Vous êtes sur la page 1sur 50


INCOME TAX, defined - As a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on a persons income, emoluments, profits, and the like. - Is a direct tax on actual or presumed income (gross/net) of a taxpayer received, accrued, or realized during the taxable year. - Simply, a tax on income or on amount which increases the net worth or net value of the taxpayer This definition is included because it is not in all cases where the BIR can determine the income tax of a person based on his income alone. In some cases, taxpayers do not reflect their true sales or income, and they overstate or over claim their expenses in order to arrive at a lower taxable base or taxable income as against which the income tax rates are to be computed. So, what the BIR does in order to assess taxpayers of their true income and collect the true tax, is to simply determine the net worth of a taxpayer. What is net worth? Simply stated, it is your value. Assets less liabilities, this is your net value. What the BIR does when it does not have books on which to audit or no reliable books. Some taxpayers have at least two sets of books. They maintain two books of account. (refer to the illustration below) So, what they do is determine the net worth of the taxpayer from one point in time to another point in time, any increase, so if this is 2007 to 2009, no taxes are paid in between, would the BIR simply agree on no tax payment? What they will do is compare the value. If this is 1 million and this is 10 million, there is an increase in the net worth of the taxpayer which is 9 million. 9 million is an income although not fully declared as an income. So, income tax is a tax on declared income and those which is reflected from an increase in the net worth or net value of the taxpayer because it will reflect the sources of the income by the taxpayer which is actually undeclared. Tax on all yearly profits arising from property, profession, trade or business, or as a tax on a persons income, emoluments, profits and the like. It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits.

FEATURES OF THE PHILIPPINE INCOME TAX LAW 1. Direct tax - The tax burden is borne by the income recipient upon whom the tax is imposed. It is a tax demanded from the very person whom it is intended or desired to pay for it. - In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them, they are impositions for which the taxpayer is directly liable on transaction or business he is engaged in (Silkair vs. CIR)

- On the other hand, indirect tax are those that are demanded, in the first instance, from or are paid by, one person in the expectation and intention that he can shift the burden to someone else. - Direct tax vis--vis indirect tax, the difference lies in the liability to pay the tax and the burden to pay the tax. 2. Progressive - as the tax base increases, the tax rate increases (5%-32%) - it is founded on the ability to pay principle and is consistent with the constitutional provision that Congress shall evolve a progressive system of taxation. 3. Comprehensive Tax Situs -Criteria in imposing Philippine income tax a. nationality/citizenship principle - A citizen of the Philippines is subjected to Phil income tax: 1. on his worldwide income from within and without the Phils, if he resides in the Phils 2. only his income from sources within the Phil, if he qualifies as a nonresident citizen b. Residence Principle -an alien is subject to Phil income tax on his worldwide income because of his residence in the Phil. Thus, a resident alien is now liable to pay income tax only on his income from sources within the Phil and is exempt from tax on his income from sources outside the Phils. c. Source Principle -an alien is subject to Phil income tax because he derives income from sources within the Phils. Thus, a non-resident alien is liable to pay income tax from sources within the Phil such as dividend, interest, rent or royalty despite the fact that he has not set foot in the Phils. 4. Partly scheduler or party-global income tax system Under this system, the compensation income, business, or professional income, capital gain and passive income not subject to final withholding tax, and other income are added together to arrive at the gross income and after deducting the sum of allowable deductions is subjected to one set of graduated tax rates or normal corporate income tax. --- GLOBAL Active and passive income are separated. In that Passive income is subjected to a scheduler system of taxation and active income is subjected to global income tax system. However, passive investment income subject to final tax and capital gains from the sale or transfer of shares of stocks of a domestic corporation and real

properties are subject to different tax rates and covered by different tax returns. --- SCHEDULAR The Philippine law is following the semi-global and semi-schedular system of taxation because this is what is provided in the Tax Code. Why is it semi-schedular? Give me an example of a scheduler tax rate. Because the income is treated differently according to a taxpayers ability to pay. An example is Income tax on individuals. Illustration: Active (compensation + illegal source) Passive Tax Rate Tax

Systems of Income Taxation a. Schedular Income Tax System - follows a schedule of rates. The Tax Code or Congress treats differently every category of income earners. - Under the schedular tax system, different types of incomes are subject to different sets of graduated or flat income tax rates. The applicable tax rate(s) will depend on the classification of the taxable income. A separate tax return or computation is required for each type of income. - Each type of income is subjected to a different rate and the taxpayer files different income tax returns. - Ex.: Passive Income xx Tax Rate % Tax xx Business Income xx Tax Rate % Tax xx Compensation Income xx Tax Rate % Tax xx b. Global Income Tax System - A global income tax system views indifferently the tax base and treats all the categories of income the same which is a uniform tax rate applied to the income of corporate taxpayers. - In a global tax system, all items of gross income, deductions and personal and additional exemptions, if any, are reported in one income tax return, and the applicable tax rate is applied on the tax base.

This system treats indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer without any distinction as to their type or nature, and subjects them to a single set of graduated or fixed tax rates. All income from whatever source is recorded in one return and only one rate is applied to the taxable income. Ex.: Business Income xx Passive Income xx Compensation Income xx Total Income xx Less: Deductions (xx) Taxable Income xx Tax Rate % Tax xx

5. Gross or net income taxation


Gross income taxation Gross income means income, gain or profit subject to tax. It includes compensation for personal and professional services, business income, profits, and income derived from any source whatever (whether legal or illegal), unless exempt from tax under the Constitution, tax treaty or statute. In other words, gross income is derived at without deducting expenses. profit plus expenses and exemptions Gross income taxationincome is taxed at gross without the benefit of deductions and expenses found under Sec. 34 of the Tax Code. Sometimes, it could even mean that it is taxed at a revenue. What are the advantages and disadvantages of gross income taxation? If we follow gross income taxation and your income is sourced from service, service income (i.e. working in Junquera), what is your concrete source that you can deduct? If we follow the gross income of taxation, you will be taxed directly with the amount paid by your customers. No deductions allowed.

Advantageous to the government: More revenue going to the coffers of the government Simplified method of taxation. There is nothing to determine whether the expenses is allowable or not. Disadvantages Inequitable to the taxpayer. It is unjust. Why are they not allowed to deduct the costs incurred in order to get that income of revenue? It will not encourage taxpayers to earn more because everything goes to the government. And would lead mainly to tax evasion because taxpayers would not declare their true income due to high tax rate. WON the tax rate is high, it

is still high because it is directly computed against your gross income without the benefit of gross deductions. 2. Net income taxation - Net income means gross income less statutory deductions and exemptions. It is referred to as taxable income. Net income must be computed with respect to a fixed period. That period is twelve months ending December 31st of every year, except in the case of a corporation filing returns on a fiscal year basis, in which case net income will be computed on the basis of such fiscal year. - Net income taxationas the word net implied, is taxation based on net income after you are allowed to deduct some items. - What are the advantages and disadvantages of net income taxation? Advantageous more on the taxpayer because he is given the chance to deduct all the expenses and deductions there is so long as it is applicable in the business for which he is engaged in or the profession he is practicing. Disadvantageous on the part of the government because of the allowance for deduction, it will be more tedious for the government to determine whether the expenses or deductions claimed are valid or not; legal or not. It becomes an avenue for over claiming expenses especially in family owned corporations. There is no 3rd person investor who is interested whether the income you are declaring is the true net income. In one actual case, for example, part of a cost of a service company was the cost of the motor vehicle, which is personal, owned by one of the owners children. Can the BIR plug that loophole? Of course it is very difficult unless we demand for the gross income taxation. But then again, applying gross income taxation is not equitable in all cases. NOTA BENE: Modified gross income as regards pure compensation earner If you are a pure compensation income earner in the Philippines, meaning all your income is derived from pure employment, then, you will be subjected to gross income taxation although modified. Modified in the sense that you will be allowed to deduct personal and additional exemptions, remember, the 15k exemption and the 25k exemption. For every child, 25k exemption. Thats what makes it modified but it is still gross. It is still gross because you are not allowed to deduct expenses like transportation expenses to and from your office, or your food during office hours. No deductions, like depreciation to your car etc. So, it is gross but modified. There are a few, one or two, deductions that you can make. But as regards those individual taxpayers that derive business, trade or professional income, we adopt the net income system

For example, you are the president of a multi-national company but at night you perform services. You have two incomes, two typescompensation income from employment and compensation income that you have at night but not thru employment (from your profession). By the time that you pay your income tax, you have to consolidate everything at the end of the year. Will you be subjected to gross income taxation or net income taxation? Are you allowed to make deductions(net income taxation)? --You are subjected to net income taxation. By the process of elimination, your modified gross income taxation will only be applicable if you are a pure compensation income earner. Once you cross that boundary, meaning you are a pure business income earner, pure profession income earner or modified (both income and employment), you will now be allowed to claim deductions. You will be covered by net income taxation. But in all cases, the schedular rates will have to be applied for individuals. 6. Features of Individual Income Taxation 1. Always, always the rates will be scheduler/graduated/progressive with regards to the value of the taxpayer/his status. 2. WON an individual is allowed deductions. The rules would be: If you are a pure compensation income earner, your deductions would only be personal additional exemptions which will subject you to modified gross income taxation. If you earn compensation PLUS business or profession or trade, you are now shifted to the other type of taxing your income which is net income taxation. You will be allowed deductions. Logic behind this is once you earn income other than from employment, you will be expected to have incurred expenses for your business, trade or profession. 3. Pay as you file system Whenever you file for your return, you are expected to pay within the same day. 4. Under certain cases, pay as you earn system, as applicable to income subject to withholding tax Individuals are also subjected to the rule that they pay the taxes as they earn. It is covered by the withholding tax system because you are expected to be withheld of your taxes the moment you earn it. When you receive your salary, it is already net of withholding taxes. The moment you receive interest from bank deposits, it is already net of taxes. Pay as you earn. 7. Features of Corporate Income Taxation a. Global concept of taxation Because you are taxed at the same rate (30%). Example is that of corporations. It is taxed at the same rate regardless of what type of

corporation it is (whether domestic, foreign resident, or non-resident foreign corporation) and regardless of the amount of income that it has earned. So, it is global. If corporation is doing business in the Philippines, net income taxation applies. Non-resident foreign corp not doing business in the Philippines b. Corporate taxpayer, particularly domestic corporations are entitled to deductions insofar as domestic corporations and resident foreign corporations are concerned, we adopt the net income tax system. Corporations, as a rule, are following net income taxation (Ex. SM deducting from its gross income the salary of its employees) because they are allowed to deduct business expenses. But this is not absolute. A resident foreign corporation is subject to gross income taxation. --- unsa man jud? c. Non-resident foreign corporations are not allowed to deduct business expenses because they are not doing business here in the Philippines. For every income that they earn they are subjected to gross income taxation. The concept of a corporation is to do business and earn profit or income. Therefore, only domestic corporations which are engaged in business are subject to net income taxation. Resident foreign corporations which registered itself in the Philippines is registered outside as well. The registration starts outside. Difference between domestic and resident foreign corporation
COMPANY A 99% owned by Filipinos Registered in British Virgin Islands (resident foreign corporation) COMPANY B 99% owned by Germans Registered in the Philippines (domestic corporation)

Company B is a domestic corporation because it is registered in the Philippines. Company A is foreign. It becomes resident when it also registers in the Philippines. If it is not registered, it remains a nonresident foreign corporation. d. Only those corporations doing business in the Philippines are allowed to claim exemptions. When you do business in the Philippines, you incur expenses which are deductible. e. Pay as you file system (except insofar as the electronic filing system is applied)

If you file the return, you are expected to pay unless they avail of electronic filing system which gives them 5 days thereafter to pay the taxes. D. INCOME, in general 1. Definition of Terms

Income- In its broad senseall wealth which flows into the hands of the taxpayers contrasted from being a mere return of capital.

Why? Everything which comes to the taxpayer as an addition to his asset except for those which are merely returns, because it is his capital, are considered income already. It is the broad definition because it includes everything which comes to the hands of the taxpayer. In its strict/ more specific meaning senseit is an amount of money coming to the taxpayer for the service performed, for an activity which he engaged in, or for an investment he has made but it is not all inclusive because as we have said, anything that is seen without anybody owning that income or wealth can be considered as income insofar as the finder is concerned. So, if you file for illegal dismissal, aside from back wages because that is compensation income, and you are awarded damages (exemplary and moral damages), is this subject to income tax? Is it an income? Yes, it is income because it increases your patrimony or your asset. All damages that you receive are considered income except actual damages. As to moral, exemplary damages, arising from various reasons such as breach of promise to marry, accidents, physical injury, illegal termination, illegal dismissal is considered income. WON it is taxable, it is a different story. It has to satisfy all the other requirements in order to be taxable. How about actual damages, is that an income? Youre driving your car and you met an accident, and you were awarded damages? The actual damages was paid as a breach of a promise to marry, is that an income? No, it is not considered income because it is an actual loss awarded to the person who suffered actual damages. So long as the actual damages is equivalent to the actual loss suffered by the recipient, then, that is not an income. It does not increase your asset or wealth. It simply to recover the value of the property that was lost. So, it is not income. But once the actual damages has been miscomputed and it is more than the actual damages that you have suffered, then it is considered as part of your income.

If you find treasure in your backyard, is it considered income? Yes, it is income. Are all kinds of dividend considered income? (this was answered in the later part of the lecture) How about illegal gains, is that an income? Yes, it is income.
b. Capital- is that which provides the income c. Income vs. Capital

Capital is the fund, while income is a flow A fund of property existing at an instant of time is called capital, while a flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the services of wealth Capital is the tree, while income is the fruit; labor is a tree, income the fruit;property a tree, income the fruit Return of capital is not subjected to income tax, while income is subject to tax

2. Sources of Income - Is the source of income a place? it is not a place. it is a property, activity or service that produces the income. To be considered as an income coming from the Philippines, it is enough that the income is derived from within. You would know that there is a source within and without the Philippines. a. Capital - Fund or property existing at one point of time. It can be an investment or capital in order for it to grow. b. Labor without any tangible capital, you can derive income out from the labor performed c. Labor and Capital- like construction businesses d. Sale of Property- dealings in real property such sale or barter 3. Criteria to determine if an income is taxable a. Existence of Income (there is gain or profit) - Amount received/realized LESS cost of property = PROFIT What is gain or profit? its the result from reducing the proceeds from the cost The tax is only a tax on the profit or income (not capital/ puhunan) The only exception where there is a tax on the capital is Sec. 24(d) or Sec. 27(d) --- capital gains tax on sale, barter, exchange of real property located in the Philippines and classified as a capital asset

Example: parcel of land bought at 1 million sell at 2 million --- tax here is on the capital because basis of capital against tax is the gross selling price. So regardless if you sold it at a profit, or sold it at a loss, you will be taxed on your selling price. *this is the only exemption if you read through the income tax where there is tax on capital and not the income Had this not been a parcel of land (capital asset) bought at 1 million, sell at 2 million --- income tax is applied only to the 1 million profit Is income merely a tax on the difference at of the price and cost? (that tax only profit/ income) but what we study in income tax is to study all the revenue, the cost and the income. Once you get gross income, this is where you apply the tax rates. Prizes winning from sports competitions --- are winnings taxable unless sanctioned by the PSA (Philippine sports association) and approval Phil. Olympic committee So Manny Pacquio is practicing it as a profession, his fights are not sanctions so his income is subject to general rule that all income are subject to income tax

b. Realization of Income - The gain or profit is realized or received, actually or constructively - Tests in determining whether income is earned for tax purposes 1. Realization Test- separation of capital and income 2. Claim of right doctrine or doctrine of ownership, command or control 3. Economic benefit test, doctrine of proprietary interest (eg stock options) 4. Severance test Constructive receipt- you have control over the income despite no actual delivery. Exceptions: Stock dividends are taxable when there is dilution of stock of other stockholders ownership. Illustration: You purchased a parcel of land in 1961 for 1 million. Today, its value is 100 million. Do you have an income? Do you have a 99 million income that is taxable? A. Parcel of Land
Purchased in 1961 Php 1,000,000.00




Do you consider Php 99 Million as taxable income based on the criteria that you have just mentioned? So its not taxable because it has not yet been sold? What if nobody buys the property? Will you pay the tax on the Php99M if no one is buying the property? Therefore, it is not taxable. Because it failed to follow number 2 criteria. Its not an income that you have realized or you have received. What is the difference between realizing an income and receiving an income? o So you own this one and has the power to dispose it, is it not realizing an income? Not all economic gains constitute taxable income. Mere increase in the value of the property without such value having been actually realized does not constitute an income but is merely an unrealized income or unrealized gain. In this case, until and unless you dispose of this property and actually sell it for the value that you expect. It is not a realized income and not being realized, with more reason it is not a received income. o There is a big difference between receiving an income and realizing it. Which comes first? Whats the difference between constructive receipt of an income and realizing it? You must know what comprises of profit. The formula as provided in your outline is simple: Proceeds or the revenues less the cost is equals your gain or profit. So if you were able to sell it at Php 100M for a cost of Php1M, your profit is Php 99M. Is it taxable or not? Depends whether the income is received or realized. When you say its received, there are 2 connotations there: Actual Receipt of Income o Example is there is a general professional partnership which you created, 48 lawyers. You decided that at the end of every month, each of you will get Php 100,000.00. That is actual receipt of income when you get it. Second, it could be constructive receipt. o It is constructive if after distributing the Php 100,000 each, there still remains at the end of the year, Php 1B in income of the general professional partnership. Even if the share is undistributed, it is considered constructive receipt of income in so far as the partners are concerned because it will be now taxable on the individual partners. It is upon your free disposal to get hold of your share of the Php 1B. Its constructive receipt. You can get it anytime. Its just that it is not with you yet.



How about realized? You say that income is realized when your right to have it has already ripened in simple words. Example: You have an apartment. You entered into a contract of lease for 1 year. All rents payable at the end of the 1 year contract. Say for example, you started out the rent or leasing out of your apartment July 1, 2010. Ending June 30, 2011, midway for the calendar year. At the end of the calendar year, December 31, 2010. Are you expected to declare a taxable income from leasing your apartment as owner? YES. The mere fact that you are able to lease out 6 months over 12 months, the activity has been finished from July 1 to December 31, 2010, your right to collect has already ripened. It is already due. So you should at the end of the year declare it as a realized income.

c. The gain or profit is not excluded or exempt under any law or treaty Illustration: So if it taxable or not, should you end there? If you have answered whether it is realized or received. Can you at that point say whether it is taxable or not? Can you say that after determining that the income has been realized or received, that is already automatically subject to income tax? Not yet. o You may say that it is a realized income but it is not taxable because there is a law exempting it. Given an example. Look into Section 32B on compensation for injuries. A bank for example, if you have been awarded moral and exemplary damages for physical injuries inflicted upon you, will the damages awarded be subject to income tax? If you have received Php1M in cash? You have been awarded moral and exemplary damages plus actual damages. Awarded Php 6M, received Php 1M as actual and Php5M for mental damages. You received it and it was wired to your account. Thats actual receipt because your account. Can we now say that this income actually received is subject to income tax? 1 Million ACTUAL Awarded Php 6M
5 Million Mental (Moral, Exemplary, etc)

ANSWER: In outline no. 2, letter K number 4. It is compensation for injuries or sickness. This will be exempt to income tax. If you are awarded damages as compensation for physical injuries or sickness, the damages, whether its actual or moral, exemplary, nominal, temperate, liquidated damages, are all exclusions from gross income. It is not subject to income tax. Despite the fact that you have actually received it. Its a wealth which is given to your hands.

Tests to determine realization of income 1. 2. 3. Severance test Substantial alteration of interest test Flow of wealth test

Severance test As capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate use, benefit and disposal is income subject to tax. Substantial alteration of interest test Income is earned when there is a substantial alteration of the interest of a taxpayer, i.e. increase in proportionate share of a stockholder in a corporation. Income to be returnable for taxation must be fully and completely realized. Where there is no separation of gain or profit, or separation of increase in value from capital, there is no income subject to tax. Thus, stock dividends are not income subject to tax on the part of the shareholder for he had the same proportionate interest in the assets of the corporation as he had before, and the stockholder was no richer and the corporation no poorer after the declaration of the dividend. However, if the pre-existing proportionate interest of the stockholder is substantially altered, the income is considered derived to the extent of the benefit received. Moreover, if as a result of an exchange of stocks, the person received something of value which are essentially and fundamentally different from what he had before the exchange, income is realized within the meaning of the revenue law. Flow of wealth test The essential difference between capital and income is that capital is a fund whereas income is the flow of wealth coming from such fund; capital is the tree, income is the fruit. Income is the flow of wealth Methods of Accounting

The tax code does not prescribe any specific method of accounting for taxes. However it allows the taxpayer to adopt any standard as long as it can properly reflect his income and his deductions and is used by him with consistency. The following are the principal accounting methods: 1. Cash basis - considers as income that which is actually and constructively received and as deduction that which is actually paid. The term constructive receipt refers to availability of the income to the taxpayer, but by his own and exclusive choosing, he prefers not to actually receive the income. 2. Accrual basis - treats as part of taxable income that which is already earned although not yet actually/constructively received and as possible deductions those which although not paid, have already been incurred by the taxpayer. 3. Installment basis-

4. Net worth/inventory method - which proceeds upon the general theory that money and other assets in excess of liabilities not accounted for by his income tax return leads to the inference that part of his income has not been reported. If a taxpayers net worth in a given year has increased to an amount larger that his reported income, then he must hve either underdeclared his income or overstated his deductions. Formula: Difference in net worth (DNW) + Non-deductible expenditures (NDE) Non-taxable receipts (NTR) = Taxable net income (TNI) 5. Excess cash expenditures - which proceeds upon the premise that if the taxpayer spends more money that what is his return show was available to him as income, then he must gave either underdeclared his income or overstated deductions. 6. Percentage/comparison- which proceeds by the commissioners comparing the results of business operations of a taxpayer with those others who are similarly situated and operating under the same conditions. d. Summary 1. Determine whether there is income or profit. Meaning your revenues less the cost to get those revenues, do you have a net gain or profit? 2. Have you realized the income? Or have you received actually or constructively the income. If yes, proceed down to the next. 3. Is there a law or a tax treaty granting exemption? If none, which we always actually construe strictly against the tax payer in exemption, if there is none, proceed on to compute for the income tax.

4.Kinds of taxable income or gain

a. Capital gains: gains or income from the sale or exchange of capital assets including: a. Income from dealings in shares of stock of domestic corporation whether or not through the stock exchange b. Income from dealings in real property located in the Philippines not used in business and trade c. Income from dealings in other capital assets other than (a) and (b). b. Ordinary gains: gains or income from the sale or exchange of property which are not capital assets: a. Business Income b. Compensation Income c. Passive Income d. Other income from whatever source Last meeting as mentioned, Is income tax always a tax on income alone? No capital can even be subjected to tax? Capital gains. Proceeds Cost = Income / Profit
Proceeds FT Parcel of Land 100Million 1Million Cost 0 5Million = = = Income/Profit 100Million (4Million) Taxable Not Taxable

o If you found Php100M in treasures at zero cost, everything is taxable. o If you Siomai have Business a real 1Million property- sold500K for 1M, = put purchased 500K it for Taxable Php5M, you lost Php4M, is this transaction taxable? o If you have siomai business, at a cost of Php500k, taxable. o There is an exemption to the rule that income tax is a tax on income not tariff. All taxes that you will see in the chapter of income tax, is income tax. Differently named, differently collected. Meaning the mode of collection is different, the manner of how it is paid is different. But everything you see in the chapter is an income tax. o So capital gain stocks is an income tax. It is the exemption to the rule that income tax is only a tax on income because in cases of sale of real properties classified as capital assets located in the Philippines, you may be taxed on that capital. Capital is actually the cost. You may be taxed because it is not dependent on the rule proceeds less cost equals profit. It is based on the gross selling price or fair market value whichever is higher. o If the gross selling price is 1M but the fair market value is Php10M, then you are taxed at Php10M, a portion of that Php10M is the cost of Php5M in buying that property before hand. It is the exemption to the rule that income tax is a tax on income. What about capital asset. We said that it must be a capital asset. Because if this is not a capital asset, it does not become subject to capital gain stock. We move on to the kinds of taxable income for gain. 2 kinds: Capital Gains

Ordinary Gains o In a car rental business, is the car a capital asset or an ordinary asset? Because only capital asset produces capital gains and only ordinary asset produces ordinary gains. Why is it an ordinary asset? In capital gains, be careful with letter C, it is a catch-all-provision, that which is not in A or B, means all others. So is it in letter C? It is under the 3rd classification of an ordinary asset, which is used in business and subject to depreciation.

Gross Income Definition: Means all income from whatever source derived including (but not limited to): i. COMPENSATION for services (including fees, commissions, and similar items); ii. GAINS derived from dealings in property; iii. INTEREST; iv. RENTS; v. ROYALTIES; vi. DIVIDENDS; vii. ANNUITIES; viii. PRIZES and winnings; ix. PENSIONS; x. PARTNERs distributive share of the gross income of GPPs. MEMORY TEASER: C.G.I.R.R.D.A.P.P.P. *The enumeration is not exclusive Special treatment: a. Forgiveness/Cancellation of indebtedness subject to donors tax not income tax since the debt is forgiven without you doing something in return it now becomes an act of liberality. However, if forgiveness of debt is due to the performance of service, then it now becomes subject to income tax Concept of Income from whatever source derived: Gross Income, in Section 32A, is all income derived from whatever source. By the phrase whatever source, it means legal or illegal, whatever type of income that is. Including but not limited to the following to those enumerated in Section 32 (A). Those list in Section 32 in not an all in exclusive list. There can be as many sources of income except those enumerated. What is enumerated in Section 32A is simply a list of the major items we classify as income. Gross Income vs. Taxable Income vs. Net Income

Gross income- means income, gain or profits subject to tax. It is derived at without deducting expenses Net income- means gross income less statutory deductions and exemptions. It is also referred to as taxable income. Net income must be computed with respect to a fixed period. That period is 12 months ending December 31st of every year, except in the case of a corporations filing returns on a fiscal basis, in which case net income will be computed on the basis of such fiscal year. Classification of income as to source Gross income and table income from sources within the Philippines Gross and taxable income from sources without the Philippines Income partly within and party without the Philippines INCLUSIONS TO GROSS INCOME, Section 32A (Situs of Income) Memorize 1. First, compensation income, The situs is the place where the services are rendered. Example, if you are a resident alien and you perform. If you are Usher and perform a 1 night concert here. Subject to income tax? The service is rendered in the Philippines or was conducted in the Philippine, therefore there is Situs in the Philippines. So Philippines has the right to tax that income. For compensation or any service that you performed, always it is where always the service is performed. Same holds true for example if a Filipino celebrity performs a concert abroad, the question of whether it is taxable or not is not fully captured in this situs. The service performed abroad, will we automatically say it is subject to tax only abroad? No because he is still a national or a resident of the Philippines. But for compensation per se lang, it is where the service is rendered. 2. Gross Income from business. Situs is the place where the business is undertaken. Merchandising, mining, farming or agricultural business, the situs is more stable. It has definite place, thus the situs is where the business is undertaken. Therefore, it is taxable in the Philippines. We cannot bring the actual mining from abroad here. It can only be an extension office which is not the actual mining. Manufacturing business, takes into consideration where the products are manufactures and where the products are sold. If the products are manufactured here, sold here, entirely we have jurisdiction over it. Everything is 100% taxable. If it is manufactured abroad, sold abroad, we dont tax it, it is beyond our jurisdiction.

But if it is manufactured abroad, and sold in the Philippines, we have the right to tax it. The business of selling is here. If manufactured here, sold abroad, we have the right to tax it. The situs is partly within and partly without. Partly within because the manufacturing here and if the contract of sale, before it is shipped abroad is perfected here, then we have situs here. 3. Income from Sale or Exchange of Property. Distinguish from real or personal property (1) If it involves personal property the place of sale (2) In the case of sale of transport documents the place where the transport document is sold. (3) If it involves real property the place or location of the real property For real property in so far as income taxation is concerned. Its easy. It is immobilized by nature therefore wherever the real property is situated, it is the state exercising jurisdiction over it which has the power to tax. So if its in the Philippines then it is taxable to Phil. income tax. How about personal property? The goods that cross borders? Will the Phil. have jurisdiction over a personal property that is sold like motor vehicle, equipments, machineries? Its not easy to answer because it is the place of sale. Where could be the place of sale? o For example: Company A would like to purchase machineries and equipments from Japan. Its a personal property that is movable, where is t he place of sale? Is it in Japan or in the Philippines? It depends with the arrangement. If the contract is perfected abroad and ownership is actually relinquished at the point of delivering it to the carrier abroad, then the sale has been consummated abroad. But if ownership is retained by the seller until it reaches Philippine ports and if its consummated here, then the sale is undertaken in the Philippines, then it will be subject to Phil. income tax. 4. Interest Income

Tax Situs: residence of the debtor Interest Income is something that cannot really be seen except payment of money. o So if a domestic corporation, needing capital for its operations, obtains a loan from a non-resident foreign bank in Japan. Of course, domestic has to pay the principal and interest. The payment of principal or the loan amount is mere return of capital while the payment of interest is the income. There is here a territorial boarder. So who has the right to tax the interest, the Phil. or Japan?
Territorial Border

COMPANY A Domestic
Obtained a loan

Bank B In Japan (Income Earner)


Note: There is a difference between a domestic corporation and a Filipino corporation. Domestic is that which is incorporated in the Phil. Filipino is at least owned 60% by Filipinos. Phil. because the domestic corporation, who is the debtor, resides in the Phil. Benefits-received theory for the Phil. government who have protected domestic corporation and allowing it to raise money in order for it to pay interest to bank Japan abroad, it will have jurisdiction. The situs is where the debtor is residing. So no matter who the creditor is, always, the Philippines has taxing jurisdiction over such interest income. Remember that the income-interest earner here is bank Japan, thus, technically, it should be Japan who will be taxing the interest income because such bank is residing in Japan but because we have our own situs rule here in the Phil. which says that any interest income where the debtor is a resident of the Phil. will be covered by the Phil. taxing jurisdiction. Therefore, the Phil. will also have to tax it. How will the Phil. government get the tax of such interest income? Will it require bank Japan to declare the income, remit the tax or some other arrangement? For payments to a non-resident foreign corporation who is not registered in the Phil., it will have to be withheld by the paying company. o So payments to Usher concert, will have to be withheld by the production team, before it is given to the nonresident foreign corporation as net. o Such non-resident foreign corporation or individual, is not within the hold of the Phil. tax authorities. They cannot be required to actually pay because they are not registered tax payers in the Phil.

5. Rent Income Tax Situs: place where the property subject of the contract of lease is located 6. Royalties Tax Situs: place where the intangible property is used

Royalties are fees you pay for the use of intangible property such as intellectual property rights. o Example: McDonalds is originally a non-resident foreign corporation the actual source. If we obtain a franchise from McDonalds, the monthly payment for the franchise is called a royalty fee. So does the Phil. have taxing jurisdiction over the royalty income that is remitted by a franchisee to the franchisor abroad? Yes since McDonalds, the intangible property, is used in the Phil. then it is the Phil. who has taxing jurisdiction over such royalty income. o Another example: In manufacturing companies wherein they have to get technical knowledge and technical know-how in creating microchips, etc. They have to pay royalty fees, lets say, 3% for the annual revenues here in the Phil. so that any payment to the non-resident foreign corporation abroad would have to be withheld of the tax because the situs of the royalty income is in the Phil. The technical know-how is exercised and being used in the Phil. So although it is intangible, you will see the effects of where it is actually used and who is benefiting. 7. Dividend- the situs is where the issuing corporation is incorporated. a. received from domestic corporation income purely within b. received from foreign corporation consider the income/operations of the foreign corporation in the Philippines during the last preceding 3 taxable years: (1) The income is purely within if the income derived from the Philippine sources is more than 85%- situs is philippines (2) It is purely without if the proportion of its Phil. income to the total income is less than 50%- situs is outside the Philippines (3) There should be an allocation if it is more than 50% but not exceeding 85% (partly within and partly without)- pro-rata

Dividends are company profits paid pro rata to stockholders. It is a fruit out of the stockholders investment in a corporation. Dividends come in many forms. Kinds of Dividends: o Cash Dividends you receive cash out of the profits of the business Example: If youre a 10% owner of PLDT, you get 10% out of the entire dividends that will be declared to the owner so if its 1B dividends then you will get 100M share because youre a 10% owner. o Sometimes what the corporation gives if its not so liquid, meaning no cash, is property dividends if its a subdivision company, you may be given a house and lot. Its property dividend; its property; its income because it is a wealth it is an increase in your assets. o Sometimes it can be stock dividends

The dividend referred to here is cash &/or property dividend because both of them are considered income while stock dividend is not included since stock dividend is not considered income as a rule because it is not yet a realized income, it is inchoate.
10 Years After Assets 47Million 100Million

LiabilitiesTiu makes 0Million 10Million o Illustration: a corporation. You all contribute 1M each so you get 47M since the class consists of 47 students and no loans so net worth is 47M. Net Worth 47Million 90Million = Increased to 43Million But after 10 years of operation, youre assets became 100M and liabiliti es 10M so you will have a net worth of 90M. Did the net worth increase? Yes the net worth increase to 43M. This 43M is your earnings from the start-up of your business and your cut-off point, which is 10 years of operation. You would actually would want to distribute the 43M as dividends if you have cash. Say for example, the 43M is in real estate property (you invested it in real estate valued at 100M) so you dont have cash. What you will do is that you will simply say that youre ownership becomes 1.5M already, thus, Tiu will increase your investment from 1M to 1.5M to each of you but it is not given in cash, it will simply increase your investment in the corporation. That is stock dividend your ownership is increased but nothing is given to you, its inchoate. Until and unless it will be given to you and you have free disposal of that, it remains a non-taxable stock dividend because its unrealized income. Who knows by next year the corporation will be losing so that there is negative net worth. The reason why dividend is taxable in the Phil. if it is issued by a domestic corporation or paid by a domestic corporation without regard to where and who the owner of the dividend is its because the domestic corporation receives protection from the government such that being an intangible property, it does not follow the general rule where the domicile of the owner is since its receiving benefits and protection from the government, the Phil. government has the right to fully tax a dividend that is given by a domestic corporation wherever and whoever the recipient of the dividend is (100%). If its a foreign corporation abroad such as for example, Ms. Dumagad owns a share in a mining corporation in Africa and she gets millions out of it annually, the situs of the dividend for Africa is where the corporation is issuing the dividend but thats a separate issue as to being her a resident citizen. But the point is, it follows where the issuing corporation is except that if a foreign corporation performs business 85% or more. Why? If its operation amounts to 85% or more located in the Philippines, it is as if it acquired situs already in the Phil. It is receiving, at most, the benefits and protection from the Phil. government, therefore, it will have full situs here in the Phil. But if its less than 50% operation in the Phil., it will have situs abroad where the domicile of that foreign corporation is. If its in between 50% and 85%, it is partly within and partly without according to the percentage of the operation in the Phil. 8. Annuities

Tax Situs: place where the contract was made 9. Prizes and Winnings - given on account of services rendered place where the services were rendered - not given on account of services rendered place where the same was given Winnings are those not given on account of services rendered while Prizes maybe given on account of services rendered or not given on account of services rendered. Every time you receive something and it is attached to a service that you have rendered, its like a compensation for services you have rendered so you back to the first rule, a compensation given is taxable where the service has been rendered. So prizes given for services rendered is taxable on the place where such services were rendered while prizes and winnings not for services rendered is taxable on the place where the same was given. o Example: Lets say Mr. Pelinio went to the U.S on March 31 and he has his bet and he won $100M lotto there. Where is the situs? The situs is in the U.S. because Mr. Pelinio did not render any service so situs is in the place where the winnings was given, which is in this case, it is in the U.S. But is it taxable in the Phil.? Knowing where the situs is does not totally equate whether its taxable or not. Is it taxable in the Phil.? Yes, because Mr. Pelinio is a resident citizen and he is taxable for all his income within and without the Phil. So what should Mr. Pelinio do so that his $100M winnings will not be subject to tax? o Mr. Pelinio will not come back for a certain period. Sec. 22E of the Tax Code provides that if youre a citizen who will qualify as non-resident because you have stayed for the most part of the year abroad, meaning more than 183 days abroad or more, then all your income abroad will not be subject to Phil. income tax. So if Mr. Pelinio will just stay after winning plus 183 days or more then you come back after that, then the winnings will not be subject to Phil. tax. So Mr. Pelinio earn it abroad, for the year he is considered non-resident citizen. 10. Pension Tax Situs: place where this may be given on account of services rendered Since pension is something that is more related to a service such as that you have rendered in the past and youre given retirement or pension pay then the situs is the place to where the services were rendered.

11. Professional income of professional partners Tax Situs: place where the exercise of profession is undertaken Since it is more on the exercise of a profession, its an activitiy, so its where the activity or the profession is undertaken. It follows the place where such profession is exercised. Exclusions from Gross Income For all the enumerations in gross income Sec. 32A, all income from whatever including but not limited to the following, from compensation income down to partners distributive share, you now know where the situs is.

E. -

1. Proceeds of Life Insurance Policy Subject to tax if: a) Insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the same, the interest is the one subject to tax. b) there is transfer of the insurance policy What is referred to here is the proceeds of life insurance given to the beneficiary once the insured dies. Reason: since it is a contract of indemnity; not a profit or gain Proceed of life insurance policy is receivable by the beneficiary, not the insured one who already died. Will it be taxable in the hands of the beneficiary? o No, because it is paid by reason of death and is considered an indemnity rather than a gain or profit on those who are aggrieved.

MR. B COMPANY A Domestic (Insurer)

For the life of

President Insurance Details: Worth Beneficiary ESTATE TAX INCOME TAX

Premium :

1. 1 Million: Beneficiary Company A life of its President, Mr. Example: Company A1.took out a life insurance policy on the 400,000 B, in order to protect itself from the sudden loss of its chief operating officer. Say for 2. 1 Million: policies Beneficiary Heirs of B example, there are2.2 life insurance taken by company A with different insurance 400,000 companies. The insurance was for 1M each. The beneficiary of the first insurance policy is Company A. The beneficiary of the second insurance policy is the heirs of Mr. B. Mr. B died. 2M was released, one by one insurance company and the other one by the second

insurance company. Will the 1M proceeds received by company A be subject to income tax or an exclusion to income tax? Will the 1M received by the heirs of B subject to income tax or an exclusion to income tax? Will they be subject to estate tax? For income tax, the 1M each received by company A and the heirs of B are exempted because the provision in Sec. 32B (1) does not distinguish the kind of beneficiaries who will receive the proceeds of a life insurance policy, therefore, proceeds of life insurance policy, regardless of who the beneficiary is (whether it be a juridical or natural person), as a rule, are exempted from income tax or excluded from gross income. Lets say, company A has to pay a total of 400,000 premiums for each policy. Will the premiums be part of the compensation or salary on the part of Mr. B who is actually indirectly benefited (his life is insured) and thus subject to income tax? For the 400,000 premiums paid by company A in order to secure the second insurance policy wherein the beneficiary is the heirs of Mr. B, such premiums are subject to income tax for they form part of Mr. Bs salary as an indirect benefit on Mr. Bs part. So the 400,000 premiums for the second insurance policy is subject to the tax on Mr. Bs salary. However, for the 400,000 premiums paid by company A in order to secure the first insurance policy wherein the beneficiary is company A itself, such premiums is not subject to tax because it is merely a return on capital of company A. Therefore, its not subject to tax on the part of Mr. Bs salary. The 1M received by company A will never form part of the estate of Mr. B and a juridical person has no estate, thus it is not subject to estate tax. However, the 1M received by the heirs of B will form part of the estate of B, and thus, it may be subject to estate tax. But can estate tax and income tax co-exist in one and the same 1M? No, because in exclusions from gross income, once an income is subject to estate tax, it will never be subject to income tax. But if there is a third person, lets say, in the life insurance policy, C, a very close friend of Mr. B, was designated as a beneficiary. Will the proceeds received by C upon Bs death form part of the estate of B? If the designation is revocable, which is the default, it goes to the estate of B, thus it will be subject to estate tax. If the designation is irrevocable, it will never form part of the estate of B, thus it will not be subject to estate tax. The enumeration sec32b are substantive exclusion from gross income. So it is by law an exclusion regardless of the point of realization. There is what we call a temporary exclusion from gross income from gross income. The word temporary means that in some point in time, the income is excluded from the gross income because either it has not been realized or it has not yet been perfected. Ex. although there is a gain or profit, so long as it has not yet been realized, it is not a taxable income as yet. It is excluded. But once it is realized, it ripens into an income that is taxable. Those are the types of income that is listed in 32b. Those that are listed in 32b whether it is received, realized,

unrealized, etc, these are already exclusions from gross income. And we started off discussing number 1 last meeting. PROCEEDS FROM LIFE INSURANCE What is the reason why proceeds from life insurance are excluded? It is to indemnify the beneficiary of the death of the person There are insurance policies which are life insurance policies but are the other type. At the point of maturity of that insurance policy, even life insurance policy, the insured has the option of receiving the proceeds from the insurance company. Is that the same type that is not taxable? To be totally free from income tax, the proceeds of the life insurance policy must result to the death of the insured? True or False. The proceeds from life insurance policy regardless of the designated beneficiary is not subject to income tax. False. As an exception to the rule, if and when the insurance proceeds are withheld by the insurance company on the condition that interest will be paid upon release, the interest or any income derived from the withholding, meaning the point of not yet releasing the insurance proceeds will be subject to income tax. It is already an income of insurance proceeds. But the life insurance proceeds, the reason why its not subject to income tax or is an exclusion from gross income is because its simply a paymen t or an indemnity for a loss or a death of a person. We are looking here at somebody who died. The person who is insured will never get the chance to receive the insurance proceeds. Otherwise, if he does so receive it, it will only be covered by exclusion number 2. Another exception to the rule why it is false. Since we are talking about exception to the rule, this means to say that there will be tax implication or some form of taxes that need to be paid. Just like number 1, we said any interest derived from withholding the release of the life insurance proceeds is already an inclusion from gross income which is taxable. Second exception is when there is a transfer to life insurance policy. What do you mean by that one? If an insurance policy is subsequently sold or transferred to another person, what will happen is that any difference between the amount paid to get the insurance policy versus the proceeds will already be subject to income tax.

Ex. if the face value of the insurance policy is 10m and you are required to pay 5m in premiums over a period of 5 years, that means to say over five years you have to pay 1m per year. And it will produce face value or face amount of 10m. So half ? If along the way, second year of the insurance policy, you have already paid 2m, and you sell it to your friend for 3m, how much is your friend going to pay to the insurance company to finish off the policy? 3m pa diba. Because the seller sold it at a point after the point of paying the premium which is 2m. Although the seller paid 2m in premiums but sold it for 3m, transfree paid 3m to seller and 3m remaining premiums since the insurance company is expected to receive total of 5m. How much did the buyer paid for the contract? 6m. If he receives the insurance policy face value of 10m, is the 10m exclusion from gross income? Not anymore because it is an exception to the rule. Therefore, is 10m taxable? The insurance policy has a face value of 10m. How much do you expect to receive upon maturity or upon death? 10m So if the insurance policy says 5m of premiums in 5 years, that means to say 1m per year. If the first insured sells it for 3m after paying 2m, the buyer actually has a capital of 3m. If he decides to finish by paying off the remaining 3m which is unpaid, he actually paid for 6m. So if the beneficiary receives the 10m in proceeds, this is not anymore covered in the exclusion number 1 because there is already a subsequent transfer of the policy. But the entire 10m is not taxable because we also have to apply the exclusion number two which says that if the part of the proceeds is a return on premium payments or cost, then it has to be exclusion from gross income or nontaxable. How much of the 10m is premium and cost? The 3m and 3m=6m So only 4m is taxable in the hands of the recipient. So again, true or false. All proceeds from the life insurance policy regardless of the designated beneficiary is not subject to income tax. FALSE. Because not all proceeds will have to be, except if it falls under the exception 1 and 2. The statement regardless of the beneficiary, is that correct? Yes. So would the designation of the beneficiary matter insofar as considering the income as exclusion? No. Whoever is the beneficiary of the life insurance proceeds would enjoy the exemption from income tax because the law does not distinguish.

But it does not mean to say that if the proceeds or life insurance proceeds is an exclusion from life insurance program, totally there would be no other tax applicable. What are the applicable tax, just in case? Lets talk about the beneficiary. Life insurance proceeds; if the beneficiary is any of the relations of the insured: heirs, estate, administrator executive, is it subject to income tax Is it an inclusion to gross income? Yes. Therefore it is not subject to tax. If the beneficiary is a third person other than those related to the estate of the decedent or the insured; ex. the company who took the life insurance policy of the insured or any other friend, would it be an exclusion from gross income of the beneficiary? Is the recipient beneficiary be subject to income tax or would that life insurance proceeds be part of his gross income? It is one of the exclusions because its regardless of who the beneficiary is. Its no longer taxable insofar as the beneficiary whether he is beneficiary class number and number 2; he is not required to pay income tax on the proceeds. But would the estate of the decedent be liable for estate tax by the mere transfer? Or would it be liable for estate tax because it is part of his estate upon death? Yes. Because if the beneficiary is the estate itself, then it goes to the estate. If the heirs, it goes still to the estate. If the executor or administrator, it goes still to the estate. Therefore it just goes to show that its part of the property of the decedent upon death. Remember estate taxation is taxing the decedent on all properties existing at the point of death. How about life insurance proceeds, when does it accrue? Upon death of the insured. Beneficiaries would not have to pay the income tax but the estate itself is liable for estate tax. Remember an estate if the decedent is a separate entity. Its an individual for tax purposes. If the beneficiary is a third person; the company who took the insurance policy, a friend, a relative who is not near the heirs, is the estate liable? At the point of computing the estate tax, will the BIR include the proceeds as part of the estate and be liable for estate tax? Mr. A, the insured is the president of company B who took out the insurance company in favor of the prior. There are two scenarios. One, beneficiary is in

relation of Mr. A which can be the estate of Mr. A itself, heir, administrator or executor. Second scenario is the company made itself the beneficiary. Insofar as recipient beneficiary is concerned, we dont have any problem. Its never subject to income tax. But how about estate tax? Will it be subject to estate tax if the beneficiary of the policy is the third person, the company itself? NO. Because ownership of the proceeds belongs to the company who is not part of the estate of the decedent. Therefore it is not subject to the estate tax. Estate tax refers only to the estate of the dead person. And if its now the ownership of the company who has designated itself as the beneficiary, of course you do not co-mingle the company with the estate. So there is the irrevocable designation of the company as the beneficiary, no way is it subject to income tax. But if in default, the company is the designated beneficiary, then it is. And what is default of insurance policy? The designation is revocable. Only if the designated beneficiary is irrevocably designated that it not belong to the estate of the decedent. So as a general rule, you will see that majority, it will always form part of the estate of the decedent, relations or third party revocably designated. It will only be excluded from the estate of the decedent if it is irrevocably designated. And irrevocable designation must be clear from the policy itself. Otherwise, default is revocable. Mr.A took out a life insurance policy wherein the terms of the contract is 10 years payment of premium and on the 20th, it will mature.If he outlives the policy he gets the insurance proceeds. If he dies before the 20 year period, his beneficiaries or heirs will get the life insurance proceeds. What is the tax if he outlives the policy and if he has not? If he outlives the policy, meaning he himself outlives the policy, it will be taxable except for the portion which represents the return of the premium payments that he has made. If he gets 100m after outliving the policy after it has matured on the 20th year, and by computation he was only able to pay 5m in premiums, then the 95m difference will have to be declared as part of his gross income taxable to 32%. If he dies before maturity of the policy, then we will follow exclusion number 1. COMPENSATION FOR INJURIES AND SICKNESS.

What injury are we talking about? Would all types of injury be covered in the exclusion? What type of compensation do you get out of a physical injury case? What are the sources wherein you derive compensation for physical injury? Compensation for injuries, do you agree that it refers only to physical injuries? As discussed by some of the authors, when you say compensation for sickness and injuries, it would have to refer to physical injuries and sickness. And when you say compensation for physical injuries, its related to sickness. You have to take it with the other. The law itself says that, for compensation maybe by virtue of a suit or a case or paid by virtue of a health insurance, personal heath insurance, accident insurance, and workmans compensation act.It simply boils down with there being something wrong with the physical body or physical disability. Would the damages received as part of the compensation for injuries and sickness be subject to income tax? No. Its not subject to income tax because it is derived not from labor, capital, labor or capital and properties. And again, its exclusion is not stemmed from the other laws but because of this 32b which actually says that any compensation received including damages on account of such injury or sickness is not part of the gross income subject to income tax. The only gray area there is the compensation for loss for future earnings. If you have studied torts, somewhere along the way you will come across SC granting compensation for the loss of the future earnings which could have been derived by the person who met the accident. So whatever is derived from that; EX. if the dead or injured is expected to receive 50k a month times the number of years of his life expectancy. That will be awarded by SC. As to whether it is taxable or not, there are conflicting views. Some of the authors would say that it is subject to income tax because it is compensation for future services which could have been rendered. But some of the authors would also say that it is not subject to income tax because it is part of the compensation for the injury or sickness. We can say that it is not taxable. We use the word compensation. And it means all types of awards given by either the SC or insurance companies. INCOME EXEPMT UNDER TREATY

Since the doctrine of incorporation, any agreement we have entered into with the other countries that there are exemption to be granted to the taxpayers earning income here, the principle of reciprocity will be respected. We consider those as exclusions from gross income. But mind you, this is not even self executing. Whatever the provisions of the tax treaties are, we have to seek confirmation from the national office of the bureau of internal revenue in Quezon City. Otherwise, if we dont seek for a confirmation ruling, even if youre situation falls squarely with what the treaty provides, you will not be allowed to avail of the exemption or the preferential treatment of the treaty. So again, its like lifeblood doctrine that in construing exemptions, it has to be strictly construed against the tax payer. RETIREMENT BENEFITS What retirement benefits are subject to tax? 1. If it falls under RA 7641 which actually is part of the labor code, art 287 on retirement benefits. 2. If it is part of the private retirement fund. So, what are the conditions for excluding from income the benefits received under retirement benefits plan? 1. recipient must be at least 50 years old 2. at least 10 years of services 3. retirement plan is reasonable 4. in nature of pension, stock option or profit sharing 5. availed once 6. approved by BIR 7. employer must contribute and for the common benefit How many situations are the in 6a, how many retirement benefits are we referring? If you are 48 years old and you have rendered 48 years with the company, can you retire with the retirement pay tax free? If you retire at the age of 51 and have

rendered 8 years of service, can you retire tax free? Should both (age, years of service) requirements co exist in all cases? This matters. Because most of the companies I know, most of the employees will wait until the point that they can get the retirement benefit free of tax. Otherwise they will have to pay 30%. When can you say that 60 year old rule will apply rather than the 50 year old rule? Can both requirement co exist? Can we expect the two types of benefits under the 7641 and the reasonable retirement benefit plan to be applied in one and the same company?So that some can retire at 60 tax free while others can retire at 50? Would the two situations mentioned before co exist in one company? This rule is under the tax code reasonable private benefit plan. If the company sets up a reasonable retirement benefit plan, retirements for it to be exempt from tax must be by a person at least 50 years old, having rendered service for at least 10 years and it is his first availment of retirement. When will the 60 year old, 5 years of service apply? In the absence of a reasonable private benefit plan established by the company, In the absence of collective bargaining agreement, In the absence of the employment contract designating when the retirement is. If there is no reasonable private benefit plan, there is no collective bargaining agreement, no employment contract, no other agreement entered into by the employee and employer, then use this. He gets to retire tax free at the age of 60, having rendered five years of service. But in more cases than not, companies, since they are encouraged to establish a reasonable retirement benefit plan, then the default is the retiree should at least be 50 years old with at least 10 years of service. So if there is a reasonable private benefit plan, to be tax free, it should be: 1. duly approved by the BIR 2. gratuity plan 3. employer established the fund, contributing to the fund itself 4. fund will be for the sole benefit of employees What are the requirement of private benefit plans proceeds to be tax free? 1. employee is at least 50 years old 2. has rendered at least 10 years

3. first availment of retirement For you to be exempt, not only must you be at least 50 years old and had at least 10 years of service. It must be the first time that you have availed of a tax free retirement, exclusive of the government retirement. Of course if its a government retirement, its totally tax free. So in this case, for example, you have reached 50 years old and have rendered 5 years of service with company A. This is the first time you have availed of the retirement. Are you tax free? Yes. Then you got yourself hired with the government at age 51. You rendered 10 years of service with the government and retired at the age of 60. Is the retirement pay that you will receive from the government exempt from tax? No. The rule is to exclude retirements from government. So if the second retirement is from the government institution, it will have to be exempt from tax. But if your second retirement after you first private institution retirement, is still with another private institution, regardless of how old you are, it is already taxable. Even if you rely on the law itself, it says there retirement benefit plan of a private institution or private corporation So if its not a private institution, its government, its not availing twice with the private. So if its private-government, both are exempt. If its private-private, that is taxable. This will apply if there is a reasonable private benefit plan. Let us say there is no private benefit plan. A collective bargaining agreement is in effect. And it says that an employee can retire at the age of 60 or after rendering 20 years of service. A, 40 years old, wants to retire after rendering 21 years of service. Taxable or not? Not taxable. Another case, no collective bargaining agreement, no employment policy, no reasonable private benefit plan. A, 60 years old, wants to retire after rendering 4 years of service in the company? Taxable or not? Taxable. Theres an existing retirement benefit plan, 50 years old, ten years of service. Taxable or not? Not taxable You always consider if there is an existing retirement benefit plan with the company. Because the law says; retirement benefits derived are exempt if its derived from RA 7641 or a reasonable private benefit plan RPBP. But the law also says that for the benefits derived in RPBP would only be exempt if it satisfies the requirements: 50 years old, 10 years of service, and first availment of in a private institution. Well of course the RPBP would also be duly approved with all the requirements. But would that 10 years- 50 years old apply to 7641? No. because this

is a different law. This is the tax code itself. If there is no retirement benefit plan, you have to apply the retirement benefits derived from 7641. But 7641 is not exclusive to 60 years old or 5 years. It says that it will only be applicable if there is no CBA, employer policy, etc.. Now if there is a CBA, do not use this as yet. If the CBA says you can retire at the age of 60 plus 20 years of service, then it must be PLUS. Both conditions must exist. If the CBA says 60 years old or more than 20 years of service, if you can satisfy just 1, then it is exempt. So long as the CBA is not more burdensome than the 60-5 year rule. It says in 641, any CBA or policy that is not more burdensome than the 60-5 year rule can be acceptable. The 60-5 year rule will be applied if there are no agreements existing. So in the case of 60 years old or at least 20 years of service, and the employee has been working for 21 years, this is exempt. Because the CBA says OR. So even if you are still young at the age of 40, you can still retire if you have rendered at least 20 .**If there is a CBA and RPBP at the same time, it has to be well defined in the CBA to whom and to what extent it will be applied. I dont really know if it can co-exist But in this ruling in BIR, an employee retired at less than 50, and rendered 21 years of service. His retirement benefits are granted with exempt by BIR. Why? Because the CBA itself which is duly approved, says than employee may be retired at the option of the company upon reaching the age of 60 years or upon having completed more than 20 years of service. So it can even be more than 10 years of service. At the age of 30 he can retire. And that is exempt. But then again, if you get yourself rehired in a private institution, and you get again your retirement, that is taxable na. You retired and got the retirement pay of 10m. Because of your excellent service, you receive a gratuity pay of 4m. Plus 15 days of work, 50k. Your vacation leave and sick leave credits that have not been used are 500k and 500k respectively. You are 50 years old with 10 years of service. In total, you receive 15,050k. Which of the items are subject to tax if the you are under the RPBP? If the company has a retirement fund, and you retire, your retirement pay will not be taken out of the retirement funds. It will be taken out from a plan, which plan is a separate entity itself. It is usually handled by insurance companies or banks. If you did your job well, you can be given gratuity pay which is outside of the fund. It is bonus. Is the gratuity pay subject to tax? No. Is the 50k taxable? Yes because it is compensation for the service rendered.

How about the leave credits? If you work and you are given vacation leave and you dont utilize them, in some companies it can be converted to cash and can be accumulated for as long as you want. Are they subject to tax? No. If you have plans of retiring, do not compute or convert your leave credits before retiring. Because usually if you convert your leave credits on a regular basis without being connected to any retirement, they are taxable in excess of ten days. But if you retire and its the only time that you convert all leave credits, it becomes a terminal leave pay, everything is taxable. Everything given during retirement if your retirement is qualified, tax free, is exempt. So even the gratuity pay is not taxable. Only the 15 day salary is taxable. But all the rest, retirement pay, bonuses, gratuity pay, leave credits, whatever it is named, basta lang the basic is exempt, everything that follows will also be exempt. If the retirement pay is exempt, any bonus, gratuity or cash equivalent are also exempt. If given separately from retirement, then they are not tax free. SEPARATION PAY Separation pay. Is it subject to tax? What are the rules for it to be exempt from tax? Is separation pay taxable if it is given out of pity? You were hired by the government as one of the midnight appointees of GMA. When Aquino came in you will be separated from work. You got 100k separation pay. Is that taxable? if you are given separation pay at the age of 48 years old after rendering 9 years of service due to occupying a redundant position, is it an inclusion to gross income? For separation pay, there is no age requirement, no years of service rendered requirement for the payment to be tax free. All that it requires is that your separation from the company must be due to death, sickness, physical disability or indury and those other causes beyond your control. For example, redundant position, or those that you find in you LC, labor saving device, retrenchment, occupying a co terminus position.

SSS Benefits How about social security benefits? Is that an exclusion from gross income? Social security benefits for us Filipinos receiving from our Philippine social security system is not taxable. Even from the GSIS as well as social security benefits from abroad. Ex. you have been a citizen or a resident in the US and you retired here, you

will get your pension and social security benefits, its also tax free. Probably thats the reason why there are so many retirees here. Winnings, prizes and awards requirements should be satisfied. 1. without any action on the part of the recipient to enter the contest 2. not required to render substantial future services In sports competitions, for your awards to be tax free or excluded in gross income, the competition must have been duly approved by the national sports associaltion and approved as well by the Philippine Olympic committee, whether it may be an international competition or neld in the Philippines or not. What it means to say is that the exclusion from gross income would never include a professional fight. Many is a professional boxer. He is not representing any sports in the Olympics. Everything that he earns is taxable. In one of the BIR rulings, there is this one boxer who sought for exemption. He was granted an exemption on the ground of bringing glory to the Philippines. But if it granted to that boxer, no other boxer can avail or use that ruling for an exemption. Why do you think other boxers cannot avail of the exemption if the exemption is granted by BIR to one of them? Exemptions are personal. So whenever rulings or SC says that this person is exempt, then no other person can use that provision unless the law is general. In any case, if and when prizes and award granted in sports competition or if any literary, religious, charitable educational achievements that you get, if it does not satisfy the condition, therefore it is taxed; it will now be withheld of tax. Because the nature of prizes and awards is that it will be given to the recipient net of taxes. Now if you happen to win in SM 1m, do not expect to get 1m. its only 800k because the tax withheld is 20%. If in the posters it is said to be tax free, will you receive 1m? Yes. But do not be misled. There is tax but the burden of tax is shifted to the one giving the price. SM will pay 1250k. the 1m you received is as if it is the 80% of the price. If it is not tax free, the price (motor vehicle) will not be given unless the winner pays the tax. INCOME DERIVED BY GOVERNMENT OR POLITICAL SUBDIVISIONS

In this exclusion, whose income is exempt? Whats a government entity? Does it include government agencies? No. You have to strictly construe it. In this case, this is exclusions are only the income of the government of the Philippines or the income of political subdivisions. And you know political subdivisions as composing of the provinces, cities, municipalities and barangays. It does not include government instrumentalities nor entities nor GOCCs.

If you have seen from your readings that here is exemption granted to agencies, instrumentalities or GOCCs, that basis is not 32b but some other provision of the law. What were talking about here is the income from the exercise of the essential governmental function of the government of the Philippines and its political subdivisions as well. The basis here is that we cannot tax the government who is taxing us. How about income derived by foreign government? Is that subject to income tax? If there is income received by a non resident foreign bank fully owned by the Japanese government, is that taxable? So when we say income derived from investment in the Philippines, would it include extending a loan to the corporations in the Philippines or the Philippine government itself? If a domestic corporation of the Philippines is obtaining a loan from a bank in Japan fully owned by the Japanese government, is that taxable? You get 1b loan and will have interest of 100k monthly. Is this covered by the exclusion that investments made by a foreign government or a financial institution fully owned by the government are exempt from tax? If the 1b is claimed in the Philippines, it is a domestic corporation, the operation is expectedly in the Philippines. The SC has already included granting of loans by foreign banks to domestic corporations, investment not only in stock, bonds and also extending loans. So any income from investments derived from money extended to the Philippines by a foreign government or even if it is a financial institution so long as its fully owned by the foreign government is already exempt from tax. So in the Philippines, it also works the other way around. There is already a tax treaty. If we extend a loan as well to foreign government, the income derived from that loan is also exempt. But not all banks are considered as covered in this exclusion. In Japan there are only two banks. In the Philippines are Land bank of the Philippines and Development bank in the Philippines.

When it says income from investment, it does not mean to say lang investment in the business. It includes and it has expanded the meaning to those extending a loan to domestic corporation. But if the extension of the loan is to a foreign corporation or not a domestic corporation, then its not income having situs here. GAINS DERIVED FROM REDEMPTION OF SHARES OF STOCK BY THE MUTUAL FUND COMPANY It should be the mutual fund company. If not, no exclsions, no exemptions. CONTRIBUTIONS TO SSS, GSIS, PAGIBIG AND UNION DUES You will notice that your salary is already deducted with these contributions. Its your share. Because the share of you employer is not reflected in the pay slips. In the computation of you tax, those items are deducted from your income because of the provision of the law. After the law made in 1997, they were already made as deductions. If your have monthly salary, you will give PAGIBIG 100. Your employer will also give 100. Your PAGIBIG account will be added 200. But if you have a housing loan and you want to contribute to PAGIBIG 1100 and your taxable income if 8900, this will actually benefit you. This will reduce your taxable income. The exempted is up to the allowed contribution Benefits in the form of 13th month pay Up to 30, 000.

Gains derived from the sale, exchange, retirement of bonds, debentures, or other cert of indebtedness with maturity of more than 5 years Under Special laws PEZA- Economic Zones- if you are exempted from 4-6 years , income tax holidays, 4 years non pioneering, 6 years for pioneer Cooperative- agricultutral and multipurpose are exempted from income tax Barangay cooperatives micro business enterprises, agricultural, and multipurpose



Deductions distinguished from exemption

All Income Less: Exclusions from Gross Income / Exemption _________________________________________ Gross Income Less: Deductions

First off, we have to know that all wealth which flows to our hands to know Taxable Income whether its an income or a capital. If its an income, you list down all your income but you exclude those which are listed as exclusions from gross income or any item which the law exempts from taxation to arrive at gross income because this is income. In order to arrive at a taxable income in which the income tax rate will be computed, we have to know the deductions allowed. - She said that the difference between an exemption and deductions is that deductions are those items allowed by law to reduce the gross income in order to arrive at a taxable income. Exclusions are these items are already, off-hand, already identified by law as an exempt income whether it be included in the list of exclusions of gross income under Section 32b or in separate special laws. Diba what did we say about exemptions, these are immunities from future taxes to which you could have been liable had there been no law granting its exclusion. - Now, if you identified all income, you exclude all the exclusions, this is the one which we were asked to memorize, the exclusions from gross income are those exemptions granted so that you will know which are covered by gross income. But not all gross income are subject because there are deductions allowed. - Is deduction an income that is not taxable? The distinction there really is when you say exemption, its an income that is not taxable. There is an inflow towards you, but there is a law saying that that income which flew into your hands is not taxable. But deduction, although it reduces the income, in order to arrive at a taxable income, is not an income. Deduction is an expense. Its an outflow of your wealth. Thats why you are allowed to deduct expenses. - When you engage in a business, you have income, you have proceeds but you are not entirely taxable on the proceeds, you are allowed to deduct expenses which you have incurred. In the same way, that deduction is not the same as exclusion. Exclusions are just like exemptions, they are income or inflows to the tax payer. But because of the provision of the tax code, it is not subject to income see. Now, you will see that in order to arrive at a taxable income, you always deduct exclusions and exemptions. It is the act of deduction but it is not an expense, its an income. 2. Return of capital a. Sale of inventory of goods by manufacturers and dealers of properties


The amount received by the seller consists of return of capital and gain from sale of goods or properties. That portion of the receipt representing return of capital is not subject to income tax. b. Sale of stock in trade by a real estate dealer and dealer in securitiesrequired to deduct the total cost specifically identifiable to the real property or shares of stock sold and exchanged. c. Sale of services- entire gross receipt are treated as part of income since they dont buy and cary nor sell any stocks or goods. Formula: Proceeds Less: cost or return of capital Gross income Less: Deductions Taxable income X tax rate Tax due Less: tax credit Tax payable 3. Basic Principles governing deductions - The basic principles that would guide you in determining whether an item is allowed to be deducted is: 1. The taxpayer or you seeking for deduction must be able to pin point some specific provision of the law authorizing you to deduct and 2. Prove that you are entitled to the deduction authorized because you satisfy all the conditions required. 3. All deductions are always strictly construed against the taxpayer. That is the 3rd principle. 4. An additional requirement for the deductibility of an expense is when a tax is required to be withheld by you, as the payer of the expense, you should have withheld the tax, otherwise, you cannot deduct the expense. - Let me put it in simple terms. If you have a business and you rent a place, a boutique perhaps in ayala at Php100k per month, per space. The law requires you to withhold 5% of your rental payments and remit it to the government. So you will only pay or give ayala Php 100k less 5% or less Php 5000. Where does the Php5000 go? To the government. Ayala will only receive 95%. If you failed to deduct even if you have given Ayala the full Php100k, you forgot to deduct the 5%, you will not be allowed to deduct entirely the Php100k rent expense. Thats what will happen if you

wont satisfy the requirement of the deductibility of taxes on expenses. 4. Kinds of deducitons a. Personal and Additional Deductions/Exemptions Section 35, not applicable to corporate taxpayers; without regard to the activity such as that he is engaged in business, or employee or mixed. b. Itemized Deductions Section 34A K and 34M- ordinary, reasonable expenses applicable only to individuals and corporations engaged in business or in the practice of profession, not those who are employed. Requistes: Must be ordinary,necessary, and reasonable Must be paid or or incurred in connection with the taxpayers trade, business or profession Deductions must be supported by adequate receipts or invoices, except standard deduction. c. Optional Standard Deduction of 40% of the Gross income is the deduction which an individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, on a corporation, in an amount not exceeding 40% of its gross income, in lieu of taking itemized deductions. Not applicable- to non-resident aliens, non-resident foreign corporation, and those who are employed In GPP, if one member elects OSD, the other members must use OSD as well. Beneficial: if you maintained less expenses, and no need to prove with official reciepts Optional standard deductions, which is in view of itemized deductions and number 3, that you can deduct in order to arrive at your taxable income is the personal and additional deductions. I am not saying that for you as a taxpayer, everything will be applicable Requisites: 1. Taxpayer must signify in his retun his intention to elect OSD 2. Irrevocable for the given taxable year 3. Not required to submit ITR such financial statements otherwise required 4. Shall keep records pertaining to gross sales in every taxable year
SM 2. 50,000 25,000 /child

All Income

Less: Exclusions from Gross Income / Exemption / Personal and Additional Exemptio _________________________________________ Gross Income
1. expense in lieu 2.

Any of the deductions claimed by a tax payer will fall under any of these categories. It may be an itemized deduction or expenses or in lieu of that an optional standard deduction at a fixed rate of 40% of your gross income. Or you can claim, if you are an individual tax payer, you can also claim the personal and additional exemptions in lieu of family and living expenses. - What are the personal and additional exemptions as mentioned before? Php 50,000 for Single, head of the family or married, the personal exemption. Php 25,000 additional exemption for every dependent child that you have, legitimate, illegitimate, acknowledged or legally adopted. So if you compute your income tax due, you may be able to claim anyone of these, but not all of these. Because optional standard deduction is only in lieu of itemized.

NON-DEDUCTIBLE ITEMS Would all your expenses incurred be deductible? If you engage in business and you had incurred expenses of Php1M but your sales proceeds is only Php500,000. Are you guaranteed that you can claim your Php1M expenses? There are non-deductible items identified by the Tax Code.
Sale Expenses Php 500,000.00 (Php 1,000,000.00)

What are the non-deductible items? Not all expenses that you paid for or have incurred may be allowed as deduction in the computation of your taxable income. Let us identify what are the items that you have spent for but are totally non-deductible items. 1. Personal living or family expenses 2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property directly or indirectly a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants)

b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust (1) Personal living or family expenses - Why non-deductible? 1. Its not related to the business. It is personal and for the family. 2. The personal exemption of Php 50,000 for single and married individual and additional exemption for every child already child already approximates your personal and family living expenses for the entire year. That is why personal and family living expenses are non-deductible items. (2) Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate; (IT IS A CAPITALexpenditures) correlate with Section 34; -Reason: benefited to other taxable years; will distort the finances of the corporations - This simply means to say that when you spend for something as a property or estate for the business, it is not deductible in the year that you have spent for it or paid for it. - Give me an example. Amount paid for new building or permanent improvements are non-deductible items period. - Example, if you open up a business and you purchased a new building used to house your operations, is that expense not deductible from your income? It is not deductible in the year you spent for it. - If you spent Php100M in purchasing a building, you are not allowed to deduct the full Php100M in the year of purchase, or in the year of construction but it will deductible as an allowance over the years of its estimated time. So if a building is constructed costing PHp100M and it is expected to have a life, useful for another 100 years from the time that it is finished from construction, then it is just but proper and reasonable to spread out the value of Php100M over the useful years of 100. So it is deductible based on depreciating effect or the value of depreciation for years. So it will diminish its value, Php1M every year. Because after every year, its estimated life reduces by 1 year so the effect is to deduct it not 1 time but over the estimated life of that property or asset or even if its not a new building, so long as its a major improvement, a betterment, which increases the life of an existing asset, it will not be deductible outright but only deductible over its life.

It is reasonable because if you deduct in the first year that you bought it, you deduct Php100M. And your sales is only PHp2M, you lose Php98M. Whereas, if you spread out the expense over 100 years, you will benefit each and every Php1M every year as an expense. If we will come across an exemption wherein non-stock, non-profit education institutions like San Carlos can actually deduct in the 1st year of purchasing building the entire Php1M. Why does the BIR allow this? Because schools are not taxable. Even if we deduct the entire Php100M of purchasing it, nothing will ever change. Even if we deduct it the next year. Schools, as non-stock, non-profit educational institutions, are not taxable. So the effect is different. IN normal businesses and abnormal businesses.

(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made (improve the value of the property to extend the value of the property) - No. 3 is it the same as No. 2? If you have a motor vehicle or delivery van in your business to deliver your items and you change the headlight or you change the mirror, can you deduct the expense outright or should you spread out the value of the repair? You can deduct outright. - No. 3 are major repairs which extends the life of an existing asset which requires an apportionment of the expenses over the number of years that the assets life has been extended or the propertys life has been extended. (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy The company took out a life insurance policy over your life as its most important employee. Every year the company pays premiums amounting to PHp100,000 over the life insurance policy. Is the Php100,000 premium a deductible business expense? You are the president of the company. Lets have an illustration: Company A gets a life insurance policy over your life, Php100,000 premiums over a year. The Php100,000 premium is used to satisfy the requirement of the life insurance taken by the company over your life and it is paid to an insurance company, Company B. This is an expense of the company. The assets of the company is decreased by Php100,000 every year just to pay the premiums of your life insurance policy. Can we claim this as an expense deductible from income of Company A who spent for it? Premium Beneficiary Deductible?

Php 100,000 Php 100,000

Company A Estate of employee U as

If a company takes out an insurance policy over the life of its employees, take note of who the beneficiary is. Its only here that the one spending for the premium is the company itself, so its losing money because its paying for something. - Can this be a deductible expense? So it can be a tax benefit in the payment of taxes, so the tax liability of Company A will be reduced, you have to know who the beneficiary is. Now if the company made itself as the beneficiary, it is not deductible because the law says it is not deductible if the taxpayer is directly or indirectly the beneficiary under the policy. - Who is the taxpayer referred to in this section? Company A. The tax payer who took the life insurance policy is the beneficiary itself, not deductible. - The principle behind that because it is merely transferring money from Company A to the insurance company and go back to Company A when the employee dies. It is merely transfer of money but will revert back to the company upon the happening of the event insured. - But if the beneficiary is another person other than the tax payer himself, it is deductible, because the proceeds will not revert to the coffers of the company. But take note, the designation of the company may be direct designation or indirect. If its traceable then it is a indirect designation in favor of the company, still it is not taxable. -

(5) Losses from sales or exchanges of property directly or indirectly - First, we have to know whether losses are deductible expenses? Yes. - Example, if you engage in the buy and sell of motor vehicles. If you have sold 10 motor vehicles in a year, 7 were sold at a profit, 3 were sold at a loss, the losses incurred by the 3 transactions can be offsetted against the gains out from the 7 transactions. So generally losses are deductible items. - If the 7 motor vehicles were sold for Php7M, your capital was only Php4M, Php3M is taxable income. If the 3 other vehicles were sold for were sold for Php1M, and puhunan is Php3M, you lost Php2M, since you own this 1 business, you will only be liable for tax for Php 1M, losses are deductible expenses so long as it is incurred in relation to your business.

Example, if you are in the manufacture of milk or production of milk, along the way some will evaporate, losses are incurred. From the cows milk, if it directly spills. But losses are deductible except for losses found in Section 36, and it says losses from sales or exchanges of property between members of a family. a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants without any regard to degrees), - Example: This motor vehicle, you sold it to your sister. Puhunan is Php3M, but the 7 you sold it to your classmates, if you sold this to your sister, is the Php2M, deductible as an expense? No. - Why are losses or exchanges of sales between you and your sister not deductible losses? Because transactions between family members are for the most part not entered into an honest transaction unlike entering into a transaction with a 3rd person or 3rd party, you may sell this one for Php10 to someone else but you can actually dispose it to your sister for Php1M. - So losses are not real in cases between family members. And even if it is real losses but because you entered it with a family member, it is not deductible. b) Except in case of distributions in liquidation, between an individual and a corporation more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual
Company A U

Loss: Php 2M


Company A sold a parcel of land to U, selling price is Php1M, cost to the company is Php 3M, the company lost Php2M from the transaction entered with U. Is the transaction PHp2M deductible from the income of Company A? Yes. Because in this case there is no mention if you are a stockholder of the company and for what share.
60% U 10% 10% V W 10% X 10%

Company A

Loss: Php 2M

Not Deductible

Company A is owned by a 5 stockholders (Corporation must be atleast 5 stockholders). You are the owner of 60% of Company A. V, W, X, Y are owners of 10% of the shares. If you are an owner of Company A by 60%, can the company deduct the Php2M from its income? No. - Why? Because if a company wishes to avoid paying taxes, it can actually enter into simulated losses or transactions by selling properties to any of its controlling stockholders. But in order for it to be a non-deductible sale class, the individual with whom the company entered into with a transaction must be a controlling stock holder, meaning he owns more than half or more than 50% of the business itself. - If Company A sold the land for Php1M costing PHp3M to any of V, W, X and Y, it is still deductible loss. Why? Because these stockholders are not controlling stockholders. - When the transaction that we are looking into is between a company and an individual, the requirement is that the individual must be a direct stockholder. c) Except in case of distributions in liquidation, between 2 corporations more than 50% in value of the outstanding stock of each of which is owned directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company - How about corporation to corporation? - Give me an illustration for number 3. - What does no. 3 prohibit? Transactions between corporations. Company A
Loss: Php 2M Deductible

Company B

Corporation A sold a land for Php1M costing Php3M, suffering a loss of Php2M. To whom was it sold? Corporation B. Is the loss of Php2M deductible? As a rule, if you have no other fact, these are the only facts given the general rule is losses incurred are deductible losses.

But if we dig into the ownership, say for example:

60% U 10% 10% V W 10% X 10% U V W 10% X 10% 60% 10% 10%

Company A
Land GSP Cost Loss

Company B
Php 1,000,000 3,000,000 Php 2,000,000


U, V, W, X and Y, and Company B is also owned by U, V, W, X and Y, and the shares are given as shown, still deductible? No. Because the ownership is more than 50%. The law provides that if for example that this transaction is entered into between 2 corporations whereby ownership is held directly or indirectly by more than 50% for the same individual is not deductible loss. So Company A is owned by more than 50% by U, Company B is owned more than 60% by the same individual, so the controlling interest in both corporations is U, the same individual, therefore, it is covered by nondeductible lsoses. Let me change the facts:
60% U 10% 10% V W 10% X 10% U V W 10% X 60% 10% 10% 10%

Company A
Land GSP Cost Loss

Company B
Php 1,000,000 3,000,000 Php 2,000,000

Deductible or not? U owns 60%, Y owns 60% on the other company. Is the loss deductible? Yes. In this case, it is not the same individual who is owning both corporations or controlling both corporations, the loss is deductible. Let me change again the facts:
60% U 10% 10% V W 10% X 10% U V W 10% X 10% 10% 10% 10%

Company A
Land GSP Cost Loss

Company B
Php 1,000,000 3,000,000 Php 2,000,000

50% Company Z

99.99% owned by U


In this case, if I put in there are 5 owners, individual owners and the 6th owner is Z Corporation, but Z Corporation is owned 100% by U, deductible or not? Okay, lets go to your first corporation, we retained ownership 60% controlled by U, Company B, the buyer of the land is owned by 10% by U, V, W, X, Y. The remaining 50% is owned by a corporation, Corporation Z. If a corporation owns a corporation, there is ultimately an individual owning it. You have to key in the ownership of all levels of the corporation. It so happened that Z corporation is 99.99% owned by U.

Is the loss deductible or not? Is this covered by transactions which are not arms length? Arms length because the law says owned by individual directly or indirectly. This is a case of 2 corporations entering into a sale transaction of a real property but both corporations are owned by the same individual although indirectly. The other one indirectly. - More than 50% is held by the same individual directly or indirectly. You say U owns this majority; its more than 50%. Is U owning or controlling this corporation? Yes, indirectly. How indirectly? U owns 10%. U owns the entire 50% through another corporation, therefore, Us ownership is: 10% + 50% = 60%. More than 50% of both corporations is owned by the same individual. Therefore, we can say that the transaction is not entered into an arms length. Let me change the facts again: 60% U 10% 10% V W 10% X 10% U V W 10% X 10% 10% 10% 10%

Company A
Land GSP Cost Loss

Company B
Php 1,000,000 3,000,000 Php 2,000,000

50% Company Z 60% owned by U , Us share is: Therefore 40% owned by A 60% of the 50% share= 30% 10% 40%


Plus: share in Co. B =

Z Corporation owns 50% of Company is owned by U and A. 60% for U, 40% for A. IS the loss deductible? Does U control corporation B? No. But then U has more than 60% of Company Z? Diba this is a corporation owned by a corporation. But you know that this corporation is owned by other stockholders. So how much of the share does U own? 60% of 50% is 30% plus 10%, U owns only 40%. - The ownership of U here is more than 50% direct control over Z Corporation. But in Company B, U only directly control Company B by 10%. U owns 10% directly and indirectly by 30% of Company B through owning B by 60%. 60% of 50% if 30%. So the 30% of Company B is owned by U through this corporation and another 10% that is a total of 40% - Does it satisfy the requirement for non-deductibility? NO, therefore the loss is deductible.

This is what you call a grandfather rule in determining ownership of the corporation. It is grandfather in a sense because you with start with Company A here and its owned by another Company C, owned by another Company C, to the extent that you determine the ownership, the vast ownership of the individual, that is the grandfather rule in Corporation Code. - If its family-owned, there are still distribution of interest and control. You still use the number of ownership that he has in his corporation. That is based on SEC because there is an annual report that needs to be submitted to the SEC, stating who the owners are and what percentages of the stocks they are holding. d) Between the grantor and a fiduciary of any trust e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust f) Between a fiduciary of trust and a beneficiary of such trust - The other non-deductible losses from sales or exchanges of property, the reason why it is non-deductible because it refers to one and the same, it simply a temporary transfer. The grantor of the trust and the fiduciary of the trust, these are second transfers so it refers to one and the same. -