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I. Definition Of Income Tax Income tax is referre d to as A tax on all yearly profits arising fr. property, professions, trades or offices, or A tax on a persons income, emoluments, profits & the like. It may be succinctly defined as a tax on income, whether gross or net, realized in one taxable year. A. Nature of Income ax Income tax is generally regarded as an excise tax. It is not le!ied upon persons, property, funds or profits but upon the "I#$ of a person to recei!e income or profits. %. &urpose of Income tax' (iscal)Non* fiscal +. to pro!ide large amounts of re!enue, +. to offset regressi!e sales & consumption taxes, -. o mitigate the e!ils arising fr. the ine.ualities in the distribution of income & wealth w)c are considered deterrents to social progress, by a progressi!e scheme of taxation. Income tax is regarded as the best measure of a persons ability to pay. /. %rief $istorical %ackground of &hil. Income ax 1. United States Revenue Act of 191 3 0xtended to the &hils. w)c was then a territorial possession of the 12 administered & enforced by internal re!enue officers of the &hil. #o!ernment -. Revenue Act of 191 6 , ar Revenue Act of 191 ! amended "e!enue Act of +3+4 3. Act "o. #$3 3 enacted by the &hil. legislature under authority conferred by +3+5 Act %. &A "o. %66 ' "ationa( Inte rna( Revenue &ode of 193 9 ) re!ised, amended & codified into a single tax code all the internal re!enue laws embodied in the +343 NI"/ & amendatory laws & decrees was amended se!eral times *. +D 11*$ ' "IR& of 19! ! ) 6A 7aw 80.9. 43, +3:5; ' first attempt to restructure tax system, tax administration 8(AI70<; 2NI 2 8+33-; ' another attempt at restructuring <. 2ources of Income ax 7aw' NI"/ as amended II. ,eanin- Of Income. Sources. /inds A. <efinition of income) differentiate fr. capital Sec. 36, Rev. Re-. # Income in the broad sense * all wealth w)c flows into the taxpayer other than as a mere return of capital, includes the forms of income specifically described as gains & profits, including gains deri!ed fr. the sale or other disposition of capital assets. #ross Income * income 8 in the broad sense; less income w)c is by statutory pro!ision or otherwise exempt fr. the tax imposed by law. Net Income * gross income less statutory deductions Income means * accession to wealth gain flow of wealth &on0i vs. &TA #13 S&RA $3 1acts2 &ets., (ilipino citizens & employees of &&#, were assigned to work abroad in +35= & +35+, during w)c they were paid 12 > as compensation. ?hen they filed their I " in +35= & +35+, they computed the tax due by applying the >*& con!ersion based on the floating rate ordained under %I" "uling No. 5=* =-5. In +354 howe!er, they filed amended I "s for @5= & @5+ using the par !alue of the peso as prescribed in "A A -BC. hey thus claim tax refunds or tax credits, w)c was denied by / A. It is to be noted that &ets. did not remit any portion of their income into the &hils. during their stints abroad. Issue2 ?9N income of &ets. were still taxable in the absence of remittances or acceptance of their salaries into the country 3e(d2 Des the foreign earnings are taxable. Income may be defined as an amount of money coming to a person or corporation w)in a specified time, whether as payment for ser!ices, interest or profit fr. in!estment. he > earnings of &ets. are the fruit of their labors in the foreign subsidiaries of &&#. It was a definite amount of money w)c came to them w)in a specified period of time of - years as payment for their ser!ices. 2ec. -+ of the NI"/ states that a tax shall be imposed upon taxable net income recei!ed during each taxable year fr. all sources by e!ery indi!idual, whether a citizen of the &hils. residing therein or abroad. &IR vs. 4OA& 1%9 S&RA 39* 1acts2 %ritish 9!erseas Airways /orp. is a +==E %ritish* owned corp. organized & existing under the laws of the 1F. It had no landing rights in the &hil. & had no /&/N . Although it did not carry passengers &)or cargo to or fr. the &hil., it maintained a general sales agent , ?arner %arnes & /o. 7td. & later Gantas Airways w)c was responsible for selling %9A/ tickets co!ering passengers & cargoes. /I" assessed deficiency taxes w)c was protested by %9A/.
consolidated & codified into a single tax code all the internal re!enue laws embodied in the NI"/ & amendatory laws & decrees
7ueries2 ?hy is income tax source blindM Are the ff. items incomeM +. found treasure -. puniti!e damages)damages for breach of promise or alienation of affection 4. worthless bad debts subse.uently collected L. tax refund C. non* cash benefits B. income fr. illegal sources 5. psychological benefits of work :. gi!e* away prizes)scholarships)fellowships /. Finds) /lassification of Income or #ain 'not in ,a;a m ;s S+IT out(ine <ut I t6in= s6e >ust omitt e d it <ec. s6e 8roceede d to (ette r D. Ella ) +. &assi!e Income refers to those items of gross income earned by the taxpayer w)o his acti!e)direct participation in the earning process. 0x. di!idends, royalties, prizes & winnings Sec. ##'?), RA $%#% he term @ordina r5 income@ includes any gain from the sale or exchange of property which is not a capital asset or property described in 2ection 438A;8+;. Any gain from the sale or exchange of property which is treated or considered, under other pro!isions of this itle, as Nordinary incomeN shall be treated as gain from the sale or exchange of property which is not a capital asset as defined in 2ection 438A;8+;. he term @ordinar5 (oss@ includes any loss from the sale or exchange of property which is not a
3e(d2 N9. ?hen pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlati!e right to recei!e & enKoy the fruits of the business & the property w)c the decedent had established. Also, pet. owned other properties w)c he rented out, fr. w)c he
S9&. %3. :enera( Ru(e . * he taxable income shall be computed upon the basis of the taxpayerNs annual accounting period 8fiscal year or calendar year, as the case may be; in accordance with the method of accounting regularly employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the /ommissioner clearly reflects the income. If the taxpayerNs annual accounting period is other than a fiscal year, as defined in 2ection --8G;, or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an indi!idual, the taxable income shall be computed on the basis of the calendar year. S9&. %%. +eriod in 06ic6 Items of :ross Income Inc(uded . * he amount of all items of gross income shall be included in the gross income for the taxable year in which recei!ed by the taxpayer, unless, under methods of accounting permitted under 2ection L4, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer, there shall be included in computing taxable income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period. Sec. *1, Rev. Re-. "o. # !hen income is to be reporte d . #ains, profits, & income are to be included in the gross income for the taxable year in w)c they are recei!ed by the taxpayer, 1N7022 they are included when they accrue to him in accordance
a. Approaches in income recognition' Sc6edu(ar vs. -(o<a( a88roac6 Tan vs. de( Rosario 1acts2 hese are two consolidated special ci!il actions for prohibition challenging' +; the constitutionality of "A 5L3B, also known as the 2implified Net Income axation 2cheme 82NI 2;, amending certain pro!isions of the NI"/, -; the !alidity of 2ec.B, "e!. "eg. No. -*34 promulgated by the %I" pursuant to the said law. &etitioners are taxpayers claiming to be ad!ersely affected by the implementation of the law. In the + st case, the petitioners assert that the "A !iolates' +; Art. 6I, 2ec. -B8+; w)c states, H0!ery bill passed by the /ongress shall embrace only one subKect w)c shall be expressed in the title thereof.I, -; Art. 6I, 2ec. -:8+; w)c states, H he rule of taxation shall be uniform & e.uitable. he /ongress shall e!ol!e a progressi!e system of taxation. I, & 4; Art. III, 2ec.+, w)c states, HNo person shall be depri!ed of P property w)o due process of law, nor shall any person be denied the e.ual protection of the laws.I In the - nd case, the petitioners contend that the %I" exceeded its rule* making authority in implementing the "e!. "eg. 3e(d2 "A is constitutional, "e!. "eg. is !alid. Its title is sufficiently descripti!e of the subKect of the law. ?hat may be apparent fr. the amendatory law is the legislati!e intent to increasingly shift the income tax system towards the schedular approach in the income taxation of indi!idual taxpayers & to maintain the present global treatment on taxable corporations. his classification is neither arbitrary nor inappropriate. (urther, the due process clause may be correctly in!oked only when there is a clear contra!ention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is e!ident in the /A%. b. %ases of income tax i. #ross income) receipts) meaning in taxation) in financial accounting
3e(d2 here was no constructi!e receipt of the di!idends. Income tax is assessed on income that has been recei!ed. In this case, income was not recei!ed due to failure to deli!er, either actually or constructi!ely. he debts to w)c they were applied were not pro!en to ha!e existed. he first debt was not pro!en to exist & the second debt was due fr. $iKos de I. de la "ama, an entity separate & distinct fr. the principal owner thereof. /onstructi!e deli!ery occurs only when it is shown that the debts to w)c the di!idends were applied actually existed, were legally demandable & chargeable to the deceased. a. ?hen is income realizedM "ealization of income for tax purposes
&ro!ided, howe!er, hat the tax on di!idends shall apply only on income earned on or after Ranuary +, +33:. Income forming part of retained earnings as of <ecember 4+, +335 shall not, e!en if declared or distributed on or after Ranuary +, +33:, be subKect to this tax. 8/; /apital #ains from 2ale of 2hares of 2tock not raded in the 2tock 0xchange. * he pro!isions of 2ection 438%; notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange. Not o!er &+==,===PPPPPPPPPPP.. CE 9n any amount in excess of &+==,===PPPP +=E 8<; /apital #ains from 2ale of "eal &roperty. * 8+; In #eneral. * he pro!isions of 2ection 438%; notwithstanding, a final tax of six percent 8BE; based on the gross selling price or current fair market !alue as determined in accordance with 2ection B80; of this /ode, whiche!er is higher, is hereby imposed upon capital gains presumed to ha!e been realized from the sale, exchange, or other disposition of real property located in the &hilippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by indi!iduals, including
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tax rate on ordinary income) tax rate for capital gain regular tax rate) special tax rates final tax T creditable tax withholding tax flat rate) graduation of tax rates min marginal rate ) max marginal rate automatic increase of tax rates by +333 and -=== L. Accounting periods & methods of accounting for taxable income & deductible expenses a. /alendar year) fiscal year
Accounting period, he accounting period is the taxable year. It is a fixed period of time, consisting of +- months, upon the basis of w)c the taxable income is computed & the income tax imposed. Sec. ##. efinitions . F 8&; he term @taxa<(e 5ear@ means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this itle. N axable yearN includes, in the case of a return made for a fractional part of a year under the pro!isions of this itle or under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the commissioner, the period for which such return is made. 8G; he term @fisca( 5ear@ means an accounting period of twel!e 8+-; months ending on the last day of any month other than <ecember. 8"; he terms @8aid or incurre d@ and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle. &3A+T9R DIII - A&&OU"TI": +9RIODS A"D ,9T3ODS O1 A&&OU"TI": S9&. %3. :enera( Ru(e . * shall be computed upon he taxable income the basis of the
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Sec. ## 'R), "IR&. he terms @8aid or incurred@ and Npaid or accruedN shall be construed according to the method of accounting upon the basis of which the net income is computed under this itle. !. III. IT9,S 9E&AUSIO"S <ifferences bet. financial acctg. O1 :ROSS tax acctg.) A"D
I"&O,9
Sec. 31. (axable income efined . F he term Htaxable income I means the pertinent items of gross income specified in this /ode, less the deductions, and) or personal and additional exemptions if any, authorized by such types of income by this /ode or other special laws. Sec. 3#. Gross "ncome . F 'a) General definition . T #ross income means all income fr. whate!er source deri!ed, including 8but not limited to; the following items' +. /ompensation for ser!ices in whate!er form paid, including fees, salaries, wages, commissions, & similar items, -. #ross income deri!ed fr. the conduct of trade or business or the exercise of profession, 4. #ains deri!ed fr. dealings in property, L. Interests, C. "ents, B. "oyalties, 5. <i!idends, :. Annuities, 3. &rizes & winnings, +=. &ensions, & ++. &artners distributi!e share of the gross income of general professional partnership. '<) Exclusions fr. gross income . T he following items shall not be included in gross income & shall be exempt fr. taxation under this itle' +. 7ife insurance . T he proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest
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4. Items of gross income A. /ompensation for ser!ices, including fees, commission & similar items +. axable compensation income &ursuant to an 0r*0e relationship Sec.3# 'A), "IR&. %ee above. Sec. #.! $ 1 'A) RR #- 9$ De Aeon2 /ompensation for personal ser!ices is usually made in money but it may also be paid for in kind, or both in money & kind If payment is made in cash, the full amount recei!ed is subKect to tax. If ser!ices are paid for w) something other than money, the (J6 of the thing taken in payment is the amount to be included as income. If the ser!ices were rendered at a stipulated price, in the absence of e!idence to the contrary, such price shall be presumed to be the (J6 of the compensation recei!ed. 0xamples of compensation in kind' +. /ompensation paid in company stocks is to be treated as if the company had sold the stock for its (J6 & paid the 00 in cash. -. ?here li!ing .uarters are furnished in addition to a cash salary, the rental !alue should be reported as income. 4. ?hen meals are gi!en an 00, the !alue thereof constitutes income subKect to tax. L. &romissory notes &)or other e!idences of indebtedness constitute income according to the amount of their (J6. a. (actors recognition' i. to consider in income
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b. reatment of the following compensation income' i. (ringe benefits to managerial & super!isory 0es 0O/71<0< (". /9J&0N2A I9N IN/9J0) taxed separately.
S9&. 33. S8ecia( Treat m e n t of 1rin-e 4enefit.'A) Im8osition of Tax . - A final tax of thirty* four percent 84LE; effecti!e Ranuary +, +33:, thirty* three percent 844E; effecti!e Ranuary +, +333, and thirty* two percent 84-E; effecti!e Ranuary +, -=== and thereafter, is hereby imposed on the grossed* up monetary !alue of fringe benefit furnished or granted to the employee 8except rank and file employees as defined herein; by the employer, whether an indi!idual or a corporation 8unless the fringe benefit is re.uired by the nature of, or necessary to the trade, business or profession of the employer, or when the fringe benefit is for the con!enience or ad!antage of the employer;. he tax herein imposed is payable by the employer which tax shall be paid in the same manner as pro!ided for under 2ection C5 8A; of this /ode. he grossed* up monetary !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by sixty* six percent 8BBE; effecti!e Ranuary +, +33:, sixty* se!en percent 8B5E; effecti!e Ranuary +, +333, and sixty* eight percent 8B:E; effecti!e Ranuary +, -=== and thereafter' &ro!ided, howe!er, hat fringe benefit furnished to employees and taxable under 2ubsections 8%;, 8/;, 8<; and 80; of 2ection -C shall be taxed at the applicable rates imposed thereat' &ro!ided, further, hat the grossed *1p !alue of the fringe benefit shall be determined by di!iding the actual monetary !alue of the fringe benefit by the difference between one hundred percent 8+==E; and the applicable rates of income tax under 2ubsections 8%;, 8/;, 8<;, and 80; of 2ection -C. '4) 1rin-e 4enefit defined .* (or purposes of this 2ection, the term @frin-e <enefi t@ means any good, ser!ice or other benefit furnished or granted in cash or in kind by an employer to an indi!idual employee 8except rank and file employees as defined herein; such as, but not limited to, the following' 8+; $ousing, 8-; 0xpense account, 84; 6ehicle of any kind, 8L; $ousehold personnel, such as maid, dri!er and others, 8C; Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted, B; Jembership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations, 85; 0xpenses for foreign tra!el, 8:; $oliday and !acation expenses,
Non* cash benefits' free use of facilities Jeals & lodging) li!ing .uarters Imputed rent) use of household durable transportation ) representation & li!ing allowance C. other fringe benefits ,eanin- of ran= H fi(e2 Sec. ## 'AA) , "IR& . he term @ran= and fi(e em8(o5e es@ shall mean all employees who are holding neither managerial nor super!isory position as defined under existing pro!isions of the 7abor /ode of the &hilippines, as amended. Sec. #.! $- 1 RR #- 9$ 9xem8t fr. Tax &o((ector vs. 3ende rson 1acts2 Arthur $enderson is the president of the American International 1nderwriters for the &hilippines w)c represents a group of American insurance companies engaged in the business of general insurance 8except life insurance;. $e recei!es a basic annual salary of &4=,=== & allowance for house rental & utilities 8light, water, telephone, etc.;. Although he & his wife are childless & are only two in the family, they li!ed in a large apartment pro!ided for by his employer. As company president, he & his wife had to entertain & put up houseguests for the company. he %I" now seeks to collect taxes on the allowances for rental & utilities expenses.
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Not o!er &+=,===PPPPPPPPPPPPP CE 9!er &+=,=== but not o!er &4=,===PPPP &C== Q+=E of the excess o!er &+=,=== 9!er &4=,=== but not o!er &5=,===PPP &-,C== Q+ CE of the excess o!er &4=,=== 9!er &5=,=== but not o!er &+L=,===PP..:,C== Q - = E of the excess o!er &5=,=== 9!er &+L=,=== but not o!er &-C=,===P &--,C== Q - CE of the excess o!er &+L=,=== 9!er &-C=,=== but not o!er &C==,===P &C=,=== Q 4 =E of the excess o!er &-C=,=== 9!er &C==,=== PPPPPPPPPPPP &+-C,=== Q 4 L E of the excess o!er &C==,=== in +33:. &ro!ided, hat effecti!e Ranuary +, +333, the top marginal rate shall be thirty* three percent 844E; and effecti!e Ranuary +, -===, the said rate shall be thirty* two percent 84-E;. (or married indi!iduals, the husband and wife, subKect to the pro!ision of 2ection C+ 8<; hereof, shall compute separately their indi!idual income tax based on their respecti!e total taxable income' &ro!ided, hat if any income cannot be definitely attributed to or identified as income exclusi!ely earned or realized by either of the spouses, the same shall be di!ided e.ually between the spouses for the purpose of determining their respecti!e taxable income. 8%; "ate of ax on /ertain &assi!e Income. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half
9nly ind. taxpayers earn comp. income Applicable rates' /itizens, "es Alien & Non* "es. Alien engaged in trade or business' S9&. #%. Income Tax Rates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein,
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4LE +33:, 44E +333, 4-E -=== based on the grossed up monetary !alue of fringe benefit. he (INA7 AO w)held & pd. by 0es at ff. rates' +. "es. /it & "es. Aliens T 4LE +33:, 44E +333, 4-E -===. -. Aliens employed by regional $G of a multinational corp. +CE 4. Non* res. alien N9 engaged in trade or business' -CE AO %A20' grossed up monetary !alue of fringe benefits
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8a; "etirement benefits recei!ed under "epublic Act No. 5BL+ and those recei!ed by officials and employees of pri!ate firms, whether indi!idual or corporate, in accordance with a reasonable pri!ate benefit plan maintained by the employer' &ro!ided, hat the retiring official or employee has been in the ser!ice of the same employer for at least ten 8+=; years and is not less than fifty 8C=; years of age at the time of his retirement' &ro!ided, further, hat the benefits granted under this subparagraph shall be a!ailed of by an
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of the 0" 8/orp. or business partnership; for the benefit of some or all of its 00s -. /ontributions made to the trust by such 0", 00 or both for the purpose of distributing to such 00s the earnings & principal of the fund accumulated by the trust in accordance w) such plan, 4. 2uch contributions were made for the purpose of distributing the earnings & principal of the fund accumulated by the trust, & L. he trust instrument makes it impossible, at any time prior to the satisfaction of all liabilities w) respect to 00s under the trust, for part of the corpus or income to be 8w)in the taxable year or thereafter;
"etirement benefits recei!ed by officials & 0es of p!t. firms fr. a reasonable plan. b. 2eparation pay) cause beyond 0es control 8.uestion of fact) must be determined on the basis of pre!ailing facts & circumstances; must not be asked for or INI IA 0< by the 0e was not of his own making c. 2imilar benefits foreign go!t. rec!d recei!ed fr.
1acts ' 9n Aug. -4, +33=, a resolution of the ct. en banc was issued regarding the amounts claimed by Atty. Uialcita on the occasion of his retirement. H he terminal lea!e pay of Atty. Uialcita recei!ed by !irtue of his compulsory retirement can ne!er be considered a part of his salary subKect to the payment of income tax but falls under the phrase Hother similar benefits recei!ed by retiring 0es & workers... & thus exempt fr. the payment of I . H he dispositi!e portion of the "es. pro!ides that Atty. U is to be refunded the amt. w)c was deducted fr. his terminal lea!e pay & the ct. declared that Hhenceforth, no w)holding tax shall be deducted by any office of this /ourt fr. the terminal lea!e pay benefits of all retirees similarly situated...I /I" filed reconsideration. a motion for clarification &)or
d. %enefits Admin
fr. 12 6eterans
e. %enefits fr. 222)#2I2 &ommissioner vs. &A 1acts2 #/7 "etirement &lan is an 00 trust maintained by the 0". &urpose of the plan is to pro!ide for retirement pensions, disability & death
3e(d2 erminal lea!e pay is exempt fr. I . ?)in the pur!iew of the NI"/ pro!isions, compulsory retirement may be considered as a Hcause beyond
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+. interest on bank deposit)deposit substitute) fr. trust fund & similar arrangement -. interest on lending)interest income fr. bonds 4. interest on uncollected salary L. Int. on foreign bonds) go!t. bonds C. in on *bills B. int. earned fr. deposit maintained under (/< system Rev. Re-. 1C- 9$2 operators interest income of pawnshop
Sec. 3# '<,! ) "IR&. *iscellaneous "tems. 6 8a; Income <eri!ed by (oreign #o!ernment. * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. &om. vs. ,itsu<is6i ,eta( 1acts ' Atlas /onsolidated borrowed fr. Jitsubishi Jetal the amount of >-= J. Atlas, in turn, undertook to sell Jitsubishi all the copper concentrates produced fr. said machine for a period of +C years. Jitsubishi then borrowed fr. the 0xport* Import %ank of Rapan. Atlas paid interest to Jitsubishi totaling &+4,3BB.53 for the years @5L to @5C. /I" imposed a +CE tax thereon. Jitsubishi is now applying for a tax credit on the ground that it was merely a financing institution owned, controlled & financed by the Rapanese #o!t.
ii.
Jeaning items'
of
the
ff.
Sec. ## 'D) "IR&. he term @<an=@ means e!ery banking institution, as defined in 2ection - of "A No. 445, as amended, otherwise known as the
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-=E 8(INA7 AO; w)held by payer* bank /itizen) resident alien -CE 8(INA7; Nonresident alien N0 % -=E 8(INA7; corp. ii. interest income fr. long term deposit or in!estment in the form of sa!ings, common ind. trust fund, deposit substitutes, in!estment management accounts & other in!estment e!idenced by certificates in such form prescribed by the %2& shall be exempt fr. tax imposed under this 2ubsection. Y <enomination &+=,=== issued by banks 9N7D
Sec. ## '11), "IR&. he term @(on-- term de8osit or investm e n t certificates@ shall refer to certificate of time deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments with a maturity period of not less than fi!e 8C; years, the form of which shall be prescribed by the %angko 2entral ng &ilipinas 8%2&; and issued by banks only 8not by nonbank financial intermediaries and finance companies; to indi!iduals in denominations of en thousand pesos 8&+=,===; and other denominations as may be prescribed by the %2&. Sec. #% '4,1). &ate of (ax on Certain 'assive "ncome. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half
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(our 8L; years to less than fi!e 8C; years * CE, hree 84; years to less than four 8L; years * +-E, and 7ess than three 84; years * -=E.
"ote2 0xemption applies only to ind. &s except nonresident alien N0 %. hey are taxed at 4CE. (or corporate taxpayers, no exemption. &re*termination will subKect the interest to tax) tax rate based on the remaining maturity. iii. Interest earned by non* stock non* profit educational institutions
1inance De8t. Order 13!- $! 0duc. inst. means a non* stock, non* profit corporation association duly registered under &hil. law, & operated exclusi!ely for educational purposes, maintained & administered by pri!ate indi!idual or group offering formal education issued permit to operate by the <0/2. "e!enues deri!ed fr. & assets used in the operation of cafeterias)canteens, dormitories, bookstores are exempt fr. taxation pro!ided they are owned & operated by the educational institution as ancillary acti!ities & the same are located w)in the school premises. De8t. of 1inance Order 1%9- 9* Re2 9xem8tion of "on- stoc= "on- +rofit 9ducationa( 9ntities Amendin- 1inance de8ar t m e n t Order 13!- $! Non* stock, non* profit educational institutions are exempt fr. taxes on all their re!enues & assets used actually, directly & exclusi!ely for educational purposes. $owe!er, they shall be subKect to internal re!enue tax on such educational institution of its educational purposes or function. Interest income shall be exempt fr. taxation only when used directly, exclusi!ely for educational purposes. o substantiate this claim, the institution must submit an annual information return & duly audited financial statement. A certification of actual utilization & the %oard resolution on the proposed proKect to be funded out of the money deposited in banks. i!. 9ther interest income
Rev. Re-u(a tion "o. 19- $6 Sec. #.C 1. 1 3pera ting lease5 defined . *** An Hoperating leaseI is a contract under w)c the asset is not wholly amortized during the primary period of the lease, & where the lessor <902 N9 rely solely on the rentals during the primary period for his profits, but looks for the reco!ery of the balance of his costs & for the rest of his profits fr. the sale or re*lease of the returned assets at the end of the primary lease period. Sec. #.C1. # +inance lease5 defined --- H(inance leaseI or Hfull payout leaseI is a contract in!ol!ing payment o!er an obligatory period 8also called primary or basic period; of specified rental amounts for the use of a lessors property, sufficient in total to amortize the capital outlay of the lessor & to pro!ide for the lessors borrowing costs & profits. he obligatory period refers to the primary or basic non* cancelable period of the lease w)c in no case shall be less than 54= days. he lessee, not the lessor, exercises the choice of the asset & is normally responsible for maintenance, insurance, & such other expenses pertinent to the use, preser!ation & operation of the asset. (inance leases may be extended, after the expiration of the primary period, by non* cancelable secondary or subse.uent periods w) the rentals significantly reduced. he residual !alue shall in no instance be less than fi!e per centum 8CE; of the lessors ac.uisition cost of the leased asset. Sec. %.C#. # Compelling persuasive factors . A contract or agreement purported to be a lease shall be treated as conditional sales contract if one or more of the following compelling persuasi!e factors are present' 8A; he lessee is gi!en the option to purchase the asset at any time during the obligatory period of the lease, notw)standing that the option price is e.ui!alent to or higher than the current fair market !alue of the asset, 8%; he lessee ac.uires automatic ownership of the asset upon payment of the stated amount of HrentalsI w)c under the contract he is re.uired to make, 8/; &ortions of the periodic rental payments are credited to the purchase price of the asset, 8<; he receipts of payment indicate that the payments made were partial or full payments of the asset. Sec. %.C3. 3 Absence of compelling persuasive factors . In the absence of the abo!e compelling persuasi!e factors or contrary implication, an intent warranting treatment of a transaction for tax purposes as a purchase & sale rather than as a lease or rental agreement, may in general be said to exist if, for example, one or more of the following conditions are present' 8a; &ortions of the periodic payments are made specifically applicable to an e.uity to be ac.uired by the lessee. 8b; he prop. may be ac.uired under a purchase option, at a price w)c is nominal in relation to the !alue of the prop. at the time when the option may be exercised, as determined at the time of entering into the original agreement, or w)c is a
interest fr. lending 8business; T regular tax rate interest income fr. bonds T final tax rate interest on uncollected salary T regular rate interest on foreign bonds T regular if taxable interest on go!ernment bonds T -=E final interest on *bills T -=E final int. earned fr. deposit maintained under (/< 8foreign currency; system T 5 Z E int. on foreign loan contracted by a nonresident foreign corp. on or after Aug. +, +3:B T -=E (inal tax.82ec. -: %, C*a; NI"/. -. "entals)7eases a. 7ease of tangible personal property
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axes & other obligations assumed by the lessee 7easehold the lessee impro!ements by
?hen is rental income recognizedM Rev. Re-u(a tion "o. # Sec. !%. &entals --- ?here a leasehold is ac.uired for business purposes for a specified sum, the purchaser may take as a deduction in his return an ade.uate part of such sum each year, based on the number of years the lease has to run. axes paid by a tenant to or for a landlord for business property are A<<I I9NA7 "0N & constitute a deductible item to the tenant & AOA%70 IN/9J0 to the landlord, the amount of the tax being deductible by the latter. he cost borne by the lessee in erecting buildings or making permanent impro!ements on ground of w)c he is a lessee is held to be a capital in!estment & not deductible as a business expense. In order to return to such taxpayer his in!estment of capital, an annual deduction may be made fr. gross income of an amount e.ual to the cost of such impro!ements di!ided by the number of years remaining of the term of the lease, & such deduction shall be in lieu of a deduction for depreciation. If the remainder of the term of lease is greater than the probable life !alue of the buildings erected, or of the impro!ements made, this deduction shall take the form of an allowance for depreciation. Sec. %9. "mprove m e n ts by lessees --- ?hen buildings are erected or impro!ements made by a lessee in pursuance of an agreement w) the lessor & such buildings or impro!ements are not subKect to remo!al by the lessee, the lessor may at his option report the income therefr. upon either of the following bases' 8a; he lessor may report as income at the time when such buildings or impro!ements are completed the fair market !alue of such buildings or impro!ements subKect to the lease. (completion basis) 8b; he lessor may spread o!er the life of the lease the estimated depreciated !alue of such buildings or impro!ements at the termination of the lease & report as income for each of the lease an ade.uate part thereof. 8 Pro-rated basis) If for any other reason than a bona fide purchase fr. the lessee by the lessor, the lease is terminated so that the lessor comes into possession or control of the prop. prior to the time originally fixed for the termination of the lease, the lessor recei!es additional income for the year in w)c the lease is so terminated to the extent that the !alue of such buildings or impro!ements when he became entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or impro!ements. No appreciation in !alue due to causes other than the premature termination of the lease shall be included. /on!ersely, if the bldg. or impro!ements are
Aim8an vs. &ommissione r 1acts ' he %I" disco!ered that 7impan In!estment /o. underdeclared its rental incomes for taxable years +3CB & +3C5. 7impan, howe!er, argued that it was not supposed to declare said rental income for @CB bec. the pre!ious owners of the leased bldg. still ha!e to collect part of the total rentals. It also claimed that only a part of the amount of &:+,B3=.== for @C5 was turned o!er to the company by their &resident, Isabelo 7im. Also, one of its tenants deposited in court his rentals amounting to &+=,:==.==. 3e(d ' 7impan, ha!ing admitted through its own witness that it had N9 declared more than +)- of the amt. found by the internal re!enue examiners as unreported rental income for @CB & more than +)4 of the amount ascertained by the examiners as unreported rental income for @C5 contrary to its original claim to the re!enue authorities. d. Applicable rate i. ii. Normal) regular rate 0xcept the ff. foreign corps. nonresident
Sec. #$, '4), "IR&. (ax on )onresiden t +oreign Corpora tion. 8+; In #eneral. * 0xcept as otherwise pro!ided in this /ode, a foreign corporation not engaged in trade or business in the &hilippines shall pay a tax e.ual to thirty* fi!e percent 84CE; of the gross income recei!ed during each taxable year from all sources within the &hilippines, such as interests, di!idends, rents, royalties, salaries, premiums 8except reinsurance premiums;, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subKect to tax under subparagraphs 8/; and 8d;' &ro!ided, hat effecti!e +, +33:, the rate of income tax shall be thirty* four percent 84LE;, effecti!e Ranuary +, +333, the rate shall be thirty* three percent 844E;, and, effecti!e Ranuary +, -=== and thereafter, the rate shall be thirty* two percent 84-E;. 8-; Nonresident /inematographic (ilm 9wner, 7essor or <istributor. * A cinematographic film owner, lessor, or distributor shall pay a tax of twenty* fi!e percent 8-CE; of its gross income from all sources within the &hilippines. 84; Nonresident 9wner or 7essor of 6essels /hartered by &hilippine Nationals. * A nonresident owner or lessor of !essels shall be subKect to a tax of four and one* half percent 8L +)-E; of gross rentals, lease or charter fees from leases or charters to (ilipino citizens or corporations, as appro!ed by the Jaritime Industry Authority.
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L. <i!idends a. ?hat is di!idend incomeM i. ii. $ow is di!idend income earned Finds of di!idend income a. /ash di!idend b. 2tock di!idend) stock rights c. &roperty di!idends
d. 7i.uidating di!idends b. <isguised di!idend) payments e.ui!alent to di!idend distribution excessi!e di!idends compensation) rental in lieu of
iii. i!.
Sec. #! 'D,1). &ates of (ax on Certain 'assive "ncomes. 8+; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes and from rust (unds and 2imilar Arrangements, and "oyalties. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements recei!ed by domestic corporations, and royalties, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income deri!ed by a domestic corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. Sec. #$ '!,a ) (ax on Certain "ncomes &eceived by a &esident +oreign Corpora tion. 6 8a; Interest from <eposits and Dield or any other Jonetary %enefit from <eposit 2ubstitutes, rust (unds and 2imilar Arrangements and "oyalties. * Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties deri!ed from sources within the &hilippines shall be subKect to a final income tax at the rate of twenty percent 8-=E; of such interest' &ro!ided, howe!er, hat interest income deri!ed by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income. #CI 1I"AA tax
Sec. !3 '&), "IR&. Dividends Distri<ut e d are Deeme d ,ade from ,ost Recent(5 Accumu(a t e d +rofits. * Any distribution made to the shareholders or members of a corporation shall be deemed to ha!e been made form the most recently accumulated profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which recei!ed. 'D) "et Income of a +artne rs6i8 Deeme d &onstructiv e(5 Received <5 +artne rs. * he taxable income declared by a partnership for a taxable year which is subKect to tax under 2ection -5 8A; of this /ode, after deducting the corporate income tax imposed therein, shall be deemed to ha!e been actually or constructi!ely recei!ed by the partners in the same taxable year and shall be taxed to them in their indi!idual capacity, whether actually distributed or not. Rev. Re-. #, Secs. #*C- #*3 he distinction between a stock di!idend w)c does not, & one w)c does , constitute income taxable to the shareholder is the distinction between a stock di!idend w)c works no change in the corporate entity, the same interest in the same corp. being represented after the distribution by more shares of precisely the same character, & a stock di!idend where there either has been a change of corporate identity or a change in the nature of the shares issued as di!idends whereby the proportional interest of the shareholders after the distribution is essentially different fr. his former interest. A stock di!idend constitutes income if it gi!es the shareholder an interest different fr. that w)c his former stock holdings represented. A stock di!idend does not constitute income if the new shares confer no different rights or interest than did the old * the new certificates Q the old representing the same proportionate interest in the net assets of the corp. as did the old. A true stock di!idend is not subKect to tax on its receipt in the hands of the recipient. Ne!ertheless, if a corporation after the distribution of a stock di!idend, proceeds to cancel or redeem its stock at such time & in such
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Sec. 3# '4, !, a), "IR&. "ncome erived by +oreign Governm e n t . * Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments. C. Annuities & proceeds fr. life insurance a. axable income)computation Art. #C#1 "&& . he aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property, whose ownership is transferred to him at once w) the burden of the income. Sec. 3# 'a,$ ) "IR&. Gross income. #a$ General definition . - #ross income means all income fr. whate!er source deri!ed, including 8 but not limited to ; the following items' 8:; Annuities b. 0xclusions i. &roceeds of 7ife insurance ?hat is insuranceM Is casualty insurance a life insurance contractM
Are proceeds of non* life or property insurance taxableM &re*need contractsM Sec. 3# '<,1 ) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 8+; 7ife Insurance . * he proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. Sec. 6# Rev. Re-. #. &roceeds of life insurance are excluded fr. gross income bec. they partake more of indemnity or compensation rather than gain to the recipient. In case of a transfer for a !aluable consideration, by assignment or otherwise, of a life insurance, endowment or annuity contract or any interest therein only the actual !alue of such consideration & the amount of the premiums & other sums subse.uently paid by the transferee shall be tax* exempt. ii. "eturn of premium paid ?hat is cash surrender !alueM /omputing income in annuity contracts Sec. 3# '<,# ) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 8-; Amount "ecei!ed by Insured as "eturn of &remium. * he amount recei!ed by the insured, as a return of premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the
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Sec. 3#. 4. 8 =$ Compensa tion for "n>uries or %ickness . * amounts recei!ed, through Accident or $ealth Insurance or under ?orkmenNs /ompensation Acts, as compensation for personal inKuries or sickness, plus the amounts of any damages recei!ed, whether by suit or agreement, on account of such inKuries or sickness. 2ec. B4 "" -. B. &rizes & winnings) Awards) "ewards a. axable items i. ii. iii. gambling winnings)contests)raffle prizes small town lottery winnings rewards under 2ec. -:- NI"/) informers reward +=E (INA7 w)holding tax
Sec. 3# '<, !d) "IR&. Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 85; ,isce((aneous items2 8d; +ri?es and A0ards in s8orts &om8e ti tion . * All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the &hilippines or abroad and sanctioned by their national sports associations. iii. &rizes & charitable) literary awards) scientific) religious) artistic)
Sec. 3# 'a, 9) "IR&. Gross income. #a$ General definition. * #ross income means all income fr. whate!er source deri!ed, including 8 but not limited to ; the following items' 83; &rizes & winnings b. 0xclusions) 0xemptions i. &hil. /harity lotto winnings 2weepstakes and
Sec. #%. '4 $ &ate of (ax on Certain 'assive "ncome. 8+; Interests, "oyalties, &rizes, and 9ther ?innings. * A final tax at the rate of twenty percent 8-=E; is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent 8+=E;, prizes 8except prizes amounting to en thousand pesos 8&+=,===; or less which shall be subKect to tax under 2ubsection 8A; of 2ection -L, and other winnings 8except &hilippine /harity 2weepstakes and 7otto winnings;, deri!ed from sources within the &hilippines' &ro!ided, howe!er, hat interest income recei!ed by an indi!idual taxpayer 8except a nonresident indi!idual; from a depository bank under the expanded foreign currency deposit system shall be subKect to a final income tax at the rate of se!en and one* half percent 85 +)-E; of such interest income' &ro!ided, further, hat interest income from long* term deposit or in!estment in the form of sa!ings, common or indi!idual trust funds, deposit substitutes, in!estment management accounts and other in!estments e!idenced by certificates in such form prescribed by the %angko 2entral ng &ilipinas 8%2&; shall be exempt from the tax imposed under this 2ubsection' &ro!ided, finally, hat should the holder of the certificate pre* terminate the deposit or in!estment before the fifth 8C th ; year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long* term deposit or in!estment certificate based on the remaining
ReKuisites for exc(usion Sec. 3# '<, !c) "IR& . Exclusions fr. gross income . * he ff. items shall not be included in gross income & shall be exempt fr. taxation under this itle' 85; Jiscellaneous items' 8c; &rizes and Awards. * &rizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or ci!ic achie!ement but only if' 8i; he recipient was selected without any action on his part to enter the contest or proceeding, and 8ii; he recipient is not re.uired to render substantial future ser!ices as a condition to recei!ing the prize or award. 5. #ifts)%e.uests)<e!ises ax treatment of remunerati!e donation 0xtended) but income from such property taxable Sec. 3# '4, 3) "IR&. 4. #ifts, %e.uests, and <e!ises. X he !alue of property ac.uired by gift, be.uest, de!ise, or descent' &ro!ided, howe!er, hat income from such property, as well as gift, be.uest, de!ise or descent of income from any property, in cases of transfers of di!ided interest, shall be included in gross income. :. 9ther types of passi!e income a. (ound treasure T regular rate b. "efund of tax or reco!ery of bad debt pre!iously deducted T regular tax rate c. /. <amages #ains deri!ed from dealings in property
S9&. 39. &a8ita( :ains and Aosses. 8A; <efinitions. * As used in this itle * 8+; /apital Assets. * the term Ncapital assetsN means property held by the taxpayer 8whether or not connected with his trade or business;, but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the in!entory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to
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'I can;t find Sec. 16 'e) in t6e &TRA and Sec. ## 'J) is repe ti tion? its coming back to me? repeti tion? the only thing " can see? 3biter *aster@$ Sec. 1##, Rev. Re-. # Losses fr. sales or exchanges of property . No deduction is allowed in respect of losses fr. sales of exchanges of property, directly or indirectly,* 5. %etween members of a family 8whole or half siblings, spouse, ancestors & lineal descendants;, :. %etween an indi!idual & a corporation more than C=E in !alue of the outstanding stock of w)c is owned, directly or indirectly by or for such indi!idual except in the case of distributions in li.uidation, 3. %etween two corporations more than C=E in !alue of the outstanding stock of each of w)c is owned, directly or indirectly, by or for the same indi!idual, if either one of the corps. w) respect to the taxable year of the corp. preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, except in the cases of distributions in li.uidation, +=. %etween a grantor & a fiduciary of any trust, ++. %etween the fiduciary of a trust & the fiduciary of another trust, if the same person is a grantor w) respect to each trust, or +-. %etween a fiduciary of a trust & a beneficiary of such trust. Sec. 13#, Rev. Re-. # efinition of capital assets . he law pro!ides that the term capital assets shall be held to mean property held by the taxpayer 8?9N connected w) his trade or business; . . . Same as Sec. 33, NIRC. he term capital asset includes all classes of property not specifically excluded by 24= 8a;. he exclusion fr. the term Hcapital assetsI by property used in the trade or business of the taxpayer of a character w)c is subKect to the allowance for depreciation in 24= 8f; NI"/ * is limited to property used by the taxpayer in the trade or business at the time of the sale or exchange 8&; it has no application to gains or losses arising fr. the sale of real property used in the trade or business to the extent that such gain or loss is
?hat is ordinary
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3e(d2 N9. ?hen pet. inherited the properties, he got not only the duty to respect any contract thereon but also the correlati!e right to recei!e & enKoy the fruits of the business & the property w)c the decedent had established. Also, pet. owned other properties w)c he rented out, fr. w)c he periodically deri!ed a substantial income, & for w)c he had to pay the real estate dealers tax, w)c he used to deduct fr. his gross income. 1nder the circumstances, pets sale of the lots forming part of his rental business cannot be characterized as other than sales of non* capital, or ordinary assets. 8remember exceptions in 244;. &a(asan? vs. &om. 1%% S&RA 6%% 1acts2 &etitioner inherited fr. her father an agricultural land in "izal. In order to li.uidate her
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35
Sec. %C'&, #) 9xce8tion . * No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation* 8a; A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation, or 8b; A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation, or 8c; A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.
36
37
Sec. 36 "IR&. '4) Losses from %ales or Exchanges of 'roperty . * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly T 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust, or 8B; %etween a fiduciary of a trust and beneficiary of such trust. Illegal transactions i!. #ains & losses attributable 8to; taxpayers failure to exercise pri!ileges or options to buy)sell prop. d. 0xclusions' #ains deri!ed fr. buying & selling shares of stock listed & traded through the local exchange
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other than the sale by a dealer in securities, +)- of +E of the gross selling price or gross !alue in money of the shares of stock
sold, bartered, exchanged or otherwise disposed w)c shall be paid by the seller or transferor. (B) %a& on S#ares o! Stock Sold or '&c#anged t#ro"g# Initial P"blic *!!ering here shall be le!ied, assessed & collected on e!ery sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates pro!ided hereunder based on the gross selling price or gross !alue in money of the shares of stock sold bartered, exchanged or otherwise disposed in accordance w) the proportion of shares of stock sold, bartered, exchanged or otherwise disposed
to the total outstanding shares of stock after the listing in the local stock exchange' 1p to -CE ' LE 9!er -CE but not o!er 44 +)4E ' -E 9!er 44 +)4E ' +E he tax herein imposed shall be paid by the offering issuing corporation
(or purpose of this 2ection, the term @closely held corporation means any corporation at least C=E in !alue of the outstanding capital stock or at least C=E of the total combined !oting power of all classes of stock entitled to !ote is owned directly or indirectly by or for not more than -= indi!iduals. (or purposes of determining whether the corporation is a closely held corporation insofar
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8-; Ret"rn o! P"blic *!!ering o! S#ares o! Stock T In case of primary offering, the corporate issuer shall file the return & pay the corresponding tax w)in thirty 84=; days fr. the date of listing of the shares of stock in the local stock exchange. In the case of secondary offering, the pro!ision of 2ubsection 8/;8+; of this 2ection shall apply as to the time & manner of the payment of the tax. 8<; Common Pro isions T Any gain deri!ed fr. the sale, barter, exchange or other disposition of shares of stock under this 2ection shall be exempt fr. the tax imposed in 2ections -L8/;, -58<;8-;, -:8A;8:;8c;, & -:8%; 8C;8c; of this /ode & fr. the regular indi!idual or corporate income tax. ax paid under this 2ection shall not be deductible for income tax purposes . e. Applicable tax rate S9&. #%. Income Tax Rates. 8A; "ates of Income ax on Indi!idual /itizen and Indi!idual "esident Alien of the &hilippines. 8+; An income tax is hereby imposed' 8a; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within and without the &hilippines be e!ery indi!idual citizen of the &hilippines residing therein, 8b; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8%;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual citizen of the &hilippines who is residing outside of the &hilippines including o!erseas contract workers referred to in 2ubsection8/; of 2ection -4 hereof, and 8c; 9n the taxable income defined in 2ection 4+ of this /ode, other than income subKect to tax under 2ubsections 8b;, 8/; and 8<; of this 2ection, deri!ed for each taxable year from all sources within the &hilippines by an indi!idual alien who is a resident of the &hilippines. he tax shall be computed in accordance with and at the rates established in the following schedule'
40
41
42
43
44
45
2tock transactions T sale of domestic shares classified as capital assets but not traded and listed in the &hil. 2tock 0xch. CE * +=E 2ale of real prop classified as capital asset T BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher 2ale of land and building by a corp. BE (INA7 AO based on gross selling price or zonal !alue whiche!er is higher ii. "egular tax on N0 #AIN /A&I A7
<. #ross income deri!ed from the /onduct of rade or %usiness or the 0xercise of a &rofession, +. /omputation of taxable income fr. business) conduct of trade or profession.
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of the functions
of a
82ec.-- 8s; , NI"/ T su8ra. ; g. other types of business -. 0xclusions a. Income exempt under a treaty Sec. 3# '4 *)M "ncome Exempt under (rea ty . - Income of any kind, to the extent re.uired by any treaty obligation binding upon the #o!ernment of the &hilippines. b. Income deri!ed by the go!t. or its political subd. fr. the exercise of any essential go!t. function. Sec. 3# '4 !) "IR& '!) ,isce((aneous Items. 'a) Income Derived <5 1orei-n :overnm e n t . Income deri!ed from in!estments in the &hilippines in loans, stocks, bonds or other domestic securities, or from interest on deposits in banks in the &hilippines by 8i; foreign go!ernments, 8ii; financing institutions owned, controlled, or enKoying refinancing from foreign go!ernments, and 8iii; international or regional financial institutions established by foreign go!ernments.
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d; those enKoyed by the copper mining industry pursuant to the pro!isions of 79I No. +L+B, e; those conferred under the four basic codes namely' 8i; 8ii; 8iii; 8i!; the ariff & /ustoms /ode, as amended, the National Internal "e!enue /ode, as amended, the 7ocal ax /ode, as amended, the "eal &roperty ax /ode, as amended,
f; those appro!ed by the &resident upon the recommendation of the (iscal Incenti!es "e!iew %oard. S9&. #. he (iscal Incenti!es "e!iew %oard, created under &< No. 55B, as amended, is hereby authorized to' a; restore tax &)or duty exemptions w)drawn hereunder in whole or in part, b; re!ise the scope & co!erage of tax &)or duty exemption, c; impose conditions for the restoration of tax &)or duty exemption, d; prescribe the date or period of effecti!ity of the restoration of tax &)or duty exemption, e; formulate & submit to the &resident for appro!al, a complete system for the grant of subsidies to deser!ing beneficiaries, in lieu of or in combination w) the restoration of tax & duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries & the terms & conditions for the grant thereof taking into consideration the international commit ments of the &hilippines & the necessary precautions such that the grant of subsidies does not become the basis for counter!ailing action. Sec. % '3), Art EID, &onstitution **All re!enues & assets of non* stock, non* profit educational institutions used actually, directly & exclusi!e for educational purposes shall be exempt fr. taxes & duties. 1pon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner pro!ided by law. Sec. % '%), Art. EID, &onstitu tion ** 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used actually, directly, & exclusi!ely for educational purposes shall be exempt fr. tax. Sec. #$ '3), Art. DI, &onstitution **/haritable institutions, churches & parsonages or con!ents appurtenant thereto, mos.ues, non* profit cemeteries, & all lands, buildings, & impro!ements, actually, directly & exclusi!ely
48
49
Sec. %#. #4$ (axable "ncome +rom %ources !ithin the 'hilippines. 8+; #eneral "ule. * (rom the items of gross income specified in 2ubsection 8A; of this 2ection, there shall be deducted the expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effecti!ely connected with the business or trade conducted exclusi!ely within
50
Sec. %#. '&) :ross Income 1rom Sources it6out t6e +6i(i88ines . * he following items of gross income shall be treated as income from sources without the &hilippines' 8+; Interests other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8+; of 2ubsection 8A; of this 2ection, 8-; <i!idends other than those deri!ed from sources within the &hilippines as pro!ided in paragraph 8-; of 2ubsection 8A; of this 2ection, 84; /ompensation for labor or personal ser!ices performed without the &hilippines, 8L; "entals or royalties from property located without the &hilippines or from any interest in such property including rentals or royalties for the use of or for the pri!ilege of using without the &hilippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties, and 8L; #ains, profits and income from the sale of real property located without the &hilippines. Sec. #%. # $ (axable "ncome +rom %ources !ithou t the 'hilippines . * (rom the items of gross income specified in 2ubsection 8/; of this 2ection there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expense, loss or other deduction which cannot definitely be allocated to some items or classes of gross income. he remainder, if any, shall be treated in full as taxable income from sources without the &hilippines. -. #eneral principles of income taxation in the &hilippines and situs of sources of income S9&. #3. General 'rinciples of "ncome (axation in the 'hilippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a
%EC. 2=. eductions from Gross "ncome . * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, 'A) 9x8enses . *
51
52
53
54
55
56
57
D91I"ITIO" . <eductions are items or amounts w)c the law allows to be deducted fr. gross income in order to arri!e at taxable income. -. %asic &rinciples In <eductions) "e.uisites #o!erning
he taxpayer seeking a deduction must point to some specific pro!isions of the statute authorizing the deduction. deductions are allowed only when there is a clear pro!ision in the statute for the deduction claimed. $e must be able to pro!e that he is entitled to the deduction authorized or allowed. As a rule, if the taxpayer does not w)in any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them form the income o the next or any succeeding year. 4USI"9SS 9E+9"S9 DS. &A+ITAA 9E+9"S9 %usiness expenses deductible fr. gross income are the ordinary & necessary expenses paid or incurred during the taxable year in carrying on the taxpayers trade, profession or business.
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Sec. 3% 8A, +, a, i;. A reasonable allowance for salaries, wages, and other forms of compensation for personal ser!ices actually rendered, including the grossed* up monetary !alue of fringe benefit furnished or granted by the employer to the employee' &ro!ided, hat the final tax imposed under 2ection 44 hereof has been paid, Rev. Re-. 6- $# as amende d <5 Rev. Re-. 1#$! his co!ers the collection at the source of the D tax on compensation D of employed indi!idual taxpayers. he only impt. sections in this "" co!er the defn. of /ompensation 8A2 IN/9J0 (9" $0 00 AN< A2 <0<1/ I%70 0O&0N20 (9" $0 0"; & its other forms 8tra!eling, representation, etc.; Secs. !C- !3 Rev. Re-. # Section !C. Compensa tion for personal services . Among the ordinary & necessary expenses paid for incurred in carrying on any trade or business maybe included a reasonable allowance for salaries or other compensation for personal ser!ices actually rendered. he test of deductibility in the area of compensation payments is whether they T Are reasonable & Are, in fact, purely for ser!ice. his test & its practical application may be further stated & illustrated as follows' Any amount paid in the form of compensation, but not in fact as the purchase price ser!ices, is not deductible. An ostensible salary paid by a corporation may be distribution of di!idend on stock. his is likely to occur in the case of a corporation ha!ing few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar ser!ices, & the excessi!e payments corresponds or bear a close holding to the relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for ser!ices rendered, but that excessi!e payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. his may occur, for example, where a partnership sells our a corporation, the farmer partners agreeing to continue in the ser!ice of the corporation. In such a case it may be found that the salaries of the farmer partners are not merely for ser!ices, but in part constitute payment of the transfer of the business. he form of method of fixing compensation is not decisi!e as to deductibility. ?hile any form of contingent compensation in!ites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different fr. that
Sec. 3% '1,<) %ubstanti a tion &e:uire m e n ts . No deduction from gross income shall be allowed under 2ubsection 8A; hereof unless the taxpayer shall substantiate with sufficient e!idence, such as official receipts or other ade.uate records' 8i; the amount of the expense being deducted, and 8ii; the direct connection or relation of the expense being deducted to the de!elopment, management, operation and)or conduct of the trade, business or profession of the taxpayer. B. Allocation of expenses and deductions S9&. *C. Allocation of "ncome and eductions . * In the case of two or more organizations, trades or businesses 8whether or not incorporated and whether or not organized in the &hilippines; owned or controlled directly or indirectly by the same interests, the /ommissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determined that such distribution, apportionment or allocation is necessary in order to pre!ent e!asion of taxes or clearly to reflect the income of any such organization, trade or business. %. Allowable deduction from business income) trade or practice of profession +. 9rdinary) Necessary %usiness 0xpenses
S9&. 3%. Deductions from :ross Income . * 0xcept for taxpayers earning compensation income arising from personal ser!ices rendered under an employer* employee relationship where no deductions shall be allowed under this 2ection other than under subsection 8J; hereof, in computing taxable income subKect to income tax under 2ections -L 8A;, -C 8A;, -B, -5 8A;, 8%; and 8/;, and -: 8A; 8+;, there shall be allowed the following deductions from gross income, 'A) 9x8enses . * '1) Ordinar5 and "ecessar5 Trade, 4usiness or +rofessiona( 9x8enses .* 8a; In #eneral. * here shall be allowed as deduction from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the de!elopment, management, operation and)or conduct of the trade, business or exercise of a profession, including'
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to maintain efficient working condition does not prolong life or add !alue repair and maintenance expense !. capital expense
Sec. 3%., see a<ove na lang please. Sec. 6$. Rev. Re-. "o. #. &epairs. he cost of incidental repairs w)c neither T materially add to the !alue of the property nor appreciably prolong its life but keep it in an ordinary)efficient operating condition may be deducted as an expense, pro!ided the plans or property account is not increased by the amount of such expenditure. "epairs in the nature of replacement, to the extent that they arrest deterioration, & appreciably prolong the life of the property depreciation
here and abroad while away from home in the pursuit of trade, business or profession
Sec. 3%. 'A, 1, a). 8ii; A reasonable allowance for tra!el expenses, here and abroad, while away from home in the pursuit of trade, business or profession, Sec. 66. Rev. "o. # (raveling expenses . ra!eling expenses as ordinarily understood, include transportation expenses & meals & lodging. If the trip is undertaken for other than business purposes, * the transportation expenses are personal expense, & the meals & lodgings are li!ing expenses, & therefore, not deductible. If the trip solely on business, the reasonable & necessary tra!eling expenses, including transportation expenses, meals & lodging, becomes business instead of personal expenses. If then, an indi!idual whose business re.uires him to tra!el, * recei!es a salary as full compensation for his ser!ices w)o reimbursement for tra!eling expenses, or is employed on a commission basis w) no expenses allowance, his tra!eling expenses, including the entire amount expended for meals & lodging are deductible fr. gross income. If an indi!idual recei!es a salary &
&ommissione r Ds. Soriano 3e(d2 0xpenditures for replacements, alterations & impro!s.)additions w)c either prolong the life of the property or increase its !alue are capital in nature & are not deductible. :UTI9RR9J DS. &OAA9&TOR 1acts2 # was primarily engaged in the business of leasing property for w)c he paid real estate brokers pri!ilege tax. $e claimed dedns for electrical supplies, paint, labor, cement, tiles, gra!el, masonry & labor used to repair the taxpayers rental apartments did not increase the !alue nor prolong its life, but merely kept the apartments in an ordinary operating condition, hence necessary expenditures for the maintenance of his business. 3e(d2 0xpenses for watching o!er laborers in construction work are not deductible. he acti!ity is more akin to construction work than running a business. /onstruction costs are capital expenditure. d. "0N A72)70A20 and)or other payments which are re.uired as a condition for the continued use or possession
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Sec. 3%. A. 1. a. 'iv) A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the de!elopment, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the 2ecretary of (inance may, by rules and regulations prescribe, upon recommendation of the /ommissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or
A farmer who operates a farm for profit is entitled to deduct amounts actually expended in carrying on the business. <eductible' /ost of 8+; tools of short life or small cost & 8-;of feeding & raising li!estock in so far as it represents actual outlay but not including the !alue of the farm produce grown upon the farm & 84; of gasoline or fuel, repairs & upkeep of the transportation e.pt. N9 deductible' 8+; costs of farm machinery, e.pt & farm bldgs. & 8-; amts. expended in the de!t. of farm orchards & ranches, prior to the time when the producti!e state is reached. 2uch are regarded as in!estments of capital or capital expenditures & may be depreciated. :A"&AB&O DS. &OAA9&TOR 1acts2 <eficiency D taxes le!ied. #ancayco claims farming expenses are deductible 8for the de!t. & culti!ation of his prop;. 3e(d2 No e!id. presented as to the nature of the farming expenses, other than #s statement. /ollector claims that the expense was for clearing & de!t., nec. to place it in a producti!e state. It is not an ordinary expense but a capital expenditure.
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Trea t m e n t of t6e ff.2 +. Ad!ertising expense -. &romotional expense 4. 7itigation expense L. /apitalization) reorganization expense
a. "0G1I2I 02 (9" <0<1/ I9N. i. paid or incurred taxable year, during the
h.
ii.
Sec. 3%. A. '#). 9x8enses A((o0a<(e to +rivate 9ducationa( Institu tions . * In addition to the expenses allowable as deductions under this /hapter, a pri!ate educational institution, referred to under 2ection -5 8%; of this /ode, may at its option elect either' 8a; to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or 8b; to deduct allowance for depreciation thereof under 2ubsection 8(; hereof. -. IN 0"02 0O&0N20
iii. 2ubKect to limitation' Interest paid on back* to* back loan shall be reduced by an amount [ to the ff. percentages of the in. income subK. to final tax' (orty* one percent 8L+E; beginning Ranuary +, +33:, hirty* nine percent 843E; beginning Ranuary +, +333, and hirty* eight percent 84:E; beginning Ranuary +, -===,
b. N9N*<0<1/ I%70 IN 0"02 Sec. 3%. '4) Inte res t. '1) In :enera( . * he amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayerNs profession, trade or business shall be allowed as deduction from gross income' &ro!ided, howe!er, hat the taxpayerNs otherwise allowable deduction for interest expense shall be reduced by an amount e.ual to the following percentages of the interest income subKected to final tax' (orty* one percent 8L+E; beginning Ranuary +, +33:, hirty* nine percent 843E; beginning Ranuary +, +333, and hirty* eight percent 84:E; beginning Ranuary +, -===, '#) 9xce8tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness petroleum exploration. is incurred to finance c. IN 0"02 &AI< IN 0"02 AJ9" IU0<. IN A<6AN/0) &0"I9<I/A77D
Sec. 3%. '#) 9xce8tions . * No deduction shall be allowed in respect of interest under the succeeding subparagraphs' 8a; If within the taxable year an indi!idual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in ad!ance through discount or otherwise' &ro!ided, hat such interest shall be allowed a deduction in the year the indebtedness is paid' &ro!ided, further, hat if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year, 8b;If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under 2ection 4B 8%;, or 8c;If the indebtedness is incurred to finance petroleum exploration. d. 9ptional expense. treatment of interest
Sec. 3%. 4. '3) 3ptional (rea t m e n t of "nte res t Expense . * At the option of the taxpayer, interest incurred to ac.uire property used in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure. 4. AO02
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c.
reatment of tax deducted and subse.uently credited or refunded shall be included as part of gross income in the year of receipt.
d. 7imitations on <eductions Nonresident alien) resident foreign corp. connected w) income fr. sources w)in the &hils. e. ax /"0<I .
Sec. 3%. &. '3) Credit Against (ax for (axes of +oreign Countries . * If the taxpayer signifies in his return his desire to ha!e the benefits of this
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i!. 7imitations on credit. %a& Credit * refers to the tax payers right to deduct fr. the income tax due the amount of the tax he has paid in a foreign country subKect to limitation. It is allowed to lessen the rigor of Intl double or multiple taxation 1istinct !r. %a& 1ed"ction TAE &R9DIT ax deducted fr. income tax itself all taxes, as a general rule are allowed as deduction w) the exception of the 5 kinds of taxes expressly excluded TAE D9DU&TIO" tax deducted fr. computing the taxable income only three kinds of foreign taxes may be claimed as credits against &hil. income tax i.e. foreign income, war* profits & excess* profits tax.
Secs. $C- $3 Rev. Re-. # Sec. $C. RR "o. #. (axes in General .* As a general rule, taxes are deductible w) the exception of those w) respect to w)c the law does not permit deduction. $owe!er, in the case of a nonresident alien indi!idual & a foreign corporation, deduction is allowed only if & to the extent that the taxes for w)c deduction is claimed are connected w) the income fr. sources w)in "&. Import duties paid to the proper customs officers, & business occupation, license pri!ilege, excise & stamp taxes & any other taxes of e!ery name & nature paid directly to the #o!ernment of the "& or to any political sub. thereof, are deductible. he word 2ta&es3 means ta&es. Proper ) no ded"ction s#o"ld be allo+ed !or amo"nts representing interest, s"rc#arge or penalties incident to delin4"enc,.. &ostage is not a tax. Automobile registration fees are considered taxes. Htaxes are deductible as such only by the person upon whom they are imposed.I hus the merchants sales tax imposed by law upon sales is not deductible by the indi!idual purchaser e!en though the tax may be billed to him as a separate item. In computing the net income of an indi!idual, no deduction is allowed for the tax is imposed upon his interest as a shareholder of a bank or other corporation. w)c are paid by the corporation w)o reimbursements fr. the taxpayer. he amount s paid should not be included in the income of the shareholder. In the case of corporate bonds or other obligations containing a tax* free co!enant clause, the corporation paying the tax or any part of it, for someone else, pursuant to its agreement is not entitled to deduct such payment fr. gross income on any ground. Sec. $1. RR. "o. #. "ncome tax imposed by the govern m e n t . - he law does not permit the deduction of the income tax paid or accrued in fa!or of the go!ernment & in no case may the taxpayer a!ail of such deduction. Sec. $#. RR "o. # "ncome5 war- profits 0 excess profits taxes imposed by the au t6orit5 of a forei-n countr5 . T Income, war* profits & excess* profits taxes imposed by the authority of a foreign country are allowed as deductions only if the taxpayer does not signify in his return his desire to ha!e to any extent the benefits of the pro!isions of law allowing credits against the tax for taxes of foreign countries. Sec. $3. RR "o. # Estate inheri ta nc e 0 gift taxesF taxes as sessed a-ainst (oca( <enefi ts.- 9state , in6eri ta nc e H -ift taxes are not deducti<(e. 2o*called taxes, property assessments paid for local benefits such as street, sidewalk & other impro!ements imposed bec. of & measured by some benefit inuring directly to the property against w)c the assessment is to be le!ied, do not constitute an allowable deduction fr. gross income tax. A tax is considered assessed against
%ec. 2=. C. #=$ Limita tions on Credit . * he amount of the credit taken under this 2ection shall be subKect to each of the following limitations' 8a; he amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources within such country under this itle bears to his entire taxable income for the same taxable year, and 8b; he total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayerNs taxable income from sources without the &hilippines taxable under this itle bears to his entire taxable income for the same taxable year. !. 9ther re.uirements.
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Sec. 3%. 'D) Aosses. F '1) "n General . * 7osses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions' 8a; If incurred in trade, profession or business, 8b; 9f property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement. he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. 8-; &roof of 7oss. * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a
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b.
+. 9rdinary 7osses') %usiness 7oss -. /asualty 7oss 4. /apital 7oss S8ecia( =inds of (osses2 +. 7osses fr. wash sales of stock or securities, -. 7osses due to in!oluntary remo!al of buildings, machinery, etc. incident to renewal or replacement, 4. 7osses of the useful !alue of capital assets due to some change in business conditions, & L. Abandonment losses in petroleum operations. Secs. 9% F 1CC . 1C% of rev. Re-. "o. # are incorporated in the following topics'
Sec. 3%. D. 1. <. x x x he 2ecretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, howe!er, hat the time limit to be so prescribed in the rules and regulations shall not be less than thirty 84=; days nor more than ninety 83=; days from the date of disco!ery of the casualty or robbery, theft or embezzlement gi!ing rise to the loss. 8c; No loss shall be allowed as a deduction under this 2ubsection if at the time of the filing of the return, such loss has been claimed as a deduction for estate tax purposes in the estate tax return. 8-; &roof of 7oss. * In the case of a nonresident alien indi!idual or foreign corporation, the losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the &hilippines, when such losses are not compensated for by insurance or other forms of indemnity. he secretary of (inance, upon recommendation of the /ommissioner, is hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or embezzlement during the taxable year' &ro!ided, hat the time to be so prescribed in the rules and regulations shall not
c.
+. Just be that of the taxpayer -. Just be actually sustained & charged off w)in the taxable year
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'3) "et O8era ti n- Aoss &arr5- Over . * he net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been pre!iously offset as deduction from gross income shall be carried o!er as a deduction from gross income for the next three 84; consecuti!e taxable years immediately following the year of such loss' &ro!ided, howe!er, hat any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this 2ubsection' &ro!ided, further, hat a net operating loss carry* o!er shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that * 8i; Not less than se!enty* fi!e percent 85CE; in nominal !alue of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons, or 8ii; Not less than se!enty* fi!e percent 85CE; of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. S(or purposes of this subsection, the term Nnot operating lossN shall mean the excess of allowable deduction o!er gross income of the business in a taxable year. &ro!ided, hat for mines other than oil and gas wells, a net operating loss without the benefit of incenti!es pro!ided for under 0xecuti!e 9rder No. --B, as amended, otherwise known as the 9mnibus In!estments /ode of +3:5, incurred in any of the first ten 8+=; years of operation may be carried o!er as a deduction from taxable income for the next fi!e 8C; years immediately following the year of such loss. he entire amount of the loss shall be carried o!er to the first of the fi!e 8C; taxable years following the loss, and any portion of such loss which exceeds, the taxable income of such first year shall be deducted in like manner form the taxable income of the next remaining four 8L; years. i!. /A&I A7 7922.
Sec. 3%. D. '*) Aosses 1rom as6 Sa(es of Stoc= or Securities . * 7osses from Nwash salesN of stock or securities as pro!ided in 2ection 4:. '6) a-erin- Aosses . * 7osses from wagering transactions shall b allowed only to the extent of the gains from such transactions. '!) A<andon m e n t Aosses . * 8a; In the e!ent a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and de!elopment expenditures pertaining thereto shall be allowed as a deduction' &ro!ided, hat accumulated expenditures incurred in that area prior to Ranuary +, +353 shall be allowed as a deduction only from any income deri!ed from the same contract area. In all cases, notices of abandonment shall be filed with the /ommissioner. 8b; In case a producing well is subse.uently abandoned, the unamortized costs thereof, as well as the undepreciated costs of e.uipment directly used therein , shall be allowed as a deduction in the year such well, e.uipment or facility is abandoned by the contractor' &ro!ided, hat if such abandoned well is reentered and production is resumed, or if such e.uipment or facility is restored into ser!ice, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be. 7osses fr. wash sales of stock or securities wagering losses abandonment losses 8petroleum operations.; +(aride( Suret5 D. &o((ector of IR
Sec. 3%. D. #=$ Capital Losses. 8a; 7imitation. * 7oss from sales or 0xchanges of capital assets shall be allowed only to the extent pro!ided in 2ection 43. 8b; 2ecurities %ecoming worthless. * If securities as defined in 2ection -- 8 ; become worthless during the taxable year and are capital assets, the loss resulting therefrom shall, for purposes of this itle, be considered as a loss from the sale or exchange, on the last day of such taxable year, of capital assets. 7osses fr. sales or exchange of capital assets 2ecurities becoming worthless.
1acts2 he /ollector of Internal "e!enue disallowed a 7922 deduction by the petitioner, said deduction was for the payment of a performance bond w)c &laridel pre!iously issued on behalf of certain debtor)principals who defaulted on their obligation. 3e(d2 he /ourt upheld the /I" in disallowing the deduction bec. the loss sustained by &laridel 2urety was compensated for 8by insurance or; otherwise &, therefore, it has not in fact & in law suffered any loss. he alleged deductible loss was co!ered by a Kudicially enforceable right based on a contract T an indemnity agreement signed by the debtor)principals in fa!or of the 2urety /o., w)c had
69
included as part of the gross income in the year of reco!ery to the extent of the income tax benefit of said deduction. e. 2ecurities becoming worthless. +. -. 4. L. ascertained to be worthless and charged off w)in the taxable year are capital assets the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust co. incorporated under the laws of the &hils. a substantial part of whose business is the
70
hat the taxpayer did in fact ascertain the debt to be worthless in the year for w)c deduction was sought, & hat in doing so acted in good faith. &OAA9&TOR v. :OODRI&3
1acts2 #oodrich claimed deductions on se!eral bad debts. Jost of the debtors were merely sent demand letters. 2ome debtors mad partial payments, others later paid the debt in full. he /I" disallowed these as deductions. 3e(d2 he claimed deductions should be reKected. he re.uirement of ascertainment needs proof of two facts 8see abo!e discussion;. #ood faith on the part of the taxpayer is not enough. $e must show also that he had reasonably in!estigated the rele!ant facts & had drawn a reasonable inference fr. the information thus obtained by him. "espondent herein has not ade.uately made such showing. he payments made, some in full, after the accounts had been characterized as bad debts, merely stresses the undue haste w) w)c the same had been written off. +R& v. &A 1acts2 &hil. "efining /ompany protested the disallowance by the /I" of bad debts & interest expenses w)c the former listed as deductions in its return. 3e(d ' hese particular bad debts were not allowable deductions bec. they do not meet the re.uirements stated in the #oodrich case. here was lack of proof or e!idence of good faith & reasonable ascertainment of collection. Among the accounts disallowed as deductions were the ff.' +. "emoblas store & /J 6ariety store T not a single document was offered to show that the stores were indeed burned, e!en Kust a police report. &"/ did not e!en send demand letters. -. Aboitiz 2hipping /orp. T no proof was gi!en of &"/ policy that gi!es rebates to clients in case of loss arising fr. fortuitous e!ents, w)c it now passes off as uncollectible debts,
71
(or the exhaustion, wear and tear 8including reasonable allowance for obsolescence; of property Definition2 '4asi(an 9states Inc., v. &omm H Secs. 11C F 11* RR #) De8recia tion - the gradual diminution in the useful !alue of tangible property used in the trade or business resulting fr. exhaustion, wear & tear, & normal obsolescence he term is also applied to amortization of the !alue of intangible assets the use of w)c in the trade or business is definitely limited in duration. he necessity for depreciation allowance arises fr. the fact that certain property used in the business gradually approaches a point where its usefulness is exhausted. %y using the property, a gradual sale is made of it, & the depreciation charged is the measure of the cost w)c has been sold. ?hen then the property is disposed of after years of use, it is no longer the whole thing originally used. b. "e.uisites for deductibility' +. he allowance for depreciation must be reasonable. -. It must be for property arising out of its use or employment in the business or trade, or out of its not being used temporarily during the year. 4. It must be charged off during the taxable year. L. A statement on the allowance must be attached to the return. H "easonable allowanceI as used in the ax /ode, includes 8but is not limited to; an allowance computed in accordance w) the regulations prescribed by the (inance 2ecretary under any of the ff. methods' +. 2traight* line method, -. <eclining balance method, 4. 2um* of* the* years digits method, & L. Any other method prescribed by the 2ec. of (inance upon recommendation of the /ommissioner. c. ?ho may expenseM deduct depreciation
In the case of property held by one person for life with remainder to another person in the case of property held in trust d. /9J&1 A I9N ) methods allowed. AI,+A" I"&., v. &O,,. 1acts2 7impan is the owner of se!eral apartment units. /I" assessed deficiency taxes & reduced depreciation expense at the rate stated in the petitioners return bec. these were excessi!e. &etitioners witness tried to establish that some of
72
in in
petroleum mining
iii. <epreciation of properties used by nonresident aliens engaged in trade or business or resident foreign corps. :. <0&70 I9N <epletion is the exhaustion of natural resources like mines & oil & gas wells as a result of production or se!erance fr. such mines or wells. Sec. 3%. #G$ epletion of 3il and Gas !ells and *ines. 8+; In #eneral. * In the case of oil and gas wells or mines, a reasonable allowance for depletion or amortization computed in accordance with the cost* depletion method shall be granted under rules and regulations to be prescribed by the 2ecretary of finance, upon recommendation of the /ommissioner. &ro!ided, hat when the allowance for depletion shall e.ual the capital in!ested no further allowance shall be granted' &ro!ided, further, hat after production in commercial .uantities has commenced, certain intangible exploration and de!elopment drilling costs' 8a; shall be deductible in the year incurred if such expenditures are incurred for non* producing wells and)or mines, or 8b; shall be deductible in full in the year paid or incurred or at the election of the taxpayer, may be capitalized and amortized if such expenditures incurred are for producing wells and)or mines in the same contract area. NIntangible costs in petroleum operationsN refers to any cost incurred in petroleum operations which in itself has no sal!age !alue and which is incidental to and necessary for the drilling of wells and preparation of wells for the production of petroleum' &ro!ided, hat said costs shall not pertain to the ac.uisition or impro!ement of property of a character subKect to the allowance for depreciation except that the allowances for depreciation on such property shall be deductible under this 2ubsection. Any intangible exploration, drilling and de!elopment expenses allowed as a deduction in computing taxable income during the year shall not be taken into consideration in computing the adKusted cost basis for the purpose of computing allowable cost depletion. 8-; 0lection to <educt 0xploration and <e!elopment 0xpenditures. * In computing taxable income from mining operations, the taxpayer may at his option, deduct exploration and de!elopment expenditures accumulated as cost or adKusted basis for cost depletion as of
73
'ersons entitled to claim deple tion allowa nce #%ec. 25 &ev. &eg. C- ED$ Allowed only to mining entities w)c own an economic interest in mineral deposits 9conomic interes t T the taxpayer has ac.uired by in!estment any interest in mineral & secures it, by any form of legal relationship, such as but not limited to, operating agreement & ser!ice contract agreement, income deri!ed fr. the extraction of mineral, to w)c it must look for the return of its capital A corporation w)c has no capital in!estment in the mineral deposit does not possess an economic interest merely bec. through a contractual relation it possesses a mere pecuniary ad!antage deri!ed fr. production. A resident foreign corporation is entitled only to deduct depreciation allowance for oil & gas wells located w)in the &hilippines. &onso(ida te d ,ines D. &TA 1acts2 /onsolidated is a domestic mining corp. w)c claimed deductions for depletion, the rates of w)c petr & the /I" disagreed on. 3e(d2 he ax /ode pro!ides in case of mines for a deduction on depletion * a reasonable allowance not to exceed the market !alue of the product thereof w)c has been mined & sold during the year for w)c the return was made. he formula depletion is' for computing the rate of
&ost of mine 8ro8ert5 0stimated ore deposit [ "ate depletion per unit of product mined & sold &ost of mine 8ro8ert5 2 +. Jine cost -. 0xpenses of de!elopment before production As an income tax concept, depletion is wholly a creation of the statute, Hsolely a matter of legislati!e graceI, hence the petr has the burden of Kustifying the allowance of any deduction claimed. he company must pro!ide the e!idence for its assertion that /I" erred. 3. "020A"/$ AN< <06079&J0N 0O&0N20 Sec. 3%. #"$ &esearch and evelop me n t . 8+; In #eneral. * a taxpayer may treat research or de!elopment expenditures which are paid or incurred by him during the taxable year in connection with his trade, business or profession as ordinary and necessary expenses which are not chargeable to capital account. he expenditures so treated shall be allowed as deduction during the taxable year when paid or incurred. 8-; Amortization of /ertain "esearch and <e!elopment 0xpenditures. * At the election of of
II. c.
74
$ow deduction is computed reated as deferred expenses 8optional; of some " and < expense <
conditions and limitations d. 7imitations on deduction) " & pro!isions shall not apply to' i.
ii.
Any expenditure for the ac.uisition or impro!ement of land, or for the impro!ement of property to be used in connection with research and de!elopment of a character which is subKect to depreciation and depletion, and Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or .uality of any deposit of ore or other mineral, including oil or gas. +=. /$A"I A%70 /9N "I%1 I9N2 AN< 9 $0"
75
!aluation of donation &roof of donation for tax deduction purposes Roxas D. &TA
1acts ' 2upra 3e(d2 /ontributions to the /hristmas (und of the &asay /ity &olice & (iremen & the %aguio /ity &olice are not deductible for the reason that /hristmas (unds were not spent for public purposes but as gifts to the families of the members of said entities. 1nder the ax /ode, a contribution to a go!t. entity is deductible when used exclusi!ely for public purposes. /ontributions to the &hil. $eralds fund for Janilas neediest families were disallowed on the ground that &$ is not a corporation or assn. /ontemplated in the ax /ode. It should be noted howe!er, that the contributions were not made to the &$ but to a group of ci!ic* spirited citizens organized by the &$ solely for charitable purposes. ++. /9N "I%1 I9N 9 A &0N2I9N "12 %ec. 2=. #8$ 'ension (rusts. * An employer establishing or maintaining a pension trust to pro!ide for the payment of reasonable pensions to his employees shall be allowed as a deduction 8in addition to the contributions to such trust during the taxable year to co!er the pension liability accruing during the year, allowed as a deduction under 2ubsection 8A; 8+; of this 2ection ; a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount 8+;has not theretofore been allowed as a deduction, and 8-; is apportioned in e.ual parts o!er a period of ten 8+=; consecuti!e years beginning with the year in which the transfer or payment is made. <eduction of lump* sum contribution "0G1I2I 02 (9" <0<1/ I%I7I D /. I 0J2 $A /ANN9 %0 <0<1/ 0<
<eduction with limitation /ontributions deductible in full. reatment of the ff. donations'
S9&. 36 . "tems not eductible.#A$ General &ule . - In computing net income, no deduction shall in any case be allowed in respect to 8+; &ersonal, li!ing or family expenses, 8-; Any amount paid out for new buildings or for permanent impro!ements, or betterments made to increase the !alue of any property or estate, his 2ubsection shall not apply to intangible drilling and de!elopment costs incurred in petroleum operations which are deductible under 2ubsection 8#; 8+; of 2ection 4L of this /ode. 84; Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made, or
76
iii. Addition) impro!ement existing asset i!. /ompare) differentiate ordinary expense
groceries
Sec. 119 Rev. Re-. # +ersona(, (ivin-, H fami(5 ex8enses are not deductible. 8+; Insurance paid on a dwelling owned & occupied by a taxpayer is a personal expense & not deductible. 8-; &remiums paid for life for life insurance are not deductible. In the case of a professional man who T "ents a property for residential purposes %ut incidentally recei!es his clients, patients, or callers in connection w) his professional work 8his place of business being elsewhere;, no part of the rent is deductible as a business expense. If, howe!er, he uses part of the house for his office, such portion of the rent as is properly attributed to such office is deductible. ?here the father is legally entitled to the ser!ices of his minor children, any allowances w)c he gi!es them whether said to be in consideration of ser!ices or otherwise, are not allowable salary deductions in his returns of income. Alimony & an allowance paid under a separation agreement are not deductible fr. gross income.
Sec. 1#C Rev. Re-. #. Capital expendi tur e No deduction fr. gross income may be made T (or any amounts made for the new buildings or for permanent impro!ements or betterments made to increase the !alue of the taxpayers property, or (or any amount expended in restoring property or in making good the exhaustion thereof for w)c an allowance of depreciation expended for securing a copyright & plates, w)c remain the property of the person making the payments, are in!estment of capital. he cost of defending of perfecting title of property, constitutes a part of the cost on the property & is not a deductible expense. he amount expended for architects ser!ices is part of the cost of the building. /ommissions paid in purchasing securities are an offset against the selling price. 0xpenses of the administration of an 0state, such as T court costs attorneys fee & executors commissions are chargeable against the HcorpusI of the estate & are not allowable deductions. Amounts T to be assessed & placed under an agreement between bondholders or shareholders of a corporation. to be used in a reorganizing of the corporation, are in!estments of capital an not deductible for any purpose in return of income. In the case of a corporation, e&penses !or organi/ations, s"c# as incorporation fees attorneys fees accountants charges, are ordinary capital expenditures, but where such expenditures are limited to purely incidental expenses, a taxpayer may be charge such item against income in the year in w)c they are incurred.
77
L.
Sec. 36. ' 4$ Losses from %ales or Exchanges of 'roperty . * In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly * 8+; %etween members of a family. (or purposes of this paragraph, the family of an indi!idual shall include only his brothers and sisters 8whether by the whole or half* blood;, spouse, ancestors, and lineal descendants, or 8-; 0xcept in the case of distributions in li.uidation, between an indi!idual and corporation more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for such indi!idual, or 84; 0xcept in the case of distributions in li.uidation, between two corporations more than fifty percent 8C=E; in !alue of the outstanding stock of which is owned, directly or indirectly, by or for the same indi!idual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company, 8L; %etween the grantor and a fiduciary of any trust, or 8C; %etween the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the
%EC. 2G. Losses from !ash %ales of %tock or %ecurities. * 8A; In the case of any loss claimed to ha!e been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period beginning thirty 84=; days before the date of such sale or disposition and ending thirty 84=; days after such date, the taxpayer has ac.uired 8by purchase or by exchange upon which the entire amount of gain or loss was recognized by law;, or has entered into a contact or option so to ac.uire, substantially identical stock or securities, then no deduction for the loss shall be allowed under 2ection 4L unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer. 8%; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire; is less than the amount of stock or securities sold or otherwise disposed of, then the particular shares of stock or securities, the loss form the sale or other disposition of which is not deductible, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8/; If the amount of stock or securities ac.uired 8or co!ered by the contract or option to ac.uire which; resulted in the non* deductibility of the loss, shall be determined under rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. Sec. 1C1 Rev. Re-. #. Capital losses on wash sales of stock or securities 7osses on sale or exchange of capital assets are allowed to the extent pro!ided in 2ec 4L of the /ode. If any securities w)c are capital assets become worthless during the taxable year, the loss resulting, therefr. shall be considered as a low fr. the sale or exchange on the last day of such taxable year, of capital losses assets. 7osses on Hwash salesI of stock or securities are treated in 2ec. 44 of /ode +.
B.
Illegal expense
&a(anoc Ds. &o((ector 1acts2 %y authority of a solicitors permit, /alanoc financed & promoted a boxing match to solicit contributions for orphans & destitute children. Included in the expenditures was an amt. for police protection.
78
+. 9ptional standard deduction. Sec. 3%. #L$ 3ptional %tandard eduction. * In lieu of the deductions allowed under the preceding 2ubsections, an indi!idual subKect to tax under 2ection -L, other than a nonresident alien, may elect a standard deduction in an amount not exceeding ten percent 8+=E; of his gross income. 1nless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as ha!ing a!ailed himself of the deductions allowed in the preceding 2ubsections. 2uch election when made in the return shall be irre!ocable for the taxable year for which the return is made' &ro!ided, hat an indi!idual who is entitled to and claimed for the optional standard deduction shall not be re.uired to submit with his tax return such financial statements otherwise re.uired under this /ode' &ro!ided, further, hat except when the /ommissioner otherwise permits, the said indi!idual shall keep such records pertaining to his gross income during the taxable year, as may be re.uired by the rules and regulations promulgated by the 2ecretary of (inance, upon recommendation of the /ommissioner. in lieu of itemized deductions not exceeding +=E of his gross income ?hat is gross incomeM Sec. #!. 9. #=$ Gross "ncome efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less sales returns, allowances, discounts and cost of ser!ices. N/ost of ser!icesN shall mean all direct costs and expenses necessarily incurred to
iii. "e!olutionary tax paid to N&A <. <0<1/ I9N2 A779?0< /9"&9"A I9N2 (9" 2&0/IA7
S9&. 3!. %pecial 'rovisions &egarding "ncome and eductions of "nsurance Companies5 !heth e r omes tic or +oreign. 'A) S8ecia( Deduction A((o0ed to Insurance &om8anies. * In the case of insurance companies, whether domestic or foreign doing business in the &hilippines, the net additions, if any, re.uired by law to be made within the year to reser!e funds and the sums other than di!idends paid within the year on policy and annuity contracts may be deducted from their gross income' &ro!ided, howe!er, hat the released reser!e be treated as income for the year of release. '4) ,utua( Insurance &om8anies . * In the case of mutual fire and mutual employersN liability and mutual workmenNs compensation and mutual casualty insurance companies re.uiring their members to make premium deposits to pro!ide for losses and expenses, said companies shall not return as income any portion of the premium deposits returned to their policyholders, but shall return as taxable income all income recei!ed by them from all other sources plus such portion of the premium deposits as are retained by the companies for purposes other than the payment of losses and expenses and reinsurance reser!es. '&) ,utua( ,arine Insurance &om8anies . * Jutual marine insurance companies shall include in their return of gross income, gross premiums collected and recei!ed by them less amounts paid to policyholders on account of premiums pre!iously paid by them and interest paid upon those amounts between the ascertainment and payment thereof. 'D)Assessme n t Insurance &om8anies .* Assessment insurance companies, whether domestic or foreign, may deduct from their gross income the actual deposit of sums with the officers of the #o!ernment of the &hilippines
79
%EC. 2C. Allowance of 'ersonal Exemption for "ndividual (axpayer. 8A; In #eneral. * (or purposes of determining the tax pro!ided in 2ection -L 8A; of this itle, there shall be allowed a basic personal exemption as follows' (or single indi!idual or married indi!idual Kudicially decreed as legally separated with no .ualified dependents &-=,=== (or $ead of (amily &-C,=== (or each married Indi!idual &4-,=== In the case of married indi!iduals where only one of the spouses is deri!ing gross income, only such spouse shall be allowed the personal exemption. (or purposes of this paragraph, the term Nhead of familyN means an unmarried or legally separated man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized natural or legally adopted children li!ing with and dependent upon him for their chief support, where such brothers or sisters or children are not more than twenty* one 8-+; years of age, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are
80
<ependent means a legitimate, illegitimate or legally adopted child chiefly dependent upon and li!ing with the taxpayer if such dependent is not more than -+ years of age, unmarried & not gainfully employed or if such dependent, regardless of age, is incapable of self* support because of mental or physical defect. c. d. Amount allowed &:,=== each max of L dependents ?ho may claim the additional exemptionM Jaya single parent claim the deductionM taxpayer and
4. /hange of status of the the dependent marriage death reaching the age of -+ gainfully employed ha!ing children
Sec. ##. 8%; he term @cor8ora tion@ shall include partnerships, no matter how created or organized, Koint* stock companies, Koint accounts 8cuentas en participacion;, association, or insurance companies, but does not include general professional partnerships and a Koint !enture or consortium formed for the purpose of undertaking construction proKects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a ser!ice contract with the #o!ernment . @:enera( 8rofessiona( 8artne rs6i8s@ are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is deri!ed from engaging in any trade or business. +ART"9RS3I+ ' includes gen. partnerships & limited partnerships, whether registered or not, %1 not gen. professional partnerships NOI"T STO&/ &O,+A"I9S2 constituted when one a group of indi!iduals, acting Kointly, establish & operate a business enterprise under an artificial name, w) an in!ested capital di!ided into transferable shares, an elected board of directors, & other corporate characteristics, %1 w)out formal go!ernmental authority. NOI"T A&&OU"TS '&U9"TAS 9" +ARTI&I+A&IO")2 constituted when one interests himself in the business of another by contributing capital thereto, & sharing in the profits or losses in the proportion agreed upon, not subKect to any formality & may be pri!ately contracted orally or in writing. ASSO&IATIO"S2 include all orgs. w)c ha!e substantially the same features of a corporation 8substantial resemblance in purpose, gen. form & mode of operations. NOI"T D9"TUR92 commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single proKect, its
L. personal exemption allowable nonresident alien indi!idual reciprocity re.uirements DI. A. &AASSI1I&ATIO" TAE+AB9RS. O1 9(
to
I"&O,9 IN/9J0
%EC. B2. General 'rinciples of "ncome (axation in the 'hilippines . * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the
81
7ikewise, a R6 was created when - corps. while registered & operating separately where placed under one sole management w)c operated the business affairs of said co.Ns as though they constituted as single entity thereby obtaining substantial economy & profits in the operation. 8/ollector !s. % /; hus the 6enture w)c has been constituted as a single entity whereby 0mpire & 1niphil agreed to pool their resources for the de!Nt of a parcel of land, is a R6 w)c is subKect to the 4CE under 2ec. -L of the ax /ode. $owe!er, the shares of 1niphil & 0mpire from the profits of the R6 are N9 21%R0/ to income tax since said profits are in the nature of di!idends w)c are not subKect to tax under 2ec. -L8e;. -. 9rdinary taxpayer a. partnership as a corporate
a partnership no matter how organized Sec. ## '4), supra. Sec. !3 'D), supra. Ona vs. &ommissioner 1acts2 ?hen %onales died, she left her husband & C children. he heirs partitioned the estate in such a way that they had a +)- undi!ided interest in += lots, B houses & an undetermined amount of damages fr. the ?ater <amage /ommission. Although the proKect of partition was appro!ed by the court. the property remained undi!ided & the husband managed the properties. $e either sold the property or leased them, & then in!ested the proceeds in real estate & securities. (rom these in!estments, the 9nas recei!ed income. hey did not, howe!er, actually recei!e their shares in the yearly income as it was left in the hands of their father who in!ested them in real properties & securities. 3e(d2 he heirs formed an unregistered partnership. (rom the moment they allowed not only the incomes from their respecti!e shares in the inheritance but e!en the inherited properties themsel!es to be used by the husband as a common fund in undertaking se!eral ONNs or in business, w) the intention of deri!ing profit to be shared by them proportionally, such act was tantamount to actually contributing such income to a common fund &, in effect, they thereby formed an unregistered partnership w)in the pur!iew of the NI"/. :atc6a(ian vs. &o((ector 1acts2 his is case where the pets. contributed to buy a sweepstakes ticket.
82
he first element is present in this case. he petitioners agreed to contribute to a common fund. $ence, the issue narrows down to their intent in acting as they did. 1pon consideration of all the facts & circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate for monetary gain & di!ide it among themsel!es, because' 2aid common fund was not something they found already in existence. It was not property inherited by them pro* indi!iso. hey created it purposely. hey borrowed a substantial portion thereof in order to establish the common fund. hey in!ested the same, not merely in one but in a series of ON. ON
he properties bought by them were not de!oted to residential purposes, or to other personal uses. Instead, they were leased.
(or o!er a decade, these conditions existed. +ascua( vs. &om. 1acts2 &ascual & <ragon bought a total of fi!e lots in - sales. hey then sold these lots. (rom these sales they earned profits. hey paid capital gains tax but the /om. demanded they pay corp. income tax for being an unregistered partnershipM 3e(d2 In the present case, there is no e!idence that petitioners entered into an agreement to contribute money, property or industry to a common fund, & that they intended to di!ide the profits among themsel!es. "espondent commissioner &) or his representati!e Kust assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land & became co*owners thereof.
83
Revenue Re-. 1 - $9. 0xcept as herein otherwise pro!ided, there shall be w)held a creditable income tax at the rates herein specified for each class of payee from the ff. items of income payments to persons residing in the &hils. Any amount paid or payable periodically or at the end of the taxable year by a gen. professional partnership to the partners, such as* drawings ad!ances sharings allowances stipends, etc. +CE, 0O/0& the amount paid to a partner who is a non* resident alien whether or not engaged in trade or business in the &hils. w)c shall be subKect to a final w)holding tax of 4=&. S9&. #6. Tax Aia<i(it5 of ,e m<e rs of :enera( +rofessiona( +artne rs6i8s . * A general professional partnership as such shall not be subKect to the income tax imposed under this /hapter. &ersons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and indi!idual capacities. (or purposes of computing the distributi!e share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 0ach partner shall report as gross income his distributi!e share, actually or constructi!ely recei!ed, in the net income of the partnership. Sec. !3 'D), supra. d. Roint !enture unincorporated) inc. 4IR Ru(in- #*%- 91 su8ra 8/ase of 0mpire 1niphil & the 1niphil 0mpire R6; 7ueries2 $ow is a R6 createdM ?hat is the tax treatment of a R6 for the purposes of income taxationM
4.
axpayers)
84
85
86
Sec. ## 'I). he term Hnon* resident foreign corp.I applies to a foreign corporation N9 engaged in trade or business w)in the &hilippines. ,aru<e ni vs. &om. 1acts2 Jarubeni is a Rapanese corp. duly licensed in the &hils. to do business. J had e.uity in!estments w) Atlantic, #ulf & &acific. A,# & & declared & paid cash di!idends to J by directly remitting the cash di!idend to Js okyo office net of the +=E final intercorporate di!idend tax & +CE branch profit remittance tax. J argues that following the principal* agent relationship theory, it is a resident foreign corp., subKect only to the +=E final tax on di!idends. It argues that must be considered a resident foreign corp. because it is engaged in business in the &hils. through its &hil. branch. It reasons that the &hil. branch & the okyo head office are one & the same corp. entity, whoe!er made the in!estment in A,#, & &. 3e(d2 he gen. rule that a foreign corp. is the same Kuridical entity as its branch office in the &hils. cannot apply here. his rule is based on the premise that the business of the foreign corp. is conducted through its branch office, following the principal* agent theory. It is understood that the branch becomes its agent here. 2o that when the foreign corp. transacts business independently of its branch, the prin.* agent relationship is set aside. he ON becomes one of the foreign corp., not of the branch. /onse.uently, the taxpayer is the foreign corp., not the branch or resident foreign corp. /orollarily, is the business ON is conducted through the branch office the latter becomes the taxpayer & not the foreign corp. In the /A%, the in!estment was made for the purposes peculiarly germane to the conduct of the corporate affairs of J, but certainly not of the branch in the &hils. It is thus clear that J, ha!ing made the independent in!estment attributable only to the head office, cannot now claim the increments as ordinary conse.uence of its trade or business in the &hils.
Sec. ## '6). he term Hresident foreign corporation,I applies to a foreign corporation engaged in trade or business w)in the &hilippines.
87
c.
,aru<e ni v. &ommissione r 1acts2 Jarubeni is a foreign corp. organized under the laws of Rapan. It in!ested in a construction business in the &hils. in A#&&. A#&& remitted the profits to Jarubeni w)holding the +CE profit remittance tax. he /I" ruled that the profit remitted to Jarubeni shld. not be subKect to the +CE profit remittance tax bec. only profits remitted abroad to its head office w)c are effecti!ely connected w) its trade or business in the &hils. are subK. to the tax. Jarubeni is now claiming a refund of the +CE tax paid. 3e(d ' Jarubeni is not liable to pay the +CE profit remittance tax bec. the profits remitted to it were not income effecti!ely connected w) its business in Rapan. 8 Note' J/ was liable to pay other kind of tax, as it deri!ed income fr. source w)in the &hils. but not a profit remittance tax;. /. IN<I6I<1A7 AO&AD0"2
-. 4.
%EC. B2. General 'rinciples of "ncome (axation in the 'hilippines. * 0xcept when otherwise pro!ided in this /ode' 8A; A citizen of the &hilippines residing therein is taxable on all income deri!ed from sources within and without the &hilippines, 8%; A nonresident citizen is taxable only on income deri!ed from sources within the &hilippines, 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker, 8<; An alien indi!idual, whether a resident or not of the &hilippines, is taxable only on income deri!ed from sources within the &hilippines,
88
+E >B= plus -E if excess o!er >B=== >4L= plus 4E of excess o!er >-=,===
84; /omputation of gross income #ross income less' &ersonal exemptions 8>-=== if single or married but legally separated; total amt. of national income tax actually paid to the national go!t of the foreign country of his residence. [ #"922 A<R12 0< IN/9J0 &on0i vs. IA& 1acts2 &etitioners are employees of &rocter & #amble* &hils. & were assigned to other subsidiaries of & & # in other countries. he .uestion is ' what exchange rate should be used. /ir' pre!ailing free market exchange rate. &ets' par !alue of the peso as per /% circular' 3e(d2 (or the proper enforcement of the NI"/, the 2ec. of (inance is empowered to promulgate all needful rules & regulations to effecti!ely enforce its pro!isions. &ursuant to this authority, "J/ 5*5+ & L+* 5+ were issued to pro!ide a uniform rate of exchange for > & &hp for internal tax re!enue purposes. &ets. argue that since there were no remittances & acceptances of their salaries & wages in > into &hils. they are exempt from the co!erage of such circulars. &ets. forge that they are citizens of the &hils. & their income, w)in or w)o & in this case wholly w)o, are subKect to income tax. c. (ilipino o!erseas workers 8N0 from 291"/02 ?I $IN 9N7D;
1. Immi-ra n t
one who lea!es the &hils. to reside abroad as an immigrant for w)c a foreign !isa as such has been secured. one who lea!es the &hils. to reside abroad for employment on a more or less permanent basis. one who lea!es the &hils. on account of a contract of employment w)c is renewed from time to time w)in or during the taxable year under such circumstances as to re.uire him to be physically present abroad most of the time during the taxable year 8physically present abroad most of the time
Sec. #3. 8/; An indi!idual citizen of the &hilippines who is working and deri!ing income from abroad as an o!erseas contract worker is taxable only on income deri!ed from sources within the &hilippines' &ro!ided, hat a seaman who is a citizen of the &hilippines and who recei!es compensation for ser!ices rendered abroad as a member of the complement of a !essel engaged exclusi!ely in international trade shall be treated as an o!erseas contract worker,
89
Sec. ##. 8(; he term @residen t a(ien@ means an indi!idual whose residence is within the &hilippines and who is not a citizen thereof. b. Non* resident alien
Sec. ##. 8#; he term @nonreside nt a(ien@ means an indi!idual whose residence is not within the &hilippines and who is not a citizen thereof. i. 0ngaged in trade or business 8N0 from 291"/02 ?I $IN 9N7D;
1$C da5 test Sec. #*. #4$ )onreside nt Alien "ndividual )ot Engaged in (rade or 4usiness !ithin the 'hilippines. * here shall be le!ied, collected and paid for each taxable year upon the entire income recei!ed from all sources within the &hilippines by e!ery nonresident alien indi!idual not engaged in trade or business within the &hilippines as interest, cash and)or property di!idends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax e.ual to twenty* fi!e percent 8-CE; of such income. /apital gains realized by a nonresident alien indi!idual not engaged in trade or business in the &hilippines from the sale of shares of stock in any domestic corporation and real property shall be subKect to the income tax prescribed under 2ubsections 8/; and 8<; of 2ection -L. ii. not engaged in trade or business 8#"922 from 291"/02 ?I $IN 9N7D;
employed by' +. regional $Gs or area $Gs of multinational corps. -. off* shore banking units 4. petroleum ser!ice contractors. <. (iduciary +. axpayers' 0states & of taxable rusts & trust)
<efinition exception
estate
Sec. ##. 8R; he term @fiduciar5@ means a guardian, trustee, executor, administrator, recei!er, conser!ator or any person acting in any fiduciary capacity for any person.
90
L.
<eductions allowed
S9&. 6#. Exemption Allowed to Estates and (rusts . - (or the purpose of the tax pro!ided for in this itle, there shall be allowed an exemption of wenty thousand pesos 8&-=,===; from the income of the estate or trust. C. "e!ocable trust
S9&. 63. &evocable trusts . * ?here at any time the power to re!est in the grantor title to any part of the corpus of the trust is !ested 8+; in the grantor either alone or in conKunction with any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, or 8-; in any person not ha!ing a substantial ad!erse interest in the disposition of such part of the corpus or the income therefrom, the income of such part of the trust shall be included in computing the taxable income of the grantor. B. Income for benefit of grantor
S9&. 61. (axable "ncome . * s"pra. 4. rust exempt from income tax
%EC. DH. "mposition of (ax. 8%; 0xception. * he tax imposed by this itle shall not apply to employeeNs trust which forms part of a pension, stock bonus or profit* sharing plan of an employer for the benefit of some or all of his employees 8+; if contributions are made to the trust by such employer, or employees, or both for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and 8-; if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be 8within the taxable year or thereafter; used for, or di!erted to, purposes other than for the exclusi!e benefit of his employees' &ro!ided, hat any amount actually distributed to any employee or distributee shall be taxable to him in the year in which so distributed to the extent that it exceeds the amount contributed by such employee or distributee. &ommissioner v. &A 1acts2 /astaneda retired fr. the go!t ser!ice in +3:-. $e recei!ed benefits including terminal benefits pay fr. w)c the /I" w)held income tax. /astaneda filed a claim for refund contending that the cash e.ui!alent of his terminal lea!e is exempt fr. tax.
S9&. 6%. "ncome for 4enefit of Grantor.8A; ?here any part of the income of a trust 8+; is, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income may be held or accumulated for future distribution to the grantor, or 8-; may, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income, be distributed to the grantor, or 84; is, or in the discretion of the grantor or of any person not ha!ing a substantial ad!erse interest in the disposition of such part of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor, such part of the income of the trust shall be included in computing the taxable income of the grantor. 8%; As used in this 2ection, the term Nin the discretion of the grantorN means in the discretion of the grantor, either alone or in conKunction with any person not ha!ing a substantial ad!erse interest in the disposition of the part of the income in .uestion.
0.
91
S9&. 3C. Exemptions from (ax on Corpora tions. he following organizations shall not be taxed under this itle in respect to income recei!ed by them as such' 8A; 7abor, agricultural or horticultural organization not organized principally for profit, 8%; Jutual sa!ings bank not ha!ing a capital stock represented by shares, and cooperati!e bank without capital stock organized and operated for mutual purposes and without profit, 8/; A beneficiary society, order or association, operating fort he exclusi!e benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees pro!iding for the payment of life, sickness, accident, or other benefits exclusi!ely to the members of such society, order, or association, or nonstock corporation or their dependents, 8<; /emetery company owned and operated exclusi!ely for the benefit of its members, 80; Nonstock corporation or association organized and operated exclusi!ely for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of !eterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person, 8(; %usiness league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any pri!ate stock* holder, or indi!idual, 8#; /i!ic league or organization not organized for profit but operated exclusi!ely for the promotion of social welfare, 8$; A nonstock and nonprofit educational institution, 8I; #o!ernment educational institution, 8R; (armersN or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperati!e telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from
92
U"D9R
T39
2ec. -: 84; Art. 6I . /haritable institutions, churches, & parsonages or con!ents appurtenant thereto, mos.ues, non* profit cemeteries & all lands, buildings & impro!ements actually, directly & exclusi!ely used for religious, charitable or educational purposes shall be exempt form taxation. 2ec. L 84,L; Art. OI6. All re!enues & assets of non* stock non* profit educ. institutions used A,<,0 for educ. purposes shall be exempt fr. taxes & duties. O O O &roprietary educ. institutions including those cooperati!ely owned may be entitled to such exemptions subKect to the limitations pro!ided by lawP 2ubKect to conditions prescribed by law, all grants, endowments, donations or contributions used A,<, 0, for educ, purposes shall be exempt fr. tax. 4IR RUAI":S 8+54 T ::; Non* stock non* profit educ. institutions, they are exempted fr. internal re!enue taxes & customs duties, in appropriate cases imposed by natl. go!t. on all re!enues & assets used A,<,0, for educational purposes. '&empt !r. ta& T tuition, matriculation & other similar fees, income fr. bank deposit interests & money market placement incident to school operations, canteen owned & operated by the school as ancillary acti!ity & located w)in the school premises, !alue* added tax on sale of books, school supplies, uniform, & other school related items & sale of misc. school items like car stickers. Not e&empt !r. ta& T income fr. trade, business or other acti!ity not related to the exercise of its educational purpose or function 8i.e. school canteen operated by a concessionaire; 8+5+ T :: ; A technical)!ocational school accepting Kobs fr. the public in order to fully utilize its machines, income deri!ed is not exempt fr. tax. 8+=C T 3+; he National obacco Admin., an attached agency of the <ept of Agriculture is not
93
Sec. #!. #E$ *inimu m Corpora t e "ncome (ax on omestic Corpora tions. 8+; Imposition of ax. * A minimu m corporate income tax of two percent 8-E= of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this itle, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimu m income tax is greater than the tax computed under 2ubsection 8A; of this 2ection for the taxable year. 8-; /arry (roward of 0xcess Jinimu m ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. 84; "elief from the Jinimu m /orporate Income ax 1nder /ertain /onditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. 8L; #ross Income <efined. * (or purposes of applying the minimu m corporate income tax pro!ided under 2ubsection 80; hereof, the term Ngross incomeN shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. S/ost of goods soldN shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. (or a trading or merchandising concern, Ncost of goods soldN shall include the in!oice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. (or a manufacturing concern, cost of Ngoods manufactured and soldN shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing o!erhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of ser!ice, Ngross incomeN means gross receipts less
94
95
Sec. #! 9. #B$ Carry +rowa rd of Excess *inimu m (ax. * Any excess of the minimu m corporate income tax o!er the normal income tax as computed under 2ubsection 8A; of this 2ection shall be carried forward and credited against the normal income tax for the three 84; immediately succeeding taxable years. See i((ustra tion in RR 9- 9$ d. "elief fr. the J/I
Sec. #9. #4$ (ax on Corpora tions %ub>ect to "mprope rly Accumula t e d Earnings (ax. 8+; In #eneral. * he improperly accumulated earnings tax imposed in the preceding 2ection shall apply to e!ery corporation formed or a!ailed for the purpose of a!oiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being di!ided or distributed. 8-; 0xceptions. * he improperly accumulated earnings tax as pro!ided for under this 2ection shall not apply to' 8a; &ublicly* held corporations, 8b; %anks and other nonbank intermediaries, and 8c; Insurance companies. 8d; 0xceptions.
financial
Sec. #! '9) #2$ &elief from the *inimu m Corpora t e "ncome (ax Inder Certain Conditions. * he 2ecretary of (inance is hereby authorized to suspend the imposition of the minimu m corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force maKeure, or because of legitimate business re!erses. he 2ecretary of (inance is hereby authorized to promulgate, upon recommendation of the /ommissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimu m corporate income tax in a meritorious case. ?hen corp. suffers losses on account prolonged labor dispute, 9r because of force maKeure, 9r because of legit business re!erses. e. 0xceptions' Sec. #.# ! '9) '$) RR 9- 9$ Sec. #.# $ 'A) '#) RR 9- 9$ of
&ublicly* held corps., %anks and other intermediaries, and Insurance companies.
nonbank
financial
e. 0!idence of purpose to a!oid income tax f. 0!idence to determine needs of business reasonable taxable income
Income exempt fr. tax, Income excluded fr. gross income, Income subKect to final tax, & he amount of net operating loss carry* o!er deducted, And reduced by the sum of'
96
+. 2enior citizens &A E=2 B . %ec. C he go!t shall pro!ide the ff. assistance to those caring for & li!ing w) the senior citizen' a; the senior citizen shall be treated as dependents pro!ided in the NI"/ & as such, indi!idual taxVpayers caring for them, be they relati!es or not shall be accorded the pri!ileges granted by the /ode insofar as ha!ing dependents are concerned. b; Ind. or non* go!ernmental institutions establishing homes, residential communities or retirement !illages solely for the senior citizens shall be accorded the ff.' +. realty tax holiday for the first C years starting fr. the first year of operation, -. &riority in the bldg. &) or maintenance of pro!. or mun. roads leading to the aforesaid home, res. com. & retirement !illage. &ev. &eg. B- J= KE. A .ualified senior citizen li!ing w) & taken care of by a benefactor whether related to him or not, shall be treated as a personal exemption of &+-,=== as head of the family. (or the purpose of claiming personal exemption as head of the family w) dependent senior citizen, the identification card number issued by the 92/A 89ffice for 2enior /itizens Affairs; shall be indicated in the Income ax "eturn to be filed by the benefactor who will be granted the exclusi!e right to claim him as dependent for tax purposes. /aring for a dependent senior citizen shall not, howe!er, entitle the benefactor to claim additional exemption allowable to a married woman or head of a family w) .ualified dependent children under 2ection -3 8l; -. In 2hort' 2enior citizen as a .ualified dependent to enable Hsingle I benefactor to claim exemption as head* of*the* family. -. 0xemptions granted under International Agreements and tax treaty Rea-an v. &om,2 su8ra &om. v. Ro<ertson 1acts2 he "obertsons are &hil. born 12 citizens working in the 12 bases in 2ubic. hey are claiming exemptions under the "& 12 Jil. %ases Agreement of +3L5 fr. income tax. he %I" ruled that the "obertsons are not entitled to the exemption as they are born in the &hils. 3e(d2 he "obertsons are exempt fr. taxation by !irtue of the treaty. In order to a!ail oneself of the tax exemption under the "& 12 mil. %ases Agreement' he must be a national of the 12 employed in connection w) the const., maintenance, operation or defense of the bases residing in the &hils. by reason of such employment & the income deri!ed is fr. the 12
A. IN<I6I<1A7. Sec. #.$ 3 '%) RR #- 9$ %EC. C1. "ndividual &eturn. 8A; "e.uirements. * 8+; 0xcept as pro!ided in paragraph 8-; of this 2ubsection, the following indi!iduals are re.uired to file an income tax return' 8a; 0!ery (ilipino citizen residing in the &hilippines, 8b; 0!ery (ilipino citizen residing outside the &hilippines, on his income from sources within the &hilippines, 8c; 0!ery alien residing in the &hilippines, on income deri!ed from sources within the &hilippines, and 8d; 0!ery nonresident alien engaged in trade or business or in the exercise of profession in the &hilippines. 8-; he following indi!iduals shall not be re.uired to file an income tax return, 8a; An indi!idual whose gross income does not exceed his total personal and additional exemptions for dependents under 2ection 4C' &ro!ided, hat a citizen of the &hilippines and any alien indi!idual engaged in business or practice of profession within the &hilippine shall file an income tax return, regardless of the amount of gross income, 8b; An indi!idual with respect to pure compensation income, as defined in 2ection 48A;8+;, deri!ed from sources within the &hilippines, the income tax on which has been correctly withheld under the pro!isions of 2ection 53 of this /ode' &ro!ided, hat an indi!idual deri!ing compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return' &ro!ided, further, hat an indi!idual whose compensation income deri!ed from sources within the &hilippines exceeds 2ixty thousand pesos 8&B=,===; shall also file an income tax return, 8c; An indi!idual whose sole income has been subKected to final withholding tax pursuant to 2ection C58A; of this /ode, and 8d; An indi!idual who is exempt from income tax pursuant to the pro!isions of this /ode and other laws, general or special. 84; he forgoing notwithstanding, any indi!idual not re.uired to file an income tax return may ne!ertheless be re.uired to file an information return pursuant to rules and regulations prescribed by the 2ecretary of (inance, upon recommendation of the /ommissioner. 8L; he income tax return shall be filed in duplicate by the following persons'
97
98
%ec. C o determine the taxable income to be reported in the .uarterly returns, the gross income and deductions shall be computed on a cumulati!e basis. he gross income to be reported are those subKect to tax under 2ec. -+ 8f; NI"/. he deduction shall be computed on a cumulati!e basis. he gross income to be reported are those subKect to tax under 2ec. -+ 8(; NI"/. he deductions that shall be allowed for the first 4 .uarters shall not include the amount for the personal and additional exemptions of the indi!idual. It is only in the last .uarter when these amounts for exemptions can be claimed as deduction. Income tax due e!ery .uarter shall be computed in accordance with 2ec. -+ 8f; based on the cumulati!e taxable income for the .uarters. he amount if income tax to be paid shall be the balance of the income tax after deducting
99
100
%EC. CB. Corpora tion &eturns. 8A; "e.uirements. * 0!ery corporation subKect to the tax herein imposed, except foreign
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%EC. EE. 'lace and (ime of +iling and 'aymen t of Luarte rly Corpora te "ncome (ax. 8A;&lace of (iling. *0xcept as the /ommissioner other wise permits, the .uarterly income tax declaration re.uired in 2ection 5C and the final adKustment return re.uired I 2ection 5B shall be filed with the authorized agent banks or "e!enue <istrict 9fficer or /ollection Agent or duly authorized reasurer of the city or municipality ha!ing Kurisdiction o!er the location of the principal office of the corporation filing the return or place where its main books of accounts and other data from which the return is prepared are kept. 8%; ime of (iling the Income ax "eturn. * he corporate .uarterly declaration shall be filed within sixty 8B=; days following the close of each of the first three 84; .uarters of the taxable year. he final adKustment return shall be filed on or before the fifteenth 8+C th ; day of April, or on or before the fifteenth 8+C th ; day of the fourth 8L th ; month following the close of the fiscal year, as the case may be. 8/; ime of &ayment of the Income ax. * he income tax due on the corporate .uarterly returns and the final adKustment income tax
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%EC. CE. !ithholding of (ax at %ource. 8A; ?ithholding of (inal ax on /ertain Incomes. * 2ubKect to rules and regulations the 2ecretary of (inance may promulgate, upon the recommendation of the /ommissioner, re.uiring the filing of income tax return by certain income payees, the tax imposed or prescribed by 2ections -L8%;8+;, -L8%;8-;, -L8/;, -L8<;8+;, -C8A; 8-;, -C8A;84;, -C8%;, -C8/;, -C8<;, -C80;, -58<;8];, -58<;8-;, -58<;84;, -58<;8C;, -: 8A;8L;, -:8A;8C;, -:8A;85;8a;, -:8A;85;8b;, -:8A;85;8c;, -:8%;8+;, -:8%;8-;, -:8%;84;, -:8%;8L;, -:8%;8C;8a;, -:8%;8C; 8b;, -:8%;8C;8c;, 44, and -:- of this /ode on specified items of income shall be withheld by payor* corporation and)or person and paid in the same manner and subKect to the same conditions as pro!ided in 2ection C: of this /ode. 8%; ?ithholding of /reditable ax at 2ource. * he 2ecretary of (inance may, upon the recommendation of the /ommissioner, re.uire the withholding of a tax on the items of income payable to natural or Kuridical persons, residing in the &hilippines, by payor* corporation)persons as pro!ided for by law, at the rate of not less than one percent 8+E; but not more than thirty* two percent 84-E; thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year. 8%; ax* free /o!enant %onds. In any case where bonds, mortgages, deeds of trust or other similar obligations of domestic or resident foreign corporations, contain a contract or pro!isions by which the obligor agrees to pay any portion of the tax imposed in this itle upon the obligee or to reimburse the obligee for any portion of the tax or to pay the interest without deduction for any tax which the obligor may be re.uired or permitted to pay thereon or to retain therefrom under any law of the &hilippines, or any state or country, the obligor shall deduct bonds, mortgages, deeds of trust or other obligations, whether the interest or other payments are payable annually or at shorter or longer periods, and whether the bonds, securities or obligations had been or will be issued or marketed, and the interest or other payment thereon paid, within or without the &hilippines, if the interest or other payment is
Sec. !9. #9$ Mear- end Ad>ustme n t . * 9n or before the end of the calendar year but prior to the payment of the compensation for the last payroll period, the employer shall determine the tax due from each employee on taxable compensation income for the entire taxable year in accordance with 2ection -L8A;. he difference between the tax due from the employee for the entire year and the sum of taxes withheld from Ranuary to No!ember shall either be withheld from his salary in <ecember of the current calendar year or refunded to the employee not later than Ranuary -C of the succeeding year. L. (inal tax !. creditable w)holding tax
Sec. #.* ! RR #- 9$
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Sec. #.* !. 3
+ra5er <efore 9xamina tion ,5 Nesus , who listened so attenti!ely to the doctors in the temple, humbly asked them .uestions, & aroused their admiration by prudent answers, grant me the light to seek out & remember important matters of this subKect I am studying for Dour greater honor & glory. 9 #od, I ask Dour help, as I approach the coming examination with some anxiety, that I may be able to pass the test successfully, if it is Dour will, 9 7ord. 0nlighten my mind, 9 $ea!enly <ispenser of #race, #od the $oly 2pirit, that I may understand rightly the .uestions to be answered by me, that I may see clearly the solution of problems put before me, & that I may a!oid the pitfalls of superficial, hasty & wrong answers, that I may keep my cool in the face of trying circumstances, & thus a!oid
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