 Substituted Filing
as legal.
Ang reckoning kasi neto is within the taxable
year, kung sa next year nito nandito kana sa second
employer tapos wala pang “term” substituted ka na pero
within a year dalawa ang employer mo you’re not
qualified for substituted.
Complicated yan kasi when you applied, nag
apply ka dito pina pa submit ka ng mga tin di ba, mag
uupdate ng record. Pag update ng recod makikita ng BIR
bakit nag wi-withhold si employer 1 dati tapos ngayon si
employer 2 na, tapos hindi naman kasi ma co-compel ng
employer 2 si employer 1, wala naman kasing, there’s no
link between employer 1 and employer 2 kundi ikaw lang
so ikaw lang ang maka demand sa employer 1 na mag
bigay ng 2316. Otherwise pag wala ka ng 2316 baka mag
so-sobra sila ng withhold sayo.
Okay so that is your withholding.
D. Passive income
Passive income is an income that without you
having to do anything, unlike in compensation income
you have to render your service in passive you just have
to pay example interest income.
Section 32. Gross Income. -
(A) General Definition. - Except when otherwise
provided in this Title, gross income means
all income derived from whatever source,
including (but not limited to) the following
items:
XXX
(4) Interests;
Interest income is an earning in depositing or
lending money goods or credit unless exempted by law
the income received by a tax payer whether usurious or
not is subject income tax. You have your Usury Law.
Q: What do you mean when you say usurious? How can
you consider an interest as usurious? What if 50% is it
usurious? Is usurious the same as unconscionable?
K: Usury law sir has been suspended when in comes to
the interest or forbearance of goods money and credit
however the Supreme Court have already held that an
interest could be usurious, unconscionable or excessive
or shocking to the conscience of man if such interest
could lead to the haemorrhaging the capital assets of the
debtor if it is not within a term. If it is within a term SC
held that if it is within a term then it could be considered
Q: Ang Usurious is the same as unconscionable and
excessive?
Sir: You revisit your Jurisprudence kasi, when you say
Usurious it violates the Usury law. When you say
excessive and unconscionable it is shocking to the
conscience of man. These are not the same. We do not
interchange them. when you say Usurious it violates the
Usury law. Meron pa bang Usury law? So, you cannot say
that it is usurious na. please revisit your jurisprudence
kasi pag ganyan ma technical kayo. Is the rate usurious?
May usury law pa ba? So, it is not usurious but
unconscionable and excessive which courts may
intervene to di ba. So please, let’s be legal, let’s be
particular with those words kasi thise are not
interchangeable. When you say usurious that doesn’t
mean na excessive siya because that violates the usury
law. That is how you should think.
Classification of Interest Income
1. Exempt from income, subject to the final
withholding tax and subject to normal tax.
We have exempt from income tax. What are interest
income exempt from income tax:
First, those members of a duly registered cooperative
that is based on RR 20-2001.
Second, BSE prescribe form of investment by not more
than 5 years. If you have an investment in the form of a
BSE prescribe form and the maturity is more than five
year that is exempt from income tax on interest. Kung
preni-terminate mo from 4 years to less than 5 years you
have your 5% preni-terminate mo to 3 years to less than
4 years you hav 12 % kung less than 3 years that is 20%.
Third, those under the expanded foreign currency
deposit by non-resident citizen, aliens that is exempt
from income tax.
Fourth, tenants of owners and tenant of land by
purchase agreements as part of CARP.
Now what are interest income subject to final
withholding tax.
Interest income or deposits made by Banking
Institution is a passive income which is usually subject to
FWT or final withholding tax. That’s income is subject to
normal tax.
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 Now, usually ang interest income subject to final
withholding tax pero it could also be subject to normal
tax. Meaning normal rates, so you have your rates of
corporation, rates of individual. What are these? If the
interest income is derived from your ordinary course of
business.
Interest Income
Regular course Subject to
of Business Normal Tax
Not your Regular Subject to Final
course of withholding Tax
Business
Example kung Bangko ka, nag i-earn ka ba ng
interest? Nag papa-utang ka di ba? Nagpa-utang ka so
ang kita mo dun is yung interest income ng babayaran ng
nangutang. So this is your regular course of day to day
business this is not subject to final withholding tax but is
subject to normal tax. Pero ikaw kung individual may
deposit ka lang sa Banko, may trabaho ka naman
dineposit mo lang that is not your ordinary course of
business, that is not subject to normal tax but is subject
to a final withholding tax.
Again if the earning is the interest income and is
part of your normal course of business this is part of your
normal income so kung individual ka graduating rates
kung corpo ka to 40% to certain rates. The rate of
interest income the final withholding income is generally
20% if you are a resident citizen, resident alien and a
non-resident alien engaged in trade or business. The
only exception to this rate is a non-resident alien not
engaged in trade or business. If you are a non-resident
alien not engaged in trade or business the tax is 25%.
Now if Corporation ka naman you are a domestic 20% pa
rin if resident foreign 20%. So the only exception is if
non-resident foreign corporation because you are taxed
at 30% .
Rental and Leases
Section 32. Gross Income. –
XXX
(5) Rents;
What are Rental Income? This is also
considered as passive income, kasi maghintay ka lang
naman mag iearn ka ng rental income. The amount paid
for the use of property under an agreement which is
determined under this regulations to be leased shall be
considered as rental interest. Such lessor may deduct all
the expenses paid or incurred during a taxable year
which are equitable.
Now in RR 19-86 the main regulation for taxation of
leases defined Operating Lease. Let’s focus on the
operating lease.
What are the rules for the lease or the rentals.
November-Decemeber (2017) YEAR ONE
Paid advance rental of three months Nov-Jan
If the pre-paid rent is received without restriction as to
its use, the entire amount (the 3 months) should be
declared on the year it is received. This is gross
income on YEAR ONE.
January-October (2018) YEAR TWO
Now, diba minsan may pre-paid kung maron
tayong mga apartment di ba. Like one month deposit
one month advance. Question, is the one month advance
and one month deposit doon sa lessor, is it part of his
gross income “yung deposit”.
Now pre-paid rental, if the advance payment
(I’m talking about the lessor ha kasi siya man ang
kumikita ng rent) now if the advance payment is a pre-
paid rental received without restriction as to its use, the
entire amount is taxable in the year is it receive in the
year whether the lessor use it as cash or goods.
So let’s say year 1 and year 2 nag rent ka
November good for one year. so for year 1 kunwari
calendar year you only have November and December
tapos for year to you have January to October tapos let’s
say advance rental of three months so binayaran mo na
si November December and January. Ang question
ngayon, is the January taxable in the year 1 when the
lessor received the payment. Or do I have to wait in the
year two for it to be taxable. Magkano ang idadagdag
mong taxable rental income just to once reconsider the 3
months na pre-paid rent.
Again, if the pre-paid rent is received
without restriction as to its use, the entire
amount (the 3 months) should be declared on
the year it is received. This is gross income on year
one.
Security Deposits with restrictions. Paano mo ba
masabi na yung pre-paid rent mo is without restriction?
Wala siyang restriction, free to use. May mga pre-paid ba
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na may mga restrictions? Yes, kunyari kapag di mo
tinupad ng lessor ang mga pinangako mong ganito
pwede ko tung ma-forfeit or maibalik. Kung sinabi mong
walang tulo yung unit tapos may tulo, di ba may mga
ganun ibalik mo yung binayad ko. That is consideration
with restriction.
How about security deposits? Ito, deposit lang, if
the advance payment is a security deposit. Meaning it is
only for purposes of insuring na after kung matapos
yung term wala kang dinamage, ito yung security
deposit. Now if it is with restriction, it restricts the lessor
as to its use then the amount should be excluded for the
determination of annual income. So if the security
deposit is refundable that not a gross income of the
lessor.
Royalties
Section 32. Gross Income. –
XXX
(6) Royalties;
A royalty income is a payment or portion or
proceeds paid to the owner of the right to a patent to use
it by portion of the proceeds by the work of another
author. So in general a royalty income is 20% final tax.
Except in royalties in books, literary verse or musical
composition in which case the tax is at 10% final tax.
Royalty, this is the use of your intellectual property. Now
pag any other that books, literary verse or musical
composition the rate is 20% final tax. Pag books, literary
verse or musical composition it is at 10% final tax.
Dividends
Section 28. Rates of Income Tax on Foreign
Corporations. –
(A) (7)
d) Intercorporate Dividends. - Dividends received by a
resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be
subject to tax under this Title.
The rules on dividends. If received by a domestic or
resident corporation…… Question what is a resident
corporation? How would you know if resident or non-
resident? If it is created under our laws, it is considered
as a? Di ba pag resident siya it is engaged in the business
in the Philippines pag hindi siya engage non-resident.
If received by a domestic or resident corporation
from a domestic corporation such dividend is tax exempt
this is what you call as inter-corporate dividends.
Kailangan nanggaling ang dividend sa domestic
corporation. It has to come from a domestic corporation
to be considered as tax exempt. Now your stock
dividends, dividends received from a cooperative from
(truly belating dividends “not sure”) are tax exempt.
Kung cash or property dividends naman subject
to final tax if received by an individual or non-resident
corporation from a domestic corporation. If received by a
resident citizen, non-resident citizen or resident alien the
tax is at 10%.
Now if receive by a non-resident alien engaged
in business in the Philippines the final tax is at 20%. If
received by a non-resident alien not doing business in
the Philippines final tax is 25%. If received by a non-
resident foreign corporation from a domestic the final
tax is at 15%. Just memorize the tax rates. Ang
importante dito is, when is it considered as an
intercorporate dividends which is exempt from
dividends tax. It is only when is received by a domestic
or resident corporation from a domestic corporation.
That is an intercorporate dividends.
E. Annuities and Insurance Proceeds ( we already
discuss this)
F. Prizes and Winnings
Section 32. Gross Income. –
XXX
(9) Prizes and winnings;
Q: What the difference between a prize and a winning?
I receive a price, I receive a winning.
A: Winning is by chance or luck. Prize is when there is an
effort. Prize is a reward from a contest or competition in
other words prize represent a remuneration for an effort
reflecting one’s priority. Winning it is a reward which
depends upon chance such as winning from Lotto.
In general prizes are subject to final tax of 20%,
except when the amount of prize is 10, 000 or less which
is subject to income tax. So let’s say na empleyado ka, ng
Mcdonalds ang sweldo mo is 100, 000 (ikaw yung
mascot sa labas). Tapos nag join ka ng contest Tawag ng
Tanghalan tapos nanalo ka ng let’s say 10, 000. Nag
tanong ka subject ba to to a final tax or isasali ko to sa
‘king income subject to graduated rates.
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A: Now, if it is 10, 000 or less it is subject to normal tax,
so subject siya dun sa income subject to the graduated
rates. If more than siya say, 10, 001 subject siya to 20%
of final tax. Meaning bago ka bibigyan ng 10, 001 ile-less
nila ang 20% kasi final tax siya.
Winning are subject also to 20% except winnings
amounting to 10, 000 or less. Pag 10, 000 or less from
PCSO it is considered as exempt.
Q: Since there is the 10, 000 threshold i-minus na ba
siya?
A: 10, 000 is the total, hindi siya yung in excess lang. So
kung 10, 001 then subject ka na to 20% . Hindi pwedeng
yung 1 pesos lang na excess ng 10, 000. So the entire is
subject to 20%.
Pero better na yang subject sa final tax 20% lang.
Imagine kung isa-subject mo siya sa normal tax what is
the rate dun sa highest threshold? 35% di ba? Okay na
yung final tax na 20%.
Gains Derived from Games and Profits
Let’s first discuss the shares of stock. Under section 127
of the Tax Code as amended by the Train Law.
“There shall be levied, assessed and collected on every
sale, barter or exchange or other dispositions of shares
of stock listed and traded through the local stock
exchange other than a sale by dealer in securities, a tax
at the rate of six-tenths of one percent (6/10 of 1%) of
the gross selling price or gross value in money of
the shares of stock sold, bartered or exchanged or
otherwise disposed which shall be paid by the
seller or transferor.”
So pag sale of shares of stock Just to summarize.
Share of sales of stock:
Let’s say may investment ako kay Davao Doc
(which recently actually buy out, Bina-buy out nila
parang 5 thousand per share, initially kasi gusto nila
control but they cannot buy out at 50% kasi mayron
tayong tintawag na tender offer in Corpo law you have to
tender offer). Meron akong shares with Davao Doc, now
binenta ko yung shares ko let’s say 5, 000 ang sales bond
tapos na-acquire ko lang siya the cost is just 200 pesos.
Q: ano yung tax ko? Now pag shares of stocks first, you
have to determine W/N ordinary course of business. Pag
ordinary course meaning I am engaged or dealing with
securities that could be subject to normal tax kasi yun
yung ordinary course of business. Pero pag hindi, kung
may shareholdings ka lang you have to ask again Is it
traded in the local stock exchange. If YES you look at 127
the tax is at six-tenths of one percent (6/10 of 1%) this is
actually a business tax.
Prior to TRAIN law it is one-half of one percent
(1/2 of 1%). Pero under the TRAIN law it is 6/10 of 1%
pag traded siya in the local stock exchange. Kung HINDI
siya traded you have your rule on net capital gain. Now
sa one-half of one percent (1/2 of 1%) your base will be
the 5, 000. Pero sa Net Capital Gain your base is only
the Net Gain, kung may gain ka.
Now under the TRAIN Law Capital Gains of the
sale of shares of stock NOT traded in the stock exchange
if final tax of the rate of 15% shall be imposed on a net
capital gain realized during the taxable year from the sale
exchange or other disposition of shares in a domestic
corporation. So your rate will be 15% of the Net Gain so
ang 15% mo nyan is only, ang base mo is the 4 because
that is your net gain. Yung 15% mo hindi siya base dito
kasi sa net gain lang. So what if beninta mo siya ng 5,
000 na acquire mo ng 6, 000? Do you have a tax base?
No, kasi wala kang net gain, you need to have a net gain
kailangan may kita ka . Now 15% of that.
Before TRAIN Law meron siyang bracketing na
if the Net Gain is 100, 000 5% if mag exceed siya ng 100,
000 10%. Ngayon ginawa nila 15% na. kasi ang ginagawa
ng tao dati gina-insure na hindi mag abot ng 100, 000
buak buakon para tig 5% lang. sabi nila ngayon 15% na
because that is your Net Gain pag hindi siya traded. Pag
may bent aka sales of shares of stock the first question is
Is it in the ordinary course of business, so if Hindi so
Capital. Is it traded, kung traded 6/10 of 1% if not
traded does it have a net gain kasi pwede naming wala
siyang net gain wala siyang kita. So kung may net gain
15%.
Sale of Real Property
Section 32. Gross Income. –
XXX
(3) Gains derived from dealings in property;
Section 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital
assets' means property held by the
taxpayer (whether or not connected
with his trade or business), but does not
include stock in trade of the taxpayer or
other property of a kind which would
Page 4 of 6
 properly be included in the inventory of
the taxpayer if on hand at the close of
the taxable year, or property held by
the taxpayer primarily for sale to
customers in the ordinary course of his
trade or business, or property used in
the trade or business, of a character
which is subject to the allowance for
depreciation provided in Subsection (F)
of Section 34; or real property used in
trade or business of the taxpayer.
(2) Net Capital Gain. - The term 'net
capital gain' means the excess of the
gains from sales or exchanges of capital
assets over the losses from such sales or
exchanges.
Q: Is the selling of Real Property in the course of the
ordinary business of the tax payer?
A: If this is ordinary business it is subject to normal tax it
is not subject to capital gains tax.
Q: How do you know that it is in the ordinary asset?
A: Under the tax code an ordinary asset is an asset which
qualify in any of the followin types of property. When we
say included in the stock, trade or inventory of the tax
payer in the normal business operation imposed during
the taxable year. So when you are engaged in Real Estate
business, so part siya ng inventory so meaning whatever
kita of that is part of your normal tax. Another one Real
Estate property primarily sold to customer by a tax payer
in the normal course of business.
Real Estate properties used in business which
are subject to the allowance and limitations. Let’s say ako
may Factory syempre yung factory ko nakatayo sa lupa,
pero yung factory ko yung inventory ko ng factory
(factory ng cellphone) yung inventory ko cellphone sabi
ko hindi na siya part ng inventory so baka capital asset
tung lupa. Is it primary subject to customer in the taxing
of business? NO, kasi nga cellphone. But it is used in
business which is subject to depreciation. Ginagamit mo
siya sa business kasi dun nakatayo yung property ko that
is still considered as an ordinary not capital asset. But if
it is used in your business it is considered as ordinary
therefore that is not subject to your capital gains tax.
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of
Section 39(B) notwithstanding, a final
tax of six percent (6%) based on the
gross selling price or current fair
market value as determined in
accordance with Section 6(E) of this
Code, whichever is higher, is hereby
imposed upon capital gains presumed
to have been realized from the sale,
exchange, or other disposition of real
property located in the Philippines,
classified as capital assets, including
pacto de retro sales and other forms of
conditional sales, by individuals,
including estates and trusts: Provided,
That the tax liability, if any, on gains
from sales or other dispositions of real
property to the government or any of
its political subdivisions or agencies or
to government-owned or controlled
corporations shall be determined either
under Section 24 (A) or under this
Subsection, at the option of the
taxpayer.
Now pag ordinary asset siya you go to the
normal tax. Pag hindi siya ordinary asset, it is a capital
asset the income tax is the capital gains tax. Capital gains
tax is soon to be realized in the sale of Real Property not
categorized as ordinary asset and the tax is at 6% on the
highest among the selling price or zonal value or the
assessed value whichever is higher. Again the 6% percent
will only apply if it is a capital asset, it is not used in
business.
Now ito ang anomaly ng Capital Assets, it is a
presumed gain. Diba si Shares of Stock you only consider
the net gain, tama naman kasi hindi naman lahat ng ito
income, yung net lang ang income. In Real Estate, it is
considered as presumed capital gain. So the 6% ang basis
niyan is not only the net gain but the selling price or
zonal value or the assessed value whichever is higher. So
it does not consider your cost. Let’s say bumili ako ng
lupa at 5 Million beninta ko siya ng 6 Million di ba dapat
ang kita ko 1 million lang, di ba dapat ang 6% doon lang
sa 1 Million? HINDI. Ang 6% is doon sa selling price or
zonal value or the assessed value whichever is higher.
Kasi ito ang tinatawag na presumed gain. Capital gains
presumed.
We also have what we called conditionally
exempting capital gains tax.
“2) Exception. - The provisions of paragraph (1)
of this Subsection to the contrary
notwithstanding, capital gains presumed to have
been realized from the sale or disposition of their
principal residence by natural persons, the
proceeds of which is fully utilized in acquiring or
constructing a new principal residence within
eighteen (18) calendar months from the date of sale or
disposition, shall be exempt from the capital gains
Page 5 of 6
tax imposed under this Subsection: Provided, That the
historical cost or adjusted basis of the real
property sold or disposed shall be carried over to
the new principal residence built or acquired:
Provided, further, That the Commissioner shall
have been duly notified by the taxpayer within thirty
(30) days from the date of sale or disposition
through a prescribed return of his intention to
avail of the tax exemption herein mentioned:
Provided, still further, That the said tax exemption can
only be availed of once every ten (10) years:
Provided, finally, that if there is no full utilization of
the proceeds of sale or disposition, the portion of the
gain presumed to have been realized from the sale or
disposition shall be subject to capital gains tax.”
This pertains to the sale of conjugal residence
which is exempt from capital gains tax. The said
principal residence pertains to the seller’s family home
or the dwelling house including the land on which it is
situated.
So pag benenita mo yung principal dwelling nyo,
principal home or family home that could be
conditionally exempt from capital gains tax. Bakit
conditionally? Because you have to satisfy the conditions
for it to be exempt from capital gains tax.
First, the entire proceeds of the sale should be fully
utilized in acquiring or constructing a new principal
home. This applies kung beninta mo yung dati mong
bahay kasi nag lipat ka nag upgrade ka, beninta mo yung
bahay mo sa NHA nagpagawa ka ng bahay sa Monteritz.
The entire proceeds from the sale of the principal
residence shall be fully utilized in acquiring or
constructing a new principal Residence within the 18
calendar.
Take note that it is only the proceeds of the sale
of your principal residence which should be fully utilized
in acquiring or constructing a new principal residence.
So let’s say beninta mo si NHA magkano lang yun? 500,
000. Nagpatayo sa Monteritz, syempre millions yun so
nag ambag ka pa pero yung 500, 000 mo that is exempt
from Capital Gains Tax. Now this exception can only be
exercised once in ten years. So every 10 years ka lang
mag lilipat ng bahay, di ka pwedeng mag lipat ng bahay
twice in 10 years.
That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from the
date of sale or disposition through a prescribed return of
his intention to avail of the tax exemption. If the
proceeds of the sale from that is fully utilized let’s say
500, 000 ang benta mo lumipat ka sa Monteritz ang
gasto mo lang ay 300, 000 so hindi mo na utilized yung
500, 000. The portion of the gain of the sale is subject to
6% capital gains tax. So the portion which is 200, 000 is
subject to 6%. The buyer of the principal residence
should withhold form the seller the supposed 6% capital
gains tax.
So, business income derived from exercise of
profession, you have partners distributive share of gross
income of General Professional Partnership as discussed
in section 26. Again the firm the GPP is not liable, who is
liable is the partners.
There are also exclusions under special law
under RA 9040 this pertains to the pay and allowances
of AFP personnel. You have mga sundalo.
Section 3. Exclusions from Gross Income. - The
following pay and allowances of AFP personnel shall
not be included in gross income and shall be exempt
from taxation under Title II of Republic Act No. 8424,
otherwise known as the "Tax Reform Act of 1997."
(a)Longevity pay;
(b)Mandatory allowances, namely (1) Cost of
Living Allowance; (2) Personnel Economic
Relief Allowance; and (3) Hazardous
Allowance;
(c)Collateral Pay, namely (1) Specialist Pay; (2)
Combat Pay; (3) Flying Pay; (4) Air Mechanic's
Pay; (5) Sea Duty Pay; (6) Hazardous Duty
Pay; (7) Instructor's Duty Pay; (8)
Parachutist's Pay; and (9) Hardship Pay; and
(d)Collateral Allowances, namely (1) Special
Clothing Allowance; (2) Cold Winter's Clothing
Allowance and Cold Weather Clothing
Maintenance Allowance; (3) Winter Clothing
Allowance; (4) Initial Enlistment and
Reenlistment Allowance; and (5) Laundry
Allowance.
End of Gross Income.
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