General principles of taxation Taxation, defined Taxation is the power by which the sovereign through its law making

body raises revenue to defray the necessary expenses of the government. It is a way of appor tioning the costs of the government among those who is some measure are privileg ed to enjoy its benefits and must bear its burden. Essential characteristics/attributes of a tax 1. 2. 3. 4. 5. 6. 7. It It It It It It It is is is is is is is levied by the state which has jurisdiction over the person or property levied by the law making body of the state an enforce contribution generally payable in money proportionate in character levied on persons and property levied for a public purpose

Underlying theory and basis of taxation 1. Lifeblood theory 2. Necessity theory 3. Benefits protection theory Nature of the taxing power 1. It is an inherent attribute of sovereignty 2. It is legislative in character Characteristics of Philippine taxation 1. Not political in nature 2. Prospective application of taxes 3. Imprescriptibility of taxes Aspects, processes, phases of taxation 1. Levy/imposition 2. Assessment and collection 3. Payment Scope of the legislative power to tax 1. Discretion 2. Discretion 3. Discretion 4. Discretion taxes as as as as to to to to purpose for which taxes shall be levied subjects of taxation amount or rate of tax the manner, means and agencies tasked with the collection of

Purpose of taxation 1. Primary purpose (a) To raise revenue 2. Secondary or non-revenue purposes (a) Reduction of social inequality (b) Encourages the growth of local industries (c) Protect our local industry against unfair competition (d) As an implement of the police power of the state (regulatory measure)

Extent of the taxing power 1. 2. 3. 4. Comprehensive Unlimited Plenary Supreme

Principles of a sound tax system 1. Fiscal adequacy 2. Theoretical justice 3. Administrative feasibility Taxation distinguished from other inherent powers and impositions TAXATION POLICE POWER EMINENT DOMAIN Purpose To raise revenue To promote public welfare through regulations To facilitate the taking of private property for public use Amount of Exaction No limit Limited to the cost of regulation, issuance of the license or surveillance No exaction but private property is taken by the State for public purpose Benefits Received No special or direct benefit by the taxpayer; merely general benefit of protecti on No direct benefit is received; a healthy economic standard of society is maintai ned A direct benefit results in the form of just compensation to the property owner Non-impairment of Contracts Contracts may not be impaired Contracts may be impaired Contracts may be impaired Transfer of Property Rights Taxes paid become part of public funds No transfer but only a restraint in its exercise Transfer is effected in favor of the State Scope All persons, property and excises All persons, property, rights and privileges Only upon a particular property Tax Special Assessment Imposed on persons, property and excises Levied on land only Personal liability attaches on the person assessed in case of non-payment Cannot be made a personal liability of the person assessed Not based on any special or direct benefit Based wholly on benefit Levied and paid annually Exceptional both as to time and locality Exemptions granted by Art. Vi, Sec. 28(3) of the 1987 Constitution is applicable Exemption does not apply Tax License Fee

Based on the power of taxation Emanates from police power The purpose is to generate revenue The purpose is regulatory Amount is unlimited Amount is limited to the cost of issuing the license and inspection and surveill ance Normally paid after the start of a business Normally paid before commencement of business Taxes, being the lifeblood of the State cannot be surrendered except for lawful consideration License fee may be with or without consideration Non-payment does not make the business illegal but may be a ground for criminal prosecution Non-payment makes the business illegal Tax Debt An obligation imposed by law Created by contract Due to the government in its sovereign capacity May be due to the government in its corporate capacity Payable in money Payable in money, property or services Does not draw interest except on case of delinquency Draws interest if stipulated or delayed Not assignable Assignable Not subject to compensation or set-off Subject to compensation or set-off Non-payment is punished by imprisonment except in poll tax No imprisonment in case of non-payment TAX TOLL Enforced proportional contributions from persons and property A sum of money for the use of something, a consideration which is paid for the u se of a property which is of public nature; e.g. road, bridge A demand of sovereignty A demand of proprietorship No limit as to the amount of tax Amount of toll depends upon the cost of construction or maintenance of the publi c improvement used Imposed only by the State May be imposed by the Government or private persons TAX PENALTY Enforced proportional contributions from persons and property Sanctioned imposed as a punishment for violation of a law or acts deemed injurio us; violation of tax laws may give rise to imposition of penalty Intended to raise revenue Designed to regulate conduct Imposed only by the State May be imposed by the Government or private persons TAX TARIFF All embracing term to include various kinds of enforced contributions upon perso ns for the attainment of public purpose

A kind of tax imposed on articles which are traded internationally TAX COMPROMISE PENALTY Basic imposition on persons, property and excises Collected as a compromise in cases involving violations of the Tax Code, rules o r regulations TAX SUBSIDY Levied by the lawmaking body of the State for the support of the government and for public needs A legislative grant of money in aid of a private enterprise deemed to promote th e public welfare TAX REVENUE A source of revenue of the government A broad term that includes not only taxes but income from other sources as well Inherent limitations upon the power of taxation 1. 2. 3. 4. 5. Public purpose International comity Territoriality Non-delegation of the power to tax Exemption of government agencies/instrumentalities from taxation

Situs of personal property Where is actually kept or located. Held to be at the domicile of the owner follo wing the age-old doctrine of mobilia sequentur personam. Exception of mobilia sequentur personam 1. When it is inconsistent with express provision of law 2. When its application would result in injustice 3. When such property has acquired an actual situs elsewhere

Properties which have acquired actual situs 1. Franchise exercised in the Philippines 2. Shares of stock, obligations, bonds issued by domestic corporations organized and constituted in accordance with Philippine laws 3. Shares of stock, obligations, bonds issued by a foreign corporation where 85% of its business is located in the Philippines 4. Shares of stock, obligations, bonds issued by foreign corporations which have acquired business situs, when such have been used in the furtherance of the bus iness of the foreign corporation 5. Shares/rights in a partnership business or industry established in the Philip pines Corporations granted exemption under Sec. 27(c), NIRC 1. NIRC 2. GSIS 3. SSS

4. PCSO Constitutional limitations upon the power of taxation 1. Due process of law art. 3 sec. 1 2. Equal protection of law art. 3 sec. 1 3. Uniformity of taxation art. 6 sec 28. (1) 4. Progressive taxation art. 6 sec 28 (1) 5. Non-impairment clause art. 3 sec. 10 6. Exception to the non-impairment clause art. 12 sec. 11 7. Non imprisonment for non-payment of poll tax art.3 sec.20 8. Bill to originate from the House of Representativesart.3 sec.24 9. Veto power of the President art. 6 sec. 27 10. President s power to tax art.8 sec. 28 (2) 11. Freedom of the press art. 3 sec. 4 12. Freedom of religion art. 3 sec. 5 13. Tax exemption of properties actually, directly and exclusively used for reli gious, charitable and educational institutions art. 6 sec. 28 (3) 14. Tax exemption granted to non-stock, non-profit educational institutions art. 14 sec. 4 (3) 15. Appropriation of public money art. 6 sec. 29 (1) 16. Grant of exemptions art. 6 sec. 28 (4) 17. President s power to grant reprieves 18. Local taxation art. 10 sec. 5 19. Special Fund art. 6 sec. 29 (3) 20. Supreme Court s jurisdiction over tax cases art. 8 sec. 2 Requisites for a valid classification 1. 2. 3. 4. It It It It must must must must be based on substantial distinction apply both to present and future conditions be germane to the purposes of the law apply equally to all members of the same class

Kinds of taxes differentiated 1. As to subject matter: Personal tax of a fixed amount imposed upon persons residing within a specified territory, whether citizens or not, without regard to their property, occupation or business in which they may be engaged (ex. Community tax) Property tax imposed on property, whether real or personal, in proportion either to its value or some other reasonable rule of apportionment (ex. Real estate ta x) 2. As to who bears the burden: Direct tax which is demanded from the person who also shoulders the burden of th e tax; the taxpayer is directly or primarily liable which he cannot shift to ano ther. Both the incidence (liability) for the payment of the tax as well as the i mpact (burden) of the tax falls on the same person (ex. Income tax) Indirect tax wherein the incidence or liability for the payment falls on one per son but the burden can be shifted or passed on to another (ex. VAT) 3. As to purpose: General tax imposed for the general or ordinary purposes of the Government, to r aise revenue for governmental needs (ex. Income tax) Special tax imposed for a special purpose, to achieve some social or economic en ds irrespective of whether revenue is actually raised or not (ex. Customs duties ) 4. As to determination of amount: Specific tax of a fixed amount imposed by the head or number or by some standard of weight or measurement; it requires no valuation other than a listing or clas sification of the objects to be taxed

Ad valorem (value) tax of a fixed portion of the value of the property with resp ect to which the tax is assessed; it requires the intervention of assessors or a ppraisers to estimate the value of such property before the amount due from each taxpayer can be determined 5. As to taxing authority: National levied by the National Government Local levied by the local government 6. As to rate: Progressive taxes whereby the tax rate increases as the tax base or bracket incr eases Regressive taxes whereby the tax rate decreases as the tax base increases Concept of double taxation 1. Direct same property is taxed twice when it should be taxed but once. (a) Same property or subject matter; (b) Same purpose (c) Same taxing authority (d) Same jurisdiction or taxing district (e) Same period (f) Same kind or character of tax 2. Indirect taxes are of a different nature or character, imposed by different t axing authorities. 3. Domestic arises when the taxes are imposed by the local or national governmen t. 4. International refers to the imposition of comparable taxes in two or more sta tes on the same taxpayer in respect of the same subject matter and for identical periods. Treaty as a mode of eliminating double taxation 1. Exemption method the income or capital which is taxable in the state of sourc e or situs is exempted in the state of residence. 2. Credit method the tax paid in the state of source is credited against the tax levied in the state of residence. Forms to escape taxation 1. Shifting the transfer of the burden of the tax by the one on whom the tax was assessed or imposed to someone else. (a) Forward shifting the burden of tax is transferred from a factor of productio n through the factors of distribution until it finally settles on the ultimate p urchaser or consumer. (b) Backward shifting the burden is transferred from the consumer through the fa ctors of distribution to the factors of production. (c) Onward shifting the tax is shifted 2 or more times either forward or backwar d. 2. Tax evasion connotes fraud through the use of pretenses and forbidden devices to lessen or defeat taxes. (a) The end to be achieved, i.e. payment of less than that known by the taxpayer to be legally due, or paying not tax when it is shown that the tax is due; (b) An accompanying state of mind which is described as being evil, in bad faith , willful, or deliberate and not coincidental; and (c) A course of action which is unlawful. 3. Tax avoidance the exploitation of legally permissible alternative tax rates o r methods of assessing taxable property or income. 4. Tax exemption the grant of immunity to particular persons or corporations of a particular class from a tax which persons or corporations generally within the same state or taxing district are obliged to pay. 5. Capitalization the reduction in the price of the taxed object equal to the ca pitalized value of future taxes which the purchaser expects to be called upon to

pay. 6. Transformation d, fearing the loss e tax and endeavors ereby producing his

the manufacturer or producer upon whom the tax has been impose of his market if he should add the tax to the price, pays th to recoup himself by improving his process of production, th units at a lower cost.

Doctrine of equitabe recoupment and set-off of taxes Where the refund of a tax illegally gtrfcor erroneously collected or overpaid by a taxpayer is barred by prescription, a tax presently being assessed against a taxpayer may be recouped or set-off against the tax whose refund is now barred b y prescription (not followed in the Philippines). Exemptions from taxation Legal basis of grant of exemptions No law granting any tax exemption should be passed without the concurrence of a majority of all the members of Congress (Art. VI, Sec. 28(4), Constitution) Creation of exemptions 1. Directly by constitution 2. By an act of the legislature 3. By treaty Types of exemption 1. Express 2. Implied Grounds for tax exemptions 1. Contract 2. Public policy 3. Reciprocity under international agreement Exceptions to the strict construction rule 1. Statute granting the exemption expressly provides for a liberal interpretatio n; 2. Not applicable to special taxes relating to special cases and affecting only special classes of persons; 3. Not applicable to exemptions of public property; 4. Exemptions to traditional exemptees like religious and charitable institution s; 5. Exemptions in favor of government, its political subdivisions or instrumental ities; 6. If the taxpayer falls within the purview of exemption by clear legislative in tent. Sources of tax laws Sources of tax laws 1. Constitution 2. Legislation or statutes, including presidential decrees and executive orders on taxation and tax ordinances, tax treaties and conventions with foreign countr ies 3. Administrative rules and regulations, rulings and opinions of the CIR, includ ing opinions of the Secretary of Justice 4. Judicial decisions of the Supreme Court applying or interpreting existing tax

laws 5. Tax treaties and conventions with foreign countries The BIR Powers and duties of the BIR SEC. 2. Powers and Duties of the Bureau of Internal Revenue. - The Bureau of Int ernal Revenue shall be under the supervision and control of the Department of Fi nance and its powers and duties shall comprehend the assessment and collection o f all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execut ion of judgments in all cases decided in its favor by the Court of Tax Appeals a nd the ordinary courts. The Bureau shall give effect to and administer the super visory and police powers conferred to it by this Code or other laws. SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and Take Testimony of Persons. SEC. 6. Power of the Commissioner to Make assessments and Prescribe additional R equirements for Tax Administration and Enforcement. (A) Examination of Returns and Determination of Tax Due. (B) Failure to Submit Required Returns, Statements, Reports and other Documents. (C) Authority to Conduct Inventory-taking, surveillance and to Prescribe Presump tive Gross Sales and Receipts. (D) Authority to Terminate Taxable Period. (E) Authority of the Commissioner to Prescribe Real Property Values. (F) Authority of the Commissioner to inquire into Bank Deposit Accounts. (G) Authority to Accredit and Register Tax Agents. (H) Authority of the Commissioner to Prescribe Additional Procedural or Document ary Requirements. SEC. 7. Authority of the Commissioner to Delegate Power. SEC. 8. Duty of the Commissioner to Ensure the Provision and Distribution of for ms, Receipts, Certificates, and Appliances, and the Acknowledgment of Payment of Taxes. The present income tax system Individual schedular tax treatment 1. It classifies income 2. It provides different tax rules 3. It imposes different tax rates Coverage of individual net income taxation 1. 2. 3. 4. Resident citizen Non-resident citizen Resident alien Non-resident alien engaged in trade or business in the Philippines

Coverage of individual gross income taxation 1. Non-resident alien not engaged in trade or business in the Philippines Income tax situs Residence resident citizen, resident alien Place non-resident alien, non-resident citizen Citizenship resident citizen Individual taxpayers who are compensation earners except non-resident alien not engaged in trade or business in the Philippines are entitled to personal exempti ons

Corporate global tax treatment 1. It generally provides for uniform rules 2. It generally imposes uniform tax rate 3. It does not generally classify income Coverage of corporate net income taxation 1. Domestic corporations 2. Resident foreign corporations Coverage of corporate gross income taxation covers 1. Non-resident foreign corporation Corporate income tax situs 1. Residence resident foreign corporation 2. Place non-resident foreign corporation 3. Nationality domestic corporation Common features Pay as you file system Individuals upon filing of their income tax returns Corporations upon filing of their quarterly corporate income tax returns and fin al adjustment corporate returns The creditable withholding tax system Withholding agent (source) withholds the tax and remits the same to the BIR Tax withheld creditable against income tax due Final withholding tax system 1. Withholding agent (source) withholds the tax and remits the same to the BIR 2. Tax withheld final settlement of the tax liability on the income covered GENERAL PRINCIPLES OF income taxATION SEC. 23. General Principles of Income Taxation in the Philippines. Except when o therwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income deriv ed from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived fro m sources within the Philippines: Provided, That a seaman who is a citizen of th e Philippines and who receives compensation for services rendered abroad as a me mber of the complement of a vessel engaged exclusively in international trade sh all be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxabl e only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Ph ilippines, is taxable only on income derived from sources within the Philippines .

dEFINITIONS Corporation, definition Includes partnerships, no matter how created or organized, joint-stock companies , joint accounts, association, or insurance companies, but does not include gene ral professional partnerships and a joint venture or consortium formed for the p urpose of undertaking construction projects or engaging in petroleum, coal, geot hermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. General professional partnerships, definition Partnerships formed by persons for the sole purpose of exercising their common p rofession, no part of the income of which is derived from engaging in any trade or business. Domestic Corporation, definition A corporation created or organized in the Philippines or under its laws. Foreign Corporation, definition A corporation which is not domestic. Nonresident citizen, definition 1. A citizen of the Philippines who establishes to the satisfaction of the Commi ssioner the fact of his physical presence abroad with a definite intention to re side therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable ye ar to reside abroad, either as an immigrant or for employment on a permanent bas is. 3. A citizen of the Philippines who works and derives income from abroad and who se employment thereat requires him to be physically present abroad most of the t ime during the taxable year. 4. A citizen who has been previously considered as nonresident citizen and who a rrives in the Philippines at any time during the taxable year to reside permanen tly in the Philippines shall likewise be treated as a nonresident citizen for th e taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 5. The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. Resident alien, definition An individual whose residence is within the Philippines and who is not a citizen thereof. Nonresident alien, definition An individual whose residence is not within the Philippines and who is not a cit izen thereof. Income and income tax Income, defined

Income means all wealth that flows into the taxpayer other that as a mere return of capital. It is gain derived from capital, or from labor, or from both, inclu ding the gain derived from the sale or exchange of capital assets. It is the amo unt of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. Criteria in imposing Philippine income tax 1. Citizenship 2. Residence 3. Source of income Types of Philippine income tax 1. Graduated income tax on individual 2. Normal corporate income tax on corporations 3. Minimum corporate income tax on corporations 4. Special income tax on certain corporations 5. Capital gains tax on sale or exchange of shares of stock of a domestic corpor ation classified as capital asset 6. Capital gains tax on sale or exchange of real property classified as capital asset 7. Final withholding tax on certain passive investment income paid to residents 8. Final withholding tax on income payments made to non-residents 9. Fringe benefit tax on fringe benefits of supervisory or managerial employees 10. Branch profit remittance tax 11. Tax on improperly accumulated earnings of corporations Income, capital, revenue, receipts, distinguished Income flow, service of wealth, fruit Capital fund, wealth, tree Receipts broader in scope, may constitute capital as well as income. Income conn otes gain derived from labor, capital or property, excluding non-income items su ch as the capital invested, cost of goods sold or those excluded by law from tax ation Revenue all funds or income derived by government whether from tax or other sour ces Sources of income 1. Property (capital) 2. Labor (service) 3. Sale/exchange of capital asset and activity

Income derived from other sources 1. 2. 3. 4. 5. 6. Treasure found or punitive damages representing profit lost Amount received by mistake Cancellation of taxpayer s indebtedness Payment of usurious interest Illegal gains Tax refund

7. Bad debt recovery Requisites for income to be taxable (Sec. 31 NIRC) 1. There must be a gain 2. The gain must be realized 3. The gain must not be excluded by law or treaty from taxation Doctrine of constructive receipt of income Income which is credited to the account of and set apart for a taxpayer and whic h may be drawn by him at any time is subject to tax for the year during which it was so credited or set apart although not yet then actually received or reduced to his possession. To constitute receipt in such case, the income must be credi ted to the taxpayer without any substantial limitation or condition upon which p ayment is to be made. Doctrine on determination of taxable income 1. Claim of right doctrine illegally acquired income constitutes realized gain. 2. Severance test theory separation from capital of something which is of exchan geable value. 3. Control test power to procure the payment of income and enjoy the benefit the reof. Gross Income General statutory definition (Sec. 32, NIRC) Except when otherwise provided in this Title, gross income means all income deri ved from whatever source, including (but not limited to) the following items: (1)Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items; (2)Gross income derived from the conduct of trade or business or the exercise of a profession; (3) Gains derived from dealings in property; (4) Interests; (5) Rents; (6) Royalties; (7) Dividends; (8) Annuities; (9) Prizes and winnings; (10) Pensions; and (11) Partner's distributive share from the net income of the general professiona l partnership. Broad definition Gross income means income less income which by statutory definition or otherwise , is exempt from the tax imposed by law. Stated otherwise, gross income means al l items of income less exclusions. Formulas used Gross income = all income less exclusions Net or taxable income = gross income less allowable deductions Taxable compensation income = gross compensation less personal and additional ex emptions Income tax due = taxable or net income multiplied by income tax rate

Income tax payable = income tax due less creditable withholding tax or tax credi t Gross income taxation and net income taxation, distinguished Gross Income Taxation Net Income Taxation Allows no deductions Deductions are allowed Grants no exemptions Exemptions are granted Tax base: gross income Tax base: net income Advantages of Gross Income Taxation Advantages of Net Income Taxation Simplifies the income tax system Fair and just due to grant of deductions Does away with wastage of manpower and supplies Tax audit minimizes fraud Substantial reduction in corruption and tax evasion exercise of discretion to all ow or disallow deductions dispensed with Provides equitable reliefs in the form of deductions, exemptions and tax credits Disadvantages of Gross Income Taxation Disadvantages of Net Income Taxation No deductions and exemptions allowed Vulnerable to corruption on account of margin of discretion in the grant of dedu ctions Susceptible of fraud in the absence of general audit Confusing and complex process of filing income tax return Taxpayers lose interest to earn more thereby lessening their purchasing capacity Difficult/costly to administer

EXCLUSIONS FROM Gross Income Reason for exclusion 1. 2. 3. er They represent return of capital or are not income, gain or profit They are subject to another kind of internal revenue tax They are income, gain or profit that are expressly exempt from income tax und the Constitution, tax treaty, Tax Code or a general or special law

Items excluded from gross income under Sec. 32, NIRC 1. Proceeds of life insurance policies. 2. Amount received by Insured as return of premium. 3. Gifts, bequests, and devises. 4. Compensation for injuries or sickness. 5. Income exempt under treaty. 6. Retirement benefits, pensions, gratuities, etc. (a) Retirement benefits received by officials and employees of private firms, in

dividuals or corporations. Requisites for exclusion: (i) Reasonable private benefit plan maintained by the employer duly approved by the BIR for the exclusive benefit of the members-employees; (ii) Retiring official or employee who has rendered at least 10 years of service ; (iii) At least 50 years of age at the time of his retirement; and (iv) The benefit of exclusion shall be availed of only once. (b) Separation benefits due to death, sickness or other physical disability or f or any cause beyond the control of the said official or employee. (c) Social security benefits, retirement gratuities, pensions and other similar benefits received by resident or nonresident citizens or resident aliens from fo reign government agencies and other institutions. (d) Benefits received from US Veterans Administration by veterans residing in th e Philippines. (e) Benefits received from the SSS. (f) Benefits received from the GSIS including retirement gratuity. 7. Miscellaneous items. (a) Income derived from investments in the Philippines in loans, stocks, bonds o r other domestic securities, or from interest on deposits in banks in the Philip pines by: (i) Foreign governments, (ii) Financing institutions owned, controlled, or enjoying refinancing from fore ign governments, and (iii) International or regional financial institutions established by foreign go vernments. (b) Income derived by the Government or its political subdivisions from any publ ic utility or from the exercise of any essential governmental function. (c) Prizes and awards under the following conditions: (i) Received in recognition of religious, charitable, scientific, educational, a rtistic, literary, or civic achievement; (ii) Recipient was selected without any action on his part to enter the contest or proceeding; and (iii) Recipient is not required to render substantial future services as a condi tion to receiving the prize or award. (d) Prizes and awards in sports competition granted to athletes whether held in the Philippines or abroad and sanctioned by their national sports associations. (e) 13th month pay and other benefits: (i) Other benefits cover productivity incentives and Christmas bonus (ii) Total exclusion shall not exceed P30,000 (f) GSIS, SSS, Medicare and other contributions. (g) Gains from the sale of bonds, debentures or other certificate of indebtednes s with a maturity of more than five (5) years. (h) Gains from redemption of shares in Mutual Fund Companies. Tax-exempt income under special laws 1. Prizes received in charity, horse racing, sweepstakes from the PCSO. 2. Salaries and stipend in dollars received by non-Filipino citizens serving as staff of: International Rice Research Institute Ford Foundation Grants Agricultural Department of the Southeast Asian Fisheries Development Center Population Council of New York 3. Income from bonds and securities: For sale in the international market Issued by EPZA 4. Income derived from the installment sales of houses to their employees and wo rkers or to low-income groups in housing projects or income derived form rentals thereof.

Reasonable private benefit plan, definition Reasonable private benefit plan means a pension, gratuity, stock bonus or profit -sharing plan maintained by an employer for the benefit of some or all of his of ficials or employees, wherein contributions are made by such employer for the of ficials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wher ein its is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for t he exclusive benefit of the said officials and employees.

INDIVIDUAL INCOME TAXATION Classification of individual taxpayers 1. RC 2. NRC (a) Immigrant (b) Employee on a more or less permanent basis (c) Contract workers whose contracts of employment are renewed from time to time within or during the taxable year 3. RA (a) Not a mere transient or sojourner (b) Maintains residence in the Philippines (c) Actual physical residence in the Philippines (d) His temporary stay (with intention to return) is on an extended stay (e) Resides for more than 1 year (f) Losses his residency if he stays outside the Philippines for a continuous pe riod exceeding 3 months as of and including December 31 4. NRA-ETB (a) Comes and stays in the Philippines for an aggregate period of more than 180 days during the calendar year (b) Includes the performance of personal services within the Philippines (c) Foreign technician on a job contract for one year 5. NRA-NETB (a) 25% final tax based on gross or entire income (b) 15% if employed by the following: (i) Regional or area headquarters of multinational corporations; (ii) Offshore banking units established in the Phil. (iii) Petroleum service contractors or sub-contractors General principles: sources of income; tax base Sources of Income Tax Base RC Within and without taxable income NRC Within taxable income

RA Within taxable income NRA-ETB Within taxable income NRA-NETB Within gross income Categories of income 1. 2. 3. 4. 5. Compensation income Business income derived by self-employed Professional income derived by professionals Passive investment income Gains derived from dealings in property

Compensation income, definition All remuneration for services rendered by an employee for his employer unless sp ecifically excluded under the Tax Code. Elements of employer-employee relationship 1. Selection and engagement of the employee 2. Payment of wages 3. Power of dismissal 4. Employer's power to control the employee with respect to the means and method s by which the work is to be accomplished. Requisites for taxability 1. Personal services actually rendered 2. Payment is for such services rendered 3. Payment is reasonable Forms of compensation Form/Kind Measure of Income 1. Cash or in money Amount of money received 2. Property or in kind FMV 3. Price is stipulated FMV of the compensation in the absence of contrary evidence 4. Promissory notes or other evidence of indebtedness (not as mere sercurity) Not discounted Discounted (year of receipt) Discounted (maturity date)

Face value Discounted value Difference between face value and FMV 5. Cancellation or forgiveness of indebtedness made in consideration of services rendered by the debtor Amount of debt cancelled

6. Premiums paid by employer on the life insurance policy of employee whose fami ly, executor, administrator or his estate is the beneficiary Amount of the premium paid 7. Income tax paid by the employer in consideration of the service rendered by t he employee Amount of such tax paid 8. Personal services performed partly within and partly without Appropriation on the time basis 9. Tax exempt compensation income N/A Convenience of the employer rule It grants exemption to benefits which are given for the exclusive benefit or con venience of the employer. De minimis benefits These refers to facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered or furnished by the employer merely as a means of promoting health, goodwill, contentment or ef ficiency of his employees.

Fringe benefit, definition (Sec. 33, NIRC) Fringe benefits refer goods, services or other benefits furnished or granted by an employer in cash or in kind, in addition to basic salaries, to managerial or supervisory employees such as, but not limited to the following: 1. Housing 2. Expense account 3. Vehicle of any kind 4. Household personnel, such as maid, driver and others 5. Interest on loan at less than market rate to the extent of the difference bet ween the market rate and actual rate granted 6. Membership fees, dues and other expenses borne by the employer for the employ ee in social and athletic clubs or other similar organizations 7. Expenses for foreign travel 8. Holiday and vacation expenses 9. Educational assistance to the employee or his dependents 10. Life or health insurance and other non-life insurance premiums or similar am ounts in excess of what the law allows Nature of fringe benefit tax The Fringe Benefit Tax is a tax imposed on fringe benefits which are granted or are paid by an employer to an employee occupying a managerial or supervisory pos ition. Purpose of the FBT The FBT is a measure to ensure that an income tax is paid on fringe benefits. If they were given in cash, an income is automatically withheld and collected by g overnment. An additional compensation which is given in non-cash form is virtual ly untaxed. This situation has caused inequity in the distribution of the tax bu rden. The FBT can enhance the progressiveness and fairness of the tax system. Benefits not subject to FBT

1. Fringe benefits which are authorized and exempted from income under the code or special laws; 2. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; 3. Benefits given to the rank and file employees, whether granted under a collec tive bargaining agreement or not; 4. De minimis benefits 5. Benefits granted to employee as required by the nature of, or necessary to th e trade, business or profession of the employer; and 6. Benefits granted for the convenience of the employer. Managerial employee, definition Managerial employees refer to those who are given powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees. Supervisory employee, definition Supervisory employees are those who effectively recommend such managerial action s is the exercise of such authority is not merely routinary or clerical in natur e but requires the use of independent judgment. Rank-and-file employee, definition Rank-and-file employees mean all employees who are holding neither managerial no r supervisory position. Doctrine of cash equivalent Any economic benefit to the employee whatever may have been the mode by which it is effected is compensation income. Allowable deductions from gross compensation income 1. Basic personal exemption: P50,000 for each individual taxpayer. In the case of married individuals where only one of the spouse is deriving gros s income, only such spouse shall be allowed the personal exemption. 2. Additional Exemption for Dependents: P25,000 for each dependent not exceeding four (4) The additional exemption for dependents shall be claimed by only one of the spou ses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed o nly by the spouse who has custody of the child or children: Provided, That the t otal amount of additional exemptions that may be claimed by both shall not excee d the maximum additional exemptions herein allowed. 3. Premium payments on health and/or hospitalization insurance Claimant: spouse claiming the additional exemption for dependents. Amount allowed: P2,400/annum or P200/month Limitation: family gross income must not be more than P250,000 for the taxable y ear. Taxpayer s entitled to allowable deductions 1. 2. 3. 4. RC NRC RA NRA-ETB on the basis of reciprocity

Conditions for the grant of basic personal exemption to NRA-ETB 1. His foreign (mother) country has income tax law; 2. His foreign country allows personal exemptions to citizens of the Philippines not residing therein; 3. Files an accurate return of his income from all sources within the Philippine s on time; and 4. Amount allowable not to exceed our maximum allowable personal exemption. Minimum wage earner, definition Minimum wage earner refers to a worker in the private sector who is paid the sta tutory minimum wage, or to an employee in the public sector with compensation in come of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned. Head of the family, definition (repealed by RA 9504) Head of the family means an unmarried or legally separated man or woman with one or both parents or with one or more brothers or sisters or with one or more leg itimate or recognized illegitimate or legally adopted children living with and d ependent upon him/her for chief support, where such brothers or sisters or child ren are not more than 21 years of age, unmarried and not gainfully employed or w here such children, brothers or sisters regardless of age are incapable of selfsupport because of mental or physical defect. Dependent, definition A dependent means a legitimate, illegitimate or legally adopted child chiefly de pendent upon and living with the taxpayer if such dependent is not more than twe nty-one (21) years of age, unmarried and not gainfully employed or if such depen dent, regardless of age, is incapable of self-support because of mental or physi cal defect. Qualified dependents 1. Parents (except step parents and parents-in-law) living with the taxpayer and dependent on the taxpayer for chief support. 2. Brothers or sisters (full or half blood) (a) Living with and dependent upon the taxpayer for chief support; (b) Unmarried and not gainfully employed; and (c) Not more than 21 years of age except if incapable of self-support because of mental or physical defect. 3. Children (legitimate, recognized illegitimate or legally adopted) 4. Senior citizen any resident citizen of the Philippines at least 60 years old, including those who have retired from both government offices and private enter prises, and has an income of not more than P60,000 per annum. Living with, definition The taxpayer exercises control based on some moral or legal obligation and makes the taxpayer s home as his principal place of abode. Chief support, definition Principal or main support, not just partial support, which is more than 50% of t he dependent s need pertaining to food, clothing and shelter. Rules on change of status

Change of Status Effect Death of the taxpayer Estate may claim the appropriate personal exemption Death of the dependent Still entitled to additional exemption Additional dependent Still entitled to additional exemption Dependent becoming more than 21 years of age Still entitled to additional exemption Marriage of the dependent Still claim as dependent for the particular taxable year Gainful employment Still claim as dependent for the particular taxable year Business, trade, professional income 1. g, 2. 3. Income derived by self-employed from trade or business (trading, manufacturin merchandising, farming, and others) Income derived by professionals from the practice of profession Gross income of farmers

Self-employed income, definition Self-employed income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business carried on by him as a s ole proprietor or by a partnership of which he is a member. Self-employed, definition Self-employed means a person engaged in trade or business or performs services f or others for a fee and who derived personal income from such trade or business or from the performance of such services. The term includes but is not limited t o single proprietorships engaged in trade or business as manufacturers, traders, market vendors, owners of eateries and farmers as well as owner of service shop s, brokers, agents and others similarly situated. Professionals, definition Professionals refer to persons who derive their income from the practice of thei r profession. How income from long-term contracts is treated 1. Percentage completion basis gross income already earned though not yet receiv ed, based on estimates of architects or engineers duly certified by them is repo rted in a taxable year and all deductions relating to such for the taxable year, even if not yet paid, are taken into account. 2. Completed contract basis taxpayer reports his income and deductions in the ye ar the contract is finally completed.

Gross income of farmers 1. Sale of livelihood and farm products received from the farm; 2. Value of merchandise and other property received from such sales; 3. Profit from the sale of livestock and other items purchased; and 4. Gross income from all other sources, rent received on crop shares, proceeds o f income of growing crops.

Passive investment income 1. Interest income 2. Rental income 3. Dividend income 4. Royalty 5. Prizes and winnings 6. Partners share from the net income after tax of business partnership, joint a ccount, joint venture or consortium Interest income, definition Amount of compensation paid for the use of money or forbearance from such use. Rental income, definition Fix sum either in cash or property equivalent, to be paid at a definite period f or the use or enjoyment of a thing or right. Other items considered as rental income 1. Obligations of lessor of 3rd parties assumed by the lessee. (a) Real estate taxes on leased property (b) Insurance premiums on the leased property (c) Dividends paid by lessee to stockholders of lessor-corporation (d) Interest paid by lessee to holder of bonds issued by lessor-corporation 2. Value of permanent improvements made by lessee on leased property that will b ecome the property of the lessor upon the expiration of the lease. (a) Outright method FMV of the completed building or improvement shall be report ed as additional rent income. (b) Spread out method allocate the depreciated value over the remaining term of the lease contract. Taxability of rentals 1. Prepaid rentals taxable if so received under a claim or right and without any restriction as to its use. 2. Security of deposit not taxable until the lessee violates any provision of th e contract 3. Loan not taxable Dividend, definition Corporate profit set aside, declared and distributed by the director of a corpor ation to be paid to stockholders on demand or at a fixed time. Kinds of dividend 1. Cash paid in sum of money 2. Property paid in securities 3. Stock paid with corporations own stock 4. Script paid in promissory notes 5. Indirect made through exercise of right or other means of payment, e.g., canc ellation or condonation of indebtedness 6. Liquidating distribution of corporate assets upon liquidation or dissolution Taxable stock dividends 1. Change in stockholder s equity, right or interest in the net assets of the corp oration;

2. 3. 4. 5. ts 6.

Recipient is other than shareholder; Cancellation or redemption of shares of stock; Distribution of treasury stocks; Dividends declared in the guise of treasury stock dividend to avoid the effec of income taxation; and Different classes of stock were issued.

Other sources 1. Capital gain from sale of shares of stock. (a) Not listed and traded through stock exchange: (i) Net capital gain not over P100,000 5% (ii) Net capital gain over P100,000 10% (b) Listed and traded though stock exchange 1/2 of 1% of Gross Selling Price 2. Acquisition and disposition of capital stock, including sales and retirement of bonds. 3. Illegal gains gambling, betting, lotteries, extortion or fraud. 4. Recovery of damages for lost profits/income. 5. Bad debts recovery which results in reduction of the taxpayer s liability in th e previous year. (a) It must be claimed as a deduction from gross income in the preceding year; a nd (b) The reduction results in a tax benefit. 6. Tax refund which results in reduction of the taxpayer s liability in the previo us year. CORPORATE INCOME TAXATION Corporation, definition Corporation includes partnerships, no matter how created or organized, joint sto ck companies, joint accounts, associations or insurance companies except: 1. Joint construction venture; 2. General professional partnership; and 3. Joint venture for engaging in petroleum, coal, geothermal and other energy op erations pursuant to a consortium agreement with the government.

Taxable unregistered or registered partnerships, requisites 1. Agreement, oral or in writing, to contribute money, property or industry to a common fund; and 2. Intention to divide the profits. Joint emergency operation (taxable) Operates the business affairs of two companies as though they constitute a singl e entity thereby obtaining substantial economy and profit in operation. Gross Philippine billings The amount of gross revenue realized from carriage of persons, excess baggage, c argo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Suspension of payment of MCIT

1. Sustained losses from prolonged labor dispute; 2. Force majeure; and 3. Legitimate business reverses. Sustained losses from a prolonged labor dispute, definition Losses arising from a strike staged by employees which lasted for more than 6 mo nths within a taxable period and which has caused the temporary shutdown of busi ness operations. Force majeure, definition A cause due to an irresistible force as by Legitimate business reverses, definition Includes substantial losses due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance. Gross income, definition Gross sales less sales returns, discounts and allowances and cost of goods sold. It will also include all items of gross income enumerated under Sec. 32(A) of t he Tax Code, except income exempt from income tax and income subject to final wi thholding tax. Cost of goods sold, definition All business expenses directly incurred to produce the merchandise to bring them to their present locations and use. Act of God.

Cost of goods sold for trading or merchandising Invoice cost of goods sold, plus import duties, freight in transporting the good s to the place where the goods are actually sold, including insurance while the goods are in transit. Cost of goods sold for manufacturing Cost of production of finished goods such as raw materials used, direct labor an d manufacturing overhead, freight cost, insurance premiums and other costs incur red to bring the raw materials to the factory or warehouse. Gross income for sale of services Gross receipts less sales returns, allowances, discounts and cost of services wh ich cover all direct costs and expenses necessarily incurred to provide the serv ices required by the customers and clients. Accumulated earnings for the reasonable needs of the business 1. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumu lations taken from other years; 2. Earnings reserved for definite corporate expansion projects or programs requi ring considerable capital expenditure as approved by the Board of Directors or e quivalent body;

3. Earnings reserved for building, plants or equipment acquisition as approved b y the Board of Directors or equivalent body; 4. Earnings reserved for compliance with any load covenant or pre-existing oblig ation established under a legitimate business agreement; 5. Earnings required by law or applicable regulations to be retained by the corp oration or in respect of which there is legal prohibition against its distributi on; and 6. In the case of subsidiaries of foreign corporations in the Philippines, all u ndistributed earnings intended or reserved for investments within the Philippine s as can be proven by corporate records and/or relevant documentary evidence. Coverage of IAET Improperly accumulated taxable income earned by domestic corporations defined un der the Tax Code and which are classified as closely held corporations. Closely-held corporations, definition Those corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by not more than 20 individuals.

Corporations not subject to IAET 1. Banks and other non-bank financial intermediaries; 2. Insurance companies; 3. Publicly-held corporations; 4. Taxable partnerships; 5. General professional partnerships; 6. Non-taxable joint ventures; and 7. Enterprises duly registered with the PEZA and enterprises registered pursuant to the Bases Conversion and Development Act. Tax exempt corporations under the NIRC 1. Labor, agricultural, or horticultural organization not organized principally for profit; 2. Mutual savings banks and cooperative banks; 3. Fraternal beneficiary society, order or association; 4. Cemetery companies; 5. Religious, charitable, scientific, athletic or cultural corporations; 6. Business, chamber of commerce, or board of trade; 7. Civic league; 8. Non-stock, non-profit educational institutions; 9. Government educational institution; 10. Mutual fire insurance companies and like organizations; 11. Farmers, fruit growers and like association. Mutual savings banks and cooperative banks, requisites 1. No capital stock represented by shares; 2. Earnings, less only the expenses of operation are distributable wholly among the depositors; and 3. Operated for mutual purposes and without profit. Fraternal beneficiary society, order or association, requisites 1. Operated under lodge system or for the exclusive benefit of the members of a society they have parent and local organizations which are active;

2. Established system of payment to its members or their dependents of life, sic kness, accident, or other benefits; and 3. No part of the net income inures to the benefit of the stockholders or member s. Cemetery companies, requisites 1. Owned and operated exclusively for the benefit of its owners; and 2. Not operated for profit. Religious, charitable, scientific, athletic or cultural corporations, requisites 1. Organized and operated for one or more of the specified purposes; and 2. No part of its net income must inure to the benefit of private stockholders o r individuals. Business, chamber of commerce, or board of trade, requisites 1. Association of persons having some common business interest; 2. Limited activities to work for such common interest; 3. Not engaged in a regular business for profit; and 4. No part of the net income inures to the benefit of any private stockholder or individual. Civic league, requisites 1. Not organized for profit but operated exclusively for purposes beneficial to the community as a whole. In general, organizations engaged in promoting the wel fare of mankind; 2. Sworn affidavit with the BIR showing the following: a. Character of the league or organization; b. Purpose for which it was organized; c. Actual activities; d. Sources of income and disposition thereof; e. All facts relating to the operation of the organization which affects its rig ht to exemption. 3. The copy of articles of incorporation, by-laws and financial statements shoul d be attached to the sworn affidavit. Mutual fire insurance companies and like organizations, requisites 1. Income is derived solely form assessments, dues and fees collected from membe rs; and 2. Fees collected from members are for the sole purpose of meeting its expenses. Farmers, fruit growers and like association, requisites 1. Formed and organized as sales agent for the purpose of marketing the product of its members; 2. No net income to the members; and 3. Proceeds of the sale shall be turned over to them less necessary selling expe nses on the basis of the quantity of produce finished by them. Common requisites of tax exempt corporations 1. 2. 3. 4. Not organized and operated principally for profit; No part of the net income inures to the benefit of any member or individual; No capital represented by shares of stock; Educational or instructive in character; and

5. Objectives are the betterment of the conditions engaged in such pursuits, the improvement of the grade of their product and the development of a higher degre e of efficiency in their respective occupations.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME Basic principles 1. The taxpayer must point to some specific provisions of statute authorizing th e deduction; and 2. He must be able to prove that he is entitled to the deduction authorized or a llowed. Cohan principle rule If there is showing that expenses have been incurred but the exact amount thereo f cannot be ascertained due to absence of documentary evidence, it is the duty o f the BIR to make an estimate of deduction that may be allowed in computing the taxpayer s taxable income bearing heavily against the taxpayer whose inexactitude is of his own making. A disallowance of 50% of the taxpayer s claimed deduction is valid. Deductions as distinguished from exclusions Deductions Exclusions Amounts deducted from gross income to arrive at net income Amounts/items exempt from tax by virtue of the Tax Code or special law Deductions as distinguished from personal exemptions Deductions Personal Exemptions Business expenses represent cost of doing business Personal expenses cover personal, living or family expenses Both individual and corporate taxpayers may claim Only individual is entitled Kinds of allowable deductions 1. Itemized deductions (Sec. 34(a) to (5) and (m) NIRC) 2. Optimized standard deduction 3. Special deductions in Sec. 37 and 38 NIRC and in special laws like BOI Law (E .O. 226) Kinds of itemized deductions 1. 2. 3. 4. 5. 6. 7. Business expenses Interest Taxes Losses Bad debts Depreciation Depletion

8. Charitable and other contributions 9. Research and development expenditure 10. Pension trust contribution Requisites for deductibility of business expenses 1. 2. ; 3. 4. 5. 6. 7. The expenses must be ordinary and necessary; The expenses must be incurred in trade or business carried on by the taxpayer The expenses must be substantiated by proof; The expenses must be reasonable; Paid or incurred during the taxable year; Expenses must not be against public policy, public moral or law; If subject to withholding tax, proof of payment to BIR must be shown.

Ordinary and necessary, definition They are directly attributable to development management, operation, and or cond uct of the trade or business of the taxpayer, or in the exercise of the taxpayer s profession. Ordinary, definition It is normal (common or usual) in relation to the business of the taxpayer and t he surrounding circumstances. Necessary, definition It is appropriate and helpful in the development of the taxpayer s business. It is intended to realize a profit or to minimize a loss. Methods of accounting expenses 1. Cash basis method deducts the expenses in the year in which they are paid. 2. Accrual basis method recognizes expenses in the year they accrue. All-events test Requires that the liability be fixed, and the amount of such liability be determ ined with reasonable accuracy. Kinds of business expenses 1. 2. 3. 4. 5. 6. 7. Compensation for personal services; Traveling expenses; Representation and entertainment expenses; Advertising and promotional expenses; Rent expense; Cost of materials and supplies; and Repairs.

Requisites for compensation expense 1. Personal service is actually rendered; 2. Compensation is for such services rendered; and 3. Compensation is reasonable. Requisites for deductibility of bonuses 1. Paid in good faith as additional compensation for services rendered;

2. Reasonable amount; and 3. Not to exceed reasonable compensation when added to stipulated salaries. Requisites for deductibility of traveling expenses 1. Paid or incurred while away from home; 2. Paid or incurred in the conduct of trade or business; and 3. Reasonable and necessary expenses. Requisites for deductibility of representation and entertainment expenses 1. Subject to the rule of substantiation receipt or adequate records, amount of expense, date and place of expense, purpose of expense and professional or busin ess relationship of expense; 2. Paid or incurred in the pursuit of trade or business; 3. Paid or incurred in the taxable year; 4. Not contrary to law, morals and public policy; and 5. Reasonable. Requisites for deductibility of advertising and promotional expenses 1. Must be substantiated; 2. All payments for the purchase of promotional give-aways, contest prizes or si milar material must be properly receipted; and 3. All payments for services such as radio and TV time, print adds, advertising expertise must be subjected to withholding tax. Methods utilized to determine materials used 1. Actual consumption method (inventory method). 2. Direct purchase method. Rules on deductibility of repairs 1. Incidental or ordinary repairs (keeps the assets in its ordinary working cond ition) deductible. 2. Extraordinary repairs (capital expenditures) not deductible. Interest expense, definition The amount which one has contracted to pay for the use of borrowed money or amou nt of compensation paid for the use of money or forbearance from such use. Requisites for deductibility of interest expenses 1. 2. 3. 4. 5. There must be an indebtedness; Incurred in connection with the taxpayer s trade or business; Indebtedness must be that of the taxpayer; The interest must have been stipulated in writing; and Paid or accrued within the taxable year.

Indebtedness, definition Unconditional and legally enforceable obligation for payment of a sum certain in money. Examples of deductible interest expenses 1. Interest on taxes/

2. Interest paid by corporation on script dividends. 3. Interest on deposits paid by authorized bank of the Central Bank. 4. Interest paid by legal or equitable owner on mortgage of real property. Examples of non-deductible interest expenses 1. 2. 3. 4. . 5. 6. 7. Interest Interest Interest Interest on preferred stock. on undrawn salaries and bonuses. on capital for cost keeping. paid where parties provide no stipulation to pay interest in writing

Interest on indebtedness of incurred to finance petroleum exploration. Interest on indebtedness paid in advance through discount or otherwise. Interest between related taxpayers.

Related taxpayers 1. Members of the family; 2. Individual and corporation individual owns directly or indirectly more than 5 0% of the outstanding stock; 3. Between corporations more than 50% of the outstanding stock of both owned dir ectly or indirectly by the same individual; 4. Grantor and fiduciary (trustee) of any trust; 5. Fiduciary and another fiduciary the same grantor; and 6. Fiduciary and beneficiary of such trust. Nature and scope of deductible taxes All taxes, whether national or local paid or accrued within the taxable year, in connection with the taxpayer s trade or business except: 1. Philippine income tax; 2. Income, war profit, and excess profit taxes imposed by the authority of any f oreign country provided the taxpayer chooses to take a tax credit; 3. Estate and donor s tax; 4. Special assessment tax; 5. Taxes paid for commodity not connected with the taxpayer s business. Requisites for deductibility of taxes 1. Paid or incurred within the taxable year; 2. Paid or incurred in connection with the taxpayer s business; 3. Deductible only by the person upon whom the tax is imposed by law (VAT is ded uctible only by seller)

Tax deduction as distinguished from tax credit Tax Deduction Tax Credit Deductible from gross income Deductible from Phil. income tax Sources: Deductible taxes such as business tax, excise tax, percentage tax and o ther business-connected taxes Sources: Foreign income, war-profits and excess profit tax Administrative conditions for allowance of credit for foreign taxes

1. The taxpayer must signify in his income tax return his desire to claim tax cr edit; 2. The return must be accompanied by the appropriate form prescribed by the BIR Commissioner, signed and sworn, carefully filled up and contained information re quired. Losses, definition The term implied an unintentional parting with something of value. It is used in the income tax law in a very broad sense to comprehend all losses which are not general or natural to the ordinary courses of business and are not covered unde r some other heading such as bad debts, inventory losses, depreciation, etc. Kinds of losses 1. Ordinary losses those incurred in trade or business; 2. Those incurred in any transaction entered for profit though not connected wit h the trade or business; 3. Casualty losses those incurred by property connected with the trade or busine ss, if the loss arises from fire, storm, shipwreck, or other casualties or from robbery, theft or embezzlement. 4. Capital losses deductible only to the extent of capital gains. 5. Losses from short sale of property. 6. Losses due to failure to exercise privilege or option to buy or sell property ; 7. Abandonment losses. Special kinds of losses 1. Wagering losses deductible only to the extent of gain or winning; 2. Losses due to voluntary removal of building incident to renewal or replacemen t; 3. Loss of useful value of capital assets due to changes in business condition; Rules with respect to buildings existing at the time of purchase of the lot upon which the said building is erected 1. When a taxpayer buys real estate upon which a building is built, the cost to build another building and the cost of removal of the old building is not deduct ible. The value of the real estate, exclusive of old improvements, being presuma bly equal to the purchase price of the land and building plus the cost of removi ng the useless building. 2. However, if the removal of the building was required by the authorities becau se the building was a fire hazard, the value of the building and the cost of its removal will be deductible as losses. Requisites for deductibility of losses (in general) 1. 2. 3. 4. The loss claimed as deduction must be that of a taxpayer; The loss must have been sustained during the taxable year; Loss evidenced by a closed and completed transaction; and Loss not compensated by insurance or otherwise.

Closed and completed transaction, definition The loss is fixed by an identifiable event occurring in the taxable year in whic h, under the surrounding facts and circumstances, the basis of an immediate reco upment is not present.

Requisites for deductibility of casualty losses (fire, storms, robbery, theft or embezzlement) 1. Sworn declaration of loss must be filed with the BIR; 2. Filed through the nearest RDO within 45 days after the date of the occurrence ; and 3. Proof of the elements of the loss claimed, such as the actual nature and occu rrence of the event and the amount of the loss. a. Casualty loss documentary proof of costs, photograph showing extent of damage , condition or value of the property after it was repaired, restored or replaced . b. Robbery, theft or embezzlement losses amount of loss. Police report is necess ary although not conclusive proof of the loss arising therefrom. Non-deductible losses 1. Losses in dealings between related taxpayers. 2. Losses on wash sale. 3. Loss due to removal of building if purchased. Related taxpayers 1. Members of the family; 2. Individual and corporation individual owns directly or indirectly more than 5 0% of the outstanding stock; 3. Between corporations more than 50% of the outstanding stock of both owned dir ectly or indirectly by the same individual; 4. Grantor and fiduciary (trustee) of any trust; 5. Fiduciary and another fiduciary the same grantor; and 6. Fiduciary and beneficiary of such trust.

Points to be considered on losses on wash sale 1. Taxpayer must have bought or sold stocks or securities 2. Substantially identical stocks or securities are acquired within a period beg inning 30 days before the date of sale and ending 30 days after such sale. 3. There must have been sale or disposition of stocks or securities. 4. Not limited to situations where the replacement is acquired by purchase. 5. The seller is not a dealer in securities. Reasons for non-deductibility of loss from wash sale 1. Prevent deduction of losses on sales of stock or securities that were replace by substantially identical stocks or securities. 2. Loss is added to the cost of the subsequently acquired securities/stock (mere artificial loss). Bad debts, definition Debts due to the taxpayer which are actually ascertained to be worthless and cha rged off within the taxable year. Requisites for deductibility of bad debts 1. Existence of a valid debt and subsisting debt; 2. Debts must be actually ascertained to be worthless; 3. Debts must be charged off within the year of worthlessness.

Steps to be taken by the taxpayer to prove that he exerted efforts to collect th e debts 1. 2. 3. 4. Sending of statement of accounts; Sending of collection letters; Giving the account to a lawyer for collection; and Filing a collection case in court.

Depreciation, definition Gradual diminution ade, profession or scence. It applies he use of which in in the useful (service) value of tangible property used in tr business resulting from exhaustion, wear and tear, and obsole also to the amortization of the value of intangible assets, t trade or business is definitely limited in duration.

Requisites for deductibility of depreciation 1. The allowance for depreciation must be reasonable; 2. It must be for property used in trade or business or profession (depreciable assets). Methods of depreciation 1. Straight line; 2. Declining balance; 3. Sum of the years digit; and 4. Any other method prescribed by the Secretary of Finance upon recommendation o f the BIR Commissioner. Depreciable assets 1. Tangible property used in trade or business allowance. 2. Intangible property like patent, copyrights and franchises Non-depreciable assets 1. 2. 3. 4. 5. 6. 7. Inventories or stock; Land and improvements; Bodies of minerals subject to depletion; Automobiles or transportation equipment for personal use (residence); Building and furniture for personal use; Intangibles use is unlimited; Personal effects and clothing. amortization.

Depreciation deduction is not allowed 1. Property amortized to its scrap value and no longer in use; 2. Beyond the capital investment in the assets being depreciated, otherwise some profit will be made. Depletion, definition It is the exhaustion of natural resources like mines and oil and gas wells as a result of a production or severance from such mines or wells. Theory and purpose of depletion allowance As the product of the mine is sold, a gradual sale is being made of the taxpayer s capital interest in the property. The purpose is, then, to enable him to recove r that capital interest free of income tax at its cost or on some other basis.

Who are entitled to depletion allowance Only persons having an economic interest in a mineral land or oil or gas wells. To acquire an economic interest, the taxpayer must have capital investment in th e property and not mere economic disadvantage. The taxpayer must have acquired a t least, by investment, any interest in oil or gas, or mineral in place, and ser vices, by any form of legal relationship, income derived from the extraction of oil, gas or mineral to which he must look for a return of his capital. Requisites for deductibility of depletion 1. Depletible asset natural resources mines, gas and oil wells; 2. Charged off within the taxable year; 3. Allowance for depletion is computed in accordance with the cost depletion met hod. Kinds of charitable and other contributions 1. Ordinary subject to limitation. 2. Special deductible in full. Who are entitled to charitable and other contributions 1. Corporate taxpayer except NFRC 5% of the Net Income before Charitable Contrib ution; 2. Individual taxpayer except NRA-NETB 10% of the Net Income before Charitable C ontribution. Requisites for deductibility of charitable and other contributions 1. Contribution or gift must be actually paid during the taxable year; 2. Must be given to the organization specified by Tax Code or special law; and 3. The net income of the institution must not inure to the benefit of any member or individual. Contributions deductible in full 1. Donations to the government or political subdivision including fully-owned go vernment corporation to be used exclusive in undertaking priority activities in education, health, youth and sports development, human settlement, science and c ulture and economic development; 2. Donations to international organizations or foreign institutions in complianc e with agreements or treaties; and 3. Donations to accredited non-government organizations. Contributions subject to limitation (5% or 10% of net income before charitable c ontribution) 1. Not in accordance with priority plan; 2. Conditions are not complied with; 3. Donation to the government of the Philippines or political subdivision exclus ive for public purposes; and 4. Donations to domestic corporations organized exclusively for religious, chari table, scientific, cultural, educational, rehabilitation or veteran and social w elfare purposes. Non-deductible expenditures in research and development

1. Any expenditure for the acquisition or improvement of land, or for the improv ement of property to be used in connection with research and development of a ch aracter which is subject to depreciation; and 2. Any expenditure paid or incurred for the purpose of ascertaining the existenc e, location, extent, or quality of any deposit of ore or other mineral, includin g oil or gas. Requisites for deductibility of employer s contribution to pension trust 1. Employer must have established a pension or retirement plan for the payment o f reasonable pension to its employees; 2. Pension plan is reasonable and actuarially sound; 3. Funded by the employer; 4. Amount contributed must no longer be subject to control of the employer; and 5. Payment has not yet been allowed as deduction. Optional standard deduction 1. Individual taxpayers entitled: RC, NRC, RA 2. Individual taxpayers not entitled: NRA-ETB, NRA-NETB 3. Limitation: not exceeding 10% of his gross income 4. Option/election taxpayer entitled must signify his intention in his income ta x return which shall be irrevocable for the taxable year for which the return is made. TAX SITUS Kind of Income Source (Tax Situs) 1. Service or compensation income Place of performance 2. Rent Location of property (real or personal) 3. Royalties Place of use of intangibles 4. Merchandising Place of sale 5. Gain on sale or personal property Place of sale 6. Gain on sale of real property Location of property 7. Mining income Location of the mines 8. Farming income Place of farming activities 9. Gain on sale of domestic stock Income within the Philippines 10. Interest Residence of the debtor 11. Gain on sale of transport document Place of activity that produces income 12. Manufacturing a. Produced in whole within and sold within b. Produced in whole without and sold without c. Produced within and sold without d. Produced without and sold within income purely within

income purely without

income partly within and income partly without income partly within and income partly without 13. Dividend income from: a. Domestic corporation b. Foreign corporation (Phil./world income ratio) - Less than 50% - 50% to 85% - More than 85% income within (Phil.)

- Entirely without - Proportionate - Entirely within (Phil.)

CAPITAL TRANSACTIONS Capital assets, definition Property held by the taxpayer (whether or not connected with his trade or busine ss), but does not include: 1. Stock in trade of the taxpayer or other ly be included in the inventory if on hand 2. Property held by the taxpayer primarily course of trade or business; 3. Property used in trade or business of a ce for depreciation; 4. Real property used in trade or business property of a kind which would proper at the close of the taxable year; for sale to customers in the ordinary character which is subject to allowan of the taxpayer.

Real properties acquired by banks through foreclosure sales are considered as th eir ordinary assets. However, banks shall not be considered as habitually engage d in the real estate business for purposes of determining the applicable rate of withholding tax. Property held by the taxpayer primarily for sale to customers in the ordinary co urse of trade or business, requisites 1. Property must be held primarily for sale; 2. Property must be held for sale to customers; and 3. Property must be sold in the ordinary course of taxpayer s trade or business. Trade or business, definition That which occupies the time, attention, and labor of men for the purpose of liv elihood or profit.

Factors/test determinative of capital or ordinary asset 1. 2. ; 3. 4. 5. Nature and character of the taxpayer s title to the property; Reason, purpose and interest of requisition as well as its period of duration Taxpayer s vocation, extent of activities; If conducted through a supervision over the agent; and Extent and nature of the taxpayer s efforts to sell.

Guidelines in determining whether real property is capital asset or ordinary ass et (See RR 7-2003) INCOME TAX RULES ON DEALINGS IN PROPERTY Tax-free exchange 1. Between corporations which are parties to a merger or consolidation (PROPERTY FOR STOCK); 2. Between a stockholder of a corporation party to a merger or consolidation and the other party corporation (STOCK FOR STOCK); 3. Between a security holder of a corporation party to the merger or consolidati on and the other corporation (SECURITIES FOR SECURITIES OR STOCK); and 4. Transfer or exchange of property for stock resulting in acquisition of corpor ate control (PROPERTY FOR STOCK). Transaction where gain recognized and lost not recognized 1. 2. 3. 4. Transactions not solely in kind; Illegal transactions; Transaction between related taxpayers; and Wash sale transaction.

ACCOUNTING METHODS AND PERIODS General rule The taxable income shall be computed upon the basis of the taxpayer's annual acc ounting period (fiscal year or calendar year) in accordance with the method of a ccounting regularly employed in keeping the books of such taxpayer. Exceptions If no such method of accounting is employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with suc h method as in the opinion of the Commissioner clearly reflects the income. When taxable income is computed based on calendar year 1. 2. 3. 4. The The The The taxpayer's annual accounting period is other than a fiscal year; taxpayer has no annual accounting period; taxpayer does not keep books; or taxpayer is an individual.

Essential requirements in keeping accounting records 1. Classification of capital and income expenditures 2. When the cost of capital assets is being recovered

3. Inventories Principal methods of accounting 1. 2. 3. 4. 5. Cash receipt and disbursement method Accrual method Installment method Percentage of completion method Crop year method

Cash method Cash method is a method of accounting whereby all items of gross income received during the year shall be accounted for in such taxable year and that only expen ses actually paid shall be claimed as deductions during the year. Under this met hod, income is realized upon actual or constructive receipt of cash or its equiv alent, and expenses are deductible only upon actual payment thereof, regardless of the taxable year when the service is performed or the expense is incurred. Accrual method Accrual method is a method of accounting for income in the period it is earned, regardless of whether it has been received or not. In the same manner, expenses are accounted for in the period they are incurred and not in the period they are paid. Under this method, net income is being measured by the excess of the inco me earned during the period over the expenses incurred during the same period. T he income that has been earned and the expenses that have been incurred are to b e reported during the year, although they have not been collected or paid. In th e succeeding year of receipt or payment, the taxpayer shall report no additional income or expenses. Realization principle Revenue is generally recognized when both of the following conditions are met: 1. The earning process is complete or virtually complete; and 2. An exchange has taken place. All events test An expense is deductible for the taxable year in which all the events had occurr ed which determined the fact of the liability and the amount thereof could be de termined with reasonable accuracy; expenditures are deductible only when the act ivities that the taxpayer is obligated to perform are in fact performed, not whe n the fact of the obligation to perform is determined. Installment method The gain reported for any taxable year is the proportion of the installment paym ent received in that year which the gross profit, realized or to be realized whe n payment is completed, bears to the total contract price. Percentage of completion method Applicable in the case of a building, installation or construction contract cove ring a period in excess of one year, whereby gross income derived from such cont ract may be reported upon the basis of percentage of completion. Crop year method

Applicable only to farmers engaged in the production of crops, which take more t han a year from the time of planting to the process of gathering and disposal of the harvest. Expenses paid or incurred during the year are deductible from the gross income realized from the sale of the crops.

Persons not allowed to use inventories for their stocks in trade 1. Flower growers; and 2. Real estate dealers. Two tests to which each inventory must conform 1. It must conform as nearly as possible to the best accounting practice in the trade or business; and 2. It must clearly reflect the income. Acceptable valuation methods for inventories 1. Cost price; and 2. Market price. Methods to determine the cost of merchandise 1. First-In, First-Out (FIFO) basis; 2. Last-In, First-Out (LIFO) basis; and 3. Average cost or moving average cost basis. Market price, definition The current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which usually purchased by the taxpayer. FILING OF TAX RETURNS AND PAYMENT OF TAXES Rules on frequency of filing tax returns 1. Income tax returns covering ordinary income, profits and gains a. Individuals deriving purely compensation income Beginning the calendar year of 2002 substituted filing of tax returns is require d where an employee receives purely compensation income from a single employer w ho deducted and remitted to the BIR the correct amount of withholding tax from t he employee s compensation income during the year. However, non-resident citizens who receive purely income from foreign sources are no longer required to file th eir Philippine income tax returns, although they must still file an income tax r eturn covering income from sources within the Philippines. b. Individual deriving purely trade, business or professional income, or mixed i ncome Must file a quarterly income tax return and an annual income tax return. Period Q1 Q2 Q3 Annual Due Date for Filing Return April 15 of the same year August 15 of the same year November 15 of the same year Return April 15 of the following year

To determine the taxable income to be reported in the quarterly tax returns, the gross income and deductions shall be computed on a cumulative basis. The gross income that shall be reported are those subject to tax at the graduated tax rate s, excluding capital gains and passive income subject to final taxes at preferen tial rates. The income tax due every quarter shall be computed based on the cumu lative taxable income for the quarter and any preceding quarters. The amount of income tax to be paid shall be the balance of the income tax after deducting the refrom the total quarterly income taxes previously paid and any taxes withheld u nder the expanded withholding tax system from the items of gross income reported for the period. However, an individual who dies during the year is required to file 2 income tax returns for the same year. c. Domestic corporation and resident foreign corporation Domestic corporation and resident foreign corporation shall file quarterly corpo rate income tax return within 60 days after the end of the calendar or fiscal qu arter used, and annual corporate income tax return on or before the 15th day of the 4th month following the close of the calendar year or fiscal year, as the ca se may be. Period Q1 Q2 Q3 Annual Due Date for Filing Return May 31 of the same year August 31 of the same year November 30 of the same year Return April 15 of the following year (if on calendar year)

2. Capital gains tax returns a. Shares of stock of a domestic corporation i. Listed and traded in a local stock exchange The transaction is exempt from income tax, but subject to the 1/2 of 1% stock tr ansaction tax, which is required to be withheld and deducted by the stockbroker handling the transaction and remitted to the BIR with 5 working days from the da te of sale. ii. Unlisted, or listed but traded outside a local stock exchange The capital gains tax must be filed within 30 days from the date of sale with th e RDO where the principal place of business of the seller is located. Also, an a nnual capital gains tax return covering all transactions involving shares of sto ck (not subject to stock transaction tax) shall be filed not later than the 15th day of the 4th month following the close of the taxable year. b. Real property The capital gains tax return shall be filed by the seller within 30 days from th e date of sale with the RDO having jurisdiction over the place where the propert y being transferred is located. The Certificate Authorizing Registration shall b e issued by the RDO where the real property is located. 3. Passive investment income No income tax return is required since the passive investment income is already subject to final withholding tax. Taxpayers required to file income tax returns not later than April 15 of the fol lowing year 1. Individuals;

2. Corporations no matter how created or organized, including general profession al partnerships; and 3. Estates and trust. Requisites for substituted filing of income tax returns 1. The taxpayer is an individual; 2. The taxpayer derives purely compensation income from a single employer; 3. Such employer has deducted and remitted to the BIR the correct amount of with holding tax from the employee s compensation during the year. WITHHOLDING TAXES Types of withholding taxes 1. Final withholding tax 2. Creditable withholding tax Final withholding tax The amount of income tax withheld by the withholding agent is constituted as a f ull and final payment of the income tax due from payee on the said income. The l iability for payment of the tax rest primarily on the payor as withholding agent . Two types of final withholding tax 1. Income payments to resident taxpayers; and 2. Income payments to non-resident taxpayers. Creditable withholding tax Taxes withheld on certain income payments are intended to equal or at least appr oximate the tax due of the payee on said income.

Three types of creditable withholding taxes 1. Expanded withholding tax on certain income payments made by private persons t o resident taxpayers; 2. Withholding tax on certain income payments made by private persons to residen t taxpayers; and 3. Withholding tax on money payments of the government. Conditions that must concur in order to be subject to the expanded withholding t ax 1. An expense is paid or payable by the taxpayer, which is income to the recipie nt thereof subject to income tax; 2. The income is fixed or determinable at the time of payment; 3. The income is one of the income payments listed in the regulations that is su bject to withholding tax; 4. The income recipient is a resident of the Philippines liable to income tax; a nd 5. The payor-withholding agent is also a resident of the Philippines.

Persons exempt from the creditable withholding tax 1. National government and its instrumentalities, including provincial, city or municipal governments and barangays, except GOCC s; 2. Persons enjoying exemption from payment of income taxes pursuant to the provi sions of any law, general or special, such as but not limited to the ff: a. Sales of real property by a corporation which is registered with and certifie d by HLURB or HUDCC as engaged in socialized housing project where the selling p rice of the house and lot or only the lot does not exceed P180,000 in MM and oth er highly urbanized areas and P150,000 in other areas; b. Corporations registered with the BOI, PEZA and SBMA, enjoying exemption from income tax under EO 226, RA 7916 and RA 7227; c. Corporations which are exempt from income tax under Sec. 30 of the Tax Code ( GSIS, SSS, PCSO and PAGCOR); d. General professional partnerships; and e. Joint ventures or consortium formed for the purpose of undertaking constructi on projects or engaging in petroleum, coal, geothermal and other energy operatio ns pursuant to an operating or consortium agreement under a service contract wit h the government. Persons constituted as withholding agent 1. In general, any juridical person, whether or not engaged in trade or business ; 2. An individual, with respect to payments made in connection with his trade or business. However, insofar as taxable sale, exchange or transfer of real propert y is concerned, individual buyers who are not engaged in trade or business are a lso constituted as withholding agents; and 3. All government offices, including GOCC s, as well as provincial, city and munic ipal governments and barangays. Time to withhold the tax Withholding tax shall be deducted and withheld by the withholding agent when the income payment is paid or payable or accrued, or the income payment is accrued or recorded as an expense or asset, whichever is applicable, in the payor s books, whichever comes first. Where the income is not yet paid or payable but the same has been recorded as an expense or asset, whichever is applicable, in the payor s books, the obligation to withhold shall arise in the last month of the return p eriod in which the same is claimed as an expense or amortized for tax purposes. Basis of withholding tax, general rule The gross amount of income payment shall be used as basis in computing the expan ded withholding tax. Basis of withholding tax, exceptions 1. Gross payments to resident individuals and corporate cinematographic film own ers, lessor or distributors; 2. Gross payments to contractors; 3. Gross selling price paid to sellers of real property classified as ordinary a sset; 4. Gross amounts paid by any credit card company to any business entity represen ting sale of goods or services; 5. Income payments made by any of the to 10,000 corporations to their local supp liers or goods, or local supplies of services; and 6. Income payments by the government on their purchases of goods from local supp liers.

Basis of withholding tax, with respect to real property other than capital asset s The creditable withholding tax shall be based on the gross selling price/total a mount of consideration or the fair market value, whichever is higher, paid to th e seller/owner for the sale, transfer or exchange of real property, other than c apital asset (Gross income means the amount after deducting the cost or adjusted basis of the real property sold or exchanged). Venue for filing withholding tax return and time for payment of the tax Creditable withholding taxes deducted and withheld by the withholding agent/buye r on the sale, transfer or exchange of real property classified as ordinary asse t, shall be paid by the withholding agent/buyer upon filing of the return with t he authorized agent bank located within the RDO having jurisdiction over the pla ce where the property being transferred is located within 10 days following the end of the month in which the transaction occurred. However, taxes withheld in D ecember shall be filed on or before January 15 of the following year. Large taxp ayers who file their tax returns and pay their taxes electronically are allowed 5 extra days after the deadlines set for taxpayers filing tax returns manually.