Académique Documents
Professionnel Documents
Culture Documents
General Principles
Citizenship & Residency
Resident Citizen
Non-resident Citizen
Overseas Contract Worker
Resident Alien
Non-resident Alien
Domestic Corp
Foreign Corp
Taxable Income
Inside RP
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Outside RP
Yes
No
No
No
No
Yes
No
Facts
Garrison v CA - 1990
1. Petitoners are all US Citizens who were born here,
got repatriated to USA, but later came back under
the Philippine Immigration Act of 1940 and were
employed at the Subic Naval Base.
Held
Principles
Terminology
Non-resident Citizens
Section 22 (E), Tax Code
RR 1-79 (1979)
RR 5-01 (2001)
Non-resident citizens who are exempt from income tax derived from sources OUTSIDE Phils are no longer required to file income tax return
RR 2 (1940)
Head of Family
Section 35 (A), Tax Code
Dependent
Section 35 (B), Tax Code
Senior Citizens
RA 7432
Dependent - a legitimate, illegitimate, or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is:
1) not more than 21 years of age
2) unmarried and not gainfully employed
3) if such dependent, regardless of age, are incapable of self-support because of mental or physical defect
Senior Citizens Act
Who are Senior Citizens?
1) Resident Citizens of the Phils
2) At least 60 years of age
Income
Not over P 10,000
Over P 10,000 - P 30,000
Over P 30,000 - P 70,000
Over P 70,000 - P 140,000
Over P 140,000 - P 250,000
Over P 250,000 - P 500,000
over P 500,000
Tax (5 to 32%)
5%
P 500 + 10% of excess
P 2,500 + 15% of excess
P 8,500 + 20% of excess
P 22,500 + 25% of excess
P 50,000 + 30% of excess
P 125,000 + 34% of excess
* if married, husband & wife shall compute separately their individual income; if any income cannot be definitely attributed to one, it shall be divided
equally for the purposes of determining their taxable income
Final Income tax - interests, royalties, awards, dividends, capital gains on sale of shares, realty
Section 24 (B), (C), (D) Tax Code
Final Tax
7.5%
10%
20%
20%
20%
20%
10%
exempt
Final Tax
5%
10%
6%
Deposit Substitute - a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments
Examples are:
1) banker's acceptances
2) promissory notes
3) repurchase agreements
4) certificates of assignment or participation
RR 10-98
RR 2-82
Who are Liable to pay tax on sale of shares of stock classifed as capital assets?
1) individual taxpayer, whether citizen or alien
2) corporate taxpayer, whether domestic or foreign
Who are NOT Liable?
1) gains derived by dealers in securities
2) gains on sale of shares of stock to the extent invested in new shares of stock in BANKS, NON-BANK FINANCIAL INTERMEDIARIES, and
CORPORATIONS organized primarily to hold equities in banks
How much is the tax?
1) for sales of stock listed & traded through the stock exchange - 1/4 of 1% on the GROSS SELLING PRICE
2) for sales of stock NOT traded through stock exchange
not over 100,000 - 10%
over 100,000
- 20%
How to determine the tax base? - it is based on the FAIR MARKET VALUE (FMV)
1) for sales of stock listed & traded through the stock exchange - FMV is actual selling price
2) for sales of stock NOT traded through stock exchange but listed in exchange - FMV is the highest closing price on the day of sale
2) for sales of stock NOT traded through stock exchange AND NOT listed in exchange - FMV is the book value nearest the valuation date
RR 8-98
Final Tax rate on Sales, Exchanges, or Transfers of Real Properties classified as CAPITAL Assets
1) Imposed on Capital Gains PRESUMED to have been realized by the SELLER - 6%
2) if sale was made to the government or to GOCCs - either 6% or under the normal income tax rate, taxpayer's option
Creditable Withholding Tax on Sales, Exchanges, or Transfers of Real Properties classified as ORDINARY Assets
1) if the seller is habitually engaged in the real estate business
if selling price is less than P 500,000
- 1.5%
if selling price is P 500,000 to P 2 million - 3%
if selling price is above P 2 million
- 5%
2) if the seller is NOT habitually engaged in the real estate business - 7.5%
3) if the seller is exempt from creditable withholding tax as per RR 2-98 - exempt
RR 13-99
Exemption of Certain Individuals from the Capital Gains Tax of 6% on the sale, exchange, or disposition of a principal residence
1) the proceeds from the sale, exchange, or disposition of his PRINCIPAL residence must be FULLY UTILIZED within 18 months. Must show PROOF
2) this can be availed of ONLY ONCE in every 10 years
3) the historical cost of his old principal residence shall be carried over to the cost basis of his NEW residence
4) if there is no FULL UTILIZATION, he shall be liable for the deficiency capital gains tax of the unutilized portion
5) if the principal residence is disposed in exchange for CONDO, and if it is used as his NEW residence, EXEMPT!
6) the 6% capital gains tax otherwide due MUST BE DEPOSITED in ESCROW wth an Authorized Agent Bank, can can only be released when sufficient
proof is shown that the proceeds have been FULLY UTILIZED within 18 months
RR 14-2000
Exemption
P 20,000
P 25,000
P 32,000
P 8,000
Change of Status
Section 35 (C), Tax Code
Change of Status
1) if taxpayer should marry or should have additional dependents during the taxable year, he may claim the corresponding exemptions in full for the year
2) if taxpayer should die during the taxable year, his estate may claim the personal exemptions as if he died at the close of the year
3) if spouse or any dependent should die or any dependent should marry or become 21 years old, or become gainfully employed during the year,
the taxpayer may claim the personal exemption as if it happened at the close of such year
Personal Exemption allowable to Non-resident Alien individuals engaged in trade, business, or in the exercise of a profession in the Phils
Section 35 (D), Tax Code
- in the amount equal to the exemptions allowed in the income tax law in the country to which he is a citizen, to citizens of the Phils, not to exceed
the exemption of our own citizens here
Requirements: (based on reciprocity)
1) that the country of which he is subject or citizen has an income tax law
2) the income tax law of his country allows personal exemption to citizens of the Phils not residing there, but deriving income from there
3) the personal exemptions shall be equal to that allowed by the income tax law of his country to a citizen of the Phils as above, or the amount provided
in the Tax Code whichever is lower
Example
for Single
for Head of Family
for Married
Personal Exemption
Allowed
P 20,000
P 18,000
P 32,000
- an individual (other than a non-resident alien) may opt to get a standard deduction in an amount not exceeding 10% of his gross income, instead of
following the personal exemptions
- the taxpayer is allowed a deduction of P 2,400 per family or P 200 a month for health and/or hospitalization insurance premiums
- said family must have a gross income of NOT MORE than P 250,000 for the taxable year
- if married, only the spouse claiming the additional exemption for dependents can avail of this
- a non-resident alien engaged in trade or business in the Phils is subject to the same tax rate as citizens
- a non-resident alien who stays in Phils for an aggregate period of more than 180 days shall be deemed as non-resident alien doing business in Phils
Tax Rate on Certain Passive Income of Non-Resident Aliens doing business in Phils
Income
1) interest under the expanded foreign currency deposit system
2) royalty from books, literary works, & musical compositions
3) royalty other than the above
4) interest on any currenty bank deposit, yield or other monetary benefits from
deposit substitute, trust fund & similar arrangement
5) prize exceeding P 10,000
6) other winnings, except Phil Charity Sweepstakes & Lotto
7) dividend from a domestic corp, or from a joint stock company, insurance or
mutual fund company, & regional operating headquarters of multinational
company or share in the distributive net income after tax of a partnership
(except a general professional partnership), joint stock or joint venture
or consortium taxable as a corporation
8) gross income from cinematographic flims & similar works
9) interest on LONG-TERM deposit or investment in banks (with maturity of 5
years or more)
Tax Rate on Capital Gains
Income
1) on sale of shares of stock of a domestic corp NOT listed & traded thru a local
stock exchange held as capital asset, on the net capital gain:
not over P 100,000
on any amount in excess of P 100,0000
Final Tax
7.5%
10%
20%
20%
20%
20%
20%
25%
exempt
Final Tax
5%
10%
6%
Tax Rate on Certain Passive Income of Non-Resident Aliens NOT doing business in the Phils
- tax rate on capital gains are same as above
- on all other sources, tax rate is 25%
Tax Rate on Aliens employed by regional or area headquarters & regional operating headquarters established in the Phils by
multinational corporations; on income received from such corporations and on Filipinos employed & occupying the same positions - 15%
Tax Rate on Aliens employed by offshore banking units; on income received from such offshore banking units; and on Filipinos
employed & occupying the same posiitons - 15%
Tax Rate on Aliens who are permanent residents of foreign countries employed & assigned in the Phils by foreign service contractors
or subcontractors engaged in petroleum operations in the Phils; on income received from such contractors or subcontractors; and on
Filipinos employed & occupying the same positions - 15%
D. Definitions
Section 22 (B), Tax Code
Corporation - includes:
1) partnerships - no matter how created or organized
2) joint stock companies
3) joint accounts
4) associations
5) insurance companies
6) mutual fund companies
7) regional operating headquarters of multinational corporations
8) joint accounts
Does NOT include:
1) general PROFESSIONAL partnerships - partnerships formed by persons for the sole purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or business
2) a joint venture or consortium formed for the purpose of undertaking construction projects
3) a joint venture or consortium formed for engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating
or consortium agreement under a service contract with the Government
Domestic Corporation - one created or organized in the Phils under its laws
Foreign Corporation - one which is NOT domestic, and may be a resident or non-resident corporation
Resident Corporation - a foreign corporation engaged in business in the Phils
Non-resident Corporation - a foreign corporation NOT engaged in business in the Phils BUT deriving INCOME from the Phils
Facts
AFISCO Insurance v CA - 1999
1. Petitioners are 41 Non-life Insurance companies
who formed themselves into a "POOL" (called the
Clearing House) in order to facilitate the handling of
re-insurance business contracted with a non-resident
foreign insurance company
Issues
Held
Principles
Terminology
on Domestic Corporations
- income tax of 35% (used to be 32%) (except if on the 4th year, MCIT applies - 2% of gross income)
- on the gross income derived during each taxable year
- from ALL sources within and without the Phils
- BUT starting Jan 1, 2009, the rate shall become 30%
Domestic Corporations are subject to any or some of the following:
1) capital gains tax
2) final tax on passive income
3) normal tax
4) minimum corporate income tax (MCIT)
5) gross income tax (GIT)
6) improperly accumulated earnings tax (IAET)
Gross Income computation
Gross Sales
Less) Sales Returns
Discounts
Allowances
Cost of Goods Sold - all business expenses directly incurred to produce the merchandise and bring them to their present location or use
Total Gross Income
Cost of Goods Sold for a Trading or Merchandising Concern:
1) the invoice cost of goods sold
2) import duties
3) freight in transporting the goods to the place where the goods are actually sold
4) insurance while goods are in transit
Cost of Goods Sold for a Manufacturing Concern:
1) all costs of production of finished goods such as raw materials, direct labor, & manufacturing overhead
2) freight cost
3) insurance premiums
4) other costs incurred to bring the raw materials to the factory or warehouse
Gross Income computation for a SERVICE concern
Gross Sales
Less) Sales Returns
Discounts
Allowances
Cost of Services - all direct costs & expenses necessarily incurred to provide the services required by the customers & clients including
a) salaries & employee benefits of personnel, consultants, & specialists directly rendering the service
b) cost of facilities directly utilized in proviidng the service such as depreciation or rental of equipment used & cost of supplies
* if it is a BANK - interest expense is included
Total Gross Income of a SERVICE concern
Proprietary Educational Institution - any private school maintained & administered by private individuals or groups with an issued permit to operate
from the DECS or the CHED or the TESDA
on Proprietary Educational Institutions & Hospitals
- income tax rate of 10%
- on their taxable income (except for passive income)
- if the gross income from UNRELATED trade, business, or other acitivity exceeds 50% of the total gross income of the institution, it shall be 35% on
the ENTIRE taxable income
Constitutional Exemption
- ALL revenues of non-stock, non-profit educational institutions used ACTUALLY, DIRECTLY, & EXCLUSIVELY for educational purposes are EXEMPT
RR 76-2003
Exempted NON-STOCK & NON-PROFIT Corporations are still liable for taxes on:
1) income derived from any of their real properties (ex. Rental payment from their building premises)
2) any activity conducted for profit regardless of disposition thereof
3) interest income from any bank deposits or yield on deposit substitutes (final tax of 20%)
4) if its foreign currency deposit - final tax of 7.5%
5) they shall also be withholding agents for their employee's compensation income subject to withholding tax
Exempted NON-STOCK & NON-PROFIT Educational Institutions:
1) their exemption refers ONLY to revenues derived from assets used ACTUALLY, DIRECTLY, & EXCLUSIVELY for educational purposes
2) but income from cafeterias / canteens & bookstores area also exempt if they are owned & operated by the educational institution & are located
within the school premises
PRIVATE Educational Institutions
1) they are exempt from the VAT - but they must be accredited with either DECS or CHED
2) but income derived from trade, business or other activity is STILL TAXABLE
3) however, their bank deposits & foreign currency deposits are EXEMPT from withholding taxes but they must show proof that such income is used
to fund proposed projects for their institution's improvement
4) they shall also be withholding agents for their employee's compensation income subject to withholding tax
G. GOCCs
Section 27 (C), Tax Code
on ALL GOCCs
- income tax of 35%
EXCEPT:
1) GSIS
2) SSS
3) PHIC (Philippine Health Insurance Corp)
4) PCSO
5) PAGCOR (no longer exempt becoz of RA9337)
H. Passive Income
Section 27 (D), Tax Code
as amended by RA 9294
FCDU of BANKS
Final Tax
7.5%
20%
20%
exempt
Final Tax
5%
10%
6%
exempt
10%
exempt
Deposit Substitute - a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments
Examples are:
1) banker's acceptances
2) promissory notes
3) repurchase agreements
4) certificates of assignment or participation
Who are Liable to pay tax on sale of shares of stock classifed as capital assets?
1) individual taxpayer, whether citizen or alien
2) corporate taxpayer, whether domestic or foreign
Who are NOT Liable?
1) gains derived by dealers in securities
2) gains on sale of shares of stock to the extent invested in new shares of stock in BANKS, NON-BANK FINANCIAL INTERMEDIARIES, and
CORPORATIONS organized primarily to hold equities in banks
How much is the tax?
1) for sales of stock listed & traded through the stock exchange - 1/4 of 1% on the GROSS SELLING PRICE
2) for sales of stock NOT traded through stock exchange
not over 100,000 - 5%
over 100,000
- 10%
How to determine the tax base? - it is based on the FAIR MARKET VALUE (FMV)
1) for sales of stock listed & traded through the stock exchange - FMV is actual selling price
2) for sales of stock NOT traded through stock exchange but listed in exchange - FMV is the highest closing price on the day of sale
2) for sales of stock NOT traded through stock exchange AND NOT listed in exchange - FMV is the book value nearest the valuation date
Intercorporate Dividends
CIR v Manning - 1975
1. In 1952, a corp called MANTRASCO was 99.9%
owned by Mr. Reese, the rest owned by 3 other
persons. Because of Mr. Reese's desire to make
sure that the company will be managed by his costockowners, they executed an agreement that said
upon his death, all the stockholders will endorse their
shares to a TRUST held by a law firm.
3. Mr. Reese died two years later and by 1963 all the
shares of Mr. Reese had been purchased by
MANTRASCO and distributed to the 3 shareholders
as stock dividends.
4. The CIR assessed them for deficiency income tax
claiming that the stock dividends was ACTUALLY
distribution of the assets or cash of the corporation
and is therefore considered INCOME. They
protested
Sale of Realty
RR 8-98
Final Tax rate on Sales, Exchanges, or Transfers of Real Properties classified as CAPITAL Assets
1) Imposed on Capital Gains PRESUMED to have been realized by the SELLER - 6%
2) if sale was made to the government or to GOCCs - either 6% or under the normal income tax rate, taxpayer's option
Creditable Withholding Tax on Sales, Exchanges, or Transfers of Real Properties classified as ORDINARY Assets
1) if the seller is habitually engaged in the real estate business
if selling price is less than P 500,000
- 1.5%
if selling price is P 500,000 to P 2 million - 3%
if selling price is above P 2 million
- 5%
2) if the seller is NOT habitually engaged in the real estate business - 7.5%
3) if the seller is exempt from creditable withholding tax as per RR 2-98 - exempt
RR 4-99
RR 9-98
banks
- also, on the interest income of the above from foreign currency LOANS granted to residents of the Phils - final tax of 10%
- resident foreign corporations engaged in business as REGIONAL OPERATING HEADQUARTERS - 10% tax on taxable income
- firms that are taxed under a special income tax regime (ex. Those under PEZA)
Foreign Corporation - one which is NOT domestic, and may be a resident or non-resident corporation
Resident Corporation - a foreign corporation engaged in business in the Phils
on Resident Foreign Corporations
- income tax of 35% (except on the 4th year, if MCIT applies - 2% of gross income)
- on the TAXABLE income derived during each taxable year
- from ALL sources within the Phils only
- BUT starting Jan 1, 2009, the rate shall become 30%
Tax Rate on Certain Passive Income of Resident Foreign Corporations
Income
1) interest under the expanded foreign currency deposit system
2) interest on any currenty bank deposit, yield or other monetary benefits from
deposit substitute, trust fund & similar arrangement
3) royalty - all types
4) dividend from domestic corporations (inter-corporate dividend)
Final Tax
7.5%
20%
20%
exempt
Final Tax
5%
10%
Tax rate of an International Carrier doing business in the Phils is 2.5% of its Gross Phils Billings
RR 15-2002
OBUs / FCDUs
Tax rate of Offshore Banking Units authorized by the Bangko Sentral, (including any interest income from foreign currency loans granted
to residents) is FINAL TAX of 20%
RR 10-76
Offshore Banking Unit - a branch of a foreign bank which is authorized by the BSP to transact offshore banking business in the Phils
Foreign Currency Deposit Unit - a department of a local bank or in an existing local branch of foreign banks, which is authorized by the BSP
to operarate under the expanded foreign currency deposit system
Gross Onshore Income - all income arising from transactions allowed by the BSP conducted by & between an offshore bank with another offshore
bank or with an FCDU or with a non-resident
RR 14-77
What is included in computing the GROSS ONSHORE INCOME of OBUs & FCDUs?
a) gross interest income arising from foreign currency loans & advances & investments with residents
b) fees, commissions, & other charges which are integral parts of the income from foreign currency loan transactions are EXEMPT! Don't include
this in computing the final tax
RR 10-98
Any profit remitted by a branch to its head office shall be subject to a tax of 15% - (EXCEPT those registered with PEZA)
How is this computed?
a) it is based on the TOTAL profits applied for remittance withouth any deduction for the tax component
If it was a FOREIGN CORPORATION, What are NOT included?
a) interests
b) dividends
c) rents
d) royalties
e) payment for technical services
d) salaries & wages premiums
f) annuities, emoluments or other fixed or determinable casual gains
g) profits, income, & capital gains
except if the above are connected with the conduct of its business in the Phils
Final Tax
20%
20%
7.5%
Final Tax
5%
10%
Special Corporations
Tax Base
Rate
10%
2.5%
4.5%
25%
7.5%
10%
The third state is the Netherlands. The RPNetherlands Tax Treaty provides that the tax
on such royalties is 15% of the gross amount
on ALL corporations
- income tax of 10% on the improperly accumulated taxable income
- the IAET is on corps which permit earnings & profits to accumulate instead of being divided or distributed
NOT Applicable to
1) publicly-held corps
2) banks & other financial institutions
3) insurance companies
Evidence of Purpose to Avoid Income Tax
1. Prima Facie Evidence - the fact that any corp is a mere holding company or investment company
2. Evidence determinative of purpose - the fact that the earnings or profits of a corp are permitted to accumulate BEYOND the REASONABLE NEEDS
of the business
Computing for the IAET
RR 2-01
M. Tax-exempt Corporations
Section 30, Tax Code
The Following organizations are tax-exempt: (as long as they aren't organized for profit)
1. Labor, agricultural, or horicultural org
2. Mutual savings bank without capital stock represented by shares &
Cooperative bank without capital stock
3. A beneficiary society, order, or association - operating for the exclusive benefit of the members
ex. A frat operating under the lodge system (Masonic lodge)
A mutual aid association
A non-stock corp organized by employees providing for the payment of life, sickness, accident, or other benefits exclusive to its members
4. Cemetery company - owned & operated exclusively for the benefit of its members
5. Non-stock corp or association - organized & operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehab
of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member or specific person
6. Business league chamber of commerce, or board of trade - no part of its income inures to any individual
7. Civic league or organization operated exclusively for the promotion of social welfare
8. A non-stock & non-profit educational institution
9. Governmen educational institution
10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or
like orgs of a purely local character - the income which consists solely of dues, assessments, & fees collected from members for the sole
purpose of meeting its expenses
11. Farmers', fruit growers', or like associations organized & operated as sales agent for the purpose of marketing the products of its members &
turning back to them the proceeds less expenses
* But the any income of the above orgs from any of their properties (real or personal), or from any activity conducted for profit regardless
of disposition made of such income, shall be taxable
N. Taxable Income
Section 31, Tax Code
O. Gross Income
COMPENSATION
BUSINESS INCOME
Business Income - in the case of manufacturing, merchandising, or mining business, GROSS income means:
Total sales
less) cost of goods sold
add) all income from incidental & outside sources
=
Gross Income
GAINS
Interests
In the case of 2 or more orgs, trades, or businneses (whether or not organized & incorporated in the Phils), owned or controlled DIRECTLY or
INDIRECTLY by the SAME INTERESTS, the CIR is authorized to distributore, apportion, or allocate gross income or deductions between or among
such orgs, trades, or businesses, if he determines that such is necessary in order to prevent tax evasion
- the CIR shall use standards that are fair, reasonable, or at ARMS's LENGTH
RMO 63-99
RENTS
Section 49, RR 2
Improvements by Lessees
- When a lessee erects a building or makes improvements per agreement with the lessor, the lessor may report the
income therefrom upon either of the following: (at his option)
1) at the time when such building or improvements are completed, the fair market value of such building or improvement
2) the lessor may spread over the life of the lease, the estimated depreciated value of such building or improvement at the termination of the lease,
and report the income for each of the adequate part
- If the lease is terminated, and it is NOT through purchase by the lessor, so that the lessor comes into possession of the property prior to the time
originally fixed, the lessor is considered to receive ADDITIONAL income for that year. (if the value of the building exceeds the amount already
reported as income). No appreciation in value due to causes OTHER than the premature termination of the lease shall be included.
- If the building is destroyed BEFORE the expiration of the lease, the lessor is entitled to deduct as LOSS for the year when such destruction occurred,
the amount previously reported as income, less the any salvage value to the extent that such loss was not compensated for by insurance
ROYALTIES
DIVIDENDS
Section 250, RR 2
Meaning of Royalties
- any payment of any kind received as consideration for the use of or right to use:
1) any patent, trademark, design, or model
2) secret formula or process
3) of industrial, commercial, or scientific equipment
4) for information concerning industrial, commercial, or scientific experience
Meaning of Dividends
- any distribution whether in cash or other property, in the ordinary course of business even if extraordinary in amount, made by:
1) a domestic or resident foreign corp
2) a joint-stock company
3) a partnership
4) a joint account
5) an association
6) an insurance company
to the shareholders or members out of its EARNINGS or PROFITS
Regarding Dividends
* when the corporation receives interest which are tax-free; it becomes TAXABLE AS DIVIDENDS when it distributes the same to its shareholders
* when the dividend is received by a corp, it is taxable only up to 25% in accordance with Sec 24, Tax Code
* when the dividend is received by a DOMESTIC corp from a FOREIGN CORP, it is taxable only to the extend that it constitutes income from sources
in the Phils as provided in Sec 37(a), Tax Code
* when the dividend is paid by a DOMESTIC corp to a NON-RESIDENT FOREIGN CORP, it is taxable in FULL.
Section 251, RR 2
Dividends paid in Property (or in Securities other than its own stock
* these are considered income too, in the amount of the full market value as when received by stockholder
* the rates are as follows:
- if received BEFORE Jan 1, 1998
Tax - Exempt
- if received bet Jan 1 - Dec 31, 1998
6%
- if received bet Jan 1 - Dec 31, 1999
8%
- if received AFTER Jan 1, 2000
10%
Regarding Dividends paid in Property
* if it was paid in stock of ANOTHER CORP, it is NOT considered A STOCK DIVIDEND
* same valuation is the market value at the time the dividend becomes payable
* scrip dividends are subject to tax in the year in which the warrants are issued
Section 252, RR 2
Stock Dividends
* stock dividends are NOT TAXABLE
Exception:
1) when the stock dividend causes CHANGE in the corporate identity or a change in the nature of the shares issued whereby the proportional interest
of the stockholders after the distribution is ESSENTIALLY DIFFERENT from his former interest
Section 253, RR 2
Section 254, RR 2
Section 255, RR 2
Sources of Distribution
* every distribution is made out of earnings or profits
* just determine them to be coming from the earnings or profits of the taxable year, if NOT, then to the past taxable years
Section 256, RR 2
Distribution in Liquidation
* when a corp distributes ALL its properties or assets in complete liquidation, the GAIN realized from this is TAXABLE
* computation is based on Sec 34 (b) or (c ) of the Tax Code
redemption - a reacquisition
of stock by a corp in
exchange for property,
whether or not the acquired
stock is cancelled, retired, or
held in the treasury
5. Were the shareholders who were NONRESIDENT ALIENS not taxable? Since even
if the dividends were to be considered as a
sale of their stock to the HK company, the
profit did not come from Phil sources and is
not subject to Phil taxes.
Regarding a trading company that is in the process of liquidation, and whose stockholders are to received liquidating dividends IN EXCESS
of their investment
- since the shareholders will realized capital gain or loss, the gain is taxable
- such gain to be computed as the difference between the fair market value of the liquidating dividends and the adjusted cost to the stockholders
of their respective shareholdings
* But because of Section 34 (b) of the Tax Code:
- if the shareholder held his shares for more than 12 months, only 50% of the capital gains is taxable
-if less than 12 months - 100% of the capital gains is taxable
ANNUITIES
Prizes & Winnings - generally taxable (they are similar to gains derived from labor)
exceptions:
1) if the recipient was selected without any action on his part to enter the contest & he was not required to render substantial future services as a
condition for receiving the prize or award
2) those granted to athlethes are exempt
3) those that are in the nature of GIFTS
PENSIONS
Pension - a gratuity granted as a favor or reward, or one paid under given conditions to a person following retirement from service or to surviving
dependents
Pensions are TAX-EXEMPT
RMC 13-80
EXCLUSIONS
The following are tax-exempt & are NOT included in gross income:
1) Life Insurance - except if the proceeds are held by the insurer under an agreement to pay interest thereon, the INTEREST PAYMENTS only, are
included in gross income
2) Amount received by insured as RETURN OF PREMIUM
3) Gifts, Bequests, & Devises - except the income from such property acquired by gifts, bequests, & devises which shall be included in gross income
4) Compensation for Injuries or Sickness - including amount of damages received on account of such injury or sickness
5) Income exempt under Treaty
6) Retirement Benefits, Pensions, Gratuities, etc - but this applies only if the retiring person has been in the service of the same employer for at
least 10 years and is NOT LESS THAN 50 years of age at the time of his retirement; and this benefit can be availed of only once
7) Separation pay caused by death, sickness, or other disability
8) Social Security benefits, retirement gratuities, pensions, & similar benefits
9) Benefits received from the US Veterans Administration
10) Benefits received from the SSS
RA 4917
RA 7833
This Act inserted some clauses to the Tax Code to specifically exempt the ff:
Refund / Credit of Taxes Withheld from Employees who were separated from employment
- if the employee is separated from previous employer but is not employed by another employer, he shall be refunded or credited the taxes withheld
on his exempt 13th month pay & other benefits by his present employer
- if the employee is separated but has no present job, he shall claim his refund with the BIR
Income derived by Foreign Government - in loans, stocks, bonds, or other domestic securities or from interests on deposits in Phil banks
Requirements from Exemption: the income was received by
1) by foreign governments
2) by financing institutions owned, controlled, or enjoying re-financing from foreign governments
3) by international or regional financial institutions established by foreign governments
CIR v Mitsubishi Metal - 1990
Fringe Benefit - any good, service, or other benefit granted in cash or in kind by an employer to an employee (except rank & file) such as:
1) membership fees, dues, & other expenses in social & athletic clubs or similar orgs
2) life or health insurance & other non-life premiums
3) interest on loan at LESS than market rate to the extent of the difference between the market rate & the actual rate granted
4) motor vehicle of any kind
5) housing
6) household personnel such as maid or driver
7) holiday & vacation expenses
8) expense account
9) expenses for foreign travel
10) educational assistance to the employee or his dependents
Fringe Benefit Tax - final tax of 32% on the GROSSED-UP monetary value of fringe benefits
* FBT is also an EXPENSE which is deductible from the employer's GROSS INCOME
* if the employee is an alien employed by a ROHQ, offshore banking unit, or petroleum service contractor, whose income is subject to a 15% tax,
the FBT is also 15%
Grossed-Up Monetary Value - amount paid by the employer which is subject to tax
Computation:
Actual Monetary Value
/ (divided by)
68%
= FBT
Special Cases
- if it is received by non-resident alien not engaged in trade or business
FBT
25%
15%
25% or 15%
Further Clarifications:
1) Housing Privilege
- if employee LEASES a residential property for the use of the employee & the property is the usual place of residence
of the employee
- if the employee PURCHASES a residential property on installment basis & allows the employee to use it as his usual
place of residence
- if the employee PURCHASES a residential property & TRANSFERS OWNERSHIP to the employee
- housing of military officials
- housing which is situated inside or adjacent to the premises of a business or factory (within 50 meters)
- temporary housing for employee who stays for not more than 3 months
2) Expense Account
- if the expense was duly receipted for and in the name of the employer, and the expense is not in the nature of a
personal expense attributable to the employee
- if these are personal expenses such as groceries for the personal consumption of the employee, paid for or reimbursed
by the employer, even if these are duly receipted for in the name of the employer
- representation & transportation allowances which are fixed in amount & regularly given as part of monthly compensation
3) Motor Vehicle
- if employer PURCHASES vehicle in the name of the employee, regardless of usage of the vehicle
- if employer shoulders a portion of the amount of the purchase price of a vehicle owned by the employee
- if employer owns & maintains a fleet of vehicles for the use of the business & the employees
- use of aircraft owned & maintained by the employer
- use of yacht
4) Household Expenses
- ex. Salaries of maids, drivers, payment for homeowners association dues, garbage dues, etc
5) Interest on loan at less than Market rate
- if it is less than 12% interest rate
FBT
50% of the value of benefit
50% of the value of benefit
100% of the value
exempt
exempt
exempt
not considered FB
considered to be FB
not considered FB
but as taxable income
100% of the value
value is amount shouldered
50% of the value of benefit
exempt
value is based on depreciation
the diff is FB
exempt
exempt
exempt
30% of value
100% of the value
the trade or business of the employer, and there is written contract that the employee must remain in employ for
a period of time
- if the assistance was extened to the employee's dependents and was provided through a scholarship program of the
company
10) Life or Health Insurance & other Non-life insurance premiums in excess of what the law allows
- if the contribution is pursuant to existing law such as to the SSS or GSIS
- if it is for the GROUP insurance of the employees
exempt
exempt
exempt
exempt
RR 8-00
The ff are considered "DE MINIMIS" benefits of ALL TYPES of employees - exempt from TAX
1) monetized unused vacation leave no exceeding 10 days per year
2) medical cash allowance to dependents of employees not exceeding P 750 / employee per sem or P 125 / month
3) rice subsidy of P 1,000 or 1 sack of 50-kg rice per month
4) uniforms & clothing allowance not exceeding P 3,000 / year
5) actual yearly medical benefits not exceeding P 10,000 / year
6) laundry allowance not exceeding P 300 / month
7) employee achievement awards for length of service or safety achievement in the form of tangible property with value not exceeding P 10,000
8) gifts given during christmas & major anniversaries not exceeding P 5,000 / year
9) flowers, fruits, books, etc given under special circumstances such as illness, marriage, birth of a baby, etc
10) daily meal allwance for overtime work not exceeding 25% of the basic minimum wage
RR 10-00
Others
- the amount of "De Minimis" benefits is not computed in determining the P 30,000 ceiling of "OTHER BENEFITS" provided in Sec 32(b) of Tax Code
- but if the employer pays MORE than the ceilings prescribed above, the EXCESS is taxable to the employee ONLY if it is beyond the P 30,000 ceiling
- any amount given by employer as benefits, whether "de minimis" or others, shall be deductible as business expense
O. Deductions
Section 34, Tax Code
In General
The ff: are allowed deductions from gross income (except for taxpayers who earn compensation income)
all ordinary & necessary expenses in carrying on the development, management, and operation of a trade, business, or profession including:
A reasonable allowance for:
a) salaries, wages, and other forms of compensation including fringe benefits
b) travel expenses, here & abroad, in pursuit of trade, business, or profession
c) rentals & others which are required for the continued use of property
d) entertainment, amusement, & recreation expenses that are directly connected to the trade, business, or profession (but not those that are contrary
to law, morals, public policy, or public order)
Expenses
2. After the event, the CIR found that the net profit
was only P 1,375. It found several questionable
items deducted as business expenses. The CIR
then denied the exemption and demanded payment
of amusement taxes.
RR 10-02
Representation Expense - expenses incurred in connection with the conduct of his trade, business, or profession in:
a) entertaining, providing amusement & recreation to, or meeting with guests
b) at a dining place, place of amusement, country club, theater, concert, play, sporting event, & similar places
- if the taxpayer is the registered member of a country, golf, or sports club, the presumption is that the expenses are FRINGE BENEFITS subject to
the FRINGE BENEFIT TAX unless the taxpayer can prove that these are actually representation expenses
Entertainment Facilities - refers to a yacht, vacation home or condominium & similar item of real or personal property used by the taxpayer
primarily for entertainment, amusement, or recreation of guests or employees
- it must be owned or form part of the taxpayer's trade, business, or profession or for which he claims a rental expense
- a yacht is considered an entertainment facility if its use is NOT RESTRICTED to specified officers or employees as to make it a fringe benefit
The ff are NOT considered entertainment, amusement, & recreation expenses
1) those that are treated as compensation for fringe benefits
2) expenses for charitable & fund-raising events
3) expenses for bonafide business meeting of stockholders, partners, or directors
4) expenses for attending or sponsoring an employee to a business league or professional org meeting
5) expenses for events organized for promotion, marketing, & advertising including concerts, conferences, seminars, workshops, conventions, etc
6) other expenses of a similar nature
* but these may STILL be qualified as deductible if they pass the requisites below
Requisites of Deductibility for Entertainment, Amusement, & Recreation Expense
1) it must be paid or incurred during the taxable year
2) it must be directly connected to the development, management, & operation of the trade, business or profession of the taxpayer
3) it must NOT be contrary to law, morals, good customs, public policy, or public order
4) it must not have been paid to an official of the government as a bribe or kickback
5) it must be substantiated by adequate proof
6) it must have been withheld and paid to the BIR
The Ceiling for the above is:
1) for taxpayers engaged in sale of goods or properties
2) for taxpayers engaged in sale of services, including exercise of profession
and use or lease of properties
Interests
Ceiling
0.5% of NET SALES
1 % of NET REVENUE
Picop v CA - 1995
RR 13-00
Interest Arbitrage
BIR Ruling 006-00
Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade, or business are deductible
Exceptions
1) the income tax provided for under this Title
2) income taxes imposed by a foreign country (but it shall be allowed if the taxpayer does not signify his desire to enjoy any benefits of tax credits
for taxes paid to foreign countries as specificied in paragraph 3). - only for those income sourced OUTSIDE the Phils.
3) estate & donor's taxes
4) taxes assessed against local benefits of a kind tending to increase the value of the property assessed
* if the above taxes are refunded or credited, they shall form part of the gross income
Losses
Losses actually sustained and NOT compensated for by insurance or other forms of indemnity are DEDUCTIBLE:
1) if it was incurred in trade, profesion, or business
2) for property connected with the trade, business, or profession if it arises from fires, storms, shipwreck, or other casualties, or from robbery, theft
or embezzlement
* Exception - if the loss has already been claimed as deduction for estate tax purposes, it is no longer deductible from gross income
RR 12-77
Casualty - the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected, or unusual nature
- the taxpayer bears the BURDEN OF PROOF
NOLCO
Net Operating Loss - the excess of allowable deduction over gross income of the business in a taxable year
Net Operating Loss Carry-over (NOLCO) - only beginning Jan 1, 1998
- the net operating loss of the business which has not been previously offset as deduction shall be carried over as deduction from gross income
for the NEXT 3 consecutive years immediately following the year of such loss
- this is allowed only if there has been NO SUBSTANTIAL change in ownership of the business:
1) where not less than 75% of outstanding shares in the business is in the name of a corp of held by the same persons
2) where not less than 75% of the paid-up capital of the corp is held by the same persons
- for mines OTHER than oil & gas wells, a NET OPERATING LOSS without the benefit of incentives provided for by the Ominubs Investments Code of
1987, may be carried over as deduction for the next 5 YEARS immediately following the year of loss
RR 14-01
Various Provisions
1) NOLCO is allowed regardless of the change in ownership of a company, in case of a merger where the taxpayer who accumulated the NOLCO
is the surviving entity
2) If the NOLCO arises from a merger, consolidation, or combination, the transferee / assignee is NOT entitled to claim the same NOLCO as deduction
UNLESS the transferor GAINS CONTROL of at least 75% of the outstanding issues or paid-up capital of the transferee
3) NOLCO is NOT transferrable or assignable to another person - EXCEPT if there has been NO SUBSTANTIAL CHANGE in the ownership of the
business in that NOT LESS than 75% of the paid-up capital of the business is held by the same persons
4) an individual who claims the 10% OPTIONAL STANDARD DEDUCTION cannot claim deduction of NOLCO simultaneously. Even if the NOLCO was
not claimed, the 3 year period shall continue to run
5) if the taxpayer paid its income tax under the MCIT computation, the 3 year period still runs
Those NOT Qualified for NOLCO:
1) Offshore Banking Units of a foreign banking corp and FCDU of a domestic banking corp
2) an enterprise registered with the BOI enjoying the Income Tax Holiday incentive
3) an enterprise registered with the PEZA
4) an enterprise registered with SBMA
5) foreign corp. engaged in international shipping or air carriage business in the Phils
6) any person, natural or juridical, enjoying exemption from income tax
Forex Losses
BIR Ruling 206-90
Bad Debts
RR 5-99
Bad Debts - are debts resulting from worthlessness or uncollecability of amounts due the taxpayer by others, arising from money lent or from
uncollectible amounts of income from goods sold or services rendered
How to ascertain if its worthless?
- can't be just because it is of doubtful value or difficult to collect
- it must depend on the particular facts & circumstances of each case
- ex. If the amount is too small and the collection through court action may be more costly to the taxpayer, this can be considered bad debts
Other Considerations to Demonstrate the Uncollectibility of a Debt
1) the value of the collateral
2) the financial condition of the debtor
3) the assignment of the case for collection to an independent collection lawyer & his sworn testimony
Exceptions
* if it is a bank, the BSP is the one that will ascertain the worthlessness & uncollectibility of bad debts
* if the receivable is from an insurance company, it cannot be claimed as bad debt unless the insurance company has been declared closed or
insolvent by the Insurance Commissioner
Depreciation
Depreciation - the gradual dimunition in the useful value of tangible property resulting from wear & tear & normal obsolescense
A reasonable allowance for Depreciation due to wear & tear or exhaustion of property is deductible.
Some Methods to determine Reasonable Allowance
1) straight-line
2) declining balance
3) sum-of-the-years-digit
- if the taxpayer & the CIR had come to an agreement on the useful life on which depreciation will be based, this agreement will be considered binding
Some cases of Depreciation
1) for properties used directly in production of Petroleum
2) for properties used indirectly in production of Petroleum
3) for properties used in Mining Operations
4) for non-resident aliens engaged in trade or business here, or resident
foreign corps
Basilan Estates v CIR - 1967
Alllowed Depreciation
10 years based on either straight-line or declining balance method
5 years using straight-line
if expected life is 10 years or less - normal rate of depreciation
if expected life is more than 10 years - notification to the CIR
a reasonable rate is allowed ONLY on properties located in the Phils
Depletion
Oil & Gas wells or Mines - are allowed a reasonable allowance for depletion or amortization computed using the COST-DEPLETION METHOD
Requisites:
1) when the allowance for depletion equals the capital invested, no further allowance shall be granted
2) after production in commercial quantities has started, certain intangible exploration & drilling costs will be deducted in the year incurred if such
were incurred for non-prodcuing wells or mines OR these may be capitalized & amortized if such were incurred for producing wells or mines in
same contract area
3) if it was a non-resident aliean or a resident foreign corp, the allowance for depletion is limited to oil wells & mines in the Phils
Consolidated Mines v CTA - 1974
1.Consolidated is a domestic corp engaged in
mining. In filed for refund for claimed overpayment
of taxes for the year 1951. But the BIR found several
questionable items:
3. The claims for audit & legal fees & other expenses
were not properly substantiated
Expenses for R & D - can be treated as ordinay & necessary expenses provide that:
1) it is incurred during the taxable year
2) it is incurred in connection with his trade or business
Limitations
* taxpayer can either fully deduct it or amortize the deductions
* this is not applicable to the expenses for the acquisition or improvement of land or property to be used in connection with R & D (these are subject to
depreciation or depletion)
* this is not applicable to expenses incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of minerals & oil
3M Phils v CIR - 1988
1. 3M Phils is a subsidiary of 3M USA. It imports,
manufactures, wholesales, & distributes all products
of 3M USA. It agreed to pay a technical service fee
& a royalty on its net sales to 3M USA.
Pension Trusts
The employer who establised the pension trust for his employee's benefit can DEDUCT it but:
1) the amount paid to the trust is reasonable
2) the amount must not have been previously allowed for deduction (double deduction)
3) the amount is apportioned in equal parts over a period of 10 consecutive years beginning with the year in which the payment is made
Taxes which were not originally withheld & paid but were only paid during audit are DEDUCTIBLE in these conditions:
1) no withholding tax was made but the payee reported the income, and the withholding agent pays during the audit including the penalties
2) no withholding tax was made, and the payeee did not report the income, but the withholding agent pays during the audit including the penalties
3) the withholding agent erroneously under-withheld the tax but pays the difference during the audit
Taxpayer, except a non-resident alien, can choose to just have a STANDARD DEDUCTION of 10% of his gross income IN LIEU of all of the above
Non-deductible Expenses
Section 36, Tax Code
Capital Assets - property held by the taxpayer (whether or not connected with his trade or business), but does NOT include:
1) stock in trade
2) other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the year
3) property held by taxpayer PRIMARILY for sale to customers in the ordinary course of his trade or business
4) property USED in the trade or business, of a character which is subject to depreciation allowance
5) real property USED in trade or business - (I AM NOT SURE IF THIS IS STILL VALID. IT MAY HAVE BEEN REVOKED ALREADY, pls check)
As to number 4, there is a limitation. This is limited to the property used in trade or business AT THE TIME OF SALE OR EXCHANGE only
It won't apply to the real property gains or losses to the extent that such gain or loss is ALLOCABLE to the land (which means normal loss / gain) and
not those that were IMPROVEMENTS made by the taxpayer which are subject to depreciation
Percentage taken into account - if the taxpayer is an individual, the following percentage is followed in computing for NET gain or NET loss
1) 100% if the capital asset was held for NOT MORE than 12 months
2) 50% if it was held for MORE than 12 months
Ex. A Merchandising company had ORDINARY net income of P 10,000 and a net capital gain of P 5,000 (held for 1.5 years)
What is the Taxable Income?
It will be P 10,000 + P 2,500 (50% of P 5,000) = P 12,500
Limitation on Capital Losses
Losses are allowed ONLY TO THE EXTENT of gains from such sales or exchanges. Except for a bank where its losses from bonds, notes, etc are
not subject to this limitation. If the taxpayer incurs NET CAPITAL LOSS, such loss CANNOT be deducted from his ordinary income because the
LOSS can be deducted ONLY TO THE EXTENT OF CAPITAL GAINS.
Ex. A taxpayer in buy & sell business, had ordinary income of P 20,000, capital gains of P 5,000 & capital losses of P 3,000
What is the Taxable Income?
Ordinary Net Income
Gains from sale of capital assets (as from sale of stocks)
50% of such gain
Losses from sale of capital assets
50% of such loss
Net Taxable Capital Gain
P 20,000
P 5,000
x 50 %
P 2,500
P 3,000
x 50%
1,500
Taxable Income
P 1,000
P 21,000
Ex. A taxpayer in buy & sell business, had ordinary income of P 20,000, capital gains of P 2,000 & capital losses of P 7,000
What is the Taxable Income?
Ordinary Net Income
Losses from sale of capital assets (as from sale of stocks)
50% of such gain
x 50 %
Losses from sale of capital assets
50% of such loss
x 50%
Net Capital Loss
P 20,000
P 7,000
P 3,500
P 2,000
1,000
P 2,500
Taxable Income
* can't deduct capital loss of P 2,500 because you can only deduct to the extent of your capital gains
P 20,000
Net Capital Loss Carry-over - if the taxpayer is an individual, and he sustains a NET CAPITAL LOSS, the loss is treated in the succeeding year as
a loss for a capital asset held for NOT MORE than 12 months (100% credited), but the amount WILL NOT EXCEED the net income for the year the
capital loss was incurred
BIR Ruling 27-02
same as above
installment plan - where the total payment in the year of sale DOES NOT exceed 25% of the total selling price
deferred payment plan - where the total payment in the year of sale EXCEEDS 25% of the total selling price
Ordinary Income
Section 22 (Z) , Tax Code
Ordinay Income - any gain from sale or exchange of property which is NOT A CAPITAL ASSET
Net Capital Gain - the excess of the gains from such sales or exchanges of capital assets over the losses from such sales or exchanges
Net Capital Loss - the opposite of the above
Percentage taken into Account
If the taxpayer is NOT a corp, the ff percentages of the GAIN or LOSS in sale or exchange of a CAPITAL ASSET shall be taken into account to
compute for the NET CAPITAL GAIN or NET CAPITAL LOSS & NET INCOME
1) if asset was held for NOT MORE more than 12 months
100%
2) if asset was held for MORE than 12 months
50%
Limitation on Capital Loss
Losses from sales or exchanges of CAPITAL ASSETS are allowed ONLY TO THE EXTENT of the GAINS from such sales or exchanges
* except for a bank who incurs losses from sale of bonds, notes, etc. - where it shall be allowed consideration for the entire amount
* so IF you incur capital losses, and you're not a bank, the most that you can claim as losses is the amount of capital gains. If your losses are more
than your gains, at the end of the year, you will claim NO LOSSES and NO GAINS
Gain - the excess amount realized over the basis for determining gain
Loss - the opposite of the above
Amount Realized - the sum of money received PLUS the fair market value of the property (other than money) received
Basis for Determining Gain or Loss from Sale or Disposition of Property (also called Original basis)
Mode of Acqusition
Cost Basis
1) If it was acquired by purchase
the actual cost
2) If by inheritance
the fair market value
3) If by gift
the same as if it would be in the hands of the donor or the last preceding owner, but if the basis is GREATER
than the fair market value, then the basis shall be the fair market value
4) if acquired for less than an adequate
consideration in money or its worth
the amount paid by the transferee for the property
Exchange of Property (Tax-FREE exchange)
General Rule - In a sale or exchange of property, the ENTIRE AMOUNT of GAIN or LOSS is recognized
Exceptions: (no gain or loss is recognized)
1) In a MERGER or CONSOLIDATION, where a corp exchanges property SOLELY for stock in another corp, which is also a party to the MERGER
2) In a MERGER or CONSOLIDATION,where a shareholder exchanges stock in a corp for the stock of another corp also a party to the merger
3) In a MERGER or CONSOLIDATION, where a security holder of a corp exchanges his securities for STOCK or SECURITIES in another corp
also a party to the Merger
4) where property is transferred to a corp by a person in exchange for STOCK in the corp, and the result of such exchange is that the person
(and up to 4 other persons), GAINS CONTROL of the corp. BUT, the stocks issued for services ARE NOT CONSIDERED as issued in return
for property
Securities - means BONDS & DEBENTURES, but NOT NOTES of whatever class or duration
Merger or Consolidation means:
1) the ordinary merger or consolidation
2) the acquisition by one corp of all or almost all the properties of another corp solely for stock
* BUT, there MUST BE A BONA-FIDE BUSINESS PURPOSE, can't be for tax purposes only
Control - means ownership of stocks in a corp of at least 51% of the total voting power of all classes of stocks entitled to vote
Merger or Consolidation
CIR v Rufino - 1987
1. The Rufinos were majority stockholders of Eastern
Theatrical Co and Eastern Theatrical Inc both in the
business of operating theaters. In 1958, the owners
passed a resolution to merge both corps by
transferring the assets, goodwill, & liabilities of the
first to the 2nd in exchange for shares of stock. This
was done because the 1st corp's life was about to
expire
3. BIR claims that the new corp did not actually issue
stocks in exchange for the properties of the old corp
at the time of the supposed merger in 1959. It was
done only on paper. The increase in capitalization of
the new corp was registered with the SEC 37 days
AFTER the old corp expired. Since there was NO
merger, the old corp was liquidated and therefore the
Rufinos are liable for their capital gains
Transfer of Substantially "ALL" the assets - means a transfer of at least 80% of the assets, including cash, with SOME degree of permanence
Transfer of Property for Shares of Stock - NO GAIN or LOSS is recognized when a person transfers property (not services) to a corp in exchange
for shares of stock, (alone or up to 4 others), where such person GAINS CONTROL of the corp
BIR Ruling 274-87
1. Maray Farms is a domestic corp. In 1987, some
of the shareholders transferred their PERSONAL
PROPERTY to the corp in exchange for MORE
SHARES of stock in the corp so that the effect is
they gained control of more than 51% of the total
voting power of all classes of stock entitled to vote
RR 18-01
RMR 1-02
The important thing to remember is the 61 day period. Ex. A person buys shares of stock in a corp, and WITHIN 30 days buys MORE shares. Then,
within ANOTHER 30 days, he sells those shares AT A LOSS, he cannot claim this loss.
T. Situs of Taxation
Section 42, Tax Code
The following are treated as Gross Income From Sources within the Phils
1) Interests - including interests on bonds, notes, & other interest bearing obligations
2) Dividends - from a domestic corp and foreign corp
unless less than 50% of the gross income of the foreign corp was derived from the Phils (the amount will be based on the same ratio
to dividends as the gross income for such period derived from sources within Phils bears to its gross income from all sources
3) Services - compensation for labor or personal services performed in the Phils
4) Rentals & Royalties - from property located in the Phils or from any interest in such property for:
- the use of any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other similar
- the use of any industrial, commercial, or scientific equipment
- the supply of scientific, technical, industrial, or commercial knowledge or info
- the supply of services by a non-resident person in connection with the use of property or rights; or the installation or operation of any brand,
machinery, or other apparatus purchased from such non-resident person
- technical advise, assistance or services rendered in connection with technical management of any scientific, industrial or commercial undertaking
- the use of motion picture films, films for TV, tapes for radio broadcast
5) Sale of Real Property - gains, profits, & income from sale of real property located in the Phils
6) Sale of Personal Property - gains, profits, & income from sale of personal property
RAMO - 1-95
The Order applies to the INCOME TAX ONLY of : (does not cover withholding, branch profit remittance tax & busines tax)
1) Phil branches & liason offices of Japanese trading firms
2) all other foreign trading companies
Tax Rates
1) for solicitation & trading activities
Worldwide Operating Income
This Order was implemented because the Phil liason offices of some multinational companies are soliciting orders from local importers. But then, these
liason offices are NOT reporting as income the sales made to local importers because they claim that the sale was actually consummated by their head
office abroad. The other way is that the Phil liason office solicits orders from local importers. It then relays the information to its foreign head office,
which looks for exporters of the product and earns a commision. But since the commission is earned by the head office, the Phil liason office does
NOT pay tax on these broker's commissions here.
So, now these transactions will be considered as CONSTRUCTIVELY consummated by the Phil liason / branch office as TRADING ACTIVITIES or
as BROKERING ACTIVITIES.
RAMO - 4-86
The problem here is that deductions being made by the Phil branch offices of foreign corp are hard to check because the supporting documents &
books of accounts are not accessible to the BIR. So, the Phil branch offices only submit an audit certification to back-up their claim for deductions.
This Order provides several procedures for BIR personnel to determine the correct deductions such as functional analysis (analyzing the functions
of the Phil branch office, etc), relevance tests, reasonableness tests, & other measures
The following are treated as Gross Income From Sources OUTSIDE (WITHOUT) the Phils
1) interests OTHER than those derived from sources WITHIN the Phils
2) Dividends OTHER than those derived from sources WITHIN the Phils
3) Compsation for labor - or personal services performed OUTSIDE the Phils
4) Rentals or Royalties - from property located OUTSIDE the Phils or from any interest in such propertyetc
5) Gains, Profits, Income - from sale of real property located OUTSIDE the Phils
Income From sources PARTLY WITHIN & PARTLY WITHOUT the Phils
These shall be allocated under rules prescribed by the Sec of Finance
1) For the gross income items allocated to sources parly within & partly without the Phils:
- there shall be deducted the expenses, losses, & other deductions properly apportioned
- and a RATABLE part of other expenses, losses, & deductions which cannot properly be allocated to some some item of gross income
2) If there is any remainder, it shall be included IN FULL as taxable income from SOURCES WITHIN THE PHILS
Situs of sale of PERSONAL PROPERTY
Gains, profits, & income derived from purchase of personal property WITHIN & sold WITHOUT, or from purchase WITHOUT and sale WITHIN
are treated as DERIVED ENTIRELY FROM SOURCES WITHIN the COUNTRY IN WHICH IT IS SOLD
Situs of Sale of stocks in a DOMESTIC CORP
Gains from sale of shares of stock in a domestic corp ARE TREATED AS DERIVED ENTIRELY FROM SOURCES WITHIN THE PHILS
regardless of where the said shares are sold
General Rule
1) Taxable income is computed on the basis of the taxpayer's annual accounting period, in accordance with the method of accounting regularly
employed in keeping his books
2) If there is no method employed or does not keep books, the taxable income shall be computed on the basis of the calendar year
3) If the taxpayer is an individual, it shall be the calendar year
Although the taxpayer is allowed to do his own accounting method, some guidelines should be followed:
1) When the production, purchase, or sale of merchandise of any kind is an income producing factor, inventories should be taken at the beginning
and at the end of the year
2) Expenses should be properly classified between capital and income. Capital expenses are those for plant, equipment, etc which have a long useful
life extending substantially beyond the year
3) When the cost of capital assets is being recovered thru deductions for wear & tear, depletion, or obsolescence, any expenses made to restore
the property or prolong its useful life should be added to the property account and not to current expenses
Sec 44, Tax Code
Installment Basis
1) Sales of Dealers in Personal Property
A person who regularly sells personal property on the installment plan MAY return as income in ANY taxable year that proportion of the installment
payment which the GROSS PROFIT realized bears to the total contract price
2) Sales of Real Property & Casual sales of Personal Property
If the price exceeds P 1,000 OR where the INITIAL payment (payment received during the taxable period) DOES NOT EXCEED 25% of the selling
price, the same basis as above may be followed
3) Sales of Real Property considered as Capital Asset by Individuals
An individual who sells real property considered as capital asset MAY pay the capital gains tax in installments under rules of the BIR
4) Changes from Accrual to Installment Basis
When a taxpayer decides to report his taxable income on the installment basis, the amounts actually received in PRIOR YEARS are not excluded
Tax Return - a sworn statement executed in accordance with law on a required FORM wherein the taxpayer states the facts as to the nature & extent
of his tax liability for a taxable year including the computation of the tax due
Second
Third
Fourth
Corporate Returns
Section 52, 53, & 56, Tax Code
15-Aug
15-Nov
on or before April 15
When to File?
for quarterly declarations
for final declaration
for sale or exchange of stock NOT traded thru local stock exchange
W. Withholding Tax
Final Withholding Tax at Source
Section 57 (A), Tax Code
The Sec of Finance will promulgate rules regarding withholding & payment of tax withheld
2. In 1977, it filed a claim for refund stating the taxsparing credit provision in the Tax Code where 20%
of the withheld tax on dividend may be refunded if
the counterpart country also gives a tax credit. The
CTA granted its request, but the CIR protested.
20%
20%
10%
20%
7.5%
10.0%
6%
0%
20%
25%
6%
15%
15%
15%
G) Domestic Corp
1) interest from any peso bank deposit, yield, monetary benefit, deposit substitutes, trust funds, etc
20%
10%
15%
7.5%
10%
20%
7.5%
10%
6%
32%
25%
4.5%
20%
15%
32%
10%
The Sec of Finance will promulgate rules regarding withholding of a tax WHICH WILL BE CREDITABLE (not less than 1% not more than 32%)
The Creditable Tax must be withheld AT SOURCE, but should still be included in the TAX RETURN of the recipient. Any excess shall be refunded
and any deficiency shall be paid by the taxpayer
10%
5%
5%
5%
1%
15%
7) income payment to certain brokers & agents: customs, insurance, real estate & commercial brokers & fees of agents
of professional entertainers
8) income payment made periodically or at the end of the year by a general professional partnership to the partners:
such as drawings, advances, sharings, allowances, stipends, etc.
9) professional fees paid to medical practitioners by hospitals or clinics or by patients (see RR 12-98)
10) real property which are NOT capital assets sold by a person engaged in the real estate business:
selling price is P 500,000 or LESS
selling price is more than P 500,000 but not more than P 2 million
selling price is more than P 2 million
- if the real property was sold by a person NOT engaged in the real estate business
- if the payment was on installment, the applicable tax will be withheld on:
every installment IF the seller was engaged in real estate business
LAST installment IF the seller was NOT engaged in real estate business
11) on additional payments by importers, shipping, & airline companies to government personnel for overtime services
12) on the amount paid by any credit card company to any business entity representing the sale of goods/services
made by them to cardholders
13) payments made by any of the TOP 5,000 CORPS to their local supplier of goods
14) payments by the government to local supplie of goods (except if the purchase is below P 10,000)
5%
10%
10%
1.5%
3%
5%
7.5%
15%
0.5%
1%
1%
RR 12-98
If the service by a medical practitioner was thru a professional partnership for the practice of the medical profession
The hospital / clinic has the responsibility to withhold the tax
No withholding tax applies if there is PROOF that NO professional fee has been charged by the medical practitioner
Return & Payment of Tax
Section 58, Tax Code
5%
* if there is any excess, it shall be either credited or refunded; if deficiency, then it shall be paid by the taxpayer
Withholding on Wages
Section 78, Tax Code
This applies to ALL EMPLOYED individuals, whether citizens or aliens, deriving income from compensation for services rendered in the Phils.
Wages - all renumeration, other than fees paid to a public official, for services performed by an employee for his employer (cash or kind)
Exceptions:
1) agricultural labor paid entirely in products of the farm where the labor is performed
2) domestic service in a private home (maids)
3) casual labor not in the course of the employer's trade or business
4) services by a citizen or resident of the Phils for a foreign government or international org
General Rule: Every employer making payment of wages shall deduct from & withhold tax
Exception: No withholding tax is required if the total compensation income of the individual does NOT exceed the minimum wage or P 5,000 a month
whichever is higher
Refunds or Credits
1) to the employer - when there was an overpayment but only to the extent that the amount of overpayment was not withheld by the employer
2) to the employee - any excess of taxes withheld shall be returned or credited within 3 months from April 15, these refunds WILL EARN INTEREST
at 6% PER ANNUM after the lapse of the 3 month period
Personal Exemptions
Before the start of employment, the employee should furnish the employer with a signed withholding exemption certificate and additional exemptions
to which he is entitlted. This is to be used by employer in determination of the amount to be withheld. If he doesn't furnish, then the employer shall
withhold tax under ZERO EXEMPTION
Husband & Wife
When both husband & wife are recipients of wages, whether from the same or from different employers, taxes to be withheld are determined as:
1) The husband is deemed HEAD OF FAMILY and the proper claimant of the additional exemptions with respect to dependent children, unless he
waives his right in favor of the wife
2) Taxes are withheld from the wife in under ZERO exemption
Non-resident Aliens engaged in trade or business - wages paid to them are also subject to withholding tax
Year-end Adjustment
On or before Dec 31, but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each
employee on their income for the entire year. The difference between the tax due for the entire year and the sum of taxes withheld from Jan to Nov
shall either be withheld from his salary in December or refunded to him NOT LATER than Jan 25 of the next year
Section 80, Tax Code
Return & Payment in Case of government employee - same as normal employees, the taxes to be withheld by the officer in charge of wages
Withholding Tax by Government Agencies
Income payments, except any single purchase of P 10,000 & below, made by a government office, national or local, including GOCCs, on their
purchase of goods from local suppliers: withholding tax of 1%
Issues
Held
Principles
Terminology
A. In General
Taxable Income
- income vs capital
1. Should the additional income tax be
computed based on two equal parts? Or does
the marriage have NO BEARING on
computing income tax?
Facts
Issues
Held
Principles
Terminology
Issues
Held
Principles
Terminology
A. GENERAL PRINCIPLES
Concept, Nature, & Characteristics of Taxation
Is cement a mineral?
ad valorem -
license tax -
Facts
2. It provided a 1 % per annum AD VALOREM tax
for use of repair & maintenance of streets & bridges
Issues
Held
Principles
Terminology
uniformity of taxation -
double taxation -
Facts
Issues
Held
Principles
But if the purpose of the FEE is primarily
revenue, or if revenues is at least one of the
real and substantial purposes, then it is
properly called a TAX
Terminology
Facts
Issues
12. Republic v Bacolod-Murcia Milling - 1966
1. Some Sugar millers are claiming that the Phil
Sugar Institute misused the funds which were
received by LEVY from them. Since they no longer
benefit from Phil Sugar, they wanted a refund from
the funds already paid
Held
Principles
Terminology
5. Did the national government already preempted the municipality from enacting the
Ordinance since the NIRC subjects operators
of sugar centrals to percentage tax?
Facts
Issues
Held
Principles
Terminology
Facts
Issues
Held
Principles
Terminology
Facts
23. CIR v Marubeni - 2001
Marubeni, a Japanese company was assessed to
pay deficiency income on some undeclared income
they got from local construction projects. They
contest it. Later, EO 41 was issued giving a one-time
amnesty to companies for unpaid income taxes.
Marubeni took advantage of this and paid to get the
amnesty. The CIR feels that they shouldn't be given
amnesty since there was already a pending case
BEFORE the tax amnesty was passed.
Issues
Held
Principles
Terminology
- equal protection
1. Was the EO in violation of the equal
protection clause?
Facts
1. The Bases Conversion & Development Authority
(BCDA) hired private contractors to develop portions
of Camp John Hay in Baguio to become Special
Economic Zones. The local authorities sent a lot of
suggestions on how to go about it, but when the
President issued his proclamation, they contested
portions of it which granted tax exemptions.
Issues
Held
Principles
Terminology
Facts
Issues
Principles
Terminology
prior restraint -
regressive - progressive -
Held
Facts
Issues
Held
Principles
Terminology
Facts
Issues
Held
Principles
Terminology
Facts
Issues
Held
Principles
Terminology
Facts
Issues
Held
Principles
As long as the burden of tax falls equally &
impartially on all owners of tenement houses
similarly classified or situation, uniformity is
accomplished
Terminology
Facts
Issues
41. Asstn Custom Brokers v Municipal Board - 1953
Held
Principles
As a rule, an AD VALOREM tax is a property
tax, BUT if the NATURE & PURPOSE is that
of an EXCISE, then it is considered an
EXCISE
Terminology
uniformity of taxation -
double taxation -
- uniformity
1. Was the Act confiscatory & unjustly
discriminatory? Thereby resulting in
deprivation of property?
license tax -
Facts
1. Meralco was granted a franchise to provide
electricity by several provinces in Laguna. Later, the
Local Government Code was passed in 1991. Then,
the province passed an Ordinance imposing a
franchise tax of 50% of 1% of gross receipts on all
businesses enjoying a franchise. Meralco paid under
protest and challenges the Ordinance
Issues
Held
Principles
- non-impairment of contracts
1. Was the original franchise a PRIVATE
CONTRACT between the government and
Lealda? So that it is protected by the nonimpairment clause?
- non-impairment of contracts
1. Was the royal decree granting the mining
concession a PRIVATE CONTRACT between
the government and Casanovas? So that it is
protected by the non-impairment clause?
Terminology
contractual tax exemptions those agreed to by the taxing
authority in contracts, such as
those contained in government
bonds or debentures, lawfully
entered into by them under
enabling laws in which the
government sheds its cloak of
authority & waives its
governmental immunity
Facts
Issues
Held
Principles
The legislature may, in the absence of a
special restriciton in the Constitution, make a
valid contract with a corporation with respect
to taxation, and such contract can be
enforced against the state
Terminology
Facts
1. Somebody donated money to a priest for the
construction of a new Catholic church in Bacolod city.
The church was constructed and Reverend Lladoc
became the parish priest. The CIR assessed him a
donee's gift tax which he protested
Issues
1. Is the Reverend liable for the assessed
donee's gift tax which was donated for the
construction of his church?
Held
YES, because it was not a property tax, it
was an excise tax (on the exercise of a
privilege of receiving & using the property)
Principles
The exemption of churches, parsonages,
convents, & all lands & buildings used
EXCLUSIVELY for religious purposes
COVERS only PROPERTY TAXES. Gift
taxes are not within this exemption
2. They claim that they also have a school for midwifery which uses hospital property too. Other
portions of the property are used as residence of the
petitioners, garage, dormitory and school
Terminology
Facts
1. Lung Center was established by PD. Its in QC
with a lot area of 120,000 sq. meters. Aside from the
hospital, it has a big space at the ground floor leased
to private stores & canteens and to doctors for their
clinics. There is a big area of land that is vacant and
another area leased for commercial purpose called
Elliptical Orchids & Gardens. Lung Center accepts
both paying & non-paying patients and receives
government subsidies
Issues
Held
Principles
Terminology
- double taxation
1. Was Section 249 of the Tax Code repealed
by Sec 90 of the General Banking Act?
- double taxation
Facts
Issues
Held
ALSO, it can be considered to fall under
the General Welfare Clause of the
Revised Administrative Code
Principles
A warehouse used to store copra is likely to
endanger the public safety because the oil
content of copra when ignited, is difficult to
put out by wate and chemicals must be used
- double taxation
Terminology
- double taxation
Facts
Issues
Held
Principles
Terminology
double taxation - when the
same property is taxed twice
when it should be taxed once;
both taxes being imposed on
the same property for the
same purpose by the same
taxing authority within the
same jurisdiction during the
same taxing period and the tax
is the same kind of tax
- double taxation
5. Did the national government already preempted the municipality from enacting the
Ordinance since the NIRC subjects operators
of sugar centrals to percentage tax?
Facts
Issues
63. Compania General v City of Manila - 1963
1. Tabacalera claiming from the City refund because
it paid BOTH the fixed LICENSE fees and SALES
TAXES required by various Ordinances; claims that it
should be exempt from the sales tax since it already
paid the license fees
Held
Principles
- double taxation
NO, license fees is clearly to regulate
sale of liquor since it is potentially harmful
to public health & morals while the sales
tax are a revenue measure
- double taxation
1. Did the City have authority to tax Republic
Cement's extraction of materials from its
PRIVATE land? Since the Local Government
code specifically gives authority to tax sand,
gravel & other quarry resources extracted
from PUBLIC LANDS only
- tax avoidance
- tax avoidance
Terminology
Facts
1. Heng Tong imported a shipment of textile. The
goods were withdrawn from customs by Pan-Asiatic
Commercial which paid the sales taxes. The BIR
made an assessment of tax deficiency PENALTY on
Heng Tong, which it is contesting
Issues
Held
Principles
Terminology
Facts
2. Petioner is now claiming or refund from CIR based
on jurisprudence (Insular Lumber v CTA) and RA
1435 or Phil Highway Act of 1953 (which provides
that 25% of the specific tax paid shall be refunded
upon submission of proof of actual use in by forest
concessionaire)
Issues
2. Should the refund be based on NIRC on
the grounds of equity and justice?
Held
When the Phil Highway Act was abolished
in 1985, the reason for the refund ceased
to exist. Since petitioner purchased &
used the oils before 1985, then, the
refund falls under the RA
- shifting
Principles
There is NO TAX EXEMPTION solely on the
ground of EQUITY
Terminology
Facts
Issues
Held
5. Can the amounts due to the OPSF be offset against Caltex's claims against it?
Principles
Terminology
Facts
Issues
2. Were the interest payments obligations of
the Phil government & that the promissory
notes were government securites exempt
from taxation?
Held
Principles
Terminology
Facts
Issues
Held
Principles
Terminology
Facts
Issues
2. Is the YMCA considered an educational
institution to exempt it from income tax?
Held
Principles
Terminology
Facts
Issues
Held
Principles
- equal protection
1. Was the EO in violation of the equal
protection clause?
Terminology
Facts
Issues
Held
Principles
Terminology
instrumentality of
government - any agency of
the national government , not
integrated within the department
framework, vested with special
functions, endowed with some
corporate powers, administering
special funds, and enjoying
operational autonomy
Facts
1. Petitoners are lawyers who question the
constitutionality of Pagcor's Charter on the basis of it
being contrary to morals, public policy, and order;
and that it waived the right of the City of Manila to
impose taxes & license fees
Issues
Held
Principles
Terminology
Facts
1. Petioners represent companies who buy & sell
copra in Misamis Oriental. Before the VAT, copra
was classified as an agricultural FOOD product and
was exempt at ALL STAGES OF PRODUCTION &
DISTRIBUTION. But the BIR issued a Memo
reclassifying copra as agricultural NON-FOOD
product and granted exemption ONLY if the sale is
made by the primary producer or owner of the land.
Sale by traders are not exempt
Issues
Held
Principles
Terminology
Facts
1. In the 1st 2 quarters of 1985, PBCOM paid P 5
million in income taxes. But at the end of the year, it
reported a net loss and asked the BIR for a tax credit
of P 5 million. It also asked for refund for withholding
taxes already paid on rentail income from its leased
properties
Issues
Held
Principles
Terminology
Facts
1. Algue claims deductions were legitimate because
these were promotional fees for services in creation
of a new company and subsequent purchase of
property
Issues
Held
Principles
Terminology
Set-off of Taxes
Facts
Issues
Held
Principles
Terminology
Facts
Issues
Held
Principles
Taxpayer Suit
Terminology
Facts
Issues
Held
Also, they have no personal and
substantial interest in the case such that
they have sustained or will sustain direct
injury; the interest here is a common
interest
Principles
Terminology