
Tax Rates (in so far as sale is of a property located a.the initial payments must not exceed 25% of the
in the Philippines) GSP
RC: 6% meaning, the installment payment must be less than
Tax base: GSP or FMV or equal to 25% of GSP to be considered as under
installment payments
NRC: 6% provided under sec. 49 of the NIRC

RA: 6% initial payments: are payments received by TP either

NRAETB: 6% in cash or property other than evidence of
NRAENETB: 6% indebtedness of purchaser during year of sale
Considered as an Exemption to GI tax rate:
CGT in so far as SOS and sale of real evidence of indebtedness: PN, etc.
property
Example:
Nature of CGT: Final Tax 1M is the selling Price
200k is the downpayment
RFC: not subject to CGT 400k shall be paid every year
NRFC: not subject to CGT Q: can the TP pay this tax on installment basis?
No explicit provision for CGT in so far as RFC and Consider: was the transaction made on installment
NRFC are concerned so subject to 30% Tax basis? Yes.
Next to consider: does it comply with requisites
NRANETB: subject to 25% FT on his GI under Sec. 49
Except to a.initial payment must not exceed 25% of the
1.CGT on sale of SOS not listed GSP
2.CGT for sale of RP located in the Philippines GSP in the problem: 1M
Exception: CGT on Sales of SOS not listed 25% of 1M: 250k
Does initial payment exceed 25%?
Hindi kasama ung real property, because for sale of No.
RP located in the Philippines: subject to 30% FT Can the TP pay his taxes on
installment basis? Yes
INSTALLMENT PAYMENTS (SEC. 49)
Example 2:
What is the premise on this particular provision? 1M is the selling price
300k down payment
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
350k every year thereafter
Q: will it fall under installment basis?
A: No
Because initial payment exceeds 25%
This is actually considered as deferred payments
***Next thing you have to remember:
ONLY be considered as initial payment if payment is
made during the year of sale
What if:
1M selling price
200k paid as down payment
Year of sale is 2010
Downpayment is to be paid 2010
100k downpayment will be paid 2011
350 every year between 2012 and 2013
Q: does it fall under installment payments?
How much was payment during year of sale? 200k
This is initial payment
100k not initial payment
Collected not in year of sale
Thus initial pay is only 200k
If only 200k, does it exceed 25%? No.
Will is fall under installment basis? Yes.
For personal property
Classify whether TP is regularly selling personal
properties on installment basis
If yes: then it will immediately fall under sec. 49
TP can also pay on installment tax basis
What if casual sales? Meaning NOT made regularly
Conditions
a.selling price must exceed 1000k
b.initial payment must not exceed 25% of the GSP
if these two are met, then falls under installment
payment of taxes
Q: A car
Purchase price: 1M
Parties agreed that 200k will be paid in year of sale
which is 2010
Late 2010: An additional 100k
Remaining balance of 700k will be paid in 2 equal
installments every year thereafter
Will we apply this rule or the second 1?
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Second 1.
Know if regularly engaged in selling PP on
installments on a regular basis
In this case, it was not stated that TP is regularly
engaged
So it falls under casual sale
Requisites under casual sales:
a.selling price exceed 1000k
it exceed
b.inital payment must not exceed 25% of the GSP
GSP here is 1M; 25% is 250k
Initial payments must not exceed 250k for it to fall
under installment basis
Here: is 200k initial payment? Yes (payment received
by TP as cash other than evidence of indebtedness)
Received in 2010, year of sale
What about 100k? Pangalawang bigay na yan
Still an initial payment because received in the year
of the sale
It is cash or property other than evidence of
indebtedness
Since we know initial payments, we’ll have to note if
these initial payments exceed 25% of the GSP
And you know that 25% of 1M is 250k
Does it exceed 25%? Yes
Will it be treated as installment payment or deferred
payment?
Deferred Payment.
If considered as deferred payment on the income
The cash equivalent of this particular note: Cash
equivalent is considered an income on year of sale
including the initial payments
Assume:
700k
If present value of note is 650k
How much is income of TP if deferred?
300 income of TP in 2010? Yes
Received in 2010
Can he avail of installment basis?
No. His initial payment exceeds 25%
If deferred payment ung present payment of note:
considered income in the year of sale because he
cannot avail of installment
In the problem
350 per year for 2 years
If present value is 650
Income in 2010? Or 2011 and 2012?
It is deferred payment, not installment payment
Thus income in the year of sale
If installment, you can report in the year of
installment
In this case, it is under deferred
Initial payment exceeds 25%
Thus, treated as income in the year of sale under
deferred
But not the value of the note which is 700k
The present value of note which is 650
You do not need to learn how to compute
Just remember the principle
Under deferred: the TP is not allowed to pay the tax
on an installment basis
Under installment basis: the Tp can pay the tax as it
is collected; as collections are made
INCOME FROM LONG TERM PROJECTS
(SEC. 48)
Long term projects under sec. 48
Defintion of long term contracts:
Are those to be constructed or installed for more than
1 year
Example:
The construction of a building begins in 2010
Ends in 2012
Is this long term?
Yes . completed more than 1 year
Falls under sec. 48
Under sec 48
Talks about a certain method: Percentage of
Completion Method
If a project completed more than 1 year, then basis of
computing income is on percentage of Completion
Method
However, you will learn that there are 2 methods:
1.Completed contract method
2.percentage of completion method
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
These are two methods involved in construction
projects
What is completed contract method:
Involves recognition of income in the year of
completion
Percentage of completion method
Recognition of income based on percentage of
completion of a particular project
Example:
Q:in year 2010, 40% has been completed in the
month of June
40% in september
The remaining 20% in December
Can we apply percentage of completion method?
No
Because construction is not completed more than 1
year
1 year lang nila tinapos
Thus completed contract method
Example:
Q: 40% finished 2010
2011 another 40%
2012: 20%
Considered as long term contract
Completed more than 1 year
Ang binayad sakanila ay 10M
Ang nagastos nila ay 9M
Anong magiging basis ng income?
The difference, kasi business
Cost can be deducted from gross kapag business
1M is the income
Magkano ang irereport na income for 2010?
The TP will only report a portion of 1M based on
percentage of completion
How to know percentage of completion under sec 48
There is a requirement that the return must be
accompanied by a certification from architects or
engineers engaged in the project showing percentage
of completion
OTHER EXCLUSIONS
Review:
 Donation mortis causa and donation inter vivos
Proceeds from life insurance
Excluded? If we talk about exclusions from GI, we are talking
Yes about those income not subject to income tax
Reason: indemnity It doesn’t mean that if its excluded, then its no longer
considered income
Amounts of premiums returned to the insured It just means that its not subject to income tax
Not taxable
Just a return of capital Q: is a gift considered an income?
Nagbayad siya ng premium tapos binalik sakanya Yes
ung premium But excluded from GI
Excluded? But subject to Philippine Tax
Yes. Not income tax, rather Donor’s tax

If: Q: bequests and devices

1M has been given to the insured since he survived Considered income
the insurance policy Flow of wealth
But amount of premium paid is only 600k Excluded from GI
Will entirety be considered excluded from GI? Subject to Philippines Tax
No. Not to income tax, rather estate tax
Only up to 600k
Kasi 600k lang ung return of capital Q: JR met a GRO and they lived together happily
Eh pano ung difference na 400k? Since JR was happy with the GRO, JR executed a
Taxable? Yes. Flow of wealth. deed of sale over a House and lot in favor of GRO
BIR said that this is compensation income kasi nga
Retirement pay and separation pay daw GRO
SSS and GSIS contributions: excluded The GRO said its not a compensation income so
excluded from GI subject to income tax
Prizes Who is correct? Then you have to think, is it in the
Just remember Efren Peñaflorida nature of a gift?
Olympic: excluded Deed of sale pero wala naman consideration, so its
relatively simulated not absolutely simulated
13th month pay, bonuses and other benefits upto So it is a gift
30k: excluded from GI No service rendered, they lived together because they
love each other
Under special laws In which case therefore, excluded from GI
Senior citizen: provided business income does not Not subject to income tax
exceed 60k But subject to donor’s tax
50% fraud penalty (BIR Ruling)
NEXT 50% fraud penalty: kasi tinago nila; nag deed of sale
sila instead of deed of donation
Gifts, Bequests,Devices
Compensation By Reason of Personal Injury Or
Bequests: personal property Sickness
Devices: Reap Property
Are these items received in nature of an inheritance? Example
Meaning received after death? Yes A car collided with a bus
So sa torts, covered ba un? Yes, mga damages
Gifts: during lifetime The passenger of X died
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Merong case and this was the judgment of the court:
1.there must be payment of hospital and medical
expenses
Q: is this considered an compensation by reason of
personal injury or sickness?
May personal injury ba? Yes
So not taxable
2.cost of repairs
Nagkabanggan so kailangan iparepair
Q: considered compensation for personal injury?
No. kasi sa car yun, hindi naman un personal injury
But is it not taxable or taxable?
Not taxable
Return of capital
3.Attorney’s Fees
Not taxable
It was just a reimbursement for expenes
Kailan grinagrant ang Attys fees?
Kapag nakitang hindi siya dapat nagkaso kundi dahil
sa taong un
Kaya hindi siya taxable
4.Moral Damages
May persona injury ba?
Yes sleepless nights, etc.
5.unearned salary
Ano reason kung bakit may unearned salary?
E nabangga siya, hindi siya nakapag trabaho
Dahil parin ba yun sa personal injury?
Yes.
So not taxable
Its by reason of personal injury
Nakpag work sana siya kung hindi siya nahospitalize
So on account of personal injury
6.Loss of Profits
Meaning business
Macocollect niyo ba un sa personal injury?
No.
So taxable
All that you need to remember is if it is collected
directly or indirectly through personal injury or
sickness then considered excluded from GI.
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Income by Reason of a Treaty
If there is a treaty, an entity cannot be immediately
exempt from tax
The entity needs to invoke the treaty before treaty
will be applied
Example
Assume there is a treaty between RP and Malaysia
And an entity is incorporated at Malaysia, engaged in
business at Malaysia
Pwede bang iassume kaagad ng entity na un na
exempt siya dahil lang may treaty?
No. Invoke treaty so it will be applied in its favor
Example
183 day rule
Considered a NRC if you have been out of
Philippines not less than 183 days
Not included under tax code, provided under a treaty
This period will only be applicable if the citizen is
outside the Philippines for employment
Benefits, received by a war veteran
For you to be excluded, the war veteran must be
residing in the Philippines
And the benefits received by war veteran must be
administered by the US Veteran’s Administration
If these requirements are complied with then
automatically NOT subject to income tax
Why? Because its part of the exclusion from GI
Income of Foreign Government (sec. 32 b)
Reason: International Comity
Q:if a financial institution is being owned or financed
by a foreign government, part of exclusion?
Yes
What if an international or regional financial
institution is being operated, not owned, by a foreign
government?
Included in the exclusion
As long as owned, financed or controlled by a
financial institution of a foreign government
Income of the Government or any of its Political
Subdivisions
Government refers to the Republic of the Philippines
(RP)
Basis: Tax exemption of the Government
Q: Can Congress amend this provision and state that
only the RP will be exempt but political subdivisions
will be subject to tax?
Yes.
Because there is no prohibition in the Constitution
GOCC’s
GR: Taxable
Unless the charter otherwise provides
Instrumentalities
Exempt
Is there a prohibition if ever the congress enacts a law
imposing instrumentalities to tax? No prohibition
Under a Special Law
RA 9504 (Minimum Wage earners)
Who are MWE’s?
Individuals who earn the statutory minimum wage
provided by the RTWPB
This exemption includes not only salary but also
holiday pay, overtime pay, NSD, hazard pay
Q: The statutory minimum wage in Baguio is P250
(assumption)
A person receives 250 a day
Will you consider him a MWE? Yes
Example:
If he receives 4k, Statutory minimum wage, OT: 500;
NSD: 100
Q:will the entire income be exempt from tax?
Yes.
Why? First thing to consider is SMW
If it falls within statutory MW even if you add the
additional payments and it exceeds the statutory
minimum wage, then everything is exempt from tax
provided that this falls under SMW
Salary lang ang titignan
What if this is the scenario?
Other than the ff income, he also received 1k
Commission, 35k bonus
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Q:does this fall under the exemption?
The rule under RA 9504 states: if the MWE receives
commission, honoraria, fringe benefits in excess of
30k, and other taxable allowances, the entire earnings
of the MWE shall be subject to tax
Q: in this particular case, will this be considered as
excluded from GI not subject to income tax?
Subject to CWT
To CWT?
Pag subject ba sa normal tax, subject na ba sa CWT?
FT? Not applicable
So is it subject to CWT? Yes
And at the end of taxable year, subject to normal tax?
Yes.
But only consider this as an advanced payment
So can you deduct from tax due at the end of taxable
period? Yes.
So is this subject to CWT? Yes
A compensation income tax
Commission: subject to CWT
....Copy kay Cams
RR 10-98
If MWE earns income from BTP,except income
subject to FT, the entire earnings shall be considered
as not exempt
But still, the SMW (includes holiday pay, etc.) shall
be exempt from WT
The MWE has an income and in that month the
business earned a net income of 5k
Is the MWE exempt from tax?
Is this taxable?
Yes. To normal tax at the end of period
...Is this subject to CWT? No
...No (CWT)
...Yes (CWT)
At the end of taxable period, will you sum up all
earnings for the year and include SMW, holiday pay,
etc. As subject tonormal tax? Yes
Not exempt from tax, only exempt from withholding
tax
May pagkakaiba un
Sa commission, allowances, honoraria, iaaply mo ba 50 points
un or lahat subject to normal tax and CWT? Yes 10 questions

Kapag other income lang is from BTP: only time to August 28, 2012
apply the rule that the entire earnings are subject to
tax but SMW and other earnings are not subject to Review
WT When do exclusions under special law on minimum
wage earners
A person works at Manila
this person earns 5000k every month Minimum wage earners exempt?
in a year, he receives 60k Yes
meron diin siyang interest income by reason of a Including holiday pay, hazard pay, nightshift
bank deposit: 10k differential, overtime pay
in that year what he earned was 50k
he also has commission for the year: 10k Situation 1:
bonuses amounting to 35k What if a MWE earns income other than those
mentioned earlier?
Q:dun sa unang category: receiving other than SMW Ex. commission, fringe benefits in excess of 30k and
(Commission, etc.): all are subject to tax other taxable allowances?
Ung pangalwa ay income from BTP: all are subject Not exempt;
but sa WT hindi muna sa SMW entire earnings is NOT exempt, thus subject to tax
Dito, pinagsama ko ung dalawa
Meron from BTP, meron ding Commissions and Situation 2:
taxable allowances What if MWE earns income from business, trade or
Taxable allowances kasi more than 30k profession
Q:if Q refers to tax in particular, then that means i Entire earnings exempt
am referring to normal tax to be imposed at the end
of the period But salaries, overtime pay, hazard pay, NSD, holiday
Is this subject to tax? Yes. No longer exempt; does pay are exempt from WT but at the end of the taxable
not fallunder 9504 period are still subject to Normal tax
..this? OT: Yes
..commission? Yes GAIN FROM SALE OF BONDS,
..35k? Only 5k (in excess of 30) REDEMPTURE AND OTHER CERTIFICATE
...50k? subject to tax net income from BTP OF INDEBTEDNESS

Pano kung sa exam ninyo hindi ko sinabing tax, ang But For the gain (from sale)
sinabi ko CWT Inorder to be exempt from tax:
Q:is this subject to CWT? The maturity period of this indebtedness enumerated
..... must be more than 5 years
What will you apply?
.... Exactly 5 years: Not exempt
But only with ...
Do not interchange interest from long term deposit
(guys nasa blackboard din to, di ko alam values hehe) 5 years and above

Gain (redemption of shares)

Shares must be ina mutual fund company (MFC)
Quiz Friday
All essay
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
To be considered a MFC: 22 b,d: must be an open
end or closed end company, incorporated in
accordance with investment company act
As long as redemption is in a MFC, no matter what
the period is from holding period is, then exempt
from tax
What if there is a loss in that particular redemption,
will it be exempt from tax?
No.
Taxability refers only to earning of a gain
There must be a profit from the transaction
DEDUCTIONS
Definition
Act of grace by the congress in order to reduce GI
TP cannot deduct if no law authorizes such deduction
Definitions are important!
It held you internalize principles behind it
Being an act of grace: follow strictisimi juris
Can mayor provide for deduction? No. Only
legislative branch: congress
It reduces “GI”NOT“gross sales”
Proforma equation for an accountancy student
GS/GR – cost of sales = gross income – allowable
deductions = net income x tax rate = tax due
Bakit kaya ganito yung formula nila?
Gross sales: amount indicated or agreed upon
between seller and buyer if it is a sales transaction
Cost of sales: not the same as expense
What makes it different from an expense?
Deduction vs. Cost
if we talk about cost, this represents the capital
ex.I boughtchoki2 for 1 peso and sold it for 2 pesos
my capital is 1 peso for that single choki
Why deduct cost?
Principle: You cannot impose tax upon capital.
Otherwise violation of due process for being
confiscatory
After deducting cost of sales you get GI
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Can GI be the basis of tax? Yes
Because it is already the income
Why remove AD? Because they are merely acts of
grace
Discretion of Congress to reduce
But for costs of sales: Congress cannot impose
because constitution provides that taxes must not be
confiscatory
For AD, you can reduce the GI but must follows
conditions set forth by Congress
Meaning, being merely an act of grace, there are
conditions which have to be compiled with by TP
If you deduct allowable deductions you get net
income
Can NI be tax base? Yes
Tax due:
Is this the amount to be paid to the BIR or is this the
tax liability
Take note, there is a difference between the two
questions
a.Is this the amount to be paid to the BIR?
No.
not automatic that this will be the one to be paid by
the TP
there may be tax credits
tax credits: will not reduce the income rather it will
reduce tax liability
If TP paid CWT during a particular period, can the
amount of CWT reduce amount of tax liability? Yes
In nature of advanced payment
Tax due not necessarily mean that this is the amount
to be paid to BIR
Because the tax due can be reduced by the amount of
tax credits or amount of CWT collected or paid
during that taxable period
b.Is this the amount of tax liability?
If you deduct all this items you will get the tax due
and payable
Remember:
AD are available only to TP engaged in BTP

Cannot be deducted by compensation earners, other
than personal exemptions
Except: special deduction
Only one
Sec. 34 (m)
Premium payments on health and hospitalization
insurance
Does this deduction presuppose an insurance policy
obtained by TP?
Yes because it refers to premium payments.
What are the requisites under Sec. 34 (m):
1.the amount to be deducted is equal to 200 per
month or 2400 a year or the amount actually paid by
TP whichever is the lowest
2.the gross family income must not exceed 250k a
year
3.it can only be deducted by TP who claimed the
additional exemption
Q: H and W
H earns 250k pesos
W earns 200k pesos
Under the law, the person who can avail of the
exemption is the H
Unless the H waives the exemption in writing,
working abroad, abandoned the family
2 types of personal exemptions:
1.basic personal (RA 9504)
All TP, whether single or married, are entitled to 50k
If with children: each qualified dependent children:
additional exemption of 25k each; not exceeding 4
children
Assume that H and W have 5 children, can H deduct
50k? Yes.
Because All TP are entitled to basic personal
exemption
Can W also deduct 50k? Yes. Because also an
Individual TP
Each individual TP is entitled to basic personal
exemption per year
They have 5 children
Who will deduct additional exemption? The H
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
How much is the additional exemption that can be
availed of by the H: P100k (25k x4 qualified
dependent children)
They are paying P200/month premiums on health and
hospitalization insurance
In one year’s time, this amounts to P2400k
Who can deduct 2400? None
Because Gross Family Income exceeds 250k (the first
requisite is not complied with)
So the moment the GFI exceeds 250k, regardless of
fact that they are paying such premiums, neither of
spouses can deduct premium payments
This is the only deduction that can be availed of by a
compensation earner other than personal exemptions
DEDUCTIONS V. EXCLUSIONS
NATURE OF EXCLUSIONS: (SEC. 32 B)
Take a look at the enumeration:
Gifts, bequests, devices
Are they in the nature of disbursements or are they in
the nature of flow of wealth meaning an income?
They are income, there is flow of wealth but not
subject to income tax
For the primary reason that they should be subject to
donors tax and not income tax
Life insurance proceeds
There is flow of wealth, there is an income
Excluded because in the nature of indemnity
Looking at the enumeration of exclusions, these are
all in the nature of income
Meaning there is a flow of wealth on the part of the
TP
ALLOWABLE DEDUCTIONS:
Taking a look at the enumeration, these are all in the
nature of disbursements
not income
Deductions v. Cost
Deductions/expenses: additional disbursements other
than a return of capital
Costs: return of capital So may sobra sila sa tax, ung TI
Millions yan, kasi di ba nagpupurchase sila
When AD allowed: So may naipapasa sakanilang VAT, pwede pa nila
a.when there is a law providing for such deduction yung ideduct, so sobra at the end of the period
b.if TP complies with conditions set forth by law Ang ginagawa nila, pwede nila yung ibenta
c.if deductions are reasonable Halimbawa and SMART nagbabayad ng VAT
Kung ung tax credit ng TI eh 10M, anong gagawin
remember: dito?
deductions are tax exemptions A person can act as broker
strictisimi juris applies So ibebenta lang ng TI for 6M
May earnings ba ung TI dun? Oo naman kasi hindi
CASES: naman na nila yan magagamit
Usually they have a period of 5 years but it can be
CIR v. Central Drug extended but should be renewed in the BIR

A tax credit si subtracted directly from one’s tax
liability/tax due
On the other hand, a tax deduction is a subtraction
from Gross Income for income tax purposes
For tax credit to be applicable:
presupposes tax liability
cannot apply if without tax liability
For deduction:
does not presuppose tax liability; so long as there is
income
If without GI: can still allow AD
Under NOLCO (net operating loss
carry over)
Does not necessitate a GI because NOLCO
can be applied
So bakit ginagawa ng government na pwedeng
itransfer?
There is a BIR ruling which states that it can no
longer be transferred
But this is unconstitutional for being confiscatory
That is a property, binayaran mo na yan sa
government
Q: si TI nagbenta 6M, panoo kikita ang broker?
Magpapatong siya, ibebenta niya sa SMART ng 7M
Kukunin ba ng SMART un at 7M? Yes
Because SMART can use up the entire 10M
Kumita ba si SMART by purchasing a tax credit
certificate? Yes ng 3M
Tax credits are in the nature of property of the TP
Reason wny no limitation on its usage

If continuous losses CIR v. Central Drug

Use tax credit for next taxable years
No limit to use of credit SC also discussed sales discounts, cash discounts,
trade discounts
Tax credits can be sold Sales discounts: preprogative granted by seller
Tax credits are in the nature of property of the TP Cash discount: a discount granted if you paid on time
To disallow would be unconstitutional for being Trade discount: discount granted to buyer if he buys
confiscatory in bulk
Tax credits are property
They have interrelated sales discount with the senior
Example: citizens act
TI has large amount of tax credit certificate RR: Ang senior citizens discount daw are in the
Zero rating sila nature of sales discount
Ibig sabihin may output VAT sila pero may input Since in the nature of sales discount, then it must be
VAT din deducted from the gross sales
So sobra sila sa tax Sales discounts are part of your gross sales
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño

Lets say the selling price is 1k
But i have granted sales discount of P50
So my selling price is P950
This is my net sales
Ang sabi nila, senior citizens discounts are in the
nature of cash discounts or sales discounts
Thus must be deducted from the income
On the other hand the people that contest that
RR:
Should not be deducted from income, rather should
be deducted from tax liability
When this case has been entertained, the applicable
law that time is RA 7432
Under RA 7432, congress specifically provided that
senior citizen discounts are in nature of tax credits
If that was the law provided by Congress, is the RR
in accordance with RA 7432?
No, because if tax credit, then it must not be deducted
from the income
Rather must be deducted from tax due
There is a difference if you treat it as tax credit from
tax deduction
Is RR contrary to law? Yes
Remember:
Tax credits are voluntary
If a TP does not want to deduct the Tax Credit from
his tax liability, is he free to do so?
Yes that is his prerogative
However, you have to remember that under CIR v.
Central Drug (June 2008)
Ra 9257
Senior citizens discount are no longer considered tax
credits, but they are now tax deductions
RA 9257 Amended by ra 9994 in 2010
Carried over the same provision of tax
deduction
So presently, senior citizens discounts are considered
as tax deduction
If tax deductions, will you subtract it from income or
tax due/liability?
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
From gross income
They are now considered as deductible expense
Q: can you seek refund of tax credit?
No
Primary reason: Not an illegal or erroneous payment
Be very particular with the year when it comes to
senior citizens discounts
Beginning 2003 (RA 9257): senior citizens discounts
are tax deductions
Before 2003: considered tax credit
...BIR ITAD Ruling.. discussion on a problem on
midterm exam..
KINDS OF DEDUCTIONS
1. Optional standard deductions (OSD)
2. Itemized Standard deductions (ISD)
OSD
Do not have substantiation requirements
No receipts needed to substantiate this deduction
In filing of return who availed of OSD: TP no longer
required to file along with return his Financial
Statements
Return lang ang iffile, hindi na iaatach ung FS
Cannot be availed of with NRA (Sec. 34 L)
ISD
Must comply with substantiation requirements
Needs to be supported by receipts or other documents
In filing of return: TP should file FS along with
return
Can be availed of by all except for those NRANETB;
NRFC (30% FWT on GI except CG on sales of SOS)
Q: which is better?
It Depends
OSD has a limitation
only equivalent to 40% of Gross Sales for Individuals
TP
If corporation: 40% of GI (RA 9504)
Is there a difference between the two? Yes
What is the difference? It has a pnemonic
Amount of deduction for an individual might be Obviously formulated by a guy
higher compared to OSD of a corporation
Why? 1.Bad Debts
Because for corporation the basis is GI; presuposes 2.Interests
thatt Gross Sales has already been deducted 3.Taxes
4.Expenses (necessary or ordinary)
Application: 5.Depreciation
10M : Gross Sales 6.Depletion
9M: Cost of sales 7.Loss
Equals 1M : GI 8.Charitable contributions
9.Pentions / trusts
TP does not have any receipts 10.Research and development expense
So he chose OSD
How much is the AD if TP is a RC: 40% of 10M BAD DEBTS
For individuals: basis of GS
So 4M Conditions:
1.must be actually asserted to be worthless
What if: 2.charged off during taxable year
TP is DC: 3. connected with BTP of the TP
Availed of OSD 4.must NOT involve a transaction between related TP
OSD: 40% of 1M
400k Related TP: (sec. 34 b)
So the corporation has a Net Income
Atleast 3 demand letters and the third one must come
Remember: from a lawyer
Once it has been availed of by TP, then it is
irrevocable for that taxable year Charged off/written off: must have been completely
removed from books of accounts of the TP
Example: If TP merely estimated it as a bad debt? Not bad debt
An Individual TP who earns income from BTP is expense.
required to file his return at the end of every quarter
So first quarter which is march, there is a period Exclusions upto there: quiz coverage
wherein the TP must file his return
In the return, he will indicate if he will will avail of September 4, 2012
ISD or OSD
Quiz
1st Q: TP filed his return
He indicated that he will avail of OSD 1.a.by provision of law, earnins of MWE is exempt
End of taxable period: he changed his mind, want to unless he receives incoem fromother sources or
change to ISD taxable allowances of benegits
Not allowed by law In this case, no other....
Next taxable period: can change
b.gains from sale is generelly taxable. But
Enumeration of ISD (BITE DeDe Loss CPR)
Aside form fact that there are substantiation abroad: textile
requirements, there are also conditions that have to be Philippines: retail
complied with (sec. 34)
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño

Abroad:merely a branch
Lecture
Be very careful with spelling
In the bar examinations, if you’re not sure about the
spelling, use a synonym
Some examiners giver great deal to spelling
Also be careful with grammar
But and are conjunctions: must add two phrases
September 7, 2012
DEDUCTIONS
Optional Standard Deductions
Available only to RC, NRC, RA, RC, RFC
Can NRA deduct OSD? No
By reason of explicit provision of the tax code
Especially if it concerns NRANETB
Why?
Because a NRAENTB cannot deduct any expense
particularly OSD or ISD
Next thing you have to consider
is that for OSD there are no substantiation
requirements
On the other hand, if we talk about ISD, they require
documents or receipts for their deductibility
OSD
What is the rate?
40%
Of what?
Depends on type of TP
If individual TP: 40% of the _____
If corporation: 40% of GI
Irrevocable for that particular taxable period
Meaning if TP used OSD this taxable year, TP can
change it to ISD the following year
Because irrevocability pertains to a taxable period
For ISD
Remember enumeration
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Only compensation earners can deduct premium
payment on health and hospitalization insurance
Not a correct statement
All individual TP except NRANETB can deduct
premium payments on health and hospitalization
insurance
This special deduction is not limited to compensation
earners
Requisites for Bad Debts
If you have read all requisites for deductibility, there
is a common denominator:
Expense must have been or incurred during the
Taxable year in connection with the trade or business
or Profession of the TP
However, it is important for you to remember that the
Bad Debts must not have been sustained through a
transaction if the parties are under Sec. 36 (b)
Sec 36 (b)
enumerates related parties or related TPs
Related TPs are not limited to members of a family
Members of a family is limited to spouse, ascendants,
descendants, brothers, sisters
Who else is covered?
Covers situation wherein transaction entered into
between individual and corporation wherein which
50% of the outstanding stocks of that particular
corporation is owned by the same individual
Except of course if the bad debts was incurred by
reason of distribution in liquidation
What if
It has been entered into between two corporations
50% in value of the Outstanding stocks of each of
which is owned by the same individual
But ofcourse the other corporation is considered as a
personal withholding company
Also under Sec. 36 (b)
Fiduciary of trust
There is fiduciary trust
Wherein which the grantor is the same individual
Next to consider under bad debts
You must interrelate it with cash basis TPs
What if the TP employs cash basis in recognizing his
income
Q: can this TP report Bad Debts Expense for tax
purposes
What is TP on cash basis?
He reports income only when collected
If no collection, then TP will not report any income
Can this person deduct Bad Debts expense?
No
Allowable deductions must be related to the income
earned by TP
In this case, a TP who reports income on cash basis
will never report income if it’s not yet collected
So basically, all income are considered as cash
collections
What if
SOS were purchased by an individual and later on
they became worthless
The SOS are classified as capital assets
Q: can the TP report this as Bad Debts Expense?
Pertaining to the value of the SOS which became
worthless?
No.
I have stated that the SOS are considered as capital
assets, so is it related to the business of the TP?
No
Treated as a capital loss
Why? Because related to a capital asset
INTEREST
Elements
a.must have been paid or incurred during the taxable
year
Sec. 36 (b) is applicable
Under Sec 36 (b) there are only 3 ISD
Bad Debts, Interest, Lossess
Example
Q: in year 2010, the TP obtained 1M loan
And every year the TP is required to pay 30% interest
per annum
Meaning TP is required to pay 300k every year
Until 2012
Q:in the year 2010 TP has forgotten to deduct 300k
from GI
Heo nly remembered that he has an interest expense
in 2011
He deducted 600k from his GI
Was the deduction correct?
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
600k comprises 300k for 2010 and 2011
Thus cannot deduct 300k incurred in year 2010
Only deduct that earned in 2011
What about 300k for 2012?
Cannot recognize in 2011
The interest expense must arise from and
indebtedness not to be used to finance petroleum
operations or must not be disallowed by law
Sec 36 (b)
Why?
Interest expenses are treated differently under
petroleum operations
Not provided under tax code but jurisprudence
For IE to be deductible
Must be by reason of a valid and enforceable
obligation with bona fide debtor-creditor relationship
Example
Q: indebtedness was incurred in 1997
1M
2010 the creditor started collecting from debtor
including interest
Debtor paid 500k interest for years 1997 to 2009
100k corresponds to interest for year 2010
Can TP deduct 100k?
Pano kung nagkokolecta lang si Creditor pero si
Debtor hindi nagbabayad pero gustong ideduct ni
Debtor as interest expense because law states “paid
or incurred”
Payment is not material for deductibility of expense
for as long as incurred during that Taxable Period
Q: can Debtor use 500k on 2010?
No, incurred during prior taxable periods
Q:what about 100k in 2010?
Then you’ll have to look at elements
Interest must arise from a valid and enforceable
obligation
The obligation here is valid
The obligation is also enforceable
If Creditor sues Debtor to claim, does D have a
defense to say that the debt is not enforceable and the
case is dismissible?
There is.
Obligation has already prescribed, there is only 10
years to collect
Therefore can Debtor deduct interest expense?
No more
No valid and enforceable obligation
Interest must be stipulated in writing
Next element (under civil code)
Otherwise void stipulation
Example:
GR: Interest Expense will be deducted in it’s entire
amount
Assuming that the business person obtained loan of
1M
And creditor imposed 30% interest per annum
So 300k per annum IE
The entire 300k can be deducted from GI as a general
rule
Exception:
If there is Interest income subject to Final Tax then
Interest Expense shall be reduced by a certain
percentage of the Interest Expense subject to Final
Tax
What is the reason behind this rule?
To discourage tax arbitrage scheme
What is Tax arbitrage Scheme?
The TP gets a back to back loan
And 1 loan is imposed on a lower tax rate
And the other loan obtained by TP shall obtain
higher tax rate
Example:
Assume that the interest expense amounted to 100k
And there is also and Interest income obtained by
reason of a bank deposit
And the interest income earned amounts to 100k
Q:what is the tax implication of the Interest Income
from bank deposit?
Subject to FWT of 20%
TP will pay 20k
The TP at the same time incurred (expense:
“incurred”; income: “earned”)100k Ineterst Expense
during same taxable period
Will this amount result to a tax savings on part of TP
in so far as taxes are concerned?
Yes
Because TP can deduct it from GI
Tax rate on that GI if corporate TP? 30%
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
There is a tax savings on part of TP amounting to 30k
Tax saving: kasi halimbawa 200k ang GI
There is only 1 expense, Interest expense
So 100k and idededuct nya
NI is 100k
30%
Tax due: 30k
Compare when there is no Interest Expense
How much is taxable income?
GI is 200k
Taxabale income is 200
If you get the NI you mulitply it by 30%
How much is the tax rate?
60k
If you compare if there is deduction of Interest
Expense there is tax saving of 30k
Pero pinadali ko lang
I just got the expense multiplied by 30% and you get
the same answer
This is called Tax arbitrage scheme
Wherein which the TP gains more than the
government
The government only gets 20k from the Interest
Income;
On the other hand the TP gets tax saving of 30k
This is reason why the tax code provides for a
limitaiton when there is an Interest Expense subject
to Final Tax
Ayaw nilang magpalugi 
Tax Code: 33% limitation
Why do we impose such limitation and why at this
rate?
Prior to 2009 the tax rate for corporate TP is 35%
Prevent scenario wherein government is being at a
disadvantaged side
But if we compare it on Interest income its 20%
Difference is 15%
So parang kumita ung TP ng 15%
To neutralize, the entire is 35%
Your getting the ratio of tax saving of the TP: 15%
divided by 35: 42%
This year
If tax rate is 30%, 20% is imposed on 20%
Tax saving is 10%
For government to get amount of the tax saving:
Get 10 divided by 30%
33.33%
Kaya nila nakuha ung limitation na 33%
But only applicable only to corporate TP
For Individual TP
Tax rate: 5-32% under sec. 24 (a)
Highest rate is 32%
If you compare to 20%
May tax saving siya na 12%
Just get the ratio: 12% divided by 32%
37.5%
That’s why limitation for individual TP is 38%
Dun nila nakuha un
If you really hate math, then just memorize the
percentages
33% for corporate tax payers
38% for individual tax payers
But that limitation is only Applicable 2009 onwards
Before: 42% limitation
Let’s apply the reduction
The TP obltained a loan of 1M
The interest rate is 30% per annum
During the same taxable year, the TP has a deposit
with BPI Manila where he earned 100k interest
income
Q: will you deduct the whole 300k as expense from
the GI?
No
TP earned an interest income subject to FT
How much can be deducted during this period?
Tax code provides that the amount of IE shall be
reduced by a certain percentage, assume that TP is a
corporate TP, which is 33%, 33% of the Interest
Income subject to FT which is 100k
Reduction is 33% of 100k = 33k
Not 300k
Deductible IE: 267k
The only thing you need to remember as law students
is that if there is an interest income subject to FT then
the amount of interest expense shall not be deducted
in full. It will be reduced by a certain percentage of
the amount of interest income subject to FT.
Another example
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
IE amounted to 1M
The TP earned Interest income from bank deposits in
Hong Bank (200k)
Also interest expense from Bank deposit at BPI
Manila (100k)
Also earned Interest income on a loan agreement
between X Corporation and Y Corporation (300k)
Can TP deduct the entire amount of 1M pesos as
Interest Expense?
Determine first if Interest Income is subject to FWT
HK Bank: No, territoriality principle, located outside
the Philippines
DC (X and Y Corp): subject to tax but not FT, only
NCIT
Interest Income from bank deposit at BPI Manila:
subject to FWT: 20%
Y corporation loan agreement (where X corporation
earned 300k was earned due to the loan):
What interest income is subject to FT? Interest
income from banks or financial institutions
In this case, subject to NCIT only since not bank
Interest Expense will be reduced by 33% of the
amount of Interest Income subject to FT
How much is this? 100k
Only amount subject to FWT
Deduct 33k from entire amount of Interest expense
So how much can be deducted?
Only 967k
OPTIONAL TREATMENT OF INTEREST
EXPENSE
Refers to deduction of Interest Expense
Under tax code, if an indebtedness had been incurred
to acquire property to be used in BTP and there is
interest expense, then IE can be treated either as an
outright expense or a capital expenditure at the option
of the TP
Application
I am engaged in business of manufacturing cars
I bought a machine which is necessary for business
Machine is Worth 1M
I bought it in January 2010
supplier gave leniency to pay 1M, i can pay
December 2010
however, the supplier stated that this will be subject
to 30% interest
so basically, i will not only pay 1M Interest? Can be deducted from GI? Yes
I will pay 1.3M
there is interest expense on my part as purchaser Surcharges? No
i can apply optional treatment of IE Late payment is frowned upon
incurred to buy property for BTP
if i will treat this IE under outright expense during Compromise penalty? No
this taxable period
can the 300k be deducted from GI? Q: a TP, X, entered into a contract of sale of a capital
Yes, outright expense asset with Y
I can deduct it immediately from GI at time the Buyer: X
idebtedness is paid or incurred Seller: Y
What if i treat it as capital expenditure, can i deduct By law, who is the one obliged to pay CG tax? The
300k from GI? seller
No But can parties stipulate that buyer be the one to pay
Because if TP will treat it as Capital expenditure the CGT? yes
This means that IE will form part of the purchase Here, X agreed to pay purchase price of 1M plus
price of the machine purchased CGT plus DST
So instead of reporting 1M as cost of machine that i However, X was not able to pay the CGT on time
have purchased So in which case he also paid surcharges and interest
since i have treated it as Capital expenditure, i can and penalties
report 1.3 M as the cost of the machine that i have X will use land for business purposes
purchased Q:can X deduct CGT from GI?
During this taxable period, i will not report any CGT is an income tax thus cannot be deducted
expense related to this particular amount DST, can be deducted
Surcharges? Cannot be deducted
However, the 300k can be amortized during the next Income tax? yes land is for business of TP
succeeding taxable period Penalties? No
But 300k will no longer be considered as IE since it
forms part of purchase price Income tax: despite fact that income tax is non
Then Cosidered as depreciation expense deductible tax, the interest on income tax can still be
deducted from GI
INTEREST ON TAXES
Not all taxes are deductible from GI September 8, 2012
Can you deduct income tax form GI? No
INTEREST PAID IN ADVANCE
Composition of tax payments of a TP
Basic tax (apply tax rate) Codal provision states:
If there is delayed payment of taxes or delayed filing: If a TP reports income on cash basis
a.20% interest per annum Through discount or otherwise
b.Basic tax will also be subject to surcharge of 25%
of the basic tax (one time imposition) What is a discount?
c.Compromise penalty not exceeding 25k A: Debtor
B: Creditor
If this is an income tax, can TP deduct the basic Loan: 100k
tax from GI? Instead of 100k, B will only deliver 90k to A
No A will not get the entire amount of 100k
Because income tax is one excluded by law to be But In reality the principal amount is still 100k
deducted Meaning At the end of the period, A will still pay
100k
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
However, B will only deliver 90k Here, 250k out of 1M is considered the amount of the
Because 10k is considered the interest principal paid or amortized
And 250k over 1M is ¼
This is called discounting of loans
Meaning interest has already been deducted at the Q:How much interest can A deduct during this 3rd Q
time of delivery of the proceeds or the principal 2010? Only 100k
amount to debtor Because the rules state that An amount of interest
expense corresponding to the principal amount of
If there is a discounting of loan paid or amortized shall be considered the allowable
Apply rules under interest paid in advance deduction from the GI of the TP
BUT Applicable only for TP who report income on
cash basis
TAXES
Rule under this principle
Interest will Only be AD in the year the indebtedness Principles
is paid Incurred in connection with BTP of TP
If indebtedness is paid in Lump sum During taxable period
If indebtedness is paid on installment basis: interest Must not be excluded by law
shall be allowed as a deduction only as to the amount
equivalent to the principal paid or principal amortized There are 4 categories which are considered as
non deductible taxes:
Situation: 1.income tax
2010 2.Donor’s tax
A and B agreed that A will borrow 1M from B 3.Estate tax
When B delivered loan proceeds to A, A agreed to 4.Special assessments
only take in 600k
Why? Deductible items: (CAM Import Local DOPE)
Because 400k considered interest expense 1.community tax
Assume that A will pay in 2011 2.Automobile registration fees
Q: can A deduct this as interest expense in 2010? No 3.Municipal taxes
In 2011? Yes. Year when paid; if lump sum payment 4.Import duties
1M paid in entirety on 1 singular date 5.Local business taxes
6.Documentary stamp tax
What if 7.Occupational tax
1M is Not paid in lump sum but on 4 quarterly equal 8.Privilege tax
installments 9.Excise tax
250k: 3rd quarter of 2010
250: 4th quarter of 2010 CGT
250: 1st quarter of 2011 Cannot be deducted from GI even if land will be used
250: 2nd quarter of 2011 for business
Because CGT is in the nature of an income tax
Question Income tax is Excluded to be deducted
3rd Quarter 2010: can A report 100k as his interest
expense? No DST
Because the rules state that An amount of interest Can be deducted especially that the land being
expense corresponding to the principal amount of purchased is for business purpose
paid or amortized shall be considered the allowable
deduction from the GI of the TP Foreign Income Taxes
Subject to alternative treatment at option of TP
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
a.Either as tax credit
b.Or declare as deduction from GI
If claiming as TP is claiming as tax credit: can no
longer be declared as deduction from GI
Can be claimed as a deduction from GI of a Citizen
or Domestic Corporation
Or a tax credit from the liability of a Citizen or a DC
For us not to be confused:
For Citizens, does it include all kinds of citizen
resident and non resident?
No
Why not? Just go back to the essence of tax credit in
so far as foreign income taxes are concerned
Imposition of TC: to countervenes effects of double
taxation
Now is it possible for double taxation to come in if its
a non resident citizen? No
Because Only income sourced from within is subject
to Philippine tax for Non residents
Thus this provision only Applies to Residents citizens
If corporation:
Only includes DC or partnerships duly registered
under laws the Philippines (treated as DC insofar as
taxation is concerned)
RFC and NRFC not included: double taxation never
sets in cases of these two
Because only income sourced from within are subject
to income tax
Is possible that alternative treatment will apply to
estates and trusts?
Yes
Treated as individual TPs
Will this rule apply to GPP?
No.
A GPP is not an income TP
But applicable to the members of the GPPs
They are the ones considered as TPs
Tax benefit rule applicable?
First thing to consider: Is it a deduction? Yes
So TBR applies
Only applies if there is income tax benefit on the part
of the TP
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Deductions will always benefit TP but will not
automatically result to an income tax benefit
For NRAETB and RFC: taxes are allowed as
deduction to extent of income earned from within
EXPENSES
Ordinary or necessary expenses
Ordinary: if reasonably expected in business
Litigation expense/costs: Ordinary Expense
Necessary expense: incurred that will increase the
income of TP or minimize losses of TP
Advertising expense: Necessary Expense
Increases or tends to increase income of TP
Capital Expenditure (CE)
Not the same as expenses
CE: cannot be deducted from GI
Because They Treated as assets
Assets are not the same as income
Assets: resources
Income:results or output of the use of these resources
When will you consider it as CE and Expense?
If outlay or disbursement will tend to increase the life
or capacity of a particular asset then that is
considered as CE
Example 1
Q: i have a car
I asked someone to paint my car
Is that a CE or an expense?
Assume that i will use the car for business
Will it increase life or improve quality of my asset?
No it will not
So its just an expense
So can be deducted from my GI
Example 2
I have a car for business
I to change the entire engine
I bought a new one
Is this CE or Expense?
CE
Increases usual life of that asset

If treated as CE: assume that the engine is worth
100k
Cannot be deducted from GI
But can be treated as an expense? yes
No longer as an ordinary expense
You will depreciate it over its useful life
This CE will be transformed into a depreciation
expense
By reason of ordinary wear and tear
Requisites for deductiblity
1.ordinary or necessary
2.Incurred or paid within taxable year
3.Made in connection with BTP of the TP
4.Must be reasonable (very important)
Reasonableness of amount depends on income of TP
If income is 1B
then an expense of 100k is still reasonable
General foods case (read; in syllabus)
Here they have spent a large amount for advertising
expense
SC: Only a reasonable amount can be considered as
deduction as advertising expense
Because A part of it is good will and good will can be
amortized over expected life of that good will
But boils down to the very basic principle that the
amount of expense must be reasonable
Must be substantiated
Exception
Cohan rule
If there is a showing that expenses have been
incurred but the exact amount cannot be ascertained,
then the BIR can make an estimate of such deduction
subject to 50/50 limitation
Elementary requirement: there must be showing of
expense; without expense, the rule cannot apply
50/50 limitation
Assuming income is 1M
The estimate of BIR will not exceed 50% of the
income
Even if the TP deems it more proper to have a 60%
deduction
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Not applicable
Why?
Because the inaccuracy of the estimate of BIR will be
on disadvantage of TP because TP did not bring any
documentary evidene
5.if the expense is subject to withholding tax
The WT should have been withheld and remitted to
the BIR
2 types of expense subject to WT
1.salary expense
2.rent/lease expense
6.must not be contrary to law
Illegal income: taxable
Illegal expense: not deductible
Expenses contrary to law are not considered
deductible
“facilitation fee”:
illegal
Same as bribe
Not deductible
KINDS OF ORDINARY AND NECESSARY
EXPENSE
1.salaries
Deductible
Q: can the eer, deduct the entire amount of the
salary? Assume gross salary is 10k. Or allowed only
to deduct the net take home pay of that ee?
You know that the 10k hindi un ung actual na
matatanggap ng ee
Assume that and natanggap lang niya eh 7k
How much is the deduction of the er
The entire amount of salary which is 10k
Fringe benefits:
Deductible
Deduct grossed up monetary value
Always inclusive of the tax, not the net
Monetary value is already net of final tax
Amount of deduction will correspond to the gorss
amount granted to the particular ee
Inclusive of tax

Q: i was hired by a company
I will be paid 20k every month
For October: i have not reported to work
No work no pay principle
I only reported to work in november
But in the books of account of my eer, the salaries
expense include by salary 20k for the month of
october
Reason of eer: they have already enlisted me as an ee
for the month of october
Should this be disallowed?
Yes
Salaries expense to be deductible, the services must
be actually rendered
If i advance my salary?
Can it be deducted?
Naglabas na si employer ng pera
20k is my salaray every month
Binigyan nya ko ng 100k
80k is the advance payment
Can er deduct enitre amount?
No
Because services for the 80k have not yet been
rendered
Travel expense
Another type of ordinary and necessary expense
Can be deductible if:
Incurred while ee is away from home
Home: principal place of business of er
My traveling expense form home to office and vice
versa
Travel expense where i can ask for reimbursement
and er can deduct it from GI? No
Must bein the pursuit of business of eer
What if i was a manager and i have to visit a
branch office located at Hong Kong
Er pays for all expenses
Yes. A traveling expense
In pursuit of trade or business of the er
RENTAL EXPENSE
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
TP has not taken or is not taking title to the property
or has no equity other than that of being lessee, user
or possessor
Subject to 5% CWT
Therefore, if the lessee did not withhold 5% CWT
from the income of the lessor, can the lessee deduct
rental expense? No
Because if subject to WT, then the CWT should have
been withheld
Otherwise non deductible
Leasehold improvement
Income on part of lessor
Recognition of income is dependent if outright or
spread out method is used
On part of lessee
Sinong nag ooccupy during lease? lessee
So Used in business
rent expense on part of lessee
How much is amount of deduction from GI on part of
lessee?
Can the lessee use outright and spread out method?
NO
Only applicable as far as income is concerned
For expenses, in so far as leasehold improvements are
concerned:
The amount of deduction is Equivalent to annual
depreciation of leasehold improvement over the life
of the LH improvement or the remaining term of the
lease whichever is shorter
representation expense
another type of ordinary and necessary expense
Refers to entertainment, amusement or recreation
expenses
The only thing to remember is that it is subject to a
limitation
Subject to limitation:
Deduction should not exceed .5% of the Net Sales or
1% of Net Receipts
Net Sales: businesses engaged in the sale of goods, or
materials or products
Net Receipts: sales of services
Assuming that i am a broker
If you are a broker you do not buy or sell lots, you Different methods on how to compute DE:
are the middleman 1.straight line method
I earn commissions 2.Sum of the years digit method
Is it possible that i incur representation expenses? 3.Double declining method
Yes
Iddate ko ung aking mga prospective clients I will only teach you straight line method because
Assume that total amount of commissions amounted that is the easiest
to 100k
And i have incurred 20k representation expense Straight line method
Can i deduct the entire amount of representation Considers the acquisition cost of the property
expense from my GI?
Let’s check If i acquired a machine for 1M: this is the Acquisition
What is 1% of 100k? 1k cost
1% cause sale of products Also take into consideration the useful life
Despite the fact that actual amount of expense is 20k Why useful life?
Since subject to limitation, i cannot deduct entire Because at the end of the useful life, the asset can no
amount of 20k longer be used
Despite fact that it is fully supported by receipts
I can only deduct 1k If useful life is 25 years
How to compute depreciation expense under straight
Supplies Expense line method
Can only deduct from GI if supplies were fully Get 1M and divide by 25 years
consumed Amount shall be considered as depreciation expense

I have bought 10k worth of supplies (coupon bond, Assumes that the this amount is the value of the
ballpen, etc) property that has diminished over a particular period
At the end of the period, i have used up 2k of time
How much can be deducted?
2k was used Can NRA and RFC deduct depreciation expense?
8k was not used YES
Can only deduct if used if depreciable property is located in the Philippines
2k can be deducted
can a NRFC deduct depreciation expense?
Repairs Expense No
Det WON the expense or repairs are minor or major NRFC cannot deduct itemized deductions
If minor: Repairs expense
if major: capital expenditure (such as the car which NRNETB is not allowed to deduct either optional or
engine has been replaced) itemized deduction
Can be an expense under depreciation expense
NRANETB is not allowed to deduct either optional
DEPRECIATION EXPENSE or itemized deduction
Diminution in the useful life of a depreciable asset They are taxed at their GI
Asset: only pertains to tangible assets or tangible
properties Therefore NRAETB and RFC are allowed to deduct
depreciation expense only if the depreciable property
Why tangible only? or tangible property is located within the Philippines
If intangible such as goodwill, patents, etc: do not
call it depreciation, you call it amortization DEPLETION
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Exhaustion of natural resource Q: let us interrelate this requisite with requisite that it
Same essence of Depreciation only that depletion must be sustained or charged off during that
pertains to wasting assets particular taxable year
year 2010
LOSS TP suffered a loss of 1M
There are different types of loss This TP obtained an insurance policy but it cannot be
1.ordinary ascertained how much shall be compensated by
2.capital insurance
3.wagering So the TP cannot yet deduct the entire 1M so the
4.abandonment deduction has been suspended
Not yet certain what amount they can get as
Requisites for deductibility insurance proceeds
1.loss is that of the TP So in 2nd month of 2011
The insurance company has release the amount of
Example: 600k proceeds
A suffered a loss of 1M Q:can the TP still deduct the amount not
Also Closing his business compensated by insurance?
Can A transfer the loss to B so that can use it as a Which is 400k
deduction from B’s GI? 600k can no longer deduct as a loss since
No compensated by insurance, basically there is no loss
Because Loss is personal in nature What about the 400k not compensated by insurance?
Can this still be deducted from the GI of the TP?
What if there is a merger between A and B Yes
corporation The postponement of deductibility is by reason of the
Can the loss be transferred to the absorbing fact that TP is not yet sure of amount of
corporation? compensation it can receive from the insurance
No company
Because loss is not transferrable This is the Only exception to requisite that it must be
actually sustained during the taxable year
2.must be actually sustained or charged off during
that particular taxable year 6.Sworn declaration or notice addressed to BIR
informing them about the loss sustained but the
example notice must be made within 45 days from date of
Accountant forgot to record loss for the year 2010 occurrence or date of discovery (RR issued by sec.
Cannot be deducted Of finance)
Must be actually charged off or sustained in that
taxable year
Ordinary Loss
3.evidenced by a close and competed transaction
OL v. Capital Los
4.Must not be deducted from Gross estate for estate OL: arises ordinary assets; OA are related to business
tax purposes CL: arise from Capital assets; CA not used in
Because law does not allow double benefits by one business
single TP
Can a TP deduct OL from his GI from business? Yes
5.must not be compensated by insurance
Can CL be deducted from GI? No.
One basic element for deduction is that it must be
related to BTP of the TP
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
CL can never be deducted from the GI
Might arise from Theft, roberry, embezzlment,
casual, unusual, sudden occurences
Called casualty loss
Casualty Losses are deductible from GI of TP under
category of ordinary losses
September 11, 2012
Requisites for deductibility of losses
However amount is still uncertain
In which case therefore Accountant did not yet
deduct 1M from GI
Because Amount of insurance proceeds to be
received by TP is not yet known
In 2011 insurance company delivered 600k
Q: can the accountant deduct the entire amount of 1M
from GI in 2011?
No
Because 600 is compensated by insurance
600k of 1M cannot be deducted
One of basis requisites for the deductibility of losses
is that it must not be compensated by insurance

1.loss be that of the TP There is remaining amount of 400k (not compensated

Can the TP transfer the loss incurred by it/him to by insurance)
another TP? No Can TP deduct it from GI?
Losses are not transferrable; its personal in nature Yes
b.must be charged off during year where loss was Exception to the rule that the loss must actually be
incurred sustained or charged off during taxable year that it
was incurred
example What is the exception to that rule?
loss was 2010 If there is an uncertain amount of delivery of
accountant forgot to record the loss in books of TP insurance proceeds
Q: can it be recorded and deducted from GI in 2011?
No loss was not sustained n 2011 but in 2010 NOLCO
Net Operating Carry Over
c.notice requirement First know definition of Net Operation Loss (NOL)
tax code: sworn declaration, about the loss, must be
submitted to the bureau not less than 30 days but not NOL
more than 90 days Refers to excess of AD over GI
administrative issuance: must be within 45 days from
discovery of loss Pro forma computation for taxable income
Gross Sales – cost of sales (because it represents
causalty loss (CL) return of capital) = GI
arises from theft,robbery, embezzlement and other GI can be reduced further by amount of AD =
casual, unusual, sudden occurrences Taxable Income (TI)
if there is CL, there must be compliance with notice
requirement to the bureau Example:
1M is GI
d.must be evidenced by a closed and completed AD is 1M
transaction Is there NOL?
must not be compensated by insurance None
Cause there’s no excess
example
Q:year 2010 Example 2
Loss was 1M GI is 2M
In this year, it is known that the insurance company AD is 1M
will deliver proceeds to the insured, the TP There is a difference of 1M pesos
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Is there a NOL? No, otherwise he will be using both deductions since
No NOL is ISD
Because the amount of AD is less than GI
Example
Example 3
If GI 1M 2008 2009 2010 2011
AD is 2M GI 2 2M 2M 2M
Difference is 1M AD 3M 1.5M 2.5M 1.5M
Is there NOL? Taxable None .5M None .5M
yes Income
There is Net Loss Net loss 1M .5M
Because here, the AD exceeds GI
In 2008
What is very important about NOL? Can TP carry over 1M
Can be carried over Yes
The NOL or excess of AD over the GI can be carried Provided TP avails of ISD
over for thenext succeeding 3 taxable years Otherwise TP cannot avail of it
This NOL is considered as deductionfrom GI or NI of
the TP In 2009
If this is the essence of NOL, will you classify NOL Can .5M be reduced by the loss incurred in the
as part of allowable or itemized deductions? Yes previous year?
Because TP can actually use it to reduce the GI yes
In which case the nature of this NOL is considered as 1m can be carried over against .5
an itemized deduction Because NOL can be carried over
For the next 3 succeeding years in order to reduce the
If a TP uses OSD, the TP can no longer avail of income of the TP
NOLCO Taxable income for 2009: zero (0)
Nabasa niyo to?
Sasabihin niyo sakin, ay Mam hinde busy kami In 2010
(haha) Can you carry over?
Hindi pwedeng nabasa niyo lang without Yes
understanding Succeeding eh
Reason: But can you use it up, can you avail of NOL?
When a TP avails of OSD: means that TPs option is No because there is loss
irrevocable for that taxable period But will the 3 year period continue to run?
TP cannot resort to ISD at the same time yes
Thus OSD of 40% (of GS if individual; of GI if
corporation) in 2011
If OSD, there will always be NI equivalent to 60% Q of Mr Nagpala or Mr. Pablito:will you use up 2008
No matter what because OSD is limited to only 40% NOL or 2010 NOL?
On the other hand if TP avails of ISD: possible that Use up losses first in 2008
TP will not pay any taxes Bakit?
ISD may be higher than GI Obviously, maxeexpire na ung 2008 correct?
Thus there is net loss
First in, first out (FIFO)
Q:what is the nature of NOL So use 2008 first
Nature of Itemized deduction For the logical reason that if the TP will use up the
If so, and the TP resorted to OSD, can TP still deduct last one incurred
of OSD can he still use ISD? The TPs right to use the NOL will also be prejudiced
Taxation 1
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So TP will use up first the loss in 2008 2011: TP no longer enjoys TH, meaning it is already
So minus .5 then no net income mandated to pay if there is an income
2011 TP earned income of 1M
Q of Mr. Ada: suppose in 2011 the taxable Can TP deduct the NOL in 2010 from income earned
Income,before applying NOL, is 800k in 2011
Assuming that GI is 2.8M Limitation in the deduction of NOLCO:
AD is 2M a.Cannot be deducted by a TP who enjoys tax
So net is 800k exemption
You know that there is still excess of .5M in 2008 in 2010 where loss was incurred, TP was enjoying
Can you use it? tax exemption
Yes Thus cannot deduct 1M from income earned in 2010
It will be carried over for the next succeeding 3 years b.Can only be availed of by TP if there is no
So .5M substantial change in ownership
There is still a net: .3 75% interest retention / equity rule
Can the TP use up the NOL?
Yes 75% interest retention rule / 75% equity rule
There is no prohibition Reason:
The law states that it may be carried over, at the Prior to this provision, some big corporations
option of the TP, for the next 3 succeeding taxable indulged themselves in buying losing businesses
year Ganito ginagawa nuon, nung wala pa ung limitation
So TP can still deduct .3M from 2010? Halimbawa, BDO is a big corporation earning alot of
yes money
Assume that allied bank is a small banking institution
what if assume allied band incurred 10M loss
there is a loss (2010) What will BDO do?
still a loss (2011) BDO will purchase this business
2012, there is an income Bakit ipupurchase eh lugi na nga
Can 2008 NOL be deducted? No, has already expired Gagamitin ung NOL
What about 2009? Yes If they will purchase this small business, they will
What about 2010? Yes only purchase it for 2 or 3M
What about 2011? Yes But if you look at the FS, they can use up up to 10M
Just have to remember the 3 succeeding taxable years inorder to reduce the income
Assume that BDO is earning atleast 20M
TP enjoys tax holiday 20M compared to the amount they have purchased
TH: essentially tax exemption Allied Bank, 2M
Because During a particular period, the TP will not 2M lang binili pero 10M ung magagamit
pay any taxes to the government Malaki ba ung tipid nila? Yes
That’s what they do
Ex. That is why this provision was inserted
Pioneer enterprises enjoys TH For the TP to avail of NL, atleast 75% of the owners
For 3 years are the same owners with respect to the shares
2008 is the start of the operation where the TP is still Take note: 75% rule applies only if there is transfer
enjoying TH or assignment of rights or liabilities
2009: part of TH
2010: part of TH Example
Corporation earned income on 2008 Q: X and Y merged
income in 2009 X is the absorbing corporation
loss in 2010, 1M X prior to merger, incurred NOL
Will you apply 75% retention rule?
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No OI: income earned from business
The TP is the same Not connected with business of TP
But you can apply NOL to X Runs contrary to the basic element of deductibility of
all itemized deductions
What if
X and Y merged Wagering loss
X will absorb Y Same as gambling loss
Y is the entity that incurred the loss Gambling winnings: taxable (income from what ever
Q: Can X use the NOL? source)
Apply 75% retention rule? Yes Illegal expenses deductible? No
X can use NOL of Y One requisite for deductibilty: Must not be contrary
If atleast 75% of Y are still owners of their respective to morals, law, public customs
shares
Gambling losses can you deduct?
“estimates are not included in the NOL” Yes
What is NOL: excess of AD over GI Exception
Under AD, Estimates are not allowed To the extent of gambling winnings but not
It must be actually incurred or sustained deductible from other sources of income
Under bad debts, If mere estimate, not allowed under
AD Example
You can only include it if actually charged off during Income from business is 1M
that taxable year Gambling winning: 2M
Other AD, must be actually paid or incurred during Gambling losses: 3M
that Taxable year
No possibility therefore that AD will include mere 1M : taxable
estimates 2M: not taxable
Consider amount of gambling losses
OTHER TYPES OF LOSSES Remember that gambling lossess are deductible to the
extent of gambling winnings
Ordinary loss So we can deduct 3M from 2M
Net is -1M
CAPITAL LOSS Loss is higher than the winning
Incurred from transactions involving capital assets Is the winning taxable?
NCLCO (Net capital loss carry over) No
Take a look at the net value of the losses and the
NCLCO winnings derived from gambling
Losses incurred from transactions involving from
capital assets Q:There is excess of 1M gambling loss
Capital assets are assets and property not used in Can it be deducted from income of business?
business No
Because principle is that gambling lossess are
compare deductible to the extent of gambling winnings
NOLCO NCLCO But not deductible from other sources of income
a.OL CL
b.3 years 1 year ABANDONMENT LOSS (AL)
c.No limitataion has limitation Only applies in case of petroleum operations and
producing wells
Ex. of limitation
Can you deduct NCL from Operating income
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
All accumulated exploration and development
expenses shall be treated as AL if in case their
operations cease
For producing wells, the amortized cost of properties
subject to depreciation shall be considered as AL
when the producing well is abandoned
Example
Machine used for producing wells is 10M
Straight line method: depreciate over estimated
useful life
Useful life of machine: 10 years
Thus 1M depreciation every year
The following year the value of that machine is only
9M
The following year only 8M and so on
This is the allowance for the ordinary wear and tear
of that machine
Assume that the producing well is operating for 5
years
1M multiplied by 5M
Can TP treat the 5M as a depreciation expense for the
entire 5 year period?
Yes, every year nagmminus siya ng 1M
What if they abandoned the well after the 5th year
period?
Nagdepreciate po ba
Kasi nga na depreciate na ung 5M
May natira pa ba siyang cost nung machine?
Yes
You have to take note that at the start of the period,
the value of the machine is 10M
And over the 5 years, they have reduced value of
machine, in the nature of depreciation expense
In which case, the unamortized cost of the machine is
5M
The well has been abandoned, meaning it has ceased
its operations
Will you treat this as abandonment loss
Yes
The Tax code provides that an unamortized cause
subject to depreciation shall be treated as AL when
the producing well has been abandoned
Q of Mr. Pablito: pwede daw bang gamitin for the
next period?
Pwede daw bang hindi ideduct lahat
Taxation 1
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Transcribed by: Charlotte Cariño
Kasi loss nga so itemized deduction siya
Sagot ni mam: hindi ba nagstop na nga ung
operation?
What is the nature of AL, the producing well has
been abandoned
Meaning the ceased its operation
So if abandoned in 2011, may pagdededucan pa ba
siya ng 2012?
Wala na, nag stop na eh.
This is why you treat the unamortized cost
So that the TP will not be at a disadvantage
SPECIAL TYPE OF LOSSES
Q:I have purchased this lot
Now this is 1 hectare
There is shaft in the property owned by Jose
I have bought this lot from Jose and demolished it
I incurred expenses in the demolition
GR: this is an expense
However, rules and regulations provide that if
demolition is by reason of fact that a new structure
will be erected on the lot, not treat as an expense but
part of the cost of the lot purchased
You only treat the demotion expense as part of the
cost of the land if the demolition was made so that a
new structure will be erected on the lot purchased
Will you apply 36 (b) for loss
Yes
There are 3 instances covered by 36 (b)
a.bad debts
b.interest
c.losses
CHARITABLE CONTRIBUTIONS
Gifts granted to qualified institutions or to the
government
You have to categorize whether the contribution is
deductible in full or deductible with limitation
Deductible in full if recipient is any of the ff:
1.Government or its agencies or political subdivision
or GOCC’s financing priority projects
If not financing priority project: donation with
limitation; not deductible in full
2.foreign institutions or international organization in
pursuance or incompliance with treaties or
agreements or commitments between RP and the
foreign government or other special laws
3.accredited NGO
Conditions for deductibility if recipient is an NGO
a.the purpose for which the NGO was established
must refer to any of the following:
scientific, education, religious, youth, sports
development, health and charity
b.no part of income of NGO will inure to benefit of
any private individual
c.(very important)
not more than 30% of the donation shall be used for
administrative purpose
d.must be utilized not later than the 15th day of the 3rd
month after the close of the taxable year when gift
was given or received
example
june 10, 2010: recipient received gift
last day for utilization of the gift, assuming that
recipient is an accredited NGO:
taxable year: 2010
close of this taxable year: december 2010
3rd month after the close: march
So not later than march 15, 2011
e.when liquidated or dissolved, the gift must be
transferred to an accredited domestic association or
corporation
if exactly 30% was used for the payment of
salaries of staff
is it in compliance with requisite for deductibility?
Yes
Because not more than 30%
What if 31% or more is being used for salaries
Is it in compliance?
No
Already more than 30%
What if 29% or less?
Is it in compliance?
yes
what are other items covered, but with limitation
1.recipient is government but not engaged in priority
project
Taxation 1
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Transcribed by: Charlotte Cariño
2.accredited domestic corporation or association
engaged in religious, educational, scientific, cultural,
charitable,health, sports development, youth,
rehabilitation of veterans
3.social welfare institutions
4.NGO
Q: ABS CBN donated 1M in favor of an orphan
Can ABS CBN deduct 1M
No
Because the orphan is not any of those allowed
Anong ginagawa ng ABS CBN?
ABS CBN donates to a foundation
Bantay bata
Reason: foundation is an accredited organization
engaged in charity
So can deduct charitable contribution but subject to
limitation
Remember enumeration of recipients
For you to know WON the contribution is deductible
What is the limitation:
should not exceed 5% of Taxable Income without
benefit of the contribution
meaning TI before charitable contribution
that is if TP is corporate TP
If individual TP: 10% of TI before Charitable
contributions
Assume that
10M is the amount of NI
AD is 20M
GI is 30M
10M ang kita
AD includes charitable contributions amounting to
4M in favor of a social welfare institution
Will fall under charitable deduction with limitation
5% of the TI or 10% of the TI limitation
Basis of limitation:
TI before charitable contribution
Will you use 10M as a basis? No
Because This amount already considers the charitable
contributions
Dapat hindi pa na minus ung charitable contribution
Kaya taxable income before charitable income
Then how much is the income before the charitable
contribution?
Not 10M Treat entire amount as expanse for the taxable year
But rather 14M when operation has become profitble
2.deferred charge
If TP is individual Should not be added to cost of property subject to
How much is the limitation depreciation or depletion
10% Should be amortized for 60 months or 5 years
So 1.4M
Is 1.4 a limitation or qualifying phrase?
Only a limitation NON DEDUCTIBLE ITEMS
Such that you have to compare it with the actual 2 types of AD
amount of contribution which is 4M 1.OSD
So, can the TP deduct the entire amount of 4M? 2.ISD
No
Because it exceeds 10% of TI before charitable The common requisite for all:
contribution a.paid or incurred during taxable year
Instead of deducting 4M b.made in relation to business
The TP can only deduct 1.4
This is a Limitation on amount of deduction NON DEDUCIBLE ITEMS
Take a look at enumeration at Sec. 36 (a)
Q:Amount of contribution is 1M
10% of 14M is 1.4M 1.Personal living and family expenses
Q: howmuch is the deduction of TP? Even if not included, cannot be deducted to the GI of
Not 1.4 a TP
1.4 is just the ceiling To be reduction from AD must be connected with
Amount to be deducted is still 1M as this is the actual BTP of the TP
amount of contribution Personal expense is not related to the BTP of the TP

September 14, 2012 Family expense:

not also
PENSION TRUST
Private benefit plan established by eer for the benefit 2.Amount that has been spent for the construction
of ee of new buildings or new improvements to increase
It could be lump sum: there refers to past service cost life of property
Ot it could be contribution basis: refers to present Why not deductible?
service cost Capital expenditure
Asset to be depreciated over useful life
If er establishes a pension trust and will provide a Do not treat as expense but part of the cost of the
lump sum fund for the pension plan asset
The lump sum amount granted for past services shall Only considered as an expense if in form of
be equally distribute for a period of 10 years depreciation
And the contribution for present services shall be
considered as a present time expense 3.Restoration of property
Why not deductible?
REASEARCH AND DEVELOPMENT Capital expenditure
EXPENSE
4.Premium payments
2 options Not talking about health and hospitalization
1.outright expense insurance : type special deduction
Here, we have PP on life of the ee
Covers life insurance policies
Taxation 1
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Transcribed by: Charlotte Cariño

The eer paid for premium payments of a policy
covering life of ee
Considered taxable on part of ee?
Depends on who the beneficiary is
a.If beneficiary is eer
not taxable on part of ee
no benefit has redounded in favor of ee
b.If beneficiary is the ee or his family
Yes taxable on part of ee
a.if it is a taxable income on the part of the ee, in so
far as premium payment paid by eer are concerned,
then it will be considered a deductible expense on the
part of the eer
para siyang directly proportional when we talk about
math
taxable income on part of the ee: deductible expense
on the part of the eer
non taxable income on part of ee: non deductible
expense on the part of the eer

What if ee dies but take note these rules are Applicable only to
Who will get proceeds if eer is beneficiary is the eer? premium payments paid by eer to insure life of ee
Employer
Will it be considered as taxable amount on the part of 5.Sec. 36 (b)
the eer? Related tax payers
I am not referring to the premium payments, i am 1.bad debts
referring to the proceeds 2.Interest
No. 3.Lossess
Because Just a mere return of capital being a form of
indemnity If the three are present between related parties or
Kapalit un nung buhay nung ee TP’s: automatically not deductible

So if we talk about proceeds, then its not taxable CAPITAL GAINS

What if benenficiary is ee or his family Determine first if WON the transaction involves an
Taxable income on part of ees family? ordinary asset or an ordinary
No
Mere return of capital Capital Asset
Capital being life of ee All property held by a TP other than:
a.stocks in trade
Books of eer b.inventoriable property
Eer paid for premium payment for life of ee c.properies primarily held for sale
If beneficiary is the eer himself, is it an expense in so d.real property used in business
far eer is concerned? e.depreciable property used in business
Nagbayad si eer para sa buhay ni ee pero and remember these
beneficiary siya naman because this is an Exclusive enumeration of ordinary
No, not a deductible expense assets
Beause as if eer is just investing or anticipating return meaning if the asset does not fall within the
of investment at a future time enumeration, then it is a Capital Asset

Beneficiary is ee or his family Example

Taxable income on ee A purchased securities of B corporation
deductible expense of eer? In so far as A is concerned, this security is considered
yes as investments of A
Will you treat this as capital asset or ordinary asset
therefore, if we conclude the entire cycle and take Assuming that A is engaged in manufacturing of cars
a look at the books of the eer and the ee Is it stocks in trade? No
Inventoriable property? No
Taxation 1
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Primarily held for sale? No Will you exclude SOS from the term “personal
Real property used for business? No property”?
Depreciable property used for business? No Treatment of SOS: depends if listed or not listed
Therefore Capital Asset a.What if not listed: 5 or 10% CGT (meaning it must
first be classified as a capital asset)
example b.What if shares not listed are ordinary asset, ang
A corporation is engaged in manufacturing of cars nagbebenta dealer ng SOS: subject to Normal tax
B purchased a car from A c.What if listed:percentage tax of ½ of 1%
B did not pay all amount of purchase price that is why we should segregate SOS because they
Only paid 1.3 cash have different tax treatments
1.7Mis evidence by a Promissory Note (PN)
Signed by B Cars
Asset in so far as A corporation is concerned? What if car is considered as capital asset
Asset (pampalubag loob) Not subject to CGT
In so far as B? Does not involve real property classified as capital
Liability (sakit sa ulo) asset or sale of SOS
A wants to sell PN to C
Allowed What if car is considered as ordinary asset?
Novation of contract Normal tax
Either delegacion or expromission
Delegacion: with consent of creditor As to the summary
Ex promission: without the consent of creditor There are two transactions subject to FT
A sells to C the PN CGT is in the nature of FT
Is this considered a capital or ordinary asset of A. a.sale of real property classified as CA: CGT of 6%
If A sells the receivables to another person b.sale of SOS not listed: CGT of 5% and 10%
Will the receivables be considered an ordinary asset?
Take a look at enumeration why did we segregate these two transactions?
SIS Read These two transactions shall not be covered by the
None of the above special rules on capital gains
Thus capital asset of A corporation
SPECIAL RULES
Why need to know WON an asset is capital or 1.loss limitation rule
ordinary? 2.holding period rule
If ordinary asset: subject to Normal tax 3. NCLCO
Capital Asset: subject CGT
Except Personal Property Loss limitation rule (LLR)
With the exception again of SOS Meaning the LLR does not apply if we are talking
about the two transactions above
Real property: capital assets Capital Losses can be deducted from Capital Gains
CGT at 6% only

If real property is ordinary asset: Holding period rule (HPR)

not a capital asset thus not subject to CGT Recognition of gains or losses shall be dependent on
Normal tax the holding period of the asset
30% for corporation WON short or long term
5-32% for individual
Net Capital Loss Carry Over (NCLCO)
If Personal Property is a capital asset: Carry over of capital loss

Taxation 1
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Capital loss can be carried over to reduce the net Net capital gain
capital gain of subsequent taxable year in an amount of 500k (CG and CL)
not exceeding the net income during the taxable year Can the ordinary losses be deducted from the CG?
the loss was sustained/incurred Yes
Because LLR refers only to the prohibition on
Before applying these principles, check WON these deductible of CL
rules apply to both individual and corporate TPs No prohibition on reduction of CG using OL

Indiv Corp HOLDING PERIOD RULE

LLR Yes Yes Know WON it is short term or long term
HHR Yes No
NCLCO Yes No Short term: not more than 12 months
Long term: more than 12 months
Only one special rule applicable to both individual
and corporate TP: LLR Period actually being pertained to
Refers to no. of months that the asset has been held
LOSS LIMITATION RULE That’s why you call it “holding period”

Example If the holding period is shorter: gains or loss shall

Ordinary Income: 1M be recognized in its entirety
CG: 1M If long term holding period: only 50% of gains or
CL: 1.5M losses shall be recognized
There is NCL
NCL: .5M example
Can this amount be deducted from ordinary income? TP purchased an asset January 1, 2010
No Same asset was sold December 1, 2010
LLR: CL Can be deducted from capital gains only Short term
Cannot be deducted from ordinary gain or ordinary Asset was held for less than 12 months
income Assume that gain derived in the sale is 100k
Will it be recognized in its entirety? Yes
What if
NCG: 1.5M What if
CL: 1M If acquired jan. 1, 2010
There is a NCG Sold Jan 31, 2011
NCG: 500k Gain derived is 100k
How much is the taxable income of the TP during the Will the individual TP recognize this CG in its
year? entirety?
1.5M (1M plus .5M) No
Take note: LLR only refers to deductibility of CL and Because long term holding period
not to the addition of CG to Ordinary Income Only 50k shall be recognized as a gain

What if: Example

OI: 1.5M OI:1M
OL: 2M Short Term CG: 1M
CG: 1.5M Long Term CL: .6M
CL: 1.M
How much is Net ordinary operating loss? How much is the NCG or NCL?
500k (OL and OI)
Will we recognize 1M in its entirety? yes
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Transcribed by: Charlotte Cariño
Because its short term 2010 2011
OI: 1M 2M
What about the long term capital loss of .6M? STCG: 500K 1M
Not recognized in its entirety STGL: 1M 500
TP will only recognize 50% of it LTCG: 1M 3M
300k LTCL: 3M 1M
Only 300k can be deducted from 1M
Q:How much is the Net capital loss or capital gain
NCG? 700k in so far as assets not held more that 12 months?
1M – 300k = 700k Is it a loss or a gain?
Can this gain be added to ordinary income? Loss
Yes 500k
So taxable income is 1.7M
For long term transactions, without considering HP,
Again, do not remember the numbers, remember the how much is the loss?
principle behind the numbers 2M

Now, we apply the holding period rule:

What if TP is a corporate TP in the given The 2M loss will only be considered up to 50%
problem, how much is the taxable income? because the asset has been held for more than 12
HPR does not apply to Corporations months
Hindi niya irerecognize at 50% lang, irerecognize So 1M lang
niya ito in its entirety
So instead of recognizing 700k NCL: 1.5M
Mgakano ang capital gain kapag corporation? You have to consider that this is a NCL
It will recognize 400k as Capital Gain
Can the individual TP, deduct it from 1M?
No
NET CAPITAL LOSS CARRY OVER Loss limitation rule
CL can only be deducted from CG
Limitation Can this be carried over?
Must not exceed amount of net income during Yes
taxable year that the loss was sustained Taxable income or Net income for 2010: 1M

Example Under 2011

OI: 1M How much is the gain or loss for 2011?
CG: 1M 1M gain
CL: 1.5M Then 500k gain
NCL? So 1.5M gain
500k Can we deduct Net capital loss (1.5M) from the net
Can it still be used by TP? capital gain (1.5M)?
Yes Yes
Subsequent taxable year Because NCLCO states that the CL can be deducted
NOT FROM THE INCOME OF THE TP but from
For NOLCO: 3 years the NET CAPITAL GAIN OF THE SUBSEQUENT
NCLCO: subsequent taxable year TAXABLE YEAR
If you answer that it can be deducted from income of
Example TP, that is an erroneous answer
Why?
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Transcribed by: Charlotte Cariño
Because it cannot be deducted from ordinary income
and this is still an income
It can only be deducted from the net capital gain
Q: can we deduct this from 1.5M?
Then you have to consider again the next portion of
the definition of the NCLCO
Must not be exceeding the net income during the year
the loss was sustained
When was the loss sustained? 2010
How much is the NI during 2010? 1M
Therefore can the TP use the entire amount of 1.5M
to reduce the capital gain?
No
The TP can only use 1M
So there’s still a NCG of 500k
Total taxable income in 2011 is 2.5M
And tanong ni Mr. Rico
“Mam, paano po kung nung 2010, zero ung taxable
income?
How much is the NCL that can be carried over for the
next table year?”
Ung net income eh zero
So magkano pwede niya icarry over
zero
SPECIAL CAPITAL
TRANSACTION
1.Short sales
When do you transfer ownership: delivery
Can a person sell something that he does not own?
No can dispose of what he does not own
But yes, provided that at the time of the delivery, he
already owns the thing being sold
Definition
Selling of SOS when the dealer is not yet the owner
of the SOS
Selling a property which the TP does not yet own
Provided at time of delivery he is already the owner
Q: If a dealer in securities, sells securities, will it
be considered an ordinary asset or a capital asset?
Ordinary asset
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Because considered inventory or a property primarily
held for sale
Q:If a dealer in securities sells securities which he
does not yet own
Can this be considered as ordinary asset?
Then you’ll have to take a look at the enumeration
Is it a stocks in trade? No
Is it an inventory of the dealer? Not yet, he does not
yet own it
Is it a property primarily held for sale? No, the dealer
does not yet own it
Is it a real property used in business? NO
Is it a depreciable property used in business? No
Therefore, capital asset
This is why short sales always result to capital gains
or capital losses
It is considered a capital transaction
Hence despite the fact that dealer in securities is
involved
If he sells securities or stocks which he does not yet
own then it is considered as short sales
Hence All gains shall be treated as capital gains
And All losses treated as capital losses
2.failure to exercise option to buy
Is there a difference between option money and
earnest money?
yes
Option money is not part of purchase price
Earnest money is part of purchase price; Nature of
down payment
A is a realtor
Engaged in buying and selling of lots
B is prospective buyer
B is given a month to decide WON to buy the land
sold by A
B paid 100k for this 1month period to think about
either to buy the property or just let it go
Q:In so far as A is concerned, will we consider 100k
as gain?
Yes. Income
But is it considered an ordinary gain or a capital
gain?
Depends if option to buy was exercised
If not exercised : capital gain on part of realtor
There was no sale
What If B exercised option to buy, meaning B bought
the land:
Will it be considered a capital gain?
No
It will be considered as Part of selling price of A
Therefore treated as ordinary gain
Why ordinary gain?
example
2M worth of lot is being sold
Option to buy was not exercised,
A did not receive the 2M kasi hindi na bibilhin ni B
Will you treat the 100k pesos as gain in so far as the
realtor is concerned?
Yes, but not an ordinary gain but a capital gain
Not among the enumeration
On the other hand
If B exercises option to buy, the 100k option money
will forms part of the selling price
So kahit 2M lang ung napag usapan nilang selling
price nung property
Since merong option money
Magkano parang binenta ni A?
2.1M
So how much is the gain of A, assuming that A
bought the land at 1M
Hindi 1M, but rather 1.5M
Because you treat the option money as an ordinary
gain, part of the selling price
So iba ung sa law on sales
Kasi sa sales, ang option money ay hindi nman part
ng selling price
But in so far as taxation is concerned, in so far as to
compute the gain of A
The option money is treated as forming part of the
selling price
That is in so far as the books of A is concerned
Let’s talk about the Books of B (buyer)
If B did not exercise the option to buy, hindi niya
binili
But he had already spent 100k
Will you consider this as ordinary loss or capital
loss?
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
With the assumption that the lot will be used in the
business of B
Basta pag the transaction involves failure to exercise
failure to buy: capital transaction
So Capital loss
What if B exercised option to buy?
Then the option money forms part of purchase price
of the lot
So instead of 2M na napagusapan,
Kung inexercise ni B ung option to buy, hindi na 2M
and ilalagay natin sa libro niya na cost nung lupang
kanyang binili
Magkano ung cost niya?
2.1M
Why? Because the code provides that the option
money shall form part of the purchase price of the
property being sold
3.wash sales
The sale of stocks or securities where substantially
identical securities or stocks are acquired or
purchased within a 61-day period beginning 30 days
before sale and 30 days after sale
Why 61 day period?
Day of sale: as 1 day
30 days before sale
30 days after sale
If there has been purchase of substanially identical
securities or stocks within a 61 day period
Then it will be considered wash sales
Remember that wash sales is not a applicableto
dealers in stocks of securities
Kasi typica sakanila ung bibili bebenta, bibili bebenta
Bakit?
Kasi un ung negosyo nila
In which case, if the transaction involves a dealer in
securities,
then Rules on wash sales will not be applicable
example
Jan. 31, 2010: There was sale of 1k SOS by A
Feb. 4, 2010: A purchased 1k SOS from the same
corporation
Q: is this considered as wash sale or short sale?
Nung siya ung nagbenta, meron na ba siyang SOS? Wash sales
Nung jan. 31, nung nagbenta si A, meron na ba The sale of stocks or securities where substantially
siyang SOS? identical securities or stocks are acquired or
Yes? So naimagine nyo lang, hindi siya magbebenta purchased within a 61-day period beginning 30 days
kung wla siyang shares of stocks ganun b un? before sale and 30 days after sale
Anong nauna, ung pagbili ba niya ng shares or ung
pagbenta niya ng shares? substantially identical shares:
Ung pagbenta niya ng shares not to no. Of shares
Ja. 31, nagbenta siya, sale was made but kind of shares
Nasa facts ba class na nung time na nagbenta siya eh
me stocks na siya? example
Waley, wala akong nilagay jan sale was made Jan. 31, 2010
So Short sale 2kSOS
Because At the time of sale, A is not yet owner of Purchased Feb. 1, 2010
shares Is this wash sales?
A purchased it after contract of sale between A and No
the other individual Short sales
So short sales Sale happened when person was not the owner of the
SOS
Additional information
2009: A purchased 1k shares of X corporation Added info
We talk about substantially the same shares, not the In 2009: person purchased 2k shares
number but type of shares Jan. 31, 2010: sold 2k shares
So Assume that everything or all shares are comon Feb. 1, 2010: purchased same type of shares
shares Is this wash sales?
Q: wash sale?
Pagkatapos mabenta, merong bang purchase? Did we discuss this already?
Un ung sabi sa definition, substantially the same Not yet
shares had been purchased within a 30 day period So again
30 days after sale, meron ba?
Yes Short sales
Jan. 31 to feb. 4 is within the 30 day period If sale of SOS happened when dealer is not yet the
So wash sales owner of the SOS or the TP is not yet the owner of
the SOS
Effect of wash sales Such that even if dealer is engaged in the buying or
Gains will be taxable but losses will be considered as selling of SOS, if it has been made during time when
not deductible dealer was not yet owner
It will not considered as ordinary income
September 21, 2012 Rather it will be considered as Capital gain

2nd Quiz: Tuesday On the other hand, If dealer is already owner of

Make up class tomorrow MC (3:00-4:00) the SOS being sold
Not categorized as CG rather OG
Oct. 13 for assessment exam date Because the SOS are treated as inventoriable property
Not mandatory of the dealer
Removal/qualifying exam
a.m. If we compare it with wash sales
price to a student who gets 90 and above (cash) Wash sales is a scenario where:
a) Does not concern a dealer
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Because wash sales do not apply to dealer of Bought: P100
securities Sold: P90
b) Concerns a 61 day period Nalugi xa
meaning before date of sale, SOS had been purchased Loss: P20k
first
20k is a loss
Example Will this be considered as deductible or non
In 2009: TP purchased 2k shares of stocks at P100 deductible?
per share Will you consider entire no. of sales (2000) as
Jan. 31, 2010: TP (not a dealer, because wash sales is covered in wash sales?
not applicable to dealers in securities) sold 2k SOS at No
P90 each Only 1k shares are covered within 61 day period
Feb. 1, 2010: TP purchased 1k SOS at P100 each Therefore 1k is wash sales
Q: is this a wash sale? The remaining is not covered
Of course not short sales because what is being sold Thus, do not treat entire 20k as non deductible
are SOS already owned by TP, so definitely not a Only consider half
short sale 1k over 2k is one half
Wash sale? What are wash sales are again?
Is one where SOS are being sold and substantially Example
identical shares had been acquired within a 61 day 2000: a TP obtained X corporation shares1k shares
period At P100 each
Reckoning point is date of sale: and this is 1 day Jan. 3, 2006: TP sold X corporation shares: 1k shares
30 days after that and 30 before that at 90 each
Jan. 30, 2006: TP purchased X corporation shares:
Q: here, was there purchase within a 61 period? 500 SOS at P100 each
Let’s check Q: is this a wash sale?
January 31 to February 1, is that within the 30 day Was there an acquisition of substantially identical
period before or after sale? SOS within the 61 day period beginning 30 days
Yes, within a 30 day period after sale before sale and 30 days after?
Therefore a wash sale Yes
There was an acquisition of SOS within 30 days after
Effect of wash sales: the date of sale
Gains are taxable but losses are non deductible Date of sale: January 3
Kelang siya ulit bumili: Jan 30
What if Within 30 day period
TP is a dealer Therefore wash sales
Will you apply the above rule that gains are taxable Effect: Gains are taxable, losses are not deductible
and losses are non deductible? How much is the Loss?
No Binili niya 100, binenta niya at 90, nalugi ba siya?
Because in cases of dealer in securities, rules on wash yes
sales do not apply P10 per share, P1k was sold
They are really engaged in buying and selling of SOS Lugi niya: 10k
Thus even if within 61 day period, Not fraudulent
This is why dealers in securities will not be covered Q: will we treat the entire amount of loss as
by the rules on wash sales deductible loss?
Not entire
Now let’s compute Because Only 500 are only covered within
did the TP who is not a dealer in securities, incurred a application of wash sale
loss or gain? 500 lang ung nabili
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
 Will it be taxable gain?
What is the Percentage of 500 over the total amount Yes
of SOS sold That is why falls within the exception
500 over 1k: ½ (5 over 10 so ½)
Q: how much of the 10k loss is considered as non 4.merger or consolidation that is not solely in kind
deductible loss Sec. 40 (c)
Only 5k Merger or consolidation where properties are
Why? exchanged
This is the loss incurred by reason of the application Either property for SOS, Stocks for SOS, Securities
of wash sales for stocks
Must be in pursuance of obtaining corporate control
General rule
Gains are taxable and losses are deductible If there are gains or losses from these transactions
Losses are categorized as itemized standard Will it be considered as Taxable gain?
deduction No
Will losses be recognized?
Exceptions: No
a.wash sales That is if under sec. 40 (c)
because gains are taxable and losses are non
deductible if there is a merger / consolidation that is solely in
kind
b.illegal transactions assume that property or stocks but does not involve
illegal acts are taxable but illegal losses are non obtaining control over the corporation
deductible meaning does not fall under 40 (c)
exception: gambling losses but it is in pursuanceto a plan of merger
gambling losses are deductible up to extent of is this taxable gain?
gambling winning but are not deductible from other not a taxable gain
sources of income losses are not deductible also
so in both situations, gains or losses are not
c.transactions between related TPs recognized (under 40 c and solely in kind)

example what if
A and B are sisters A corporation wants to buy SOS of B corporation
A borrowed money from B B corporation shares are worth 100M
There is interest imposed: 100k A in exchange of 100M SOS delivers 75M worth of
For B: considered as income SOS
Will this income be taxable on B? Yes And 50M worth of cash
On part of A: interest expense Will it fall under scenario where gains are not taxable
Interest not a deductible expense and losses are not deductible?
No
Let’s go to losses Because exchange by reason of merger is not solely
A and B are sisters in kind
A sold her SOS in favor of B Take note, Stocks are not exchanged form stocks
And there was a loss of 100k only
Will the loss be considered as deductible loss? Here, stock are parted with in order for them to
No, Related TPs receive stocks plus cash
So Not solely in kind
What if Therefore, will it fall under the rule that gains are not
A earns a gain from transaction of SOS taxable and losses are not deductible?
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
yes
where there is a m/c that is not solely in kind these particular amounts of personal exception and
additional exemption was made effective July 2008
The SOS of B corporation is worth 100M (RA 9504)
A corporation delivered 75M worth of shares
And 50M cash amounts applicable prior 9504
In so far as B corporation is concerned: B earned a basic personal exemptions varies depending on status
gain an amount of 25M of a TP
On the part of A: A parted with 75M SOS plus cash a.single: 20k
of 50M so 125M b.married: 30k
In return, A only receive 100M worth of shares c.head of family: 25k
On part of A corporation, was it a loss or gain?
Loss prior to effectivity
25M loss it is important to know WON the TP has a dependent
Will the gain earned by B be considered as taxable or why?
not? If it has a dependent, classified as HOF
Taxable
On pat of A, non deductible loss Additional exemptions prior to RA 9504: 8k per
Provided that this is in pursuance of plan of merger child
or consolidation Not exceeding 4 children

INDIVIDUAL TPS Sababan book

1st type of deduction
Allowed to deduct either OSD or ISD, if engaged in
BTP
If pure compensation earner, cannot deduct OSD or
ISD
Second type of reduction from GI:
Premium payment in health and hospitalization
insurance
Are these available to both compensation and earn
BTP: yes
Conditions to be deductible:
a. GFI does not exceed 250k
b.amount of deduction, NOT amount of payment,
does not exceed 2400 per year or per month
c.claimed by spouse claiming additional exemption
“if you have a senior citizen, you are a head of the
family”
Correct
Provided that the application is made prior to 9504
After 9504: does not matter
Because all are entitled to 50k
But prior,this was very important
Whether the SC is your parent or not, you entitled to
BPE of 25k
“TP is also entitled to additional exemption”
Requisites for additional exemption
a.a child
whether legitimate or illegitimate
a SC is not a child
is TP entitled to additional exemptions if he has a SC
in his care? No

prior to 9504
3rd type of deduction if TP has brothers or sisters or parents who are
Personal exemptions depending on him for chief support, TP is classified
2 types as a HOF
a.basic personal entitled to BPE of 30k
b.additional exemptions
after 9504
basic personal exemption: 50k will this fact be material?
additional: 25k per child No
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Everybody is entitled to a fixed amount of 50k
Taxable period of an individual TP? Calendar year
Meaning it starts in January and ends at December
9504 took effect July 2008
At the end of 2008, Is TP entitled to 50k?
No.
Under RR 10-2008
Must be pro rated
Meaning Exemption applicable from January to July
is either 20, 30 or 25
Exemption applicable from july to December: 50k
Assume single individual
Ilang months from jan to july? 6
50k po ba ay per annum?
50k is per annum
20k is also per annum
Half of 20 is 10
Half of 50 is 25
TP is entitled to BPE of 35k, not entire 50k
What if
TP has a qualified dependent
Living with him and dependent upon him for chief
support
But dependent or child is studying outside the
locality where TP is located
Is TP still entitled to additional exemption? Yes
Because it is still considered as living with TP
Father does not have custody over child
Custody is with mother, child is below 7 years old
But father has been supporting the child financially
Meaning depending upon him for chief support
Q; is the TP entitled to additional exemption
Father not entitled
Child is Not living with father
Conjunction is AND
Living AND Depending upon him for chief support
CHANGE IN STATUS
Under sec. 35(c), only 2 things to remember
1.know instances covered within sec. 35 (c)
2.if covered, apply what is favorable to TP
Determine instances covered under this
1.death of TP
2.having additional dependents
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
3.Death of a dependent
4.Dependent is already gainfully employed
5.dependent is More than 21
6.dependent is already married
If these instances are present
Apply interpretation favorable to TP
Accounting period for TP is calendar year
Starts at January and end at December
A is TP and is married to W
A died
Will it change the total amount of exemption?
No, whether single or not
Everybody is entitled to 50k
But what if this happened prior to effectivity of
9504
Will this be event be material
January: A still considered as married
Prior to 9504
Wis entitled to 30k
June: A died
Is W still considered married? No
So the BPE should have been 20k
But under sec. 35 (c), apply in context favorable to
TP
So treat as if A died at the end of taxable period
Can W claim 30k for entire taxable covered?
Yes because it is covered under sec. 35 (c)
After effectivity of RA 9504
As to Dependents
TP is a single mom
1 child
Child died June 30
The SM is entitled to additional exemption of 25k
after effectivity of law
The child died June 30
So nung december wla na siyang anak
But can TP claim additional exemption? Yes
Treat as if child died after taxable year
This is 2009
2010 can TP still avail of AE? No
Qualified dependent died during prior year
What if Yes
The TP is married NRC? Yes
B is pregnant March RA? Yes
Manganganak December NRANETB? No
From January to November: no qualified dependent Taxed at gross income, no deductions
Can the H avail of additional exemption? NRAETB? Yes
Yes Subject to reciprocity rule
Because this instance is Covered under sec.35 c
Therefore treat as if incident happened during Here, there are two interpretations
beginning of TP 1.NRAETB can avail of basic personal exemption
only if reciprocity rule applies
Pag panget: treat it as if it happened at the end of the 2.covers both personal and additional exemption
taxable year
Pag maganda: treat it as if it happened at the Reciprocity rule
beginning of the taxable year Applicable if country where the NRA resides grants
personal exemption in favor of FC who are not
If essay question residing therein
Do not use “favorable to the TP” Ung FC is also considered as NRAETB in sofar as
Ang gagamitin eh “since this is an instance to the the foreign country is concerned
detriment of the TP, you treat the birth of the Assume that an alien is engaged in business in the
qualified dependent as if it happened at the beginning Philippines and has been staying the Philippines for
of the taxable period.” more than 180 days
Shortcut lang un How will you classify this alien? NRAETB provided
not residing in Philippines, otherwise classified as
What if resident alien
A has a child What if the Japanese government grants basic
A being Single Mom, cannot support child personal exemption in favor of FC who are not
So during TY, child was adopted by the aunt living at residing in Japan but engaged in Business in Japan
the USA (NRAETB at Japan), of 30k
Can A claim additional exemption during the TY? Reciprocity rule dictates that the NRAETB in the
From January to June child is still under custody of Philippines shall also be grated a BPE in the amount
SM of 30k
But June, the child was already adopted That is reciprocity rule
The child went to US
The child is already dependent for chief support to But if your read sec. 35 (d)
the aunt of A It shall not exceed amount granted to residents or
Q: can A claim additional exemption citizens in the Philippines
1st condition not present So if the BPE granted to FC in Japan in 55k
Not covered by sec. 35 (c) Can Philippine government grant the same amount to
A cannot claim additional exemption the alien ETB? No
Because at the end of TY, the child is no longer a There is a limitation, must not exceed the amount
qualified dependent granted to residents or citizens in the Philippines
This is why you should now enumeration under sec. Granted in the Philippines: 50k
35 c Thus instead of granting 55k, only 50k shall be
Only apply favorable treatment if instance is covered granted
by sec. 35 (c)
Q: what if BPE granted to FC engaged in business
Can Resident avail of basic exemption and in Japan amounted to 25k
additional exemption? How much is BPE that can be granted? 25k
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
If BPE granted in Japan is 60k: how much is the BPE
that the Philippine government can grant? Only 50k
Because limitation is that only up to extent of amount
granted to residents or citizens of the Philippines
What if
BPE granted to FC ETB in Japan is 50k
Also grants 25k additional exemption
Is the NRAETB who is a resident of japan entitled to
50k BPE? Yes
How about additional exemption?
Interpretations:
1.only limited to BPE
2.includes AE
Read sec. 35 (d)
Analyze the section
Does it cover both or just BPE?
After quiz read RA 9337 (Corporate TP) and RA
9294
September 22, 2012
Sec. 35 (d)
Pertains to NRAETB
Interrelate with sec. 35 (a)
Sec. 35 (d) talks about NRAETB being entitled to
personal exemptions
Does this section isolate its coverage to include
only BPE?
No
It clearly provides that a NRAETB shall be entitled to
personal exemption
If we take a look at 35 (a), if the term is personal
exemption, it actually includes both BPE and AE
As per BIR Ruling, it only covers BPE and most
authors of books say that it covers both
In the bar what will you use?
Just cite sec. 35 (d) and sec. 35 (a)
Under sec. 35 (d) of the tax code, it provides that
NRAETB shall be entitled to personal exemptions
And under Sec. 35 (a), personal exemption refers
both to BPE and AE
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Q:first instance
In Japan, the government grants BPE of 30k
And AE of 20k
Will the Philippine government grant a NRAETB
30k BPE?
Yes
20k AE?
Yes
What if
The Japanese Government does not grant FC ETB
but not residing there, no AE
Will the Philippines government grant AE to the
NRAETB? No
Reciprocity rule
One author:
In most jurisdictions outside Philippines, most of
them do not grant AE to FC
So that means that any NRAETB who belongs to that
country will also not be entitle to AE
But the basis is not the BIR Ruling but the provisions
of the tax code
INCOME OF H AND W
H and W are treated as separate TPs
But they must file a return that includes both their
income
The only exception to the rule that they must submit
a return that will include both their income is when it
is impracticable for them
In which case, each of them may file a separate return
But the Bureau must consolidate these returns
Review
Who can claim AE: only one spouse
That spouse: H
In cases of legally separated spouses, each of them
can claim AE in so far as the dependent under their
custody but not to exceed 4 children
While as a rule, the H can claim AE, there are
exceptions
1.H is unemployed
2.if the H abandoned the family
3.if Hs sole income is derived from outside of the
Philippines
4.if H waives the AE in favor of the W
Q: A is a OCW
Wife, B is also working as a government ee
Can B claim AE assuming that they have 4 children?
Yes
Because here, falls under exception
When H derives his sole income from outside the
Philippines
INCOME OF MINORS
Is it possible that minor earn income?
Yes
Will minors file a separate return or declare
income in the return of parents?
They have to file a separate return through guardian
or legal representative
What is the exception to that?
When the income obtained by minor is derived from
a property received from a living parent of the minor
Minor will not file a separate return, income will be
declared in tax return of parents
Exception to this exception
When
1.donors taxes had already been paid
2.when transfer is exempt from donors tax
Application
A has a son
A is a SM
B is the son, 7 years old
He appears in several telenovelas
Meaning the son is earning huge money compared to
the mother
Will a separate return be filed for the minor?
Yes
Through whom?
Through the guardian or any legal representative
What if
B is 7 years old
Obtained a property donated by A who is still alive
Donors taxes have not yet been paid
Property is earning rentals
Taxation 1
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Transcribed by: Charlotte Cariño
Will the rental income be declared in the income
return of B or A?
In the return of A
Because donors taxes have not yet been paid
What if
Donors taxes have already been paid
Will the rental income from this property be declared
in the income return of B or the living parent?
In a separate return
This is the exception to the exception
ACCOUNTING PERIOD OF INDIVIDUAL TPs
Quiz Tuesday: includes AD until whatever it is
finished today
2 accounting period
1.Fiscal Year
2.Calendar year
Who uses Fiscal year?
Only corporate tax payers
Calendar year
Used by individual TPs
There are also instances wherein calendar year
may be used by tax payers other than individual
TPs
1.when TP has no accounting period
So assume that corporate TP did not employ any
accounting period
So the TP was just recording without any particular
tax period
What is the tax period to be used by bureau?
Calendar
2.TP has no books
So if a corporate TP did not keep any books of
accounts such as books or ledgers
Then the corporation shall employ CY
3.the corporate TP had chosen CY
Can corporate TP change their accounting period
from FY to CY and CY to FY?
Yes
Can individual TP change accounting periods?
No
Why not?
Because they shall use CY only
Reason why no possibility to change accounting
periods
RETURNS OF INDIVIDUALS
General Rule
All individual TPs are required to file necessary
returns
RC: required to file returns on income derived within
and without the Philippines
NRC, RA, NRAENTB and NRAETB: file returns but
only declare income derived within only
Because only that shall be subject to tax
What is the exception to the rule that returns must
be file
When we talk about exceptions, we mean income tax
return
1.GI does not exceed PE (BPE and AE)
Exception: when the TP is engaged in BTP
Q:an individual TP earns 150k worth of GI
The TP has 3 dependent children
How much is AE: 75k
How much is the CPE: 50k
Total of 125k
Will it fall under this exception?
No
Because the GI is still greater than the personal
exemptions
What if
GI is 100k
3 children
Total personal exemption is 125k
So GI does not exceed total amount of PE
Q: will the TP file a return?
Assuming that business is retail
Yes
Because despite the fact that the GI does not exceed
the PE, the TP is engaged in BTP
So regardless of income, the TP is still required to
file a return
Taxation 1
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Transcribed by: Charlotte Cariño
Pano kung wala siyang income? zero
Will the TP still submit a return?
Yes
If the TP is engaged in BTP
2.TP earning purely compensation income
Where the income tax has been correctly withheld
Then the ee or TP is no longer required to file the
necessary return
But you have to remember that for it to be considered
as exception
The WT must have been correctly withheld
Tax due is 15k at the end of the taxable period
Total amount of CWT is 15k
Is it still necessary to file a return?
No
Because TP is earning purely compensation income
and WT have been correctly withheld
Exception:
a. Compensation earner earned income concurrently
from 2 or more ers at anytime during the taxable year
then the TP is required to file the necessary return
A is a government ee
From 8pm to 5pm
He is also an instructor in the evening at a private
school
Q:is A required to file a return?
Yes
Because A is concurrently deriving compensation
income from 2 or more eers
b.when the GI (compensation income) exceeds 60k
TP is required to file the necessary return
In practice
Why practice, because we are governed by
substituted filing
If you are an ee and your eer had already submitted
1604 CM, you have heard this during the
impeachment trial, they call it the alpha list and the
alpha list has already been submitted to the Bureau
indicating all the taxes withheld and all taxes have
been correctly withheld by the eer, then the ee is no
longer required to file the tax return despite the fact Such that if a corporate TP is exempt from tax, it is
that the GI exceeds 60k still required to file the necessary return

This is under substituted filing Q:A is MWE

Is A required to file a return?
But the exception of filing a return is only applicable No
if incase that SF has been fully complied with Because a MWE is exempt from tax
Unless MWE derives income from BTP or unless the
What is Substituted filing? MWE earns taxable income or taxable allowances
Happens if
a.there is only 1 eer WHERE TO FILE
b.if ee is deriving purely compensation income
meaning the ee is not deriving any income from BTP Revenue district office where the individual TP is
c.eer submitted an alpha list to Bureau residing or where the principal place of business is
d.eer provided for 23-16 to the Bureau not later than located
January 16 of the following year
WHEN TO FILE
what if
ee earned in TY 2011: 150k GI Final or annual income tax return: April 15 of the
tax due: 15k following year covering the income for the preceding
taxes withheld: 15 year
the eer filed alpha list to the bureau
and then eer has actually furnished the ee 23-16 Example
Q: is the e still required to file the necessary return to Income was earned 2010
the Bureau? When to file?
No April 15, 2011
Because in this case, it already complied with
substituted filing? Remember:
Why? CGT (also a form of Income Tax) shall be filed
Because within 30 days from date of sale
a. the eer had correctly withheld the taxes Sale of SOS: 30 days from date of sale
b.there is no other income
c.there is only 1 eer The only difference between these two capital
d.the necessary forms have been submitted to the BIR transactions is that for sale of SOS not listed, a Final
and furnished to the ee consolidated return shall be filed on April 15 of the
following year
3.the sole income had already been subjected to FWT
What about sale of RP? Not required
Here, then that means that it extinguished the TP
liability Only required if subject of sale is SOS
Therefore, is it sill necessary to include in the return
to be subject to income tax? System Employed by the Philippine Government
No more Pay as you file system
This is why an exception Once a TP files his return, the taxes corresponding to
the income declared in the return shall also be paid
4.the TP is exempt from tax Therefore, if a return is required to be filed within 30
days from date of sale
Only applies incases of individual TPs When is the payment of that tax?

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Also within 30 days from date of sale, when the So if they continue with the business of X,
return has been filed magspspend ba sila ng pera? yes
So they are considered an unregistered partnership
Are there any exemptions to the payment of Is an unregistered partnership treated as a corporate
taxes? TP?
Yes Yes
Why Therefore, in this particular scenario, the income
Under tax code, may also be paid on installment derived by partnership shall be subject to corporate
other than sec. 49 tax
Also can pay in installment when the ff are present: And the distribution of income among them shall be
1.when the tax due or tax liability exceeds 2k subject to dividends tax
2.must be paid:
a.at time of filing of return What if
b.(second installment) on or before July 15, folding X and Y are friends
close of taxable year X had a dream of several numbers
So X told Y, can we buy a ticket, cheap in tau
large TPs can file their returns electronically P10 from me, P10 from you
Both of them contributed this money, they bought a
single raffle ticket
CORPORATE TPs Is this an unregistered partnership?
Was there contribution of money with intention of
3 types dividing the profit among themselves? Yes
1.domestic corporation So there is a corporation, an unregistered partnership
2.resident foreign corporation Actually considered a corporate TP under tax laws
3.non resident foreign corporation
What if
Resident v. non resident They have not bough a raffle ticket
Resident: doing business in Philippines They bought a lotto ticket
Non resident: not doing business in the Philippines They won
1M
WAYS ON HOW TO DETERMINE A Will it be subject to corporate tax?
CORPORATE TAX PAYER No
Why not?
Q:X is the owner of a particular property being leased Because it is exempt from tax
out to several individuals However, if it is not exempt from tax, then it will be
X died subject to corporate tax
Heirs are 1, 2, and 3
They decided to continue the business and share in The distribution of profits
the profits among themselves Subject to dividends tax
Is there a corporation? Because treated as a corporation
They you have to go back to the definition of
partnership What if
What is a partnership? A, B and C are the heirs who inherited a property
Contribution of money, industry or property with the from X
intention of dividing the profit among themselves They have subdivided among themselves
Pag tinuloy po ba nila ung negosyo may effort po ba Sold it for a profit
sila dun? Yes, that’s industry. Will income be subject to corporate tax? Ung income
Ung property cinotribute ba nila sa isat isa? Yes nila?
No
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Because there was no contribution of money, The annual TR or final adjustment return shall be
industry or property filed the following year: April 15
In which case, it will only be subject to individual So if taxable period is 2008, you will file April 15,
taxes 2009
Q:what is the tax rate to be imposed in 2010 where
What if the return is filed in 2009
X and Y bought a land in 1990 Will it be 30% or 35%?
They were BF and GF 35%
2004, the relationship went sour Because this is the year when the income was
So they decided to just sell this property actually earned
Will it be considered as income subject to tax?
No Q:income earned in 2009, what is the tax rate?
Sale of property was due merely to terminating co 30%
ownership In 2007: 35%
There was no contribution of money, industry or 2008: 35%
property nor a division of profits
Thus, being a co ownership is not subject to tax 2.Minimum Corporate Income Tax (MCIT)

ESTATE
If under judicial settlement: estate is a separate TP
If under extra judicial settlement: corporate TP
except if there is co ownership
Q:if it has been determined that there is an
unregistered partnership and therefore there is a
corporate TP
WHAT ARE THE TAXES THAT SHALL BE
IMPOSED?
1.normal corporate income tax (NCIT)
For NCIT, tax base: taxable income
Same as taxable base for individuals
Equal to 2% of GI
Applicability of MCIT is subject to the ff conditions:
a.when the corporation is subject to normal corporate
income tax
b.the corporation must be atleast 4 years in existence
application of 1st condition
preferential treatment of proprietary educational
institutions
PEI considered as such if accredited by DECS,
CHED or TESDA as such
What is the tax consequence of transactions involving
PEIs?

How to get taxable income again 1.apply pre dominance test

GS – cost of goods sold (return of capital) = GI (can
be subject to tax)
Will we deduct AD for us to get TI? Yes
So tax base for NCIT is the difference between AD
and GI for you to arrive at TI
If the unrelated activities does not exceed 50% of the
total gross income, then the preferential tax rate of
10% of the TI shall apply
Otherwise if percentage of unrelated activities exceed
50% then the regular tax rate will apply

For individual TP, NT is subject to rates from 5 to Q:tuition fees

32% under sec. 32 (a) 1M
Income from canteen concessionaires: 500k
For corporate TP, tax rate is 30% (beginning 2009) Total GI: 1.5M
But from 2006 to 2008: tax rate is 35% Tuition fees, related activities
From canteen, no
Q:you have learned that if a period covers a particular What is percentage of unrelated activity?
tax period Less than 50%
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Therefore rate applicable is 10% of TI This is the reason why they have decided to include
MCIT such that the government can still collect if
What if there is a GI earned by the corporation
Tuition fees:.5M
Canteen concessionaire: 1M Let’s check
Total: 1.5M 2010: loss
Unrelated activity: exceed 50% of the total GI 2011: loss
Tax rate applicable? 30%, the normal tax 20120: loss
2012: loss
Assume that this is already at its 6th year of 2014: loss
operation Now, in 2014, gain is 2M gross sales
2010, this is the amount Cost of sales is 1M
Income form tuition: 1M GI: 1M
Income from canteen: .5M AD: 10M
Can we apply MCIT? There is a loss of 5M
No Now, can the Philippine government collect taxes
Because corporation is not subject to NCIT from this corporation?
NCIT is 30% Yes
During 2010, the tax rate of the PEI is 10% Because
preferential tax rate 1.NCIT is applicable
So cannot apply MCIT 2.corporation is in its 5th year in existence
If we compute NCIT here, zero
What if: Because it reported a loss times 30% so no tax due
For 2011
Tax rate is 30% Since MCIT is already applicable, you have to
Is MCIT applicable? Yes compare it with NCIT
Because NCIT is applicable MCIT is 2% of GI, not taxable income
In this case, did the corporation earn GI? Yes
2nd application 1M
Business started 2010, registered with the BIR 2010 What is 2% of 1M
2010: is MCIT applicable? Compare with NCIT
No MCIT is higher
2011: no Therefore, will this corporation pay a tax to the
2012: no government?
2013: yes Yes
Corporation must be atleast 4 years in existence MCIT

History behind imposition of MCIT INDIVIDUAL TPS

Before included, several corporation indiscriminately Ayokong me kasosyo
use AD in order for them to report at a loss Sole proprietor
1st year: loss 2010: loss
2nd year: loss 2011: loss
Andami nila NOLCO 2012: loss
3rd year: loss 2012: loss
Nag aacumulate ung NOLCO such that in the 6th year Will you pay a tax to the government?
of operation, and they will report an income, they can No
use the NOLCO to use in 3 years for them not to pay Because MCIT is only applicable to corporate TPs
any taxes
September 29, 2012 (First and Second Hour)
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Expanded Withholding Tax
If there is EWT (and you know that EWT is in the
nature of CWT), will it reduce the TPs liability?
Yes
Being in the nature of MCIT
Then this tax can be used to reduce either the NCIT
or MCIT
NCIT:
30%, Beginning 2009
2006-2008: 35%
Optional Corporate Income Tax (OCIT)
3rd available tax for corporate tax payers
Only __% of the GI will be subject to tax at the
option of the Tp
However, there are conditions to this
a.ratio of gross sales over the total cost of sales
b.if ratio is not more than 55%
b.and if the tax effort ratio of the Philippines is atleast
20% of the GDP or GNP
then OCIT is applicable
at the present time, the highest tax effort ratio (the
effort of the government) is 5%
so at the present time OCIT is not applicable
why?
Because of the conditions of 20%
What if
The tax collection effort of the Philippines is at 25%
Can the corporate tax payer use the 15% of the GI in
order to get its income tax liability?
Yes
Because the conditions are existing
But if
The Corporate Tax Payer (CTP) chooses OCIT, then
it is considered as irrevocable for a period of 3 years
So for the next taxable period, he will use again 15%
of the GI and the next the same
What is the disadvantage of OCIT?
Because it is possible that AD are greater than the GI
If this is so, and the TP chooses OCIT
Then assume that GI is 3M
AD is 4M
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Q:if the TP during the previous year used OCIT
Will the TP pay it cash for that TP
Yes
Because its irrevocable
He has to use it for a 3 year period
So kung NCIT lang ung inapply ditto
May babayran bang tax?
Wala
Because AD are greater than the GI
It should be at 0
For NCIT, tax base is not the GI but the taxable
income
Improperly Accumulated Earnings Tax
We also talk about surtax
Same as improperly Accumulated earnings tax
Q:when shall IAET be imposed?
A: it will be imposed if a CTP accumulates its
earnings for more than 100% of the ___________
(7mins)
History
Why was this provision included
Because for the previous years, prior to this,
corporations had this routine of not distributing
dividends
If they do not distribute the dividends, that means
that they are not accumulating all their earnings
Retained earnings (accounting term):
Type of account where all the income in current and
previous year that will be recorded
Assuming 2009
Income is 1M
Papasok ba siya sa retained earnings?
Yes
Dun ipapasok lahat ng income tax
2010
1M income, ipapasok
2011
Ipapasok sa retained earnings
If we take a look at the entire set up
The RE will be 3M
Now, what happens to the RE
What is the effect of distribution of dividends?
If a corporation distributes dividends to its SH, Alam ninyong matataxan ung dividend,
mababawasan ba ung income na hawak nung magdidistribute pa ba kau?
corporation? Wag nalng
Yes That is why the provision on retained earnings was
Kukunin niya sa income nya inserted
Kasi ang dividends is the share of the SH from the Because this set up is one way for them to evade
income of the corporation payment of dividends tax
The corporation will declare it and distribute it to the
SH 10M is the income
Now, this particular corporation will distribute it in SOS purchased by SH (pain in capital): Only
favor of A, B and C amounts to 1M
500k each Is there a discrepancy
Logically speaking, ang hinahawakan ng corporation Yes
is 3M Under the tax code
Pag ibibgay na nya ngaun sa SH, marereduce ba ung If the RE is roe than 100% of the paid in capital, then
3M? IAET will be imposed not upon the SH but upon the
Yes CTP
Because shares of A, B and C will be taken from the
retained earnings or income held by the corporation How much is the IAET:
What is the effect of distribution of dividends? 10% of IAE
It has the effect of reducing the retained earnings Q:RE for a particular period is 5m
Anong ginagawa ng closed corporations (usually PIC is 1M
handled by family members) IAE is 3M
Ang ginagawa nila, they do not distribute dividends What is the tax base for surtax (IAET)?
Assume that there are 5SH (brothers and sisters) IAE
Income: 10M
Will this be subject to tax? Yes Is IAE applicable to all types of corporate tax
Who is the TP in so far as the 10M is concerned: the payers?
Corporation GR: Yes
Subject to tax Except: Banks and other non banks, financial
intermediaries, publicly held corporations, Insurance
If this corporation does not distribute dividends to companies
1,2,3,4,5
Is there an income tax liability in so far as the SH are What is the logic behind the exceptions
concerned? Q: are banks required to keep enough funds?
None Yes
Because there is no flow of wealth As well as all others
The corporation is distinct and separate from the SH That is why it is justified for them to keep 100% of
their income
Assume that X corp distribute dividends of 1M
each R2-2-2002
Does it have any tax implication? Circumstance when justified for corporations to hold
Yes earnings of more than 100%
The dist of div will be sbuj to dividends tax: if there is a board resolution that funds will be
10% for RC, NRC, RA earmarked for expansion projects
20% for NRAETB
25% NRANETB Authors of books
Kung kau ang magkakapapatid at may distribution of “not returnable”
dividends
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If the author of tax books states that it is not
returnable However, take a look at the tax code
Means that it does not have an income tax return There are exceptions provided
1.GSIS
IAET 2.SSS
Not required to be indicated in the Tax return 3.PHIC
Therefore, does that it have a prescriptive period? 4.PCSO
Go back to imprescriptibility of taxes
Are taxes imprescriptible? Do not include PAGCOR
GR: Yes Amended already
Exception if government provides for a period for its
assessment and collection PAGCOR is already a taxable income subject to
Since not returnable, government does not provided NCIT
for a prescriptive period to collect and asses IAET
Can we consider IAET as imprescriptible? 4.DEPOSITARY BANKS
Yes
Therefore, if there is a problem in your examination a.If the DB is under the expanded foreign
which actually states that IAET can be collected for 3 currency deposit system
years only, will this be incorrect? Then all the transactions are exempt from tax
Yes
Because collection and assessment of IAET do not Provision under the tax code is no longer applicable
prescribe It has already been amended by RA 9294

Income earned from foreign transactions with:

Special Domestic Corporation (memorize)
1.non residents
2.offshore banking units in the Philippines
1.PROPRIETARY OF PRIVATE 3.local commercial banks including foreign banks
EDUCATIONAL INSTITUTIONS under expanded foreign currency system
Apply predominance test What government agency controls their transactions?
Test in order to determine whether the NCIT or BSP
preferential tax shall be imposed
When to impose preferential tax treatment of 10%? Income here is exempt from tax
If unrelated activities do not exceed 50% of the total
GI b.other income to be specified by the secretary of
Otherwise, it will be subject to the NCIT rate of 30% finance shall be subject to regular tax
Applicable to banks
Is it 10% of GI?
No c.Interest income from foreign currency loan with
Its 10% of taxable income residents
Subject to 10% FT
2.NON PROFIT HOSPITALS
Q:assume depositary bank under EFCDS
Also apply predominance test Earned income by lending loans
To the ff:
3.GOCC’s A, Another bank, Under FCDS
And a domestic bank
GR: Taxable C
Unless charter so provides
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 commercial banks authorized to transact businesses
st
1 transaction: exempt? under FCDU shall be subject to 10% FT
Is it a NR, a OBU, no
Local Commercial Bank? yes all that you need to remember the 3 individuals above
Thus exempt pag meron nay an, exempt
Provided that you have seen this term:
Under foreign currency deposit” next thing to remember, interest income ba yan
yes
2nd transaction might fall under the next provision
X corporation, domestic corporation
Is it considered non resident? No if interest is derived from FCL by a resident
OBU? No then automatically subject to 10% FT
LCB? No
Income dictated by SOF? No next
Interest income from Foreign Currency loan with a Q: X a NRFC deposited money in a bank under
resident? FCDU
Yes Who earns interest income, is it X or the FCDU?
In so far as the depositary bank is concerned X
Ung depositary bank ung nagpautang, so interest Will the interest income of X be considered as
income of the depositary bank subject to tax?
Tax implication: not exempt No
If depositary bank entered into a transaction with X Only applicable only in income earner is the
corporation, a domestic corporation will it be depositary bank
exempt? The income earner here is the bank
No What is the rule again?
Not one of the entities covered by the exemption If earned by a NRC, it is exempt
Will it be subject to normal tax? If by resident, then subject to 7.5% tax
No So in the problem, will the interest income earned by
Because there is an explicit or categorical provision X subject to tax?
under 9337 No
If interest income was derived from a FCL with a NRC
resident: subject to 10% FT
Is a domestic corporation a resident? Yes SUMMARY
So what is tax implication of this transaction
Subject to 10% FT What are the Entities subject to preferential tax
treatment?
5.OFFSHORE BANKING UNITS IN THE 1.PEIs
PHILIPPINES 2.NPH

If an OBU is in the Philippines, this is a resident Under PEZA law there are also entities subject to
Will it be subject to 10% FT? preferential tax treatment
No
What is the entity constitutionally exempt from
If there is a foreign currency transaction of a income tax?
depositary bank with an OBU in the Philippines Non stock, no profit educational institutions
Then income derived by depositary bank is
considered as exempt from tax Not the non stock non profit educational institution
therefore, interest income earned from residents other that is exempt from tax
than OBU in the Philippines and other local
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What is exempt is the fact that the income or property
is ADE used for educational purposes
Do not say that it is exempt because the income is
derived by non stock non profit educational
institution
This is incorrect
By being a NSNPED does not automatically mean
that the income is not subject to tax
Depends on usage
EXEMPT ENTITIES UNDER SECTION 30
Common denominator of the entities:
They are operating for their members
They are not operating for profit
If I talk about for profit, then no benefit redounds in
favor of the members or trustees
Includes Non-stock nonprofit educational
institutions
Last paragraph:
Notwithstanding provisions in the last paragraph,
income of whatever kind and character of the
foregoing are______
Q:
An entity enumerated under sec. 30
charitable institutions
Where no income shall redound in favor of its
members or trustees
Sells tickets for the concert of Nicki Minaj
What if the income is used in order to finance the
activities of the charitable institution?
Will this be taxable profit?
According to the last paragraph of sec. 30
If the income was derived from a profit activity
regardless of disposition then taxable
This is a profit activity
Not exempt
Because Last paragraph is very explicit
Last paragraph of sec. 30
enunciates the principle that it’s not the usage of the
income rather the source of the income that is
material in determining taxability
Q:sec. 30
Part of the enumeration is NSNPED
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And sold tickets of Nicki Minaj
Proceeds were used to improve school facilities
Will it be exempt from tax?
Yes
The constitutional provision prevails
So insofar as NSNPED are concerned, do not apply
last paragraph of sec. 30
But for the others, apply the last paragraph
RESIDENT FOREIGN CORPORATION
Difference between Resident foreign Corporation and
Non-resident Corporation?
RC: doing business in the Philippines
NRFC: not doing business
Special Types of Resident Foreign Corporation
1.international carrier
Q:if I talk about a IC, under RFC
Presupposes the fact that that IC has a landing right
in the Philippines
Meaning it is doing business in the Philippines
Very important to know that the tax rate for IC is 2 ½
% of the gross Philippine billings
GPB: the gross revenue derived from carriage of
persons, excess baggage, cargo or mail
ORIGINATING FROM THE PHILIPPINES
Very important
Where will it originate?
Originating from the Philippines
Uninterrupted and continuous flight
Application of definition of GPB
A ticket has been purchased in Manila
For a trip from Taipei to Manila
Is it part of GPB?
Hindi natin pinaguusaopan ang sec. 42 under tax situs
Ang pinag uusapan natin GPB
So just remember its definition
So no
Galling Taipei
A ticket was bought at Hongkong
For a trip from manila to Guam
Will it form part of GPB?
Take note, ticket was not sold in the Philippines
Yes If there is an income from a FCT with
Because: consider definition a.non resident
b.another OBU in the Philippines
What if c.a local commercial bank including a foreign bank
The ticket was booked at Chicago authorixed to transact business by the BSP under the
But delivered in Guam for a trip from manila to FCT
hongkong then income is exempt
Will it be considered as part of GPB?
Yes if there is an interest income derived by the OBU
Because originated from the Philippines from a resident other than a OBU or commercial
bank
b.Revalidation of tickets 10% FT

what if Branch Profit Remittance Tax

ticket was bought in the Philippines but revalidated in
an airline outside the Philippines Q: Proctor and gamble US established a
for a trip from manila to Hawaii corporation in the Philippines
part of GPB So submitted its AOI under name of Proctor and
regardless of fact that it has been revalidated or Gamble Philippines
endorsed to foreign airline outside the Phil Will you treat this as a branch?
as long as the person, cargo or mail originated from No
the Philippines then GPB Considered as a subsidiary
Because has a personality separate end sit from PNG
what if US (parent)
a ticket was bought Its just that PNG USA owns majority of the shares of
from manila to Amsterdam PNG Philippines
Amsterdam to UK
Total cost of ticket is 70k Q:luis vitton
Pero my cutting trip Assume that incorporated at USA
Here there is transshipment They have an office ate green belt
In cases of transshipment will you consider it as part Branch
of GPB? Does not have any personality separate and distinct
Yes from the entity in US
But only the aliquot portion corresponding to the It’s just that they have extended an office in the
length flow from the Philippines to the point of Philippines
transshipment shall be considered as part of the GPB
From the pt of tran to point o desti: not part of GPB BPRT
As the term implies, will it be imposed upon the
OBU in the Philippines branch?
They are treated as RFC Yes
Rule: What is it?
Do not apply provision under tax code, it has been Rate of 15% of the total profits applied or earmarked
amended for remittance
RA 9294
Q:one of questions in the quiz
If OBU PNG Philippines earns 70% of its income from south
Derive income from foreign currency transactions East Asian nations
Just apply pirnicples under depositary bank 30% earned in the Philippines
PNG Philippines nagbigay ng pera kay USA, 10M
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Q: what will be ur adive if PNG asks you of the
taxability of 10M being remitted to PNG USA Rate of BPRT?
Is it subject to BPRT? 15%
No
Because in the first place PNG Philippines is not a Remember that if you talk about total profits, apply
branch your earmark for remittance
It’s a subsidiary It must refer to that which is connected with BTP of
So what will be the advice? the corporate TP
Si USA nag mamayari ng stocks kay Philippines
Tas si Philippines nagbigay ng income niya kay USA Q:Is a branch office considered a corporate tax
Ano ulit tawag dun? payer?
Dividends Pag branch, hindi xa separate and distinct
Distribution of income or remittance from PNG So No
Philippines to USA So if a BPRT is being imposed, it is not being
Is a dividends imposed upon the branch
So dividends tax It is imposed upon GAP
So what is the rate if the recipient is NRFC? Branch payer is just an extension
30% or 15% if tax sparing rule
REGIONAL AREA HEAD QUARTERS
Q:tama po ba nating isagot na only 30% shall be (RAHQs) and REGIONAL OPERATING HEAD
subject to dividends tax because it is the only income QUARTERS (ROHQs)
derived in the Philippines?
Sec. 42 If you want to check their definitions:
If dividends sec. 22 of the tax code
First thing to consider, who is the issuer?
If the issuer is a DC or a FC RAHQ
If DC: treated as sourced from within, entirely within Not doing business in the Philippines
If issuer of dividend is a FC: material to determine It’s just for the purpose of coordination
the income of the 3 year period prior to the Means that there is a multi national company
declaration And its just coordinating the transactions of the multi
50% or more, Philippines: entirely within national company
Less than 50%: pro rate
So, if not operating business, will it be exempt from
Dito, ang nag issue is PNG Philippines tax?
DC xa Yes
So consider all the dividends or its entirety as within
ROHQ
Q: GAP USA does not have a subsidiary in the Conducts business in the Philippines
Philippines Subject to tax
But it has liaison offices at different malls 10% tax rate
Will you treat those offices as branches?
Yes Depositary banks
Therefore if they remit money to GAP USA, will it Remember that a DB can either be domestic or RFC
be subject to tax? If RFC: apply rules as in the first hour
Yes. Transactions are exempt from tax if it’s a foreign
BPRT, not dividends tax currency unit
Why? And has been derived from transactions from local
Because it’s not a subsidiary and commercial banks
It’s merely a branch
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Automatically if the transactions are entered into with If the country of the NRFC allows credit against the
these entities income tax due of the NRFC in the nature of taxes
Then the income is exempt from tax foregone, there will be a corresponding deduction on
this NRFC
NRFC
3 special NRFC Application of Tax sparing rule
Special because the tax is different and rules are Dividends tax: 30%
different Country: Japan
NRFC invested in SOS in a DC
Tax rate of NRFC: Will the dividends be considered as entirely sourced
25% of GI form with in
They are at the same rate as a NRANETB Yes
Always taxed at GI Because issuer is a DC
Just apply sec. 42 basic principles
1.cinematographic, film or lessor or distributor
25% of the Gross Rental (paki check kung gross What if
rental kasi hindi ko maxado marinig sa recording) In Japan
They allow a reduction of 15% tax credit from the
2.lessor of vessels chartered by the Philippine taxable income of the NRFC
National Imposed by the Japanese government
4.5% of the Gross Rental Is tax sparing rule applicable?
Yes
3.lessor of aircraft machineries or equipment Why?
7.5% of the Gross Rental Pag present ang TSR, 15% ang tax rate
Ilan ang finorgoe\ ng Philippine Government?
Why do you think tax base is gross rental? 15%
Kasi ung TP eh non foreign Instead of 30%
So the TP is not allowed to make any itemized If this tax foregone is allowed as tax credit form
deductions income tax due imposed the Japanese Government
Is tax sparing rule applicable?
Gross yes
Kasi these types of TPs are non resident corporations kasi ung spare tax gagamitin ng NRFC to reduce his
its tax liability at Japan
NRFC so in which case if that is allowed, then instead of
25% FWT on its GI derived from the Philippines imposing 30%
we only impose 15%
Except interest income on foreign loan
If derived on FL TAX RETURN OF CORPORATE TAX PAYER
Sinon nagpahiram?
Si NRFC Things to remember:
Siya ung creditor, siya ung nag earn ng interest eh 1.CTPs file their income tax returns quarterly
So subject to 20% FT When: within 60 days from the close of the taxable
quarter
Separate rule for Inter corporate dividends
If recipient is a NRFC: tax at 30% or 15% if the tax 1st Quarter: January to march
sparing rule is applicable Last day of filing: may

Tax sparing rule 2nd quarter: April to June

Last day august
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
 Not amount to be paid
rd
3 quarter: July to September Previous payments can be used to reduce tax liability
Last day: November in the previous quarter
So reduce by 600k
4th quarter: October to December
Already final adjustment Q:4th quarter
Sec. 76 Income to be declared: 5M
30%
2.Corporate tax payers (CPT) report income on 1.5M
cumulative basis Amount to paid by TP?
Income earned by CTP: No, use prior payment to reduce tax liability
Quarter 1:1M Prior payment is 1.2
Quarter 2:1M So only 300k will be paid
Quarter 3:2M
Quarter 4: 1M Lets change that
4th quarter
Q: AD are higher than GI
2nd Q: how much is the income to be declared? 4th quarter: company earned loss of 500k
Not 1M but 2M Income to be reported in the final return:
Why? Net is loss
TP has already reported 1M during the 1st Quarter
CTP report their income on a cumulative basis If there is a loss, there is a “no tax liability”
Nakapag bayad na siya pero
Q:what is the tax rate? Nagbayad na xa for the previous quarters from 1st to
30% 3rd quarter ng 1.2M
300k Pero later on at the end of the taxable period, if you
Babayaran ba yan ng CPT? sum up all payments, it sums up to a loss of 1M
Yes Can the TP still use this? Yes
Because you pay as you file system Can be credited against tax liability for the next table
So pag nag file ng 1st quarter return year
Dapat bayaran din ung tax Can corporation refund this? Yes
either as refund or tax credt
2nd Q Sec. 76
1M is the only income derived in this quarter (guys paki check ung part na to kasi hindi ko alam
But CTP declares income on cumulative basis ung sinusulat na figures ni mam sa board)
So 30%
600k FILING
Eh mam, hindi po ba yan double taxation?
No Q:are individuals required to file an Income tax
Bec. CTP can use the previous payments as a returns (ITR)?
reduction of the tax liability Yes
So CTP can use the 300k in the 1st quarter in the 2nd But there are exceptions to that
quarter
So only 300k shall be paid Q:Is an individual exempt from filing, to file an
income tax return?
3rd Q: 1.if GI does not exceed PE
Income to be declared: 4M 2.purely compensation earners
30% Exception: concurrently earning from 2 or more eers
1.2 Do not apply 60k rule
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
There is already substituted filing that is mandatory 6M
by 2002 Subject to corporate tax
3.if sole income is subject to FWT 2M each
4.if there individual is exempt from tax
Will the SH or partners be subject to dividends tax?
So is an individual exempt from filing, exempt from Yes only of distributed
tax?
Yes What if: ang dinistribute lang eh 1M each partner
3 sila
MWE Will they be liable to 2M each or 1m each?
Is he required to file? 1M
No Because the corporation is a business partnership
Exempt from tax under RA 9504 So the recognition will be under actual receipt

Is a corporate tax payer required to file income ESTATES AND TRUSTS

tax return
Yes What is the Accounting period for an individual?
Calendar year
Is a corporation exempt from tax, required to file Starts in January
an income tax return?
Pag individual, no What if in May, the individual died?
Pag corporation: Yes What is the tax implication of all activities that had
Except if corporation has shown proof of exemption happened from January to may?
Subject to income tax? yes
Only 1 scenario where Exempt Corporation is Subject to tax on estate?
exempt from filing Ask yourself, from January to May, buhay ba siya?
when exempt corporation has shown proof of Oo
exemption So apply regular rule for individual TP? Yes

general Professional Partnership 2 possible tax implications

Required to file ITR? The start of the year till the date of death
Yes Subject to income tax on individuals
Although not an income tax payer
But the ITR will include names of the partners, ____ From date of death to December?
of the partners and the gain of the GPP No more income tax on individual;
What is applicable is income tax on estate
Is GGP subject to tax?
No Will all estates be considered an income tax
payer?
GPP earned 6M No
Will the 6M be subject to corporate tax? You only consider it as an income tax payer if it is
No under admin or judicial settlement
GPP is not a corporate tax payer
If under extra judicial settlement: no
What about individual Taxes?
Yes Are individuals entitled to BPE?
Under constructive receipt of income yes
50k
Business partnership Additional exemptions? Yes
Taxation 1
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25k No
Only 5M is considered as tax on estate
A died How much is deductible?
Under judicial settlement Assume that 6M is distributed
Is estate entitled to BPE? Only 5M is deductible
Under tax code, sec. 62 That is the Only income earned by the estate TP
The rules on individuals shall be applicable and
estate tax will be entitled to 20k BPE What about the 1M distributed?
Subject to tax?
San Beda reviewer Yes estate tax
There are 2 views
Q: what if, at the end of the taxable period,
1.estate is subject to 50k income has not yet been distributed?
Because nag increase na nga daw under RA 9504 January of the following year
June 2010: income of estate is 5M has been
2.BPE for estates is 20k distributed in June 2010
Will it be subject to tax?
Paano kung sa bar exam un ang tanong, anong iaaply Nung December ba, kelangan ba nya (estate) mag file
niyo? ng ITR?
in my view Yes.
20k kelan ang due date?
Why? April 15
Because if you take a look at tax code Nung april 15 po ba kelangang bayaran nung estate
It does not state that the estate will be entitled to the ung tax sa 5M
BPE which individuals are entitled to Presupposes that taxes of the 5M had already been
Hind ganun ang pagkakastate paid
Ang sbi dun ang estate tax payer shall be entitled to a
BPE of 20k Now, June, dinistribute ung 5M after payment of tax
So it has been fixed in the law Will the distribution be subject to tax in so far as the
Also BIR forms heirs are concerned?
BIR uses 20k No
Why
Q:what if portion of the income is distributed in Because it has already been subjected to tax when
favor of heirs? held by estate prior to the distribution
Will it be in the form of a deduction from the income
of estate? Q:what if there are 3 children?
Assume from January to May income is 1M Is the estate entitled to additional exemption?
From May to December 5M No
So 6M May anak ba ang estate?
If 6M has been distributed in favor heirs None
Will you consider 6M as a deduction of income
earned by estate TP? What if
The principle: The judicial settlement is already terminated
“The distribution of income of the current year to the Considered only as TP if under judicial or
heirs is considered as deductible from the taxable administrative settlement
income of the estate” Will it be subject to tax? The income
Because income distributed to the heirs are taxable yes
income not of the estate but by the heirs Who is the TP?
So is the 6M deductible by the estate? Depends
Taxation 1
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 2.income which is to be distributed concurrently by
If there is co ownership: then subject to individual the fiduciary ot the benieficiary
taxes TO BE DISTRIUBTED
If there an unregistered partnership: subject to If already distributed, not longer tax on trust
corporate tax 3.income collected by guardian of a an infant which
is to be held or distrubeted as may be directed by the
Heirs inherit a parcel of land court
Occupied by several individuals who are paying rent 4.income which at the distcration of the fiduciary
charges may be distributed to the beneficiaries or can be
There was a judicial settlement accumulated
Assume that Judicial settlement is 2010-2011
Who is the TP here? Application
Halimabwa namantay january 1, 2010 What if the income subject of the trust has already
Nagstop ung judicial settlement ng december 31, been given to the beneficiaries
2011 Who is the TP in so far as the income is concerned?
Who is the TP during this period? Na distrubte na
The estate So beneficiary
Still under judicial settlement
Next
2012 What if
Continue to earn income Has been held or accumulated by the fiduciary for the
Who is the TP? beneficiary
If heirs will infuse funds to earn profit: corporate tax Who is the TP?
Will it fall under also enumeration?
2012 Yes
Divide profits among themselves Si TP is the trust
Subject to individual taxes on the portion of each Why?
Get the principle or logic
What if there is an extra judicial settlement? You do not qualify if the trust Is revocable or
rule irrecovable?
Prior to actual partition
Can we consider the state as a TP? Revocable
No , not under judicial Trustor can get it anytime
Trustor is the TP
Will we apply the principles above?
Yes If irrevocable
So under EJS, consider if there is a co ownership or a Meaning grantor hindi n nya pwedeng kunin
unregistered partnership Kay beneficary na talaga un
Who is the TP?
TRUSTS

A right to a property whether real or personal, held When will there be an instance where there is a trust
by 1 person for the benefit of another who is the TP?
If the instances fall under sec. 60
Sec. 60
Enumerates taxable trusts Story tau
1.income accumulated for the benefit of an unknown Binigay ni grantor ung income jan. 1
or uncertain person Dec. 31: ung income nag earn ng additional 1M
Or a person with contingent interest There was no distribution to the beneficiaries
Taxation 1
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1M is capital not subject to tax Employees trust
Panu ung na earn?
Kaninong income un 1M na un? Will trust and estate file an income tax return
Pag revobale: kay trustor yes every april 15
Pag irrevocable:
Hind pwedeng si Ben kasi hindi pa niya natatanggap Is there an exemption?
So kay trust If the income of the trust or estate is less than 20k
So irrecovale if TP is the trust

What if
2011: there is an additional al income of 1M
And before 2011 ends, the entire 2M was distributed
to the beneficiaries
Except 1M capital
So parang pinapanamange parin nila sa trust
will you subject this to tax?
Ung 1M lang

What if
The trust does not have any designation whether it is
revocable or irrevocable
However, has been stated that income shall be for the
benefit of the grantor
Who is the TP?
Is it the trust?
No
Ung grantor

What if
Trust is administered in a foreign country
Effect of this?
Who is the TP?
Ung pagmanamange ng condo nasa ibang bansa
Trustee
Because the service of managing a trust is subject to
tax

Halimbawa bank, babayaran mo ba si PNB pag

magbibigay ka ng Trust account kay trustee?
Si PNB ung trustee
Income is granted in favor of beneficiary
Here, can we treat trustee s income TP?
Yes
Only time when trustee is an income tax payer

Remember
Under trust
There is a trust no subject to income tax
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño
Taxation 1
Atty. Carantes
Transcribed by: Charlotte Cariño