TAX NOTES (LEGAL GROUND) Lectures of Atty. Japar B.

Dimampao Supplement Bar Material

STATE POLICY Declared Policy of the State: (Code RD!"N) 1) to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, inclu ing tax a ministration! ") to provi e, as much as possible, an e#uitable relief to a greater number of taxpayers in or er to improve levels of isposable income an increase economic activity! $) to create a robust environment for business to enable firms to compete better in the regional as well as the global mar%et! &) the State ensures that the 'overnment is able to provi e for the nee s of those un er its (uris iction an care) T#E !$I$R$ 1) Po%er& a'd d(tie& of the !IR$ *he B+, shall be un er the supervision an control of the -./ an its powers an uties shall comprehen : (CODE ACE")P) 1) the assessment! ") collection of all national internal revenue taxes, fees, an charges! $) the enforcement of all forfeitures, penalties, an fines! &) execution of (u gments in all cases eci e in favor by the 0*1 an or inary courts 2) give effect an to a minister the supervisory an police powers conferre to it by the 0o e an other laws) ") PO*ERS of the Co++i&&io'er of the I'ter'al Re,e'(e$ 1) to interpret tax laws an to eci e tax cases 3Sec) &)! ") to obtain information an to summon, examine, an ta%e testimony of persons 3Sec) 2)! $) to ma%e assessments an prescribe a itional re#uirements for tax a ministration an enforcement 3Sec) 4)! &) to elegate powers 3Sec) 5)! 2) to a minister oaths an ta%e testimony 3Sec) 1&)! 4) to ma%e arrests an seizures 3Sec) 12)! 5) to assign or re6assign internal revenue officers 3Sec) 14 7 15)) RE-UISITES O. A /ALID TAX REGULATION 38+M+*1*+.9 ./ *:; P.<;, *. +9*;,P,;* *1= 81<S) 1) +t must be consistent with the provision of the *ax 0o e ") ,easonable $) >seful an necessary &) +t must be publishe in the official gazette or in the newspapers of general circulation) SOURCES O. RE/ENUES The following taxes, fees and charges are deemed to be national internal revenue taxes : (Code IE/PEDO or E/E"PIDO) 1) +ncome tax! ") ;state an onor?s taxes! $) @alue6a e tax! &) .ther percentage taxes! 2) ;xcise taxes! 4) -ocumentary stamp taxes! an 5) Such other taxes as are or hereafter may be impose an collecte by the Bureau of +nternal ,evenue

INCO0E TAX

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.EATURES O. OUR PRESENT INCO0E TAXATION -) <hat are the features of our present income taxation in the light of ,)1 A&"&B A$ <e a opte the so6calle C !"#$%&%'()*% TA+ ()T,(D E 0omprehensive in the sense that we practically apply all possible rules of tax situs) Criteria (&ed (Code R$ P$ N$) a) Residency of taxpayer! Situations where we utilize resi ency as basis: 1) <e tax the income of a resi ent alien erive from sources within the Philippines) ") <e also tax the income from sources within of resi ent foreign corporation in the Philippines) b) Place/Source >se as a basis in taxing the income of a non6resi ent alien in ivi ual) <e can only tax his income erive from sources within an in taxing the same, we consi er the place where the income is erive ) c) Nationality or Citizenship in the case of individual taxpayer <e use that as a basis in imposing tax on the income of a resi ent citizen) Resident citizen may be taxe from his sources within an without) *he source of income here is immaterial what we consi er is the nationality or citizenship of the taxpayer) Domestic corporation E we can tax its income erive from sources within an without) .n Non-resident citizen, they can only be taxe on their income erive from the sources within E tax situs is the place Fsource of income)

Ta12ayer 1) ,0 ") 9,0 $) .0< &) 18+;9 &)1 9,16;*B &)" 9,169;*B &)$ 18+;9 ;,16M90 &)& 18+;9 .B>s &)2 18+;9 PS0S 2) -omestic 0orp) 4) /oreign 0orp6,/0F9,/0
1) ") $)

So(rce& +F. 3Sec) "$ G1H) + 3Sec) "$ GBH) + 3Sec) "$ G0H) + 3Sec) "$ G-H)

+ +

3Sec) "$ G;H) 3Sec) "$ G/H)

1 resident citi-en is taxable on all income erive from sources within an without the Philippines) 1 non.resident citi-en is taxable only on income Philippines) erive from sources within the

&) 2)

1n overseas contract wor/er is taxable only on income from sources within the Philippines! a seaman who is a citizen of the Philippines an who receives compensation for services ren ere abroa as a member of the complement of a vessel engage exclusively in the international tra e shall be treate as an overseas contract wor%er) 1n alien individual, whether a resi ent or not of the Philippines, is taxable only on income erive from sources within the Philippines) 1 domestic corporation is taxable on all income without the Philippines! an erive from sources within an

4H 1 foreign corporation, whether engage or not in tra e or business in the Philippines, is taxable only on income erive from sources within the Philippines) I'co+e Ta1atio' +ay 3e 4ro(2ed i'to

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1) ") in ivi ual income taxation corporate income taxation

-) What are the basic features of individual taxationB (S$P$ .$ E$ 0$) A) 5) +n ivi ual income taxation a opte the Sched(lar &y&te+ of ta1atio' Sched(lar Sy&te+ of Ta1atio' E is a system employe where the income tax treatment varies an ma e to epen on the %in or category of the taxpayer?s taxable income ( an vs! Del Rosario"! Characteristics of schedular system of taxation: a) +t gives or accor s ifferent tax treatment on the income of in ivi ual taxpayer) b) +t classifies income) #anifestations$ 3that un er the in ivi ual taxation we a opte the sche ular system of taxation) 6C7 !7 P7 D27 I7 R7 R7 D7 A7 P%7 P7 P8 >n er Sec) $"3a), income may be categorize as follows: 1) compensation income, ") business income, $) professional income, &) income erive from ealings in property, 2) interest income, 4) rent income, 5) royalties, A) ivi en s, I) annuities, 1J) prizes, 11) winnings, 1") pensions, an 1$) partner?s istributive share from the net income of the general professional partnership) *his is the manifestation that as far as in ivi ual income taxation, the income is categorize ) 98 *he ta1 rate& are 2ro4re&&i,e i' character ) *his is clear un er Sec) "& 3a)) Kou will notice there that the tax base increases as the tax rate increases) :8 0odified 4ro&& i'co+e a& re4ard& co+2e'&atio' ear'er ) Mo ifie because in etermining the taxable compensation income, the only allowable e uctions are personal an a itional exemption) Kou cannot e uct the allowable e uctions un er Sec) $& from gross compensation income) But as regar s those in ivi ual taxpayers that erive business, tra e or professional income, we a opte the 'et i'co+e &y&te+$ *his is so because un er Sec) $&, allo%a3le ded(ctio'& may be claime by in ivi ual taxpayers who erive business tra e an professional income) ;8 <e employ this CPay a& yo( .ileD system) <8 >n er certain cases, we employ the C 2ay a& yo( ear'D system) *his applies to C income su%&ect to 'ithholdin( tax)! -$ <hat are the basic features of corporate income taxationB A$ 58 Glo3al Co'ce2t has been a opte ) LLL 'lobal system where the tax treatment views in ifferently the tax base an treats in common all categories of taxable income of taxpayer 3*an vs) -el ,osario)) Characteri&tic& of Glo3al &y&te+ of Ta1atio'

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a) *niform tax treatment E this is sub(ect to iminishing corporate tax rates of $&M 3Nan) 1, 1IIA), $$M 3Nan) 1, 1III), $"M 3Nan) 1, "JJJ)) See 0hapter +@, Sec) "5)) b) Does not cate(orize income) 98 orporate taxpayer, particularly domestic corporations are entitled to deductions ) So, insofar as omestic corporation an resi ent foreign corporation is concerne , we a opte here the net income tax system) 9ew provisions un er ,)1) A&"&: 1JM tax on improperly accumulate earnings of a corporate taxpayer) :8 Pay a& yo( file &y&te+ has also been employe ) 0orporate taxpayer is allowe to a opt calen ar or fiscal year perio ) 0orporate taxpayer files corporate income tax return #uarterly) 1n it also files the so6 calle /+918 1-N>S*;- ,;*>,9) +n the case of in ivi ual taxpayer, the payment shoul not be later than 1pril 12 of every taxable year) +n ivi ual taxpayers are not allowe to a opt the so6calle /+S018 K;1, P;,+.-) O +ndividual taxpayers are allowe to a opt only the calen ar year perio while corporate taxpayers have the option either the calen ar year perio of the fiscal year perio ) Cale'dar year 2eriod E this covers the perio of 1"6month commencing from Nan) 1 an en ing -ec) $1) .i&cal year 2eriod E this is also a 1"6month perio commencing on any month or en ing on any month other than -ec) $1) DE.INITION O. CERTAIN TER0S GROSS INCO0E TAXATION E is a system of taxation, where the income is taxe at gross) *he taxpayers un er this system are not entitle to any e uctions) +n general, we a opte the 'et i'co+e ta1atio' because un er Sec) $&, taxpayers are allowe to claim the so6calle 188.<1B8; -;->0*+.9S) GROSS INCO0E E means all income erive whatever source, inclu ing but not limite to the following: 6STP"IRR"DAP"PS8 1) 0ompensation for services! ") 'ross income from tra e or business or the exercise of a profession! $) 'ains erive from ealings in property! &) +nterests! 2) ,ents! 4) ,oyalties! 5) -ivi en s! A) 1nnuities! I) Prizes an winnings! 1J) Pensions! an 11) Partner?s istributive share from the net income of the general professional partnership) NET INCO0E TAXATION E income is taxe at net) *he taxpayer may claim allowable e uctions) INCO0E E all wealth which flows in the taxpayer other than a mere return of capital) +t inclu es all income specifically escribe as gain or profit inclu ing gain erive from the sale or isposition of capital asset) ,*D+C+-. D/0+N+ +1N: +t also means gains erive from 31) capital, 3") labor, or 3$) both labor an capital inclu ing gains erive from the sale or exchange of capital asset) .OUR (;) So(rce& of INCO0E= 6Cla!S8 a) 0apital b) 8abor c) Both labor an capital

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) Sale of property ;xample of income erive from capital LLL +nterest +ncome ;xample of income erive from labor LLL 0ompensation +ncome ;xample of income erive from both capital an labor LLL +ncome of an in epen ent contractor) *he in epen ent contractor provi es wor% force, provi es capital an erives income from such capital) O +n determinin( the profit from the sale of property , you shoul always be gui e by this formula: 1mount ,eceive .r ,ealize 8;SS 0ost of Property P P,./+* TAXA!LE INCO0E E 3the ol term is 9et +ncome) E means all pertinent items of gross income specifie in the *ax 0o e le&& the e uctions an For personal an a itional exemptions, if any, authorize for such types of income by this 0o e or other special laws) 3Sec) $1 of the *,1 of 1II5)) Shoter @ersion: -ll pertinent items of (ross income less allo'a%le deductions! -$ <hat are the a vantagesF isa vantages of gross income taxation an net income taxationB Advantages of gross income taxation0 1) +t simplifies our income taxation) *his is so because since no e uctions are allowe , it is very easy to tax the income) Kou on?t have to fin out whether e uctions or expenses are legitimate or not because they are not e uctible) ") *his will generate more revenue to the government) $) +t minimizes cost) Disadvantages of gross income taxation0 1) 1s far as the taxpayer is concerne , this is ine#uitable because they cannot claim the expenses, which are incurre in connection with his tra e or business or exercise of his profession) ") 1n if this is the system, in all li%elihoo the taxpayers will lose interest to earn more) +t will in effect re uce the purchasing capacity of the taxpayer) $) Since taxpayers cannot claim those legitimate expenses as e uctions, they may resort to frau ulent scheme that will minimize their tax ability an this may be one through the un erstatement of income) So, in effect, this will encourage tax evasion) Advantages of net income taxation0 1) 1s far as the taxpayer is concerne , they will consi er this as e#uitable an (ust system) ") *his will minimize tax evasion because examiners will be employe to chec% whether expenses are correct or not) $) *he conse#uence of no) " is that this will generate more revenues) Disadvantages of net income taxation0 1) vulnerable to graft an corruption ") vulnerable to tax evasion $) will give rise to loss of revenues)

SOURCES>SITUS O. INCO0E
1n income may be an income from within or without the Philippines) *he other term for income within is .ocal +ncome while income without is sometimes calle 2lo%al +ncome or *niversal +ncome) +n determinin( 'hether an income is an income 'ithin or 'ithout3 you have to consider the classification or 4ind of income! CLASSI.ICATION O. INCO0E 6C7 !7 P7 I7 R7 R7 D7 A7 P7 P7 P8 1) 0ompensation income from services

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") +ncome erive from business, tra e or profession E in this regar , the common forms of business are merchan ising business, farming business, mining business an manufacturing business) $) +ncome from sale or exchange of property 3either real or personal property) &) +nterest +ncome 2) ,ent +ncome 4) ,oyalties 5) -ivi en s, which may be receive from omestic or foreign corporation A) 1nnuities I) Prizes an winnings 1J) Pensions 11) Partner?s istributive share in the net income of general professional partnership 3Professional income of a partner) ? CO0PENSATION INCO0E *ax Situs: Place 'here services are rendered ) So, if services are ren ere within the Phils), that is a 8ocal +ncome) +f it is a payment for services ren ere outsi e the Phils), that is an income without) ,0 E income from within an without are taxable) 9,0 E only compensation income from sources within is taxable) ,1 E same as 9,0) ? !USINESS INCO0E 60: .8 a) Merchan ising Business b) /arming Business c) Mining Business ) Manufacturing Business

ax Situs$ Place 'here these %usiness are underta4en)

ax Situs$ 31) if the goo s are manufacture in the Phils) 1n sol within the phils) *his is consi ere as income derived purely within! 3") 'oo s manufacture outsi e the Phils) an sol outsi e E income derived purely without. 3$) 'oo s manufacture within the Phils) an sol outsi e the Phils) E income partly within and partly without. 3&) 'oo s manufacture outsi e the Phils) an sol within the Phils) E income partly within and partly without. ? INCO0E .RO0 SALE OR EXC#ANGE O. PROPERTY +f it involves personal property, in etermining the tax situs, we have to consi er the place of sale) +n the case of sale of transport documents, tax situs is the place where the transport ocument is sol 3B.10 0ase)) +f it involves real property, the tax situs is the place or location of the real property) So, if the property sol is situate within the Phils), the income erive from such sale is consi ere as income within) ? INTEREST INCO0E *ax Situs: R/S+D/NC/ of the D/5 1R Case$ *here was this contract regar ing the construction of ocean6going vessels) *here was this issuance of letter of cre it an the payment of ownpayment) 1ll the elements of the transactions too% place in Napan) *he payment was ma e in Napan) *he letter of cre it was execute in Napan) *he elivery was ma e in Napan) *he de%tor is a domestic corp) +s the interest income on this loan evi ence by the letter of cre it taxable to the Napanese corp)B

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6/.D$ '!, because the tax situs of interest income is not the activity %ut the residence of the de%tor! he place 'here the contract of loan is executed is immaterial! ? RENT INCO0E *ax Situs: the P.-C/ of property su%&ect of the contract of lease! ? ROYALTIES *ax Situs: the P.-C/ 'here the intan(i%le property is *S/D ? DI/IDEND a) Received from domestic corp) E this is an income purely within) b) Received from forei(n corp) E consi er the income of the foreign corp) in the Phils) uring the last prece ing three 3$) taxable years! rules$ 31) *he income is purely 'ithin if the income erive from the Phil) sources is more than A2M 3") +t is purely 'ithout if the proportion of its Phil) income to the total income is less than 4JM 3$) here should %e an allocation if it is more than 2JM but not excee ing A2M ? ANNUITIES *ax Situs: the P.-C/ 'here the contract 'as made ? PRI@ES AND *INNINGS Prizes may %e (iven on account of services rendered E in which case, the tax situs is the 2lace %here the &er,ice& %ere re'dered) +f these prizes are not (iven on account of services , the tax situs is the 2lace %here the &a+e %a& 4i,e') ax situs of 'innin(s is the place where the same was given)

?PENSION *ax Situs: P.-C/ 'here this may %e (iven on account of services rendered ?PRO.ESSIONAL INCO0E O. PRO.ESISONAL PARTNERS *ax Situs: P.-C/ 'here the exercise of profession is underta4en

GROSS INCO0E
GROSS INCO0E E means all income erive from whatever source, inclu ing but not limite to the following: )' L,()!'0 6code STP"IRR"DAP"PS8 1) compensation for services ") gross income from tra e or business or the exercise of a profession $) gains erive from ealings in property &) +nterests 2) ,ents 4) ,oyalties 5) -ivi en s A) 1nnuities I) Prizes an winnings 1J) Pensions an

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11) Partner?s istributive share from the net income of the general professional partnership (Sec! 78 of R- of 9::;" %+ L,()!'( 6code LAGCIR08 1) procee s of life insurance policy ") amount receive by the insure as return of premium $) gifts, be#uests, evises or escent &) compensation for in(uries or sic%ness 2) income exempt un er treaty 4) retirement benefits, pensions, gratuities and others: (.7 /7 R7 S7 S7 G) a) retirement benefits receive from foreign institution whether public or private b) veteran?s benefits c) retirement benefits receive from private firms whether in ivi ual or corporate ) separation pay e) SSS f) 'S+S 5) miscellaneous items: a) prizes an awar s given in recognition of religious, charitable, scientific, e ucational, artistic, literary, or civic achievements 0.9-+*+.9S: 1) the recipient was selected 'ithout any action on his part to enter the contest or procee ing ") the recipient is not re<uired to render su%stantial future services as a con ition to receiving the prize or awar b) income erive by the government or its political sub ivisions from the exercise of any essential governmental function or from any public utility c) income erive from investment in the Philippines by foreign government or financing institutions ) prizes an awar s in sports competitions e) gain erive from the re emption of shares of stoc% issue by the mutual fun company f) contributions to 'S+S, SSS, P1'6+B+', an union ues g) benefits in the from of 1$th month pay an other benefits h) gain erive from the sale, exchange, retirement of bon s ebentures or other certificate of in ebte ness with a maturity of more than five 32) years) 3Sec) $" 3b), *,1 of 1II5) ?ALLO*A!LE DEDUCTIONS 1) 1ptional Standard Deduction E of ten percent 31JM) of the 'ross +ncome available only to in ivi ual other than a non6resi ent alien provi e he signifies in his return his intention to elect .S-, otherwise, itemize e uctions apply) ;lection ma e shall be irrevocable for the taxable year 3Sec) $& 8) ") +temized Deductions E un er Sec) $& 16Q, an M $) Personal and -dditional Deductions//xemptions under Sec! 7= ? ITE0I@ED DEDUCTIONS 6code ELIT"!DD"CRC8 1) expenses ") loses $) interest &) taxes 2) ba ebts 4) epreciation 5) epletion of oil, gas wells an mines A) charitable an other contributions I) research an evelopment 1J) contribution to pension trust ? NON"DEDUCTI!LE ITE0S 1(ec. 23 A4 1) Personal living or family expenses! ") 1mount pai for new buil ings or permanent improvements, or betterment to increase the value of any property or estate!

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$) 1ny amount expen e in restoring property or in ma%ing goo the exhaustion thereof for which an allowance is or has been ma e! or &) Premiums pai on any life insurance policy covering the life of any officer or employee, or of any person financially intereste in any tra e or business carrie on by the taxpayer , in ivi ual or corporate, when the taxpayer is irectly or in irectly a beneficiary un er such policy) 1(ec. 23 B4 .osses from sales or exchan(es of property directly or indirectly > 1) Between members of a family 3brother, sister of half or full bloo , spouse, ascen ant, lineal escen ants)! ") ;xcept in case of istributions in li#ui ation, between an in ivi ual an a corporation E more than 2JM in value of the outstan ing stoc% of which is owne irectly, by or for such an in ivi ual! or $) ;xcept in case of istributions in li#ui ation, between two corporations E more than 2JM in value of the outstan ing stoc% of each of which is owne , irectly or in irectly, by or for same in ivi ual, if either one of such corporation is a personal hol ing company or a foreign personal hol ing company! or &) Between the grantor an a fi uciary of any trust! or 2) Between fi uciary of a trust an the fi uciary of another trust, if the same person is a grantor with respect to each trust! or 4) Between a fi uciary of a trust an a beneficiary of such trust)

TAXA!LE INDI/IDUALS
RESIDENT CITI@ENS (RC) +ncome from 'ithin and 'ithout E taxable NON"RESIDENT CITI@ENS (NRC) +ncome from 'ithin When an NRC returns to the Phils!3 his income may also %e taxed as Resident Citizen or Non-Resident Citizen! +llustration$ 1, an .0<, arrive in the Phils) sometime in Nune 1IIA) :e will be taxe as a 9on6 ,esi ent 0itizen 39,0) as regar s the income that he earne which covers the perio of Nanuary to Nune) 9ow as regar s the income that he will erive upon his arrival from Nune to -ecember, he will be taxe as ,esi ent 0itizen 3,0)) 5ut if he is not in the Phils) from the perio of Nanuary to -ecember 1IIA, he will be taxe as 9,0 for the sai perio ) +f he will return to the Phils) an stay there from Nanuary t -ecember 1III, he will be taxe as ,0 for the same perio ) ? NRC must prove to the satisfaction of the 5+R Commissioner the fact of physical presence a%road 'ith the intention to reside therein! ? When an NRC decides to return to the Phils!3 he must prove his intention to reside here permanently! ? No' NRC includes 1@/RS/-S C1N -C W1RA/RS (1CW"3 +##+2R-N S3 and those 'ho S -B 1* S+D/ the Phils! %y virtue of an employment! RESIDENT ALIEN (RA) 1) 1n in ivi ual who is not a citizen of the Phils) but a resi ent of the Phils) O +nclu es those who consi er the Phils) as a secon home) OOO ransient tourist who (ust so(ourn, their stay is merely temporary, thus may not be consi ere as ,1) O +f an alien stays in the Phils! for a period of more than one (9" year3 he is considered as R-! SPECIAL NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"NET!)

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O :e must be an alien in ivi ual who is not resi ing in the Phils) an not engage in tra e or business in the Phils) O 6e is one 'hose stay in the Phis!is not more than 9CD days SPECIAL NON"RESIDENT NOT ENGAGED IN TRADE OR !USINESS (SNRA"NET!) 5 Those employed by0 (ROP) 1) ,egional or 1rea :ea #uarters of Multinational corporations! ") .ffshore Ban%ing >nits! $) Petroleum Service 0ontractors NON"RESIDENT ALIEN ENGAGED IN TRADE OR !USINESS (NRA"ET!) E considered as en(a(ed in trade or %usiness if his stay is more than 9CD days L <e can no longer tax his income from sources without) <e can only tax his income from sources within)

ENTITLE0ENT O. DEDUCTIONS
RC E entitle to e uctions because the tax base is taxable income) 'ross +ncome 8ess: 1llowable e uctions PPPPPPPPPPPPPPPPPPPPPPP *axable +ncome NRC E entitle to e uctions because the tax base is taxable income) RA E entitle to e uctions because the tax base is taxable income) NRA"T! E entitle to e uctions because the tax base is gross income) *heir income is sub(ect to "2M tax rate) SNRA"NET! E sub(ect to 12M tax rate on their income in the from of: S 6 Salaries # 6 :onoraria O 6 .ther * 6 <ages E 6 ;moluments R 6 ,emuneration

EXCLUSION .RO0 GROSS INCO0E

APROCEEDS O. LI.E INSURANCEB (ub6ect to tax if 0 1) the insurer an insure a(reed that the amount of the procee s shall be withhel by the insurer with the obligation to pay interest in the same, the interest is the one su%&ect to tax! ") there is transfer of the insurance policy! /xample$ 1 transferre to B his life insurance policy) *he value of the policy is P1 M) B pai a consi eration amounting to P$JJ,JJJ) B continue paying the premiums after the transfer such that the premiums amounte to P"JJ,JJJ) >pon the eath of the insure , the P1 M may be receive by the heirs) -$ +s the full amount of P1 M exemptB A$ 9., only the consi eration given an the total premiums pai may be exclu e ) *hat is, P1 M less P2JJ,JJJ)

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Pro%lem$ 1 obtaine a life insurance policy for B) B is the presi ent of 1?s corporation) 0orp) has an insurable interest in the life of its officers, so premiums may be pai by the employer 1) >pon the eath of B, his esignate beneficiaries will receive the procee s) a) +s the amount representing the procee s of the life insurance policy taxableB b) <hat about the premium pai by the employer 1B -oes this amount form part of the gross compensation incomeB c) -oes the amount representing the procee s of life insurance policy from part of the estate of the ece entB -ns'ers$ a) 8et us first ma%e t'o (8" assumptions) 8et us assume that: 1) the beneficiary esignate is the employer! ") the beneficiary esignate is the heir of the family of the insure ) he ax Code ho'ever3 ma4es no distinction! Re(ardless of the desi(nated %eneficiary is the employer or the heirs3 or the family of the insured proceeds of life insurance policy should al'ays %e excluded! b) Premiums of life insurance policy pai by the employer may form part of compensation income! hence, taxa%le if the %eneficiary desi(nated are the heirs or the family or the employees) +t is not taxa%le compensation income if the desi(nated %eneficiary is the employer because that is (ust a mere return of capital) c! Proceeds of life insurance policy may %e excluded from the (ross estate of the decedent under the follo'in( cases$ 1) if the beneficiary esignate is a $r person an the esignation is irrevocable! ") it is a procee of a group insurance policy) :owever3 it is included in the (ross estate of the decedent$ 1) if the beneficiary esignate in the estate, executor or a ministrator of the estate or the family of heirs of the ece ent! ") if the beneficiary esignate is a $r person an the esignation is revocable Gsee Section A2 3e)H -s far as Sec! C= (e" is concerned3 an employer may %e considered a 7 rd person! AA0OUNT RECEI/ED !Y INSURED AS RETURN O. PRE0IU0B ,eason for ;xclusion: +t represents a mere return of capital) *he &o(rce& of thi& ret(r' of 2re+i(+ (L$E$A$) 1) 8ife +nsurance Policy ") ;n owment contracts $) 1nnuity contracts 666Whether the premiums are returned durin( or at the maturity of the term mentioned in the contract or upon surrender of thee contract Pro%lem$ 1 too% out an en owment policy amounting to P1 M) :e pai premiums amounting to PAJJ,JJJ) >pon the maturity of the policy, 1 receive that P1M) :ow much is the taxable amountB -ns'er$ *hat is P1,JJJ,JJJ) E value of en owment policy 8;SS: P AJJ,JJJ) E representing amount of premium PPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPP P "JJ,JJJ) E taxable amount

1"

?AGI.TS7 !E-UESTS a'd DE/ISESB ,ationale: <hat is contemplate here are onations which are purely (ratuitous in character in or er that it may be exclu e ) 2ifts are exclu e because these are sub(ect to donorFs tax) 5e<uests and devises are exclu e because these may be sub(ect to estate tax) <hat about remuneratory onationsB Remuneratory donations are su%&ect to income tax! %+ %#T)!'( to the $ule:LLL the income or fruit of such money given by onation, be#uests or evise, inclu ing the income of this gift, be#uest or evise in cases of transfer of ivi e interest) ?ACO0PENSATION .OR IN)URIES OR SICCNESSB ,eason for ;xclusion: *his is (ust an indemnification for the in&uries or dama(es suffered) *his is compensatory in nature) *he sources are: 1) *he compensation may be paid %y virtue of a suit! ") +t may be paid %y virtue of health insurance3 accident insurance or Wor4menFs Compensation -ct 5ut as re(ards dama(es representin( loss of anticipated income3 this is the one that is taxa%le! +f dama(es are in the nature of moral3 exemplary3 nominal3 temperate3 actual and li<uidated dama(es3 as a rule3 these may not %e su%&ect to tax! ;xample: +f a person suffere in(ury as a result of a vehicular acci ent, an an action is file in court, the 0ourt awar s the following: Moral 6 ;xemplary 6 1ctual 6 P1JJ,JJJ) P1JJ,JJJ) P 4J,JJJ) 3hospitalization expenses) P "J,JJJ) 3repair of car) P 4J,JJJ) 3loss of income)

OOO -ll dama(es a'arded are tax-exempt except dama(es of representin( loss of income! Ruestion: 1re amages awar e by the 0ourt on account of breach of contract taxableB 1nswer: Rualify your answer) <ith regar s to amages awar e on account of loss of earnings of the contracting party, it is taxable) AINCO0E EXE0PT UNDER TREATYB ,eason for the ;xclusion: reaty has o%li(atory force of contract) %xception0 1s may be provi e for in the treaty) ?ARETIRE0ENT !ENE.ITS7 PENSIONS7 GRATUITIES AND OT#ERSB . *%T%$A'7( B%'%8)T O *his may be given by the >S 1 ministration) O *he recipient must %e a resident veteran! . B%'%8)T( 9)*%' B: 8!$%)9' A9%' )%( !$ )'(T)T,T)!'( ;&%T&%$ #,BL) !$ #$)*AT% 'iver: /oreign government agencies or institutions whether public or private) ,ecipient: ,esi ent citizen, non6resi ent citizen or resi ent alien) 1%servation$

1$
9on6resi ent citizen shoul not be inclu e in the enumeration since it is alrea y un erstoo that we cannot tax his income from without) <e can only tax the income of nonP6resi ent citizen erive from sources within) *he same is true with resi ent alien because we can only tax his income from sources within) *he inclusion of 9,0 an ,1 in the enumeration are mere surplusage) .$%T)$%"%'T B%'%8)T( $% %)*%D )'D)*)D,AL !$ !$#!$AT% 8$!" #$)*AT% 8)$" ;&%T&%$

,ecipient: Private employees or official of such private firm) $%<,)()T%(0 1) *he private employee or official must be at least 2J years of age at the time of his re#uirement! ") :e must have ren ere at least 1J years of service to the employer at the time of the retirement! $) *here must be reasonable private benefit plan E establishe by the employer! &) *he reasonable private benefit plan must be approve by the B+,) 2) ,easonable private benefit plan may be in the nature of pension plan, profit sharing plan, stoc% bonus plan, or gratuity! 4) *he employer must give contribution an no amount shall inure to the benefit of a particular employee or official) *his must be establishe for the common benefit of the employees or officials! 5) *his can be availe of .90;) O *he subse#uent retirement benefits receive from another private employer is no longer exempt but sub(ect to tax) O +f the secon employer is a government entity or institution, in which case, that is exempt because the giver here is not a private firm) *he limitation applies only when the giver of the subse#uent retirement benefits is another private employer) .#&:() AL D)(AB)L)T: B%'%8)T( O *hese inclu e eath benefit, sic%ness benefit an other isability benefit) Sometimes, the term use is Cseparation payD) 'iver: may either be public or private employer ?Sources of Separation Pay$ 1) -eath of an employee! ") Physical isability of an employee! $) 1ny other cause beyon the control of the employee or official) ;xample of no)$ a) ,etrenchment of employees! b) +nstallation of labor saving evises! c) -issolution of law firm) LResi(nation of an employee is a cause 'ithin his control! LBut3 involuntary resi(nation is %eyond the control of the employee! L*he most important thing here is that the separation pay was given on account of the above6 mentione sources) L*here is no re#uirement as to age of the employee or official! there is also no re#uirement as to the length of service of the employee or official) L9o re#uirement also as to the number of availment of benefits) "A0OUNT O. T#E ACCU0ULATED SICC LEA/E AND /ACATION LEA/E CREDITS he monetized value of these %enefits may %e su%&ect to tax if these 'ill not form part of the terminal leave pay! he monetized value of sic4 leave credit is al'ays tax exempt3 if it forms part of the terminal leave pay!

1&
1s regar s >9>S;- @101*+.9 8;1@; 0,;-+*, this is exempt only if the number of ays is 1J ays or less in excess of 1J ays, it is alrea y sub(ect to tax) +f the unused sic4 leave %enefit is monetized , if the employer allow such practice, an the same is given at the en of this year, it is sub(ect to 'ithholdin( tax because in this case, it oes not form part of the terminal leave pay) ,eason for exemption of terminal leave pay: *he accumulate value of unuse sic% leave an vacation leave cre its inclu e in the terminal leave pay is exempt from income tax because it is one receive on account of a cause beyon the control of the employee) *his terminal leave pay is usually given un er a compulsory retirement) 0ompulsory retirement is a cause beyon the control ofte employee)

?A0ISCELLANEOUS ITE0SB
a. #ri-es and Awards in Awards ompetitions ,;R>+S+*;S: 1) 0ompetition an tournament must be sanctione or approve by the 9ational Sports 1ssociation! ") *he competition an tournament must also be approve by the Philippine .lympic 0ommittee, whether local or international! whether hel in the Phils or outsi e)(if not accredited- 8DG tax" b) #ri-es and Awards made primarily in recognition of: (RCS"SALE) $eli(ious3 harita%le3 ivic -chievement3 (cientific3 Athletic3 Literary3 %ducational ;xample: P1 M rewar given to Mr) 1 vincula for his exemplary honesty) *his may be exclu e from his gross income because it is given in recognition of civic achievement) :e was (5) selected 'ithout any action on his part to enter a contest or proceedin( ! an (9) he is not re<uired to render su%stantial future services as a condition to receivin( the a'ard! c. )ncome derived from public utility or from the exercise of essential government function by the 9overnment or political subdivisions of the #hils. ,ecipient: 2overnment or its Political Su%division O 2overnment of the Repu%lic of the Phils or 2overnment of the Phils ,&$ National 2overnment 'overnment of the ,epublic of the Phils) is synonymous with 'overnment of the Phils) 9overnment of the #hils. or government of the #hils) E refers to the government corporate entity through which the functions of the government are exercise throughout the Phils), inclu ing save as the contrary appears from the context, the various arms through which political authority is ma e effective in the Phils), whether pertaining to the autonomous regions, cities, provinces, municipalities, barangays or other forms of local government) *hese autonomous regions, provincial, city, municipal or barangay sub ivisions are the political sub ivisions) 'ational government 6 refers to the entire machinery of the central government) *his inclu es the three 3$) ma(or epartments of the government: the ;xecutive, the 8egislative an the Nu iciary (#actan Ce%u +nternational -irport -uthority vs! #arcos3 Sept! 993 9::H"! +t is clear that (overnment-o'ned and controlled corporations is within the contemplation of the term Cnational governmentD) <e nee this istinctions because the particular item of exclusion emphasizes the fact that political sub ivisions of the State form part of the 'overnment of the Phils) Kou must have notice that there is no provision regar ing government6owne an controlle corporations) 1lso, there are no provisions on agencies or instrumentalities of the government) *he item or income here is exempt if the recipient is either the 'overnment of the ,epublic of the Phils) or the provincial sub ivisions of the State such as provinces, cities, etc) O +ncome derived %y a (overnment-o'ned and controlled corporation3 a(ency or instrumentality of the (overnment may %e su%&ect to tax!

12

O2overnment-o'ned and controlled corporations are no' su%&ect to corporate income tax , except: a) SSS b) 'S+S c) Phil) :ealth +nsurance 0orp) ) P0S. e) P1'0., Situation: 1 municipality erive income from hol ing a fiesta) R(le: *he rule is settle that hol ing a town fiesta is consi ere a proprietary function) *herefore, sai income is sub(ect to tax) Situation: 1 municipality erive income from the operation of public mar%et, electric power plant an other public utilities) R(le: *hat income is tax exempt) d. )ncome derived from investment in the #hils. 1=4 by foreign government or 1>4 financing institutions, owned, controlled or financed by foreign government, regional or 124 international financing institutions established by foreign government ,;R>+S+*;S: 9! a) b) c) Recipient must %e$ foreign government! financing institution owne , finance or controlle by foreign government! regional financing institution, international financing institution establishe by foreign government! ") +t must %e an income derived from investment in the Phils )

Sources of such income: 666 +t may be in the nature of bon s) So, foreign government here may be consi ere the cre itor E possible income here is the i'tere&t of 3o'd&) 9ow, loans may be exten e E possible income here is i'tere&t o' loa'&) 666 +f a forei(n (overnment or financin( institution ma e a eposit in a ban%, Phil) currency eposit E the income here is the nature of i'tere&t i'co+e ) 666 +f a forei(n (overnment ma e an investment in a omestic corporation) +t may be consi ere a stoc%hol er) 1n a stoc%hl er is entitle to ivi en ) :ence, the di,ide'd i'co+e receive from omestic corporation is ta1 e1e+2t) OO +f the recipient of such ivi en is a re&ide't forei4' cor2oratio' that is also ta1 e1e+2t) +t is only sub(ect to tax if the recipient of such ivi en is a 'o'"re&ide't forei4' cor2oratio') Ca&e ;=+MB19Q, which is a consortium of Napanese ban%s, exten e a loan in the amount of S"JM to Mitsubishi Metal 0orp), a Napanese corporation) *he same amount was exten e by Mitsubishi as a loan to 1tlas 0orp), a omestic corporation) *he contract entere into between Mitsubishi Metal 0orp) is enominate as Ccontract of loan an saleD) +t is a contract of loan because Mitsubishi woul len 1tlas S"JM) +t is a contract of sale because un er the contract 1tlas boun itself to sell the concentrates 3this is a mining corp)) that may be pro uce by the concentrator machineFe#uipment purchase through the use of the S"JM for a perio of 12 years) *his being a contract of loan, Mitsubishi is entitle to interest on loan) +SS>;: <hether or not such interest on loan is sub(ect to Phil) income tax -R2*#/N S: Mitsubishi conten e that this is not taxable because: 1) *he source of S"JM is a tax exempt entity 3;=+MB19Q is a financing institution controlle an finance by a foreign government)! an ") Mitsubishi is an agent of ;=+MB19Q, a tax exempt entity)

14

:;8-: *here was no evi ence to the effect that Mitsubishi is an agent of ;=+MB19Q) +t is a mere allegation that has not been proven) +n a contract of loan, once the loan is consummate , the amount becomes exclusive property of the borrower) +t is no longer consi ere the money of ;=+MB19Q) :ence, the interest of such loan shoul be sub(ect to tax) *he len er is not a tax exempt entity) *he cre itor here is Mitsubishi an it is not a tax exempt entity) Such being the case, tax exemption must be strictly construe against the taxpayer an liberally in favor of the government) <hen you claim exemption, you shoul prove it clear an categorical terms) O *he problem may be mo ifie by the examiner) *he examiner may clearly state the Mitsubishi is an agent of ;=+MB19Q) *he answer is, the interest on loan is tax exempt) Mitsubishi then is consi ere as an extension of ;=+MB19Q) +t is as if the len er is ;=+MB19Q) e. =2th month #ay and Benefits O *his applies both to private an public employees) O *otal exclusion shoul not excee P$J,JJJ sub(ect to increase by the Secretary of /inance upon the recommen ation of the B+, 0ommissioner) f. ontributions to 9()(, (((, "%D) A$%, #A9.)B)9, and union dues

O *his is a surplusage) ;ven if this is not mentione , we cannot tax that) g. (ale, exchange, retirement of bonds, debentures and other certificates of indebtedness with a maturity of more than 8)*% 1?4 :%A$( 6 +f maturity is less than 2 years, taxable) R(le +nterest on %onds 1) issue by 0)B 6 exempt ") if issue by corp)6 not exempt R(le Redemptions of share in mutual funds: 6 only those gains erive from re emption of shares issue by a mutual fun company are exempt 6 it must emanate from a mutual fun 6 +f the term is not more than 2 years 32 years or less), the gain erive from the sale, exchange an retirement of the same, may be sub(ect to tax) +llustration: +f you are a cre itor, you may sell these bon s, ebentures or certificates of in ebte ness to another) 6indi mo na mahintay an( maturity 4asi lon( term! +f there is a gain on the sale of the same, it woul be a tax exempt provi e that the bon s, etc), have a maturity or term of more than 2 years) ,etirement of bon s, ebenture, etc) 666 Na(%ayad na Iyun( de%tor! *here may be gain erive from the same, such as interest) *his time, since the gain is in the nature of interest, it is sub(ect to tax) But, the gain erive from the sale, exchange or retirement with a term of more than 2 years, is tax exempt) *his is because exemptions are strictly construe against the taxpayer an liberally in favor of the government) +nterests on bon s, ebentures, etc) are taxable, the provision is clear) +t only covers saleFexchangeFretirement of bon s, ebentures an other certificate of in ebte ness with a maturity of five years) Strict interpretation of tax exemption)

TYPES> CLASSI.ICATION O. INCO0E 5$ CO0PENSATION INCO0E D an income erive un er an employee6

employer relationship) his may include the follo'in(: 3*E!!"DROP)

15
*ages, Emoluments, !onuses, !enefits, Director?s fee, *axable Retirement Benefits, Other items of income of similar nature, *axable Pensions O $etirement benefits may be sub6ect to tax , if it oes not comply with the provision of Sec) $" 3b) par) 4 sub)par a) O #ensions may be sub6ect to tax , if it is given not in accor ance with the con itions lai un er that exclusion provision) own

O !ther items of income of similar nature may include: (C#A0P) 0lothing allowance, :ospitalization allowance, 1llowances for /oo , Me ical allowance, Share from the Profit sharing plan of the employee O T%(T( T! D%T%$")'% ;&%T&%$ A' )' !"% )( !"#%'(AT)!' or '!T0 /in out whether it is receive un er an employer6employee relationship) 1ny payment receive un er an employer6employee relationship is compensation income) OT%(T( T! D%T%$")'% T&%$% $%LAT)!'(&)#0 1A .D 4 1) 1ppointment 3selection an hiring) ") 0ompensation $) -ismissal power &) 0ontrol test %+)(T( A' %"#L!:%$.%"#L!:%%

N$!$ : *he name or esignation of income is immaterial) *he basis of the income is immaterial an the manner by which it is pai , is also not important) -s lon( as it is (iven under an employer-employee relationship3 then that is compensation income ) A' %LLAT)!' !8 )'D%BT%D'%(( E 0onsi ere as compensation income is the in ebte ness ha been cancelle in consi eration of the services ren ere ) OOO Share of the employee from the PR10+ S6-R+N2 P.-N of the employer- 0ompensation income receive in consi eration of services ren ere ) TA+ L)AB)L)T: !8 T&% %"#L!:%% #A)D B: T&% %"#L!:%$ @ 0ompensation income if pai un er an employer6employee relationship in consi eration of services ren ere ) #$%"),"( #A)D B: T&% %"#L!:%$ !' T&% )'(,$A' % #!L) : !8 T&% %"#L!:%% @ 0ompensation income if the beneficiary esignate is the family of heirs of the employee) OOO he %asis of the income is immaterial ) ;ven if it is pai in piece wor%, fixe rate or percentage basis as long as it is pai un er an employer6employee relationship) $%<,)()T%( 8!$ TA+AB)L)T: !8 !"#%'(AT)!' )' !"% A$%0 (SPR) 1) *here must be services, ren ere un er an employer6employee relationship) ") +f payment must be for that services ren ere ) $) +t must be reasonable) *he compensation for services ren ere must be reasonable) #urpose why only a reasonable amount may be taxed as compensation income0 *a%e note on the part of the employer, he can claim such compensation for services as e uction) 9ow, only the amount that is reasonable un er the circumstances can be claime as e uction) So, if the amount or the value of the services ren ere is P1J,JJJ but the employee receive P12,JJJ) 1s far as the employer is concerne , he can only claim the reasonable amount of P1J,JJJ) +n the case of an employee, he can consi er P1J,JJJ as compensation income) *he excess of P2,JJJ may be treate as other income) OOO Not all payments for services rendered are considered compensation income ) .nly those pai un er the employer6employee relationship) T#E .OLLO*ING ARE NOT CO0PENSATION INCO0E (P I)

1A
1) 0ompensation for services ren ere by independent service contractor) *his may be treate as tra e or business income) ") +ncome erive by professionals from the practice of profession un er professional partnership) *his is treate as professional income) OOO 8ringe benefit is considered as compensation income. *his is governe by Sec) $$, *,1 1II5) *his is compensation income in the sense that this is receive un er an employer6employee relatioship) D! T$)'% !8 A(& %<,)*AL%'T 6 you may be pai in cash or in propertyF%in 6 e#uivalent value of property is taxable ? DI..ERENT .OR0S O. CO0PENSATION INCO0E =. #ropertyABind E /air Mar%et @alue (0#@" of the property) +f there is a price stipulated3 it is the price stipulate that will be followe in the absence of contrary evi ence) >. #romissory 'ote or other evidence of )ndebtedness . a) +f it is not discounted, it is the face value of the promissory note) b) +f it is discounted, it is the fair iscounte value of the promissory note) 2. (toc/ @ /M@ of that shares of stoc%

C. ancellation of )ndebtedness @ Cancellation of inde%tedness has the follo'in( tax conse<uences$ a) +t may amount to taxa%le compensation income if the in ebte ness has been cancelle in consi eration of the services ren ere ) b) +t may amount to taxa%le (ift or donation if the in ebte ness has been cancelle without any consi eration at all) *his is not sub(ect to income tax but may amount to taxable gift or onation) +t may amount to capital transaction if the cre itor is a corporation an the ebtor is a stoc%hol er) +f creditor corporation condoned the inde%tedness of the de%tor stoc4holder, that may amount to taxable capital transaction) *his is the form of irect ivi en ) 9ow, property dividend is su%&ect to tax rates of HG3 CG and 9DG! -ivi en receive from omestic corporation is now sub(ect to tax)

c)

?. Tax liability of the %mployee paid by the employer in consideration of services rendered @ amount of tax liability 3. #remiums paid by the employer on the life insurance policy of the employee. a) +t is a taxa%le compensation income if the beneficiary esignate are the heirs of the employee or his family) b) +t is not a taxa%le compensation income if the beneficiary esignate is the employer because it is (ust a mere return of capital) +f the desi(nation of the employer as %eneficiary is indirect 3e)g): +t is the cre itor of the employer that is esignate as beneficiary), that is still not taxable compensation income) /xample of +ndirect desi(nation of the employer as a %eneficiary$ a) Beneficiary is the wife of the Presi ent of a close corporation) b) +f the employer may secure a loan from he insurance policy)

1I Premiums 'ill %e taxed under Sec! 77 par!% no!9D) it is state there: C8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows) O +f the payment 'as received %y the employee 'hen he 'as no lon(er connected 'ith his employer, it is still consi ere compensation income) <hat is important here is that it must be receive uring the existence of the employer6employee relationship) ;mployees may be ismisse by the employer, an they may file complaint for illegal ismissal against the employer) Nu gment was ren ere by the arbiter in favor of the employee) 1ll the wages suppose to be pai 3e)g) bac%wages) can be taxe as compensation income) <hat about attorney?s feesB *hat is exempt)

.RINGE !ENE.ITS code (#E/"#I0"E#EL) 8$)'9% B%'%8)T E 1ny goo , service, or other benefit furnishe or grante in cash or in %in by an employer to an in ivi ual employee (except ran4 and file employee" such as but not limite to the following: 1) :ousing! ") ;xpense account! $ @ehicle of any %in ! &) :ousehol personnel such as mai , river, others! 2) +nterest on loan at less than mar%et rate to the extent of the ifference between the mar%et rate an the actual rate grante ! 4) Membership fees, ues an other expenses borne by the employer for the employee in social an athletic clubs or other similar organizations! 5) ;xpenses for foreign travel! A) :oli ay an vacation expenses! I) ; ucational assistance to the employee or his epen ents! an 1J) 8ife or health insurance an other non6life insurance premiums or similar amounts in excess of what the law allows!(if contri%ution-exempt" O &ousing allowance may be exempt from tax if the living Duarters are0 a) Provi e with the premises of the employer) b) +t must be ma e as a con ition of employment) +f sai re#uisites are not present, housing allowance may be taxe as fringe benefits) O "eal allowance may be exempt from tax if it is provi e within the premises of the employer) O #rivilege or purchase discount are tax exempt if it oes not excee S of the basic monthly salary of the employee) +f it is more than J3 the excess may be as fringe bene 5 "edical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if the following reDuisites are present0 1) +t must be of relatively small value 3reasonable amount)) 3,S@) ") +t must be given for the following purposes: 30:;') a) *o promote 0ontentment b) *o promote :ealth c) *o promote ;fficiency ) *o promote 'oo will O Ta1 E1e+2t fri'4e 3e'efit& (R.7 D07 C7 E17 ECR) 1) 5enefits (iven to the ran4 and file employees , whether grante un er a collective bargaining agreement or not) ") KDe minimis %enefitsD E means of small amount) *hese are benefits relatively of small amount)

"J
$) &) 2) 0ontributions of the employer for the benefit of the employee to retirement, insurance an hospitalization benefits plans) /ringe benefits which are authorize or exempte from tax un er special laws) *hose given for the convenience of the employer, inclu ing those which are re#uire by the nature of the tra e, business or profession of the employer (/mployerFs Convenience Rule"

De minimis benefits 3of relatively small value) E limite to facilities or privileges furnishe or offere by employer to his employees merely as a means of promoting health, goo will, contentment, or efficiency of employees, such as: a) b) c) ) e) f) g) Monetize unuse vacation leave cre its not excee ing ten 31J) ays uring the year! Me ical cash allowance to epen ents of employees not excee ing P52J per semester of P1"2 per month! ,ice subsi y of P$2J per month! >niforms! Me ical benefits 8aun ry allowance of P12J per month! ;mployee achievement awar s, for length of service of safety achievement in the form of tangible personal property other than cash gift certificate, with an annual monetary value not excee ing S month of the basic salary of employee receiving the awar un er an establishe written plan which oes not iscriminate in favor of highly pai employees! 0hristmas an ma(or anniversary celebrations for employees an their guests! 0ompany picnics an sports tournaments in the Philippines an are participate in exclusively by employees! an /lowers, fruits, boo%s or similar items given to employees un er special circumstances on account of illness, marriage, birth of a baby, etc)

h) i) ()

5#rinciple of %mployer7s onvenience $ule0 6 fringe benefits may be exemptFnot sub(ect to tax if these are given for the benefit or a vantage of the employer) The following are the possible fringe benefits, which may be exempt under the %mployer7s onvenience $ule0 (# / # 0 T) a) :ousing benefit b) @ehicle c) :ousehol personnel ) Membership in a social or athletic club or similar organization e) *raveling expense benefit O &ousing benefit E in etermining whether the same is exempt un er the employer?s convenience rule, you have to consi er the peculiar nature of the special nee s of the employer) $eDuisites for exemption0 1) +t must be ma e as a condition for employmentL ") +t must be provided 'ithin the premises of the employer OOO *his may apply to a supervisor of a plant or a company) O +f the housin( or livin( <uarters are provided outside the premises of the employer3 even if that is for the convenience of the employer3 this is only exempt up to =DG of the amount ) So, 2JM taxable, 2JM exempt) O *ehicle E ;xempt but epen s upon the peculiar nature of the special nee s of the business of the employer) /xample$ 8B0 or -:8 business O &ousehold personnel such as maid, driver and others E ;xempt, but epen s upon the peculiar nature of the business of the employer) O "embership in a social club, etc) E Peculiar nature re#uirement)

"1
O Traveling expense benefit E Peculiar nature re#uirement) /xample$ ;mployer sent his employees abroa to atten a particular seminar to improve their technical %now6how) B1, R>;S*+.9: 1 is a river of 0ongressman Magtanggol an he receive a monthly salary of P2,JJJ an living #uarter allowance of P",2JJ) a) <hether the P",2JJ living #uarter allowance is exclu e or sub(ect to taxB b) 1ssuming the employer is an obstetrician woul your answer be the sameB 19S<;,: a) *hat shoul be sub(ect to tax) b) +t shoul be exclu e ) ,eason: 0onvenience of the employer?s rule)

9$ GROSS INCO0E .RO0 !USINESS7 TRADE OR PRO.ESSION

B,()'%(( @ 1ny activity that entails time, attention, effort for purposes of livelihoo or profit) -s re(ards construction %usiness, the taxpayer here must be an in epen ent contractor) :e may report his income un er the percentage of completion metho or un er the so6calle complete contract metho ) #$!8%(()!'AL )' !"% @ *he recipient of the same must be professionals) :ow about those who claim that they are professionals but are not registere in the P) ,) 0), can they still be tax as suchB Kes, irrespective of whether they are license or not because of the rule that gross income erive from whatever source)

:$ PASSI/E INCO0E
#A(()*% )' !"% @ *his is the income that is sub(ect to final tax) )ncome sub6ect to final tax are the following0 (code RPD"*IDS) 1) ") $) &) 2) 4) ,oyalties Prizes <innings +nterests on ban% eposit, eposit substitutes, trust fun s an other similar arrangements) -ivi en receive from omestic corporation, mutual fun insurance company, regional hea #uarters of multi6national corporation an other corporation) Share a partner in the net income after tax of a taxable partnership, (oint account, (oint venture or concessions)

OOO Do not include passive income in the income of your business or profession, or in your compensation income) *his is so because when you receive this income, the tax ha alrea y been impose an e ucte )

RC7 NRC7 RA

NRA"ET!

NRA"NET!

"" ROYALTIES "JM except in the case of literary 'or4s3 %oo4s and musical compositions 'hich are su%&ect to 9DG final tax

Same as ,0, 9,0, ,1

"2M

PRI@ES e1ceedi'4 P5E7EEE$EE +f it is P9D3DDD!DD or less3 it is N1 su%&ect to final tax %ut the same must "JM %e included in other income 3e)g) compensation, business, professional) *INNINGS except PCS1 M .otto "JM INTERESTS ON !ANC "JM DEPOSITS7 etc) DI/IDENDS Sub(ect to RECEI/ED fro+ increasing rates of do+e&tic cor2$7 etc$ 4M if receive in 1IIA! AM in 1III! an 1JM in "JJJ) S#ARE O. A PARTNER i' the 'et i'co+e after a ta1 of a ta1a3le 6 o6 2art'er&hi27 etc) 4, A 7 1J

"JM

"2M

"JM "JM

"2M "2M

"JM

"2M

"JM

"2M

Ruestion: :ow o you treat that share of a professional partner from the net income of a general6 professional partnershipB 1nswer: *his shoul be taxe at the rate provi e un er Sec)"&, that is, 2M to $&M) But as regards the share of a partner in the net income after tax of a taxable or business partnership, that is one which is sub(ect to final tax) #$)E%( @ may be exempt if given in sports competition an if given primary in recognition of scientific, artistic, literary, e ucational, religious, charitable, or civic achievement) INTEREST $ules 1) +f it is an interest on forei(n currency deposit system3 it is exempt) +f the recipient is non6resi ent in ivi ual 39,0, 9,16;*B, 9,169;*B)) ") +f the recipient is a resident individual (RC3 R-"3 that is sub(ect to 5)2 M) $) +nterest income is also exempt if it is an interest income on a long6 term eposit or long6 term investment 3this must have a term of not less than 2 years)) )f the term is less than ? years it is sub6ect to the following rates : 1) & years to less than 2 years 2M ") $ years to less than & years 1"M $) 8ess than $ years "JM

"$

D)*)D%'D $% %)*%D 8$!" D!"%(T) !$#!$AT)!' 1) his is exempt from tax if the recipient is a foreign government, financing institution, regional financing institution, international financing institution establishe by foreign government Gsee Sec)$" 3B) 35) 3a)H) ") +t is also exempt if the recipient of such ivi en is another omestic corporation or resi ent foreign corporation Gsee Sec) "A31)35)3 )H

A#)TAL 9A)' D%$)*%D 8$!" (AL% !8 (&A$%( !8 (T! B Listed and traded through local stoc/ exchange @ this is not sub(ect to income tax but sub(ect to percentage tax of S of 1M of the gross selling price) 'ot listed and traded through local stoc/ exchange E this is the one sub(ect to income tax) 9ot over P1JJ,JJJ)JJ 1mount .ver P1JJ,JJJ)JJ 2M 1JM

+f the share of stoc4 is not listed and traded throu(h local stoc4 exchan(e , the basis of the tax is net capital gain) So, you shoul first e uct the capital loss) +f listed and traded throu(h local exchan(e , there is no e uction allowe because the basis of the tax rate of S of 1M of the gross selling price) he a%ove-mentioned tax rates apply to all individual taxpayers!

5 A#)TAL 9A)' D%$)*%D 8$!" T&% (AL% !8 $%AL #$!#%$T: 6 *he real property involve must be consi ere 01P+*18 1SS;*) 6 *he tax on capital gain erive from the sale of real property is 4M of the gross selling price or zonal value which ever is higher) O CAPITAL ASSET D property held %y the taxpayer 'hether or not connected in his trade or %usiness except: (code SOUR) Stoc% in tra e or other property of any %in which woul be inclu e in the inventory of the taxpayer if on han at the en of the taxable year) ") Property primarily hel for sale to customers in the .r inary course of tra e or business) $) Property >se in tra e or business sub(ect to epreciation &) ,eal property use in tra e or business) *he efinition of capital asset says Creal property hel by the taxpayer whether or not connecte with his tra e or business except real property use in tra e or business)D So, in order to %e a capital asset3 the real property must %e one not used in trade or %usiness ) *hat is why, the sale of resi ential house an lot is sub(ect to 4M of capital gains because it is a real property not use in tra e or business) But, sale of real property by a real estate dealer is not a capital transaction because the property involve is one primarily hel for sale to customer in the or inary course of tra e or business) *hat is not a capital asset %ut an ordinary asset) *his covers not only CsaleD of property! it also covers con itional sale of real property inclu ing the so6calle pacto de retro sale un er 1rt) 14J" of the 900, or isposition of property locate in the Phils) +f the %uyer is the (overnment or any of its political su%-divisions or political a(encies3 includin( (overnment o'ned and controlled corporations3 the seller have the option to avail 1)

T T

"&
the 4M or un er Sec) "&31), wherein the basis un er sai section is taxable income so e uctions may be allowe ) *he cost of the property may be e ucte but when you avail of the 4M, the basis is gross selling price or zonal value whichever is higher) T +s this a tax on the buyer or the sellerB +t is a tax on the seller ) But sometimes, through an agreement, p'ede nilan( +-transfer sa %uyer3 an there?s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale)

OT#ER INCO0E
O !T&%$ )' !"% includes 6code R$I$D$O$8 a) ,ent income other than royalties b) +nterest income other than interest income on ban% eposit c) -ivi en income ) +ncome from .ther sources an this may inclu e: (!IT"CDC) )1) Ba ebts recovere )") +llegal gains erive from gambling )$) *ax fun s )&) 0ompensation for private property expropriate by the government for public use) )2) -amages )4) 0ancellation of in ebte ness 5$ $%'T 6 0ompensation for the use of one?s property) 6 *he payment may be in cash or in %in ) *he property involve is either personal or real property) 6 +n the case of personal intan(i%le property3 sub(ect to final tax if it involves intellectual property, copyright, tra emar%s etc) T&% 8!LL!;)'9 !'(T)T,T%( TA+ABL% $%'T )' !"%0 1) *he re4(lar re't may be monthly, semi6annually or annually ") Additio'al re't i'co+e which inclu es: a) !bligation of the lessor assumed by the lessee *he following are obligations which may be assume by the lessee: 6R$I$D$I$O$8 a)1) ,eal property taxe on lease premises a)") .bligation to pay insurance premium on the insure lease premises a)$) +f the lessor is a corp), the obligation to istribute -ivi en s to its stoc%hol ers a)&) .bligation to pay interest on the bon s issue by the lessor) a)2 .ther obligations of the lessor which may be assume by the lessee) b) *alue of permanent improvements on leased premises ) *his may be reporte through: b)1) 1utri(ht method at the time of permanent is complete , he may report that as a itional rent income E /M@ of the buil ing or permanent improvement) b)") Spread out method by allocating the epreciation among throughout the remaining term of the lease ) c. Advance rentals c)1) +f in the nature of the prepai rentals without restriction on the use of the amount, it is taxa%le) c)") +f it is in the nature of security eposit, it is taxa%le rent income if there is a violation of the term of the lease) c)$) +f it is in the nature of a loan to the lessor, it is not taxa%le) >. )'T%$%(T )' !"% E compensation for the use of money) 6 <hether it is an interest on loan pursuant to the business of a taxpayer or personal transaction, interest income, except if it is tax exempt, is always taxable) *his is so because the source of income is immaterial, even if it is from an illegal source)

"2

+nterest income on ban% eposits is sub(ect to final tax) istribute by the Boar of -irectors

2. D)*)D%'D )' !"% E amount eclare , set asi e an to stoc%hol ers, on eman or a fixe perio )

lasses of Dividend$ GC$L$I$P$S$S$H Cash dividend .i<uidatin( dividendthis is given upon li#ui ation of corporate affairs +ndirect dividend it is given in other form an this inclu es cancellation of in ebte ness by the corp) of the obligation of stoc%hol er Property dividend it may be in the form of stoc% other than the stoc% of the corp) Stoc4 dividend stoc% issue by the giver corp) Script dividend +t is given in the form of promissory note or other evi ence of in ebte ness) STOCC DI/IDEND @ as a rule not taxable. *his is so because there is no income here) +t merely represents the transfer of surplus account to the capital account) /NC/P +1NS to the Rule: (toc/ dividend may be sub6ect to tax under the following exceptional cases0 6C OR D8 1) +f there is a 0hange in the stoc%hol ers interest in the net assets of the corp! ") +f it is one issue by .ther corp) <e call that C dividend stoc/D (toc/ dividend vs. dividend stoc/ E Stoc% ivi en as a rule is not taxable whereas ivi en in stoc% is taxable) $) ,e emption of stoc% ivi en ! &) +f the corp) issues -ifferent shares of stoc%) +f the corp) issues two ifferent classes of shares of stoc%, the ivi en that may be eclare thereafter is taxable)

;xample: !utstanding stoc/ 1) Preferre ") 0ommon $) Preferre &) 0ommon 2) Preferre F0ommon 4) Preferre F0ommon

(toc/ dividend 0ommon Preferre Preferre 0ommon Preferre 0ommon

Taxable 9* 9* 9* 9* * *

Disguised dividend @ treasury stoc% ivi en eclare out of the outstan ing capital stoc%, the purpose of which is to avoi the effect of taxation 3Commissioner vs! #annin("! +t is one which is ma e to appear as stoc% ivi en when the truth of the matter is that it is a ivi en which is illegally eclare , such a case, since the purpose is to eva e taxation, it is taxable) ,emember, treasury shares of stoc/ are not entitled to dividends.

ALLO*A!LE DEDUCTIONS (SEC$ :;)

1) ") $) &) 2) As regards individual taxpayers, the following may claim allowable deductions0 ,0 9,0, only those expenses incurre in the Phils) because here, we cannot tax his income erive from sources without) ,1, only those expenses incurre in the Phils) 9,16;*B, but only those expenses incurre in the Phils) PP 3Professional Partners un er Sec) "4)

%xceptions0 1) +* earning 0+ E ;;, ;, ,;8

"4
") 9,169*B $) 1liens employe 1) ,M0 B) .B> 0) PS0 &) 9,/0 As regards corporate taxpayers, the following are entitled to claim allowable deductions0 1) -0, which inclu es private e ucational institutions, non6profit hospital, government6owne an controlle corps) ") ,/0 ITE0I@ED DEDUCTIONS 6E7I$T7L7!7D7D7C7R7C8 1) ;xpenses 4) -epreciation ") +nterests 5) -epletion of oil, gas, wells an mines $) *axes A) 0haritable contributions &) 8osses I) ,esearch 7 -evelopment 2) Ba ebts 1J) 0ontribution to Pension *rust O +n the case of individual taxpayers, they may avail of the optional standard deduction of 9DG of (ross income O Corporate taxpayers are not allowe to claim 1JM optional stan ar e uctions)

O 1ll in ivi ual taxpayers except the 9,1 in ivi ual may claim this optional stan ar e uctions) O )temi-ed deduction may apply to corporate taxpayers as well as individual taxpayers ) 5 8,'DA"%'TAL #$)' )#L% )' D%D, T)!'( 1) *he taxpayer must prove that there is law authorizing e uctions) ") *he taxpayer must prove that he is entitle to e uctions) OOO NR0C are not entitled to claim deductions)

5$ EXPENSES
!$D)'A$: F '% %((A$: %+#%'(%( <hen we spea% of .,-+91,K, this simply refers to the expenses which are normal, usual or common to the business, tra e or profession of the taxpayer) *his may not be recurring) /xample: if an action is file in court, it is but normal to hire the services of a lawyer) So, the taxpayer has to pay attorney?s fees) +t is an or inary expense un er this circumstances) 9;0;SS1,K6 +t is one which is useful an appropriate in the con uct of the taxpayer?s tra e or profession) .,-+91,K 7 9;0;SS1,K ;=P;9S;S 6are those which are incurre or pai in the evelopment, operation management of the business, tra e or profession of the taxpayer) ;=*,16.,-+91,K ;=P;9S;S E 'ot Deductible) *hese are amortize or in lieu of the same, you may claim that so6calle allowance for epreciation) 1n if it involves intangible asset, the wor use is 1M.,*+U1*+.9) *here is no har an fast rule) -n expense may %e ordinary insofar as a particular taxpayer is concerned and it may not %e an ordinary as re(ards another taxpayer! ;xample: +f you have business here in Manila an you also have business in *awi6tawi, what is the expense that you may incur in *awi6tawi which you may not possibly incur in ManilaB +n *awi6tawi, you may nee people to guar your business) But here in Manila, you may nee not because of our new Presi ent6elect)

"5

CINDS O. ORDINARY F NECESSARY EXPENSES 6C$A$R$T$E$R$S$8 1) 0ompensation for services ren ere ") 1 vertising 7 promotional expenses $) ,ent expenses &) *ravelling expenses 2) ;ntertainment expenses 4) ,epairs 7 maintenance expenses 5) Supplies an materials !""!' $%<,)()T%( 8!$ D%D, T)B)L)T: of these ordinary F necessary expenses0 6D$I$R$8 a) #ust %e paid or incurred D*R+N2 the taxa%le year! +f you incur expenses in 1II5, you cannot carry this over to 1IIA) expenses incurre uring a particular year must be claime as e uctions uring this year when the same were incurre ) CP1+-D E to signify the fact that the taxpayer uses the 01S: B1S+S) >n er the 01S: B1S+S, an expense is recognize when it is P1+-) C+90>,,;-D E implies that the taxpayer employs the 100,>18 B1S+S) >n er the 100,>18 B1S+S, income is recognize when earne regar less of the receipt of the same an the expense is recognize when incurre ) b) c) #ust %e paid or incurred in connection 'ith the trade3 %usiness or profession of the taxpayer! #ust %e proven %y R/C/+P S! .OR DEDUCTI!ILITY O. T#ESE ORDINARY F

SPECIAL RE-UISITES NECESSARY EXPENSES

=. !"#%'(AT)!' 8!$ (%$*) %( $%'D%$%D *his must be reasona%le, meaning, this must not be ostensible) Ca&e 5: Partnership was sol to a corp) an it was agree that the partners will serve the corp) an ma%e it appear that they ren er services) So, compensation for services was ostensibly ma e by the corp) #eld *hese is a mere ostensible salary or payment for services not actually ren ere because that amount really forms part of the properties purchase by the corp) Ca&e 9: 0orporate officers succee e in selling the property of the corp) So, profit was erive therefrom) Bonuses were given to these corporate officers) #eld *he rule is settle ) Bonuses must be given in goo faith) *here must be services ren ere because bonuses are a itional compensation) +n this particular case, there was really no services ren ere because that sale was ma e through a bro%er) *he corp) ma e it appear that it was through the efforts of these corporate officers that brought about a successful sale of property) 5onuses must %e (iven in (ood faith and in determinin( 'hether %onuses 'ill form part of the compensation for services rendered3 you have to consider the 31) nature of the business, 3") the financial capacity of the taxpayer an 3$) the extent of the services ren ere ) >. AD*%$T)()'9 A'D #$!"!T)!'AL %+#%'(%( 6 +t must be reasona%le! Ca&e: Sugar -ev?t) 0orp pai P1"2,JJJ)JJ to 1lgue 0orp) representing promotional expenses)

"A
#eld *his is reasonable un er the circumstances because the particular bu get sub(ect for promotion involves million of pesos) 1n un er that circumstances, the P1"2,JJJ)JJ is reasonable as this may coinci e with the efforts exerte consi ering that the taxpayer has no venture in that experimental pro(ect to establish that vegetables of investment company an this involves millions of pesos) 2. $%'T %+#%'(% a) *he taxpayer must N1 %e the o'ner of the property or he has no e#uitable title over the property) b) *his is su%&ect to 'ithholdin( tax! Kou cannot claim that the taxes suppose to be withhel have not been pai or remitte to B+,) C. T$A*%LL)'9 %+#%'(%( 6 *his must be incurred or paid 'hile Ka'ay from home)! 6 K6ome) oes not refer to your resi ence but to the station assignment or post) /xample$ /rom home office to branch office, the traveling expenses incurre are e uctible) 1n this inclu es not only the transporatiotion expenses but also meal allowance an hotel accommo ations) ?. %'T%$TA)'"%'T %+#%'(%( 6 *his must not %e contrary to la'3 morals3 (ood customs3 pu%lic policy or pu%lic order ) 6 :ence, %ri%es3 4ic4%ac4s3 and similar payments are not deducti%le ) 61lso, the expenses incurre by the taxpayer in entertaining gov?t officials in 26star hotel to gain political influence are not e uctible) 3. $%#A)$( A'D "A)'T%'A' % %+#%'(%( 6 1nly ordinary or minor repairs are deducti%le! - /xtra-ordinary repairs cannot %e claimed as deduction an in lieu of that, the taxpayer may not be allowe to claim epreciation) - +f the cost of the repair increases the life of an asset for a period of more than one (9" year3 that amount is consi ere extra6or inary repair) 1ther'ise3 it is consi ere or inary repair) G. (,##L)%( A'D "AT%$)AL( 6 his must %e actually consumed durin( the taxa%le year! 6 RULE ON SU!STANTIATION simply re<uires that ordinary and necessary expenses must %e proven) *he 2roof& re#uire inclu e: 6N$O$R$E$D$8 a) .fficial receipts b) 1 e#uate ,ecourse c) 1mount of ;xpense ) -ate an place where such expense is pai or incurre e) 9ature of expense

9$ INTEREST
$%<,)()T%( 8!$ D%D, T)B)L)T: 1) *his must be pai or incurre ->,+9' the taxable year) ") *his must be pai or incurre in connection with the tra e, business or profession of the taxpayer $) *here must be an obligation which is vali an subsisting) &) *here must be an agreement in writing to pay interest) Ruestion 1: <hat about that interest on unclaime e uctionsB salaries of the employees, is that interest

"I

1nswerF:el : 9., because there is no obligation or in ebte ness) +t is the fault of the employees in case they faile to claim their salaries) Ruestion ": <hat about that interest charge to the capital of the taxpayer, is that e uctibleB 1nswer: +nterest on cost6%eeping purposes is not e uctible) *his oes not arise un er an interest6 bearing obligation) T&%!$%T) AL )'T%$%(T @ an interest which is compute or calculate , not pai or incurre , for the purposes of etermining the opportunity cost of investing in a business) *his oes not arise from legally eman able interest6bearing obligation) *his is not a deducti%le interest! Ruestion $: <hat about interest on preferre stoc%, is this e uctibleB 1nswer: 1s a rule, interest on preferred stoc/ is not deductible , because there is no obligation to spea% of) +t is in effect an interest on ivi en ) *he reason why it is not e uctible is that the payment is epen ent upon the profits of the corp) +t will only be pai if the corp) earn profits) 1n woul not be pai of the corp) incurs losses) B,T if it is not dependent upon corporate profits or earnings, that is deductible ) +f is payable on a particular on a particular ate or maturity without regar to the corporate profits, it is e uctible) he Supreme Court mentions W1 (8" 0-C 1RS$ 1) not epen ent upon corporate profits! an ") agreement as to the ate or term within which payment will be ma e) )'T%$%(T !' 9!*7T (% ,$)T)%( is now taxable. So, if the taxpayer obtaine a loan from P9B an use the procee s in purchasing gov?t securities, the interest is now taxable) 8i%ewise, the interest expense pai on that loan, the procee s of the same, ha been use to purchase gov?t securities is now e uctible) -$ <hat about an interest on a loan pai in a vance, is this e uctibleB 8et us say that the taxpayer obtaine a loan from a ban% an it is payable within 2 years) *he loan obtaine is P2J,JJJ)JJ) 9ow, it was e ucte in a vance, can that be claime as e uctionsB A$ 9.) Kou can only e uct the same when the installment is ue a particular year) INTEREST EXPENSES *#IC# ARE NON"DEDUCTI!LE 6PARCAPU8 1) +nterest expense on P,;/;,,;- S*.0Q! ") <hen there is 9. 1',;;M;9* in writing to pay interest! $) +nterest expense on loan entere into between ,;81*;- *1=P1K;,S) &) +nterest pai or calculate for 0.S*6Q;;P+9' P>,P.S;S 2) +nterest pai in 1-@190; 4) +nterest on obligation to finance P;*,.8;>M ;=P8.,1*+.9 5) +nterest on >9081+M;- S181,+;S of the employees $elated taxpayers$ a! mem%ers of the same family 'hich includes$ a)1) spouses

$J
a)") brothers an sisters a)$) escen ants an ascen ants b) %et'een t'o (8" corporations o'ned or controlled %y one individual! :e must have a controlling interest over these two corporations) .,, if one corp) is consi ere as personal hol ing company of another corp) c! %et'een a corp! and an individualL that individual o'ns or controls more than =DG of the outstandin( capital stoc4 of the such corp! ) parties to a trust! )1) grant or fi uciary )") fi uciary of one trust an fi uciary of another trust but there is only one grantor )$) beneficiary an fi uciary OKour %nowle ge of relate taxpayers is also important in etermining whether losses are e uctible or not) +f losses 'ere incurred or paid in connections 'ith the transactions %et'een these related taxpayers3 these are not deducti%le! Ruestion: :ow much interest expense is e uctibleB

1nswer: *he interest that may be claime as e uctions shall be re uce by: a) &1M 6 Beginning Nanuary 1, 1IIA b) $IM 6 Beginning Nanuary 1, 1III c) $AM 6 Beginning Nanuary 1, "JJJ of the income sub(ect to final tax) /N-#P./ 10 +NC1#/ S*5,/C 1 0+N-. -N$ 1) interest on ban% eposit ") interest on eposit maintaine un er the foreign currency eposit system So, if the interest income on ban% eposit amounte to P1JJ,JJJ)JJ) 1n the total interest expense incurre or pai by the taxpayer is P"JJ,JJJ)JJ) +f this is incurre in 1IIA, &1M of P1JJ,JJJ)JJ is P&1,JJJ)JJ) *hat P"JJ,JJJ)JJ interest expense incurre or pai , shoul be re uce to P&1M of that P1JJ,JJJ)JJ to arrive at P12I,JJJ)JJ which is the interest that may be claime as e uction) P"JJ,JJJ)JJ 6 &1,JJJ)JJ 66666666666666666666666 P12I,JJJ)JJ *he rule has been establishe that -N/S are N1 1RD+N-RB 15.+2- +1NS ) But the Supreme Court in t'o (8" cases relaxed the distinction %et'een taxes and ordinary o%li(ations ) 1) *he interest on deficiency donor7s tax is deductible ) *he S0 explaine that taxes here are consi ere obligations or in ebte ness) 1n it rule that we have to relax the istinction between tax an or inary obligation in this respect) )nterest on deficiency income tax can also be claimed as deductible interest expense because taxes here are consi ere or inary obligations)

")

:$ TAXES
$%<,)()T%( 8!$ D%D, T)B)L)T:: 1) *his must be pai or incurre uring the taxable year) ") *his must be taxes pai or incurre in connection with the tra e, business or profession of the taxpayer) OOO axes that may %e claimed as deductions may %e national or local taxes!

$1
T&% 8!LL!;)'9 A$% '!'.D%D, T)BL% TA+%( 6S$I$N$E8 1) SP/C+-. -SS/SS#/N E tax impose on the improvement of a parcel of lan ") +NC1#/ -N E *his inclu es foreign income tax) +n this regar , the so6calle foreign income tax may be claime as a e uction from gross income or this may be claime as tax cre it against Phil) income tax) +n the event that he claims that as tax cre it, he can no longer claim the same as e uction) *axes which are N1 C1NN/C /D W+ 6 6/ R-D/3 5*S+N/SS 1R PR10/SS+1N 10 6/ -NP-B/R /S - / -N3 D1N1RFS -N 3see also iscussion on tax benefit rule)

$) &)

TA+ A( D%D, T)!'( vs. TA+ $%D)T T *axes as e uctions may be claime as e uctions from gross income) T *ax cre it is a e uction from Phil) income tax) T *ax as e uction inclu es those taxes which are pai or incurre in connection with the tra e, business or profession of the taxpayer) :owever, the sources of a tax cre it is foreign income tax pai , war profit tax, excess profit tax pai to the foreign country) *he foreign income tax pai to the foreign country is not always the amount that may be claime as tax cre it because un er the limitation provi e un er the *ax 0o e, it must not be more than the ratio of foreign income to the total income multiplie by the Phil) income tax) *axes are e uctible only by the person upon whom the tax is impose /xcept$ 1) Share hol er ") corporate bon s 6 tax free 0ovenant clause

The following are entitled to claim tax credit0 1),0 ") -0

;$ LOSSES
CLASSI.ICATION O. LOSSES 6O$ C$ *$ D C$ S$8 1) !$D)'A$: L!((%( E losses sustaine in the course of tra e, business or profession of the taxpayer) ") A#)TAL L!((%( E the assets that must be involve there must be capital assets Ca2ital Lo&&e& i'cl(de the follo%i'4 a) 8oss arising from failure to exercise privilege to sell or buy property b) <orthless securities c) 1ban onment losses in the case of natural resources ) 8oss from wash sale $) ;A9%$)'9 !$ 9A"BL)'9 L!((%( E the amount that is e uctible must not excee the gains) %xample0 *he winnings amounte to P1,JJJ)JJ 8oss is P2JJ) *his loss is e uctible) +f the winning is P2JJ an if the loss is P1,JJJ) *he amount e uctible is only P2JJ because the amount must not excee the gains) +f there is no winnings an loss is P2JJ) -e uction losses here is U;,.) &) A(,ALT: L!((%( E this must be reporte to the B+, earlier than $J ays but not later than &2 ays following the ate of the loss) Ca&(alty lo&&e& i'cl(de a) /ire

$"
b) c) ) e) f) g) Storm shipwrec% .ther casualty losses ,obbery ;mbezzlement *heft

2) (#% )AL L!((%( E include the following$ a! loss arisin( from voluntary removal of %uildin(s as an incident to rene'al or replacement Problem: Suppose the taxpayer ha a buil ing constructe on a parcel of lan ) :e owne this as well as the buil ing erecte thereon) :e ha business an his business was con ucte within the premises) *hen, he eci e to remove such buil ing as to construct a new buil ing for new business) +s the cost of emolition to give way to a new buil ing e uctible lossB YES$ Suppose 1 purchase that parcel of lan of B an inclu e in that sale was that of the buil ing) 1 emolish this buil ing in or er to construct a new buil ing) +s the cost of emolition e uctible insofar as 1 is concerne B NO$ *hat can only be claime as e uctions if the one emolishing the same is the taxpayer) *he moment that is sol to another claim that as e uctible loss) *he treatment here is, the cost of emolition shoul be capitalize in the selling price) E1ce2tio':1 may claim that as e uctible loss if this was emolishe by value of a court or er because the gov?t consi ere this as a fire hazar , loss of useful value of property or capital asset) T&% !""!' $%<,)()T%( for D%D, T)B)L)T: !8 L!((%( are0 1) .osses must %e actually/sustained and not mere anticipated lossesL ") $) #ust not %e compensated %y insuranceL 666 +f it is partly compensate , only the amount not compensate by insurance is e uctible) #ust %e evidenced %y a completed transaction) Co+2leted Tra'&actio' D this means that the loss must be fixe by i entifiable event) /xample: +f it is a loss sustaine from sale, the event that may i entify or complete the transaction is the consummation of the contract of sale) Suppose it is in the nature of casualty losses li%e fireB *he fire estroye your property in 1II2, no payment has been ma e because the insurer an the insure were still un er negotiation) +t was only in 1II5 that they agree on the amount) *he amount agrees upon is P1JJ,JJJ) *he taxpayer may claim that casualty losses only in 1II5 when payment was actually ma e) *his is the event that will complete the transaction)

<$ !AD DE!TS

$%<,)()T%( 8!$ D%D, T)BL)T:0 6CU7 *7 T!P7 /S7 U8 1) Must be char(ed off and uncollecti%le within the taxable year! ") Must be ascertaine to be 'orthless $) Must arise from trade3 %usiness or profession of the taxpayer! &) Must be valid and su%sistin( in ebte ness! 2) Must be uncollecti%le in the near future) &!; T! #$!*% T&% ;!$T&L%(('%(( !8 !BL)9AT)!'0 -ccordin( to the Supreme Court3 the follo'in( S /PS must %e complied : 1) *here must be a statement of account sent to the ebtor! ") 1 collection letter!

$$
$) &) 2) +f he faile to pay, refer the case to a lawyer! +f lawyer may sen a eman letter to the ebtor! +f the ebtor still fails to pay the same, file an action in court for collection) +n provin( that the de%tor is insolvent of %an4rupt , mere allegation of the same is not enough) Kou shoul prove that the ebtor is in ee ban%rupt or insolvent) So, you may secure a copy of that decision %y the S/C or other agency as the case may be, eclaring the ebtor as ban%rupt or insolvent) 1n then there must be a eman letter sent to him) +n case the de%tor 'as ro%%ed, there must be a police report to that effect) *he de%tor may %e a NR0C , so you may argue that he may not be sue here) 1ccor ing to the Supreme 0ourt, as a rule that is not an excuse) Kou shoul still send a demand letter to that NR0C) +n other wor s, there must %e dili(ent efforts to collect the inde%tedness and to prove that in the near future such o%li(ation is no lon(er collecti%le ) OOO +f the recovery of %ad de%ts3 resulted in a tax %enefit to the taxpayer , that is taxable) +f it did not result in any tax %enefit to the taxpayer , that is not taxable) (TAX !ENE.IT RULE) ,ea the case of Phil! Refinin( Company vs! Commissioner, a 1IAI case)

9)B)

G$ DEPRECIATION
he idea here is not to recover profit3 %ut to recover the cost of property invested in %usiness) <hen the properties are use in tra e, business or profession of the taxpayer, the law consi ers or recognizes the gra ual loss or sale of property) D%#$% )AT)!' refers to the gra ual iminution of the useful value of the property use in tra e, business or profession of the taxpayer, arising from wear an tear or natural obsolence) $%<,)()T%( 8!$ D%D, T)B)L)T:0 6U P R A C 8 1) *he property must be used in trade3 %usiness or profession of the taxpayer! ") *here must be deprecia%le properties) *he non.depreciable properties are a) Personal property not use in tra e, business or profession of the taxpayer! b) +nventoriable stoc% an securities c) 8an ) Mining an other natural resources $) &) *he allo'ance for depreciation must %e reasona%le *he method in computin( the allowance for epreciation must be in accordance 'ith the method prescri%ed by the Sec) of /inance upon the recommen ation of the B+, 0ommissioner) This prescribed method includes: a) -eclining balance metho b) Sum of the years igit metho c) Straight line metho ) 1ny other metho as may be prescribe by the Sec) of /inance upon the recommen ation of the B+, 0ommissioner *his must be char(ed off durin( the taxa%le year!

2)

H$ DEPLETION D natural resources

T *his involves natural resources such as oil, gas wells an mines) *hese are non-replacea%le

$&
assets) T T *he re<uisites for deducti%ility are the same as that of depreciation except that the properties involve are natural resources he idea here is not for profit %ut to recover the cost of investment throu(h this allo'ance for depletion)

I$ C#ARITA!LE AND OT#ER CONTRI!UTIONS

O These are fully deductible if the contributions are given to the following0 6.$ A$ G$8 1) 2overnment or its political sub ivisions, agencies or instrumentalities, for the purpose of un erta%ing priority pro&ects of the government! These priority pro6ects include0 6S$#$E$8 a) Sports evelopment, science an invention b) :ealth an human settlement c) ; ucational an economic evelopment ") $) 0orei(n (overnment or institution an international civic organizations! -ccredited N21 '.9.!. means non-profit domestic corporation 'hich are formed and or(anized for any of the follo'in( purposes: 6C$#$E$R$S$8 a) ,esearch b) :ealth c) ; ucation ) 0haritable, cultural, character buil ing e) Sports evelopment an social welfare The amount of charitable contribution that may be claimed as deduction may be0 1! +n the case of individual taxpayer$ 6 9ot more than 1JM of the net income before charitable contribution ") +n the case of corporate taxpayer$ 6 9ot more than 2M of the net income before the charitable contribution T)8 the recipient of such contribution is any of the following D formed or organi-ed for : GR$E$C$S$H 1) ,eligious purpose an rehabilitation of veterans ") ; ucational purpose li%e e ucational corporations which are not #ualifie as 9'. $) 0haritable, cultural purpose &) Scientific, sports evelopment an social welfare purpose A5EJ or <J of the 'et i'co+e 3efore charita3le co'tri3(tio'B E1a+2le +f an in ivi ual taxpayer has a gross income of P1JJ,JJJ an the allowable e uction, except charitable contribution, is P2J,JJJ) *he 0haritable contribution is P2,JJJ) -e uction first P2J,JJJ from P1JJ,JJJ an the result is P2J,JJJ) *his P2J,JJJ is the basis of that C1JM or 2M of net income before charitable contributionD) So, 1JM of the P2J,JJJ is P2,JJJ) :ence, the actual contribution of P2,JJJ may be fully claime as e uction) But let us say, the amount of charitable contribution is P1J,JJJ) So, he can only e uct P2,JJJ as charitable contribution, an not the actual amount of P1J,JJJ because the law imposes a limitation that the amount that may be claime as e uction must not be more than 1JM of net income before charitable contribution)

$2 K$ RESEARC# F DE/ELOP0ENT PROGRA0

This may not be claimed as deduction if the amount is: 1) Spent for the ac#uisition or improvements of lan evelopment of natural resources) ") or for the improvement or

Pai or incurre for the purpose of ascertaining the existence, location, extent or #uality of any natural resources li%e eposits of ore or other minerals inclu ing oil or gas)

5E$ CONTRI!UTION TO PENSION TRUSTS

$%<,)()T%( !8 D%D, T)B)L)T:$ 1) *here must be a pension plan establishe by the employer! ") *he pension must be reasonable or soun ! $) 0ontribution must be given by the employer to that pension plan! &) *his must be for the benefit of the employees! 2) *he plan must not be sub(ect to the control of the employer) Contri%ution to pension trust may refer to the current year or past years! C*RR/N B/-R- this is considered as ordinary M necessary expenses

;mployer may also ma%e a contribution to the pension plan in regar services ren ere for the past 1J years)

to the

PERSONAL EXE0PTIONS
PERSONAL EXE0PTIONS 5$ #ersonal and additional exemptions) 39ote: <ala na yung S$A$P$E)) >. #remiums on health and hospital insurance Limitations$ a$ +t must not be more than P",&JJ)JJ a year) +n other wor s, P"JJ)JJ a month) *he P",&JJ)JJ is the maximum amount that may be claime as e uctions) 3) c) *he family must have an income of not more than P"2J,JJJ)JJ a year) *he claimant must be the spouse claiming the a itional exemption)

Premiums on life insurance policy is also included here %ecause it is included under the health insurance policy! PERSONAL EXE0PTION *his is an arbitrary amount in the nature of e uctions from gross compensation income) +f the taxpayer has no compensation income , this can be claime as e uction from gross income from business, tra e or profession) Personal exemption is given to approximate the nee s of the taxpayer) +t is a substitute for the isallowance of family, personal an living expenses) B)'D( !8 #%$(!'AL %+%"#T)!'$

$4
1) Basic personal exemption: a) b) c) single or legally separate without epen ent! hea of the family! each marrie in ivi ual if both of them are earning 0ompensation income 3in case only one of the spouses is eriving gross income, only such spouse shall be allowe the personal exemptions) Ph29E7EEE$EE Ph29<7EEE$EE Ph2:97EEE$EE

") Additional exemption 6 *his only applies to #ualifie epen ent chil an chil ren such as legitimate an illegitimate chil ren)

Ph2I7EEE$EE for every <ualified dependent child %ut not to exceed O

T #ersonal %xemption E only in ivi ual taxpayers, inclu ing estate an trust, are entitle ) T)n case of estate and trust E Php"J,JJJ)JJ

R$C$

N$R$C$

R$A$

F #ersonal %xemption

F within

F within

Additional %xemption

F within

F within

NRA"NT! Fsub(ect to the rule on reciprocity) But it must not excee the maximum allowable personal exemption) = ,ule on reciprocity oes not apply)

NRA"NET!

Le4e'd > 6 availa%le! X E not availa%le #ead of the fa+ily E unmarried man or 'oman le(ally separated man or 'oman 'ho has the follo'in( <ualified dependents$ 1) #arents 6 6 ") .ne or both parents) Must be living with the taxpayer an upon the taxpayer for chief support) Parents must %e natural parents! epen ent

Brothers or sister 6 o %e <ualified they must %e$ a) 8iving with the taxpayer! b) -epen ent upon the taxpayer for chief support! c) >nmarrie ! ) 9ot gainfully employe ) e) 9o more than "1 years ol except if physically or mentally incapacitate ! P must %e %rothers or sisters %y %lood P one is enou(h hildren. onditions0 a) #ust %e le(itimate 3 ille(itimate3 le(ally adopted or stepchildren 8iving with the taxpayer!

$)

$5
b) c) ) e) -epen ent upon the taxpayer for chief support! >nmarrie ! 9ot gainfully employe ! 9ot more than "1 years ol except if physically or mentally incapacitate )

T -epen ent is consi ere Cliving with the taxpayerD even if the former or the latter are not physically together if that is brought about by force of circumstances) /xample if one of the parents will have to un ergo by6pass operation in the >)S) TChief S(22ort E means more than 2JM of the nee s of the epen ents are provi e by the taxpayer) Pro3le+: +f the chil or the brotherFsister got marrie an then he has foun to be physically or mentally incapacitate , so bumali% si tatay at epen ent sa tatay for chief support, can he #ualify as epen entB A'&%er 9o, physical or mental defect applies only to a(e re<uirement! 1nce the child or %rother/sister (ot married3 he is automatically dis<ualified as dependent! T &A'9% !8 (TAT,(: 1) -eath of spouse uring the taxable year! ") -eath of epen ent uring the taxable year! $) -eath of the taxpayer uring the taxable year! estate of the taxpayer may claim the %asic personal exemptionL &) 1 itional epen ent uring the taxable year! 2) *axpayer got marrie uring the taxable year! 4) 'ainful employment of the epen ent uring the taxable year 5) -epen ent became more than "1 years ol uring the taxable year) T /ven if the a%ove-mentioned chan(e of status happened durin( the taxa%le year3 the taxpayer may still claim the %asic personal exemption %ecause it is as if the chan(e of status happened at the end of the taxa%le year! T *here is a provision in the *ax 0o e, which is not so clear) /or purposes of head of the family7 in the case of natural chil ren or chil , there is that wor Hac/nowledged or recogni-edI. T 0or purposes of the definition of head of the family , it is clear that to #ualify as epen ent, the natural chil or legitimate chil must be ac%nowle ge or recognize by the taxpayer) T But in the efinition of the epen ent, dependent means legitimate, illegitimate or legally a opte chil or chil ren) *here is no wor ac%nowle ge or recognize ) T <as this eliberately omitte by our 0ongressmenB -oes this imply that since they have so may illegitimate chil ren, they may not be re#uire to ac%nowle ge or recognize them an they can claim this illegitimate chil as their epen entB *his is not clear) +f we will try to interpret the law literally, there is no nee of any recognition on the part of the taxpayer) T +s this really the intention of lawB T 9o) he intention of the la' has al'ays %een to reco(nize this ille(itimate child and this is one 'ay of compellin( the taxpayers to reco(nize this child! T *he #resident of the $epublic of the #hils. cannot issue an executive order to increase the basic personal exemption because the provision un er the .l *ax 0o e authorizing the Presi ent to increase the personal an a itional exemption upon the recommen ation of the Sec) of /inance has been remove or elete by ,1 A&"&) T No'3 you can only increase the amount of personal and additional exemption %y le(islative enactment)

NON"DEDUCTI!LE ITE0S

$A
1) ") $) Personal, living or family expenses *hose which are consi ere capital expenses) Capital expenditures may be one that may increase the value of an asset) ;xtra6or inary repair expen e to restore the property, or ma%ing goo its exhaustion) /xtra-ordinary repair is one that may prolong the life of an asset for more than one 31) year) Kou cannot claim the same as e uction) +nstea , you may claim it as allowance for epreciation) Premiums pai on the life insurance policy of the officer or employee of the employer, when the employer is irectly or in irectly esignate as beneficiary)

&)

2) 8osses from sales or exchanges of property between relate taxpayers RULES T Premiums paid on the insurance policy of the officer or employee may %e claimed as deduction %y the employer3 +f the beneficiary is the family or the heirs of the officer or the employee) T +t is not deducti%le on the part of the employer3 +f the beneficiary esignate irectly or in irectly is the employer) +f the %eneficiary desi(nated is the creditor or the heirs of the employer3 the esignation is in irect! hence, that premium is not e uctible) T .n the other han , on the part of the employees, these premiums may be a taxable compensation income) +t is taxa%le compensation income on the part of the employee if the beneficiary esignate is the family of heirs of the employee) T Therefore, if these premiums are deducti%le on the part of the employer3 that is taxa%le on the part of the employee! +f these premiums are not deducti%le on the part of the employer3 that is not taxa%le on the part of the employee! N$!$ Personal3 livin( and family expenses are deducti%le for the simple reason that these are not connecte with the business, tra e or profession of the taxpayer) +n lieu of the same, the taxpayer may claim the so6calle CPersonal an 1 itional ;xemptionD in the case of in ivi ual taxpayers)

CORPORATE INCO0E TAXATION

CORPORATE TAXPAYER D corporation, includes partnership no matter how create or organize , (oint account companies, insurance companies an other associations) )t excludes0 GG227 )/"c7 )C" PGE"GH 1) 'eneral professional partnership! ") Noint venture for the purpose of un erta%ing construction pro(ects! $) Noint consortium for the purpose of engaging in petroleum, geothermal an other energy operations pursuant to a consortium agreement with the government TAX EXE0PT CORPORATIONS The following organi-ations shall not be taxed in respect to income received by them as such0
5) 9) :) 9eneral professional partnership E evote to a common profession, must not engage in a business! Joint venture for the purpose of un erta%ing construction pro(ects! Joint consortium for the purpose of engaging in petroleum, geothermal an other energy operation pursuant to a consortium agreement un er service contract with the government E there must be a consortium agreement with the government

$I
;$ T 8abor, agricultural or horticultural organization not organize principally for profit) So, it may erive income from such business as long as it is merely incidental, the organization is still exempt) <hat is important here is that in the articles of incorporation of this tax6exempt organization, it must be clearly provi e that these organizations are not formed or or(anized for profit! E1a+2le: +n the course of promoting agricultural pro ucts, the agricultural organization may sponsor exhibits an income may be erive from the same) *hat will not ma%e this corporation taxable because that is merely inci ental) *he activity has connection with the purpose for which the corporation was organize ) <$ #utual savin(s %an4 not having s capital stoc% represente by shares an cooperative ban% without capital stoc% organize an operate for mutual purposes an without profit) 6 must form an organize for mutual purposes 6 Mutual savings ban% an cooperative ban% must not be organize for profit) So, it must not issue shares of stoc%) 1 %eneficiary society3 order or association3 operating for the exclusive benefits of the members such as a fraternal or(anization operating un er the lo ge system, or a payment of life, sic%ness, acci ent, or other benefits exclusively to the members of such society, or er or association, or non6stoc% corp) or their epen ents) Lodge system E one which must operate un er a parent an subsi iary associations Cemetery company owne an operate exclusively for the benefit of its members) 6 *his must be non6profit cemetery) ;xample: 8ibingan ng mga Bayani Non-stoc4 corporation or association organize an operate exclusively for reli(ious3 charita%le3 scientific3 athletic3 or cultural purposes3 or for the reha%ilitation of veterans ! no part of its income or asset shall belong to inure to the benefit of any member, organizer, officer, or any specific person) 5usiness lea(ue3 cham%er of commerce3 or %oard of trade , not organize for profit, an no part of the net income of which inures to the benefit of any private stoc%hol er or in ivi ual) 6 #a4ati stoc4 exchan(e and #anila stoc4 exchan(e are not covered %y the exception) *hey are sub(ect to tax)

G$

H$

I$

K$

$eDuisites0 a) *his must be establishe for common business interest) b) 9o part of the income shall inure to the benefit of a particular in ivi ual) ;xample: 1 clearing house corp) establishe by member not for profit an such corp) is tax exempt) +f an association is organize by businessmen for the purpose of encouraging prospective investors to invest in the Phils) that association is not tax exempt because the members of such organization have ifferent business interests) 5E$ Civic lea(ue or or(anization not organize for profit but operate exclusively for the promotion of social welfare) ;xample: Piso for Pasig /oun ation is not for profit) *his is a civic organization) :omeowners 1ssociation is sub(ect to tax because that is not organize for profit) 0armers associations or li4e associations, organize an operate as a sales agent, for

55$

&J
the purpose of mar%eting the pro ucts of its members, an turning bac% to them the procee s of sales, less the necessary selling expenses on the basis of the #uantity of pro uce finishe by them) K<uantity of poduce) means proportionate) *his must not be for profit) 59 0armers cooperative or other mutual typhoon or fire insurance company3 mutual ditch or irri(ation company3 or li4e or(anization of a purely local character3 the income of which consists solely of assessments, ues an fees collecte from members for the sole purpose of meeting its expenses) 2overnment educational institution) *hese are >)P)M)S)>) - non-stoc4 and non-profit educational institution) T *a%e note that the last paragraph of Sec) $J! it provi es, C9ot withstan ing the provisions in the prece ing paragraphs)D *his means that even thou(h they are exempt3 as re(ards certain income3 they may %e su%&ect to tax! OO So, notwithstan ing the provisions in the prece ing paragraphs, the income of 'hatever 4ind and character of the fore(oin( or(anizations from any of their properties3 real or personal3 or from any of their activities conducted for profit re(ardless of the disposition made of such income3 shall %e su%&ect to tax! OO *he implication is that if these tax exempt corps mentioned under nos! O to 9O3 made an investment3 the income derived from such investment may %e su%&ect to tax! T So, if they have real property and lease it to another, the rent income is sub(ect to tax) T+f they have deposit in a %an4, the interest income on the same is sub(ect to tax) T+f they sell property for profit, that is sub(ect to tax So, the exemption oes not cover this income erive form such investment) *hus, it must be an income erive from their activities which may be the purpose for which they are organize ) OOO *he insertion of non6stoc%, non6profit e ucational institution, to my min , is not in accor ance with the provision of 1rt)1& Sec) $ par) $, because the 0onstitution provi es for a particular test for exemption an that is CuseD of the property) So, if a non6stoc%, non6profit e ucational institution has interest income erive from ban% eposit, in view of this provision 3Sec) $J, 9+,0), the B+, may impose a tax on the same, regar less of the use or isposition) So, even if the interest on such eposit is use to achieve e ucational purposes, that will not exempt it from taxation) *he 0onstitution says Cactually, irectly an exclusively use for e ucational purposesD, the meaning of this is, as the procee s or income is actually irectly an exclusively use for e ucational purposes, that may be exempt) But un er Sec) $J, no) *hat must be connecte with the purposes or purposes for which such institution has been forme or organize ) Since this runs counter to 1rt) 1& Sec) & par) $ of the 0onstitution, this Sec) $J shoul be eclare unconstitutional) *he 0onstitution says CuseD but here 3Sec) $J) it is regar less of the use or isposition) *his must yiel to that 0onstitutional provision) (Sec$ 9H 2ar C7 TRA 5KKH) 'S+S 3'overnment Service +nsurance System) SSS 3Social Security System) P:+0 3Phil) :ealth +nsurance 0orp))

5:$ 5;$

5<$ 5G$ 5H$

&1
5I$ 5K$ 9E$ P0S. 3Phil) 0harity Sweepsta%es .ffice) P1'0., 3Phil) 1musement 7 'aming 0orp)) Eno longer tax exempt as of "JJ56nob 91P.0., E special law

N$!$ he rule no' is settled3 2ovFt o'ned and controlled corps! -re su%&ect to corporate income tax except those mentioned under Sec! 8; par C! PARTNERS#IP " *his is an association of two or more persons an they may contribute money, property, or in ustry to a common fun with the intention of ivi ing the profits among themselves)

Tests that will determine whether a partnership exists or not0 1) *here must be a contribution to a common fun ) ") T *here must be an intention to ivi e the profits among themselves) Co-o'nership is not a partnership) 0o6ownership, as a rule is a tax exempt because a co6 ownership is forme an organize not for profit but for common en(oyment of the property or for the preservation of the property) Partnership is considered a corporate taxpayer ) *a%e note that this exclu es general professional partnership) .nly partnership forme or organize for profit is exclu e ) +f it is formed and or(anized for the practice of common profession3 it is a tax-exempt partnership! 0or purposes of taxation, this business partnership is taxable irrespective of whether it is orally constitute or in writing an whether or not it is registere in the S;0)

ase0 *he heirs of the ecent inherite the property) *here was istribution of share) But such shares are hel un er single management) +n fact the income of such property after istribution was manage by one of the co6heirs) &eld0 *he fact that they agree that the shares shall be hel by the co6heir un er the single management for profit, this accor ing to the S0 convert the co6ownership in to a taxable unregistere partnership) 1,na vs. ommissioner @ ,na doctrine4 ase0 *he heirs inherite the properties from their ecease mother) *he property was un er the a ministration of an a ministrator) *his a ministrator of the property was authorize to sell these properties for profit, or lease properties for profit an engage in an income pro ucing activities) &eld0 <hen these heirs inherite the property from their ecease mother, co6ownership exists) 1t the particular stage, it is exempt from tax when the heirs eci e to invest such property in an income pro ucing activity that co6ownership is converte in to a taxable unregistere ownership 1(eJa vs. ommissioner @ (eJa doctrine4 ase *here was two sisters who form a common fun for the purpose of engaging in a series of transaction for profit) &eld0 *here is a taxable unregistere partnership here) OOTest that will determine whether co.ownership is taxable unregistered partnership D /in out whether the heirs ma e a substantial improvements on the inherite property) *he heirs made a su%stantial improvement on the inherited property , the implication is that they will engage in a

&"
business for profit, 1%vangelista vs. ommissioner @ %vangelista doctrine4. +f that happens, that co6ownership will be taxe as unregistere ) ase0 .belio Sr) entere into a contract with .rtigas limite company) >n er that contract, .rtigas limite company will istribute parcels of lan to the 0hil ren of .belio Sr) for their resi ential houses) 1fter the sub ivision of such parcel of lan to the chil ren of .belio Sr), these chil ren eci e to sell this parcel of lan to <i e 0ity 0orp) <as there a taxable partnership forme by the chil ren of .belio Sr)B &eld0 *here was no partnership forme because there was no intention to ivi e the profits among themselves) *his was a mere isolated transaction) +solate transaction will negate any intention to ivi e the profits among themselves) *hus, there was no taxable partnership forme ) ase0 Pascual an -ragon purchase $ parcels of lan from Bernar ino an " parcels of lan form Mr) ,o#ue) *hereafter, the three parcels of lan which were purchase from Bernar ino, were sol to Marimer 0orp) with a profit of P142,""")5J while the parcel of lan purchase from Mr) ,o#ue were sol at a profit of P4J,JJJ to ,eyes) &eld0 there was no partnership organize because this is (ust a mere sharin( of (ross return ) 1n as you have learne in partnership, the law says, Cthe partners share in the net profits of a taxable partnershipD) So, mere sharing of gross return oes not of itself establish a partnership) )oi't acco('t E <hen two persons form or create a common fun an such persons engage in a business for profit, this may result in a taxable unregistere association or partnership ) Re4i&tratio' is not a re<uisite for purposes of taxation ) <hat is important here is they must engage in a business or activity for profit) )oi't &tocL co+2a'ie& E *his is the mi way between corporation an partnership) *his has what you call Khybrid personality)! +t is somewhat a partnership because it is an association, an persons or members of the same contribute fun , money to a common fun ) 1n this us manage by Boar of -irectors! this means: it has that feature of a corporation) 1n these persons may transfer their share without the consent of others) E+er4e'cy o2eratio' D *hese may be forme by two corporations) *his two corporations have separate personalities) +f they form that emergency operation 3it is really a special activity) to engage in a (oint venture, corporation 1 may be taxe only from the income erive from such business) *he income erive from such emergency operation shoul also be inclu e in that taxable income sub(ect to corporate income tax) +n the same way, that corporation ", has a separate an istinct personality! if it a part of that emergency operation, the income erive from such special activity shoul also be inclu e in the income of that corporation ", sub(ect to corporate income tax, even if it is not registere with the S;0 3Securities an ;xchange 0ommission)) TBut if two corporations are manage by one manager, an this " corporations lease services, manage by one person an it has " separate accounts, it is not an association forme which is sub(ect to tax) Do+e&tic Cor2oratio' (DC) E corp) forme or organize un er Phil) 8aws Re&ide't .orei4' Cor2oratio' (R.C) E foreign corporation engage in tra e or business within the Phils) No'"Re&ide't .orei4' Cor2oratio' (NR.C) E foreign corp) not engage in tra e or business within the Phil) here is no fix criterion as to 'hat constitute en(a(ed in trade or %usiness ) ;ach case shall be (u ge in the light of peculiar environmental circumstances) But Kengaged in businessD implies continuity of commercial transaction or ealings E continuity of business! there must be continuity of intention to con uct continuous business)

&$
ase0 B.10 is an offline international airline) .ffline because it oes not ren er any services an no lan ing rights in the Phils) B.10 claime that it is not sub(ect to tax with respect to the sale of transport ocuments or airline tic%ets in the Phils because it is an offline international airline) +t oes not ren er any service an it has no len ing rights) &eld$ *he contention of B.10 is not tenable) *he income erive from the sale of that transport ocuments in the Phil) is sub(ect to tax) *he sub(ect of income may be property, activity or service that pro uce the same) /or an income to be consi ere as an income erive from sources within the income must be erive from activity con ucte or un erta%en in the Phil) +t is true that B.10 ha no property in the Phil) from which its income may be erive ) +t is true that B.10 i not ren er any service in the Phil) from which its income may be erive ) But there was that activity that was un erta%en in the Phil) from which income was erive an that refers to the sale of transport ocument) 1ccor ing to the Supreme 0ourt, the sale was ma e in the Phil) an the payment was ma e in the Phil) *his particular activity en(oys protection of the Phil) government) So, it shoul share the bur en of tax) B.10 was consi ere oing business in the Phil) un er this particular situation because there were series of transactions ma e in the Phil) an B.10 was appointe a permanent agent in the Phil) *his implies that the Phil) an the B.10 ha no intention to establish continuous business here in the Phil) 0ontinuity of con uct is the peculiar circumstance referre to in the case) OO+f these were mere isolate transaction 3let?s mo ify the facts of the case) an B.10 has no permanent agent in the Phil), such airline is not consi ere oing business in the Philippines) ,emember, international carrier is taxe on gross Philippine billings) ase0 1 foreign vessel unloa e cargoes in the Phil) twice) &eld0 <e cannot consi er that as resi ent foreign corp) *hese are mere isolate transactions) ase0 +f a corporation made an investment in another corp ), the Supreme 0ourt hel that, it will not ma%e the corp) as oing business in the Phil) because it has no intention to establish continuous business) ase$ Marubeni corp) is a foreign corp) it investe in a omestic corp) *his foreign corp) has a branch office in the Phil) it ma e a irect investment in that omestic corp) So, it receive ivi en from that omestic corp) &eld0 *hat will not ma%e such foreign corp) a resi ent foreign corp) because of that absence of intention to establish continues business) +t woul be ifferent if it was course through the branch office of such foreign corp)

GENERAL RULES Cla&&ificatio' DC R.C NR.C So(rce& +F. + + Ta1 !a&e *axable +ncome *axable +ncome 'ross +ncome E'titled Ded(ctio' F F = Ta1 Rate $&M6 1IIA $$M6 1III :9J " 9EEE $&M 6 1IIA $$M 6 1III :9J " 9EEE

<uestion: 0an 0ongress pass a law imposing tax on the income of a ,/0 erive from sources withoutB Answer0 9o, because this will violate the principle of territoriality in taxation) <e cannot exten protection to that particular sub(ect of taxation) he fundamental %asis of the po'er to tax is the capacity of the taxin( authority to extend protection to the su%&ect of taxation!

&&
T he 7OG3 77G 78G tax rates mentioned may not %e applied except if it is lo'er than the 8G of (ross income of such corporate taxpayer) *his is calle Kminimum corporate income tax rate of >K of gross income)! %xample$ +f a corporate taxpayer has a gross income of P"JM) "M of that is P&JJ,JJJ) +n this case, the tax to be pai must not be lower than P&JJ,JJJ) +f the net income is P"JM an the e uction is P1IM, we only have P1M ) Kou multiply that by $&M because now is 1IIA, so that will give you P$&J,JJJ) *his is the corporate income tax applying that tax rate 3$&M) is lower than "M which is P&JJ,JJJ 3this is the amount suppose to be pai )) 1pplying the minimum corporate income tax rate of "M if the gross income, the amount to be pai as tax is P&JJ,JJJ) T So, the C+i'i+(+ cor2orate i'co+e ta1 rate of 9J of 4ro&& i'co+e D means that the corporate taxpayer must pay corporate income tax not lo'er than 8G of its (ross income ) +f the actual corporate income tax is lower than the "M tax that is suppose to be pai , it is the "M minimum) But, if the actual corporate income tax applying that $&M is P4JJ,JJJ, this is the tax that shoul be pai )

SPECIAL RULES A$ SPECIAL DC 1) PRI/ATE EDUCATIONAL INSTITUTION SOURCES +F. Ta1 !a&e *axable +ncome Ta1 Rate 1IIA:1JMor$&M 1III: $$M 9EEE :9J

'otes0 T ax rate is 9DG if its income derived from unrelated trade3 %usiness or activity does N1 exceed =DG of its (ross total income! T 5ut its income is su%&ect to 7OG tax rate if its income from unrelated3 trade or %usiness or activity exceeds =DG of its (ross income) %xample0 +ts income erive from unrelate tra e, business or activity amounte to P"JM) 1n income erive from relate tra e, business or activity is P1JM) So, the total income is P$JM) +f the allowable expenses amounte to P1JM, the taxable income now woul be P"JM) GG$GHJ M 9E0 : ,&$ 5E0NNN : P ::$:J

I'co+e deri,ed fro+ U'related T!A

I'co+e deri,ed fro+ Related T!A

So, the amount from unrelate *B1 344)45M) is more than 2JM of its gross income 3P$JM)) *hus, this P"JM taxable income is sub(ect to $&M tax rate) But, if the income from relate *B1 is P"JM an its income erive from unrelate *B1 is P1JM) So: Related T!A 66666666666666 vs) V66666666666666666 U'related T!A

*he income from unrelate *B1 is not more than 2JM of its gross income) *hus, this P"JM is sub(ect to P1JM preferential tax rate) )' !"% D%$)*%D 8$!" $%LAT%D T$AD%, B,()'%(( !$ A T)*)T: T *his must be an income derived from an activity 'hich is su%stantially related to the performance of educational functions) *his may inclu e income from boo%store, canteen or ormitory)

So(rce& ")NON"PRO.IT #OSPITAL +F.

Ta1 !a&e *axable +ncome

Ta1 Rate 1IIA61JMor $&M 1III6$$M

&2 "JJJ6$"M
OOO/or purposes of non6profit hospital, this must be income derived from activities 'hich are su%stantially related in achievin( the primary purpose of that hospital , which is to ren er services to the public) *he explanation as to when the 1JM or $&M tax rate applies is the same as that of private e ucational institution)

!$ SPECIAL R.C 1) INTERNATIONAL AIR CARRIER ") INTERNATIONAL S#IPPING

So(rce& I 3+ncome <ithin)

Ta1 !a&e GROSS P#ILIPPINE !ILLINGS

Ta1 Rate 9$<J (9$ NNNN J)

OOO /or purposes of )nternational Air arrier, GROSS P#IL$ !ILLINGS refer to the amount of gross revenue erive from carriage of persons, excess baggage, cargo an mail originating from the Philippines in a continuous an uninterrupte flight irrespective of the place of sale or issue, an the place of payment of the tic%et or passage ocument) O Gro&& Phil$ 3illi'4& for 2(r2o&e& of )nternational (hipping means gross revenue whether from passenger, cargo or mail originating from the Phils) up to final estination, regar less of the place of sale or payments of the passage or freight ocuments)

C$ SPECIAL NR.C 5$ LESSOR O. CINE0ATOGRAP#IC .IL0S 9$ LESSOR O. /ESSELS C#ARTERED TO .ILIPINO NATIONALS OR CORP$= The harter
Agreement of which is approved by "aritime )ndustry Authority

So(rce& I

Ta1 !a&e GROSS

Ta1 Rate 9<J

GROSS

;$<J

:$ LESSOR AIRCRA.T7 0AC#INERY E-UIP0ENT

O. I F GROSS H$<J

OOO Lessor of D and video is not inclu e in no) 1) So, it is sub(ect to $&M tax rate) OOO Lessor of personal properties is not inclu e in no) ", so, it is also sub(ect to $&M tax rate)

&4

OT#ER RULES DC 5$ INTEREST INCO0E ON !ANC DEPOSIT 9$ INTEREST INCO0E ON !ANC DEPOSIT UNDER T#E EXPANDED .OREIGN CURRENCY DEPOSIT SYSTE0 :$ ROYALTIES DERI/ED *IT#IN T#E P#ILIPPINES ;$ CAPITAL GAINS DERI/ED .RO0 ITS SALE O. S#ARES O. STOCC a$ If it i& li&ted a'd traded thr( local &tocL e1cha'4e Of 5J of the Gro&& Selli'4 Price 3$ If it i& NOT li&ted or traded thr( local &tocL e1cha'4e Not o,er P5EE7EEE$ <J O,er P5EE7EEE 5EJ <$ CAPITAL GAINS DERI/ED .RO0 T#E SALE O. REAL PROPERTY *#IC# IS NOT USED IN TRADE OR !USINESS G$ ??? !RANC# PRO.IT RE0ITTED !YA !RANC# O..ICE (thi& o'ly a22lie& to R.C) 9EJ R.C 9EJ NR.C *his shoul be inclu e in its gross income &(3Oect to :;J ta1$ B>* in the case of interest on loans which have been ma e on or after 1ugust 1, 1IA4, the same is &(3Oect to 9EJ fi'al ta1)

H$<J

H$<J

Ta1"e1e+2t

9EJ

9EJ

:;J

Thi& r(le a22lie& !OT# to cor2orate a'd i'di,id(al ta12ayer&$

GJ of the Gro&& Selli'4 PriPe or @o'al /al(e %hiche,er i& #i4her NOT APPLICA!LE

Sho(ld 3e treated a& OT#ER INCO0E SU!)ECT to :;J

S(3Oect to !ra'ch Profit Re+itta'ce Ta1 of 5<J NO*7 the 3a&i& of the ta1 i& the a+o('t a22lied for or ear+arLed for re+itta'ce

NOT APPLICA!LE

&5

CASE Marubeni 0orp) is a foreign corp) it has a branch here) +t ma e a irect investment in a -omestic 0orp), so it receive cash ivi en s) -o we have to inclu e that in that profit to be remitte an sub(ect to 12MB #ELD 9.) *his is not effectively connecte with the con uct of tra e or business of their branch office) *hat shoul be exclu e from the profits that shoul be remitte to that Marubeni 0orp) *he con ition is, it must be an income or profit effectively connecte with the con uct of tra e or business of such corp) through its branch office) H$ DI/IDENDS RECEI/ED .RO0 DC EXE0PT EXE0PT ? *hese ivi en s receive from -0 by 9,/0 is &(3Oect to 5<J .i'al Ta1 I. the foreign govt) of that foreign corp) allows a ta1 credit at lea&t 5KJ of the taxes eeme pai in the Philippines by 9,/0) ? So, the implication is that if that foreign govt) oes 'ot allo% a ta1 credit of at lea&t 5KJ7 that is &(3Oect to :;J a'd 'ot 5<J$

Note: *hese incomes must be erive from the Phils) So, this is an interest income on ban% eposit maintaine .>*S+-; the Phils), that is not sub(ect to final tax but shoul be inclu e in the gross income of the -0)

INTRACORPORATE DI/IDENDS EXPLAINED TAX SPARING CREDIT (Sec$ 9I$! (<) 3) QQQ 5KJ P(r2o&e *o attract investors in the Phils) Sit(atio' 9,/0 receive ivi en , cash or property ivi en from -0) *hat ivi en receive from -0 is sub(ect to 12M /+918 <+*:.8-+9' *1=)

*his 12M may be impose on this ivi en receive from -0 if the foreign govt) of the 9,/0 allows a tax cre it at least 1IM 31IIA), 1AM 31III), 15M 3"JJJ)) +t shoul be cre ite from the taxes eeme pai by this 9,/0 in the Phils) So, if the foreign govt) oes not allow a tax cre it of at least 1IM, the tax there is not 12M but $&M) *hus, the tax spare or save is 1IM because normally the tax is $&M) So, $&M less 12M e#uals 1IM, that is the tax save an that represents the tax cre it allowe by the foreign govt) -(e&tio': Must the foreign govt) actually grant a tax cre it or is it enough that the foreign govt) allow such tax cre itB A'&%er *here is no statutory provision that re#uires actual grant) 9either is there a ,evenue ,egulation re#uiring actual grant) +t is clear that the provision of the law says CallowsD) So, it is enough to prove that the foreign corp) allows a tax cre it) +t is not incumbent upon the foreign corp) to prove the amount actually grante ) -(e&tio': -oes a withhol ing agent or a subsi iary corp) have the personality to file a written claim or refun B A'&%er *he withhol ing agent has the personality to file a written claim for refun ) 1 withhol ing agent is technically a taxpayer because it is re#uire to e uct an withhol the tax, an it has the obligation to remit the same to the govt) So, withhol ing agent is liable for tax) +t has therefore the personality to file a written claim for refun ) <ithhol ing agent is not only an agent of the taxpayer but also an agent of the govt) Since it is an agent of the taxpayer, it is ipso facto authorize to file a written claim for refun ) CAPITAL TRANSACTIONS EXPLAINED

&A
0apital *ransaction +nvolves 0apital 1sset) 01P+*18 1SS;* means property hel by the taxpayer whether or not connecte with his tra e or business ;=0;P*: GS).)>),)H 1) Stoc% in tra e or property of the taxpayer which may be properly inclu e in the inventory at the en of the taxable year Ginventoriable property may inclu e finishe goo s, raw materials or wor% in process)H ") Property primarily hel for sale to customers in the .r inary course of tra e or business) $) Property >se in tra e or business sub(ect to epreciation, which means that this must be epreciable property) &) ,eal property use in tra e or business) *hese & properties enumerate are calle ORDINARY ASSETS$ ASSETS *#IC# ARE CONSIDERED AS CAPITAL ARE 1) Properties not inclu e in those above enumerate ") Properties use in tra e or business classifie as capital assets: a) accounts receivable b) property for investment in stoc% c) sub ivision of lots to tenants at the instance of the government) *he sale of these sub ivi e lots at the instance of the govt) to the tenants is consi ere as 0apital *ransaction) ) +nterest of a partner in a partnership) *he partner may transfer that interest to another an he may erive gain therefrom, that is consi ere as 0apital *ransaction) 9)B) +t is therefore safe to say that all properties not use in tra e or business are consi ere as 0apital 1ssets) Ca2ital A&&et ca' 3e Co',erted i'to a' Ordi'ary A&&et$ E1a+2le 1 property was inherite by the heirs from their ecease parents) *hat property is consi ere as 0apital 1sset) +n the event that this property 3a parcel of lan ) is improve by the heirs substantially an sell the same at a profit, sai capital property is now converte into an .r inary 1sset) *he profit erive from the sale of the lan which has been substantially improve by the heirs is consi ere as or inary gain) Ordi'ary A&&et ca' 3e co',erted i'to a Ca2ital A&&et$ E1a+2le +f the taxpayer is engage in real estate business, if he ies, these properties will be transmitte to his heirs) 1n if the heirs will iscontinue the business of that ecease parent, that properties which are or inarily hel for sale to customers maybe converte into a 0apital 1sset) .ACTORS that &ho(ld 3e co'&idered i' DETER0INING %hether it i& CAPITAL or NOT 5$ It +ay 3e the ,ocatio' of the ta12ayer$ +n one case, if the taxpayer is engage in hotel management an he inherite (ewelry from his parents an he?ll sell the same, the 0ourt sai that it is a 0apital *ransaction) +t woul be ifferent if the one selling a parcel of lan is a real estate ealer an he evelope the same before this property may be sol to another, this time such taxpayer is engage in a business, in which case that sale of parcel of lan is consi ere as .r inary *ransaction)

9$ So+eti+e& the 2eriod or the e1te't of acti,itie& +ay 2lay a' i+2orta't role$ Ca&e +f a taxpayer is engage in a lumber business an he has been unsuccessful for a perio of 11 years an he trie again on the 1" th year) *he sale that may be ma e on the 1" th year may not be consi ere or inary transaction) But those sales which, woul have been ma e uring that 11th year when such taxpayer is engage in tra e or business may be consi ere .r inary 1sset) +f the taxpayer stop his business an then un erta%e another business, that may be consi ere 0apital *ransaction)

&I

SPECIAL CAPITAL TRANSACTIONS D these transactions are eeme capital transactions) SPECIAL CAPITAL TRANSACTIONS INCLUDE 5$ .ail(re to e1erci&e o2tio' or 2ri,ile4e to 3(y or &ell 2ro2erty$ E1a+2le B offers his lan to 1) B gives 1 2 ays within which to ma%e up his min to buy this parcel of lan for P2JJ,JJJ)JJ 9ow, 1 pays B P2,JJJ for giving him time to thin% whether he will buy that uring the 2 ay6perio ) +f 1 fails to buy the same, he incurre a loss an we call this 0apital 8oss) So, the loss of 1 is consi ere a gain on the part of B because the latter receive that P2,JJJ) So, failure to exercise option to buy may result in a capital loss on the part of the offeree or buyer) 1s regar s the seller, the gain is consi ere 0apital 'ain) 9$ Di&tri3(tio' of a&&et& or &hare& of &tocL to &tocLholder (2o' liR(idatio' of a cor2oratio'$ E1a+2le 1fter li#ui ation, the stoc%hol ers are entitle to the return of their capital if there is still something left) +f 1 ma e an investment an the value of his shares of stoc% is P1JJ,JJJ, after li#ui ation of the corporate affairs, the corp) gives 1 P12J,JJJ) *he gain of 1 which is P2J,JJJ is consi ere 0apital 'ain) :$ ReadO(&t+e't of 2art'erS& i'tere&t i' a 2art'er&hi2$ E1a+2le 1 partnership is earning a profit, let us say, P1JJ,JJJ) *hen it increases to P1M) So, the partnership may rea (ust the partner?s interest in the partnership) .r it may also arise if for example, 1 ma e an a itional contribution) So, 1?s interest will change) 9ow, in ma%ing rea (ustment of interest, the partner may erive gain therefrom, an that is a 0apital 'ain) ;$ Retire+e't of 3o'd&$ E1a+2le *he ebtor issues bon s an after one 31) year, he pays the same) *he value of the bon s is P1JJ,JJJ) >pon re emption, the ebtor pays P1"J,JJJ to the cre itor) So the P"J,JJJ is a gain to the cre itor an we consi er that as a 0apital 'ain) But if there is a loss, that is consi ere as 0apital 8oss) <$ *a&h Sale *his has been escribe as C41 ays saleD

*he seller here is not a ealer in securities) +t is escribe as 41 ays sale because here, $J ays before the sale, the seller ac#uire substantially i entical securities ., $J ays before the sale, he ac#uire i entical or substantially the same stoc%s or securities) CSaleD may also inclu e exchange or option to sell securities) E1a+2le: securities) *o ay is Nune 1J, 9ow, here is 1 who is not a ealer in securities or stoc%s) :e sells

0an that be classifie as wash saleB Kou must fin out whether $J ays before Nune 1J, he purchase i entical securities) .r he ma not have purchase i entical securities within that $J ay perio before the sale but it is possible that within $J ays after Nune 1J, he may have purchase i entical securities) *he tax treatment here is, the gain is taxable, meaning that is classifie as 0apital 'ain because the seller is not engage in such business) +f there is a loss, since it is classifie as 0apital *ransaction, that is consi ere 0apital 8oss) *he capital gain is taxable but the capital loss incurre from wash sale transaction is not e uctible) G$ Short Sale D a transaction wherein a person sells securities which he oes not own yet) *he seller here is a mere speculator! he is selling securities which he is yet to ac#uire, provi e however, that he has ownership of the securities at the time of elivery E he has the right to transfer ownership) 3See further iscussion on p) 55)) RULES T#AT GO/ERN CAPITAL TRANSACTIONS

2J
5$ #oldi'4 Period R(le >n er this rule, if the property has been hel by the taxpayer for a perio of not more than 1" months, the gain or loss is 1JJM recognize ) +f it is more than 1" months, the gain or loss is 2JM recognize ) So, the gain or loss may be 1JJM or 2JM taxable e uctible as the case may be) E1a+2le Kou sell your personal car) *his is a capital transaction because the asset involve is a capital asset) 8et us say that you sell the car at P"JJ,JJJ an the cost of the car is P12J,JJJ) :ere, there is a gain of P2J,JJJ) Kou must fin out the ate of the ac#uisition an the ate of sale or isposition) +f the ate of ac#uisition an the ate of sale fall within the 1" month perio , this P2J,JJJ is P1JJ,JJJ taxable) But if excee ing 1" months, this P2J,JJJ is only tacable up to P"2,JJJ) *his is an example of tax avoi ance) N$!$ *his rule is applicable only to in ivi ual taxpayers) *his is so because the capital gain erive from capital transaction of corporate taxpayers is always 1JJM recognize respective of the number of months uring which the property was in the possession of the corp) taxpayer) 9$ Ca2ital Lo&& Li+itatio' R(le 6 meaning, capital losses are e uctible only to the extent of capital gain 6 so, it follows that there is no capital gain, there is no e uctible losses) 6 0apital loss cannot be e ucte from capital gain 6 .r inary loss is e uctible from or inary gain) N$!$ *his rule a22lie& to i'di,id(al a'd cor2orate ta12ayer& ;=0;P* on ban%s an trust companies because they are consi ere as ealer in securities as far as issuance of bon an evi ence of in ebte ness are concerne ) Net Ca2ital Lo&& Carry"o,er R(le "meaning, the capital loss that may be carrie over in the succee ing taxable year must not excee the net income uring the year that it was incurre ) E1a+2le +n 1II4, the capital gain is P1JJ,JJJ an capital loss is P"JJ,JJJ) S., there is a capital loss of P1JJ,JJJ which may be carrie over in 1II5 by the taxpayer) *his net capital loss in 1II4 may be claime as e uctions from the capital gain in 1II5) But if in 1II4 the net income is P12J,JJJ an the net capital loss is P1JJ,JJJ, so the net capital loss oes not excee the net income) *hus, the entire amount of P1JJ,JJJ net capital loss can be carrie over in 1II5) 0an that P1JJ,JJJ net capital loss be carrie over in 1IIAB 9., because the law says uring the Csuccee ing taxable yearD) *ax exemption must be strictly construe against the taxpayer an liberally in favor of the govt) N$!$ Thi& r(le a22lie& to i'di,id(al ta12ayer&$ +n this regar , there is such a thing as no operating loss carry over) .P;,1*+9' 8.SS are losses incurre in the course of tra e or business of the taxpayer) 9et operating loss may be carrie over by the taxpayer, whether corporate or in ivi ual, to the next three 3$) consecutive years provi e that uring that year, such taxpayer is not exempt from taxation an there must be no substantial change in ownership of the corporation, in the case of the corporation) Substantial change may arise if less than 52M of the outstan ing capital stoc% or pai up capital stoc% is hel by the same person) Ca&e *he B.+ registere in ustries are allowe to carry over operating losses) *his time, those losses that were incurre uring that perio of 14 years operation may be carrie over to succee ing taxable year) The r(le that %e ha,e e&ta3li&hed i& : e12e'&e& +(&t 3e 2aid or i'c(rred d(ri'4 the ta1a3le year) Kou can claim those expenses as e uction uring the year when the same were incurre or pai ) *he e1ce2tio' to this rule are net operating loss carry6over an net capital loss carry6over) "eaning of Terms0 CAPITAL GAIN D gain from sale or exchange of capital asset) CAPITAL LOSS D loss incurre from sale or exchange of capital asset) NET CAPITAL GAIN D excess of capital gain over capital loss)

21
NET CAPITAL LOSS D excess of capital loss over capital gain) Gai'& deri,ed fro+ deali'4& i' 2ro2erty for+ 2art of Gro&& I'co+e (Sec$ :9 A$ 'o$ :) 6 *his may inclu e sale or exchange of goo s or properties) 6 +f the property is sol for cash, that is consi ere as &ale$ 6 +f it property for another property, this may be classifie as e1cha'4e$ There +ay 3e a 4ai' i' re4ard to e1cha'4e of 2ro2erty if the follo%i'4 co'c(r 1) *he property receive must have a fair mar%et value! ") *he property ispose of must be substantially ifferent from the property receive ) 6 So, a li%e %in transactions are not taxable transactions) 6 +f a lan has been substantially improve an then it is exchange with another lan , that may not be taxable) :owever, there is that B+, ruling that this is no longer applicable even if these are li%e %in transactions, it may be taxable) But Prof) 'eronimo of 1teneo isagree ) :e sai , you cannot change that by B+, ruling) So, we can compromise that this will not apply to capital transactions but to or inary transactions) +n etermining the gain or loss in the sale or exchange of property, this is the basic formula: C1mount receive or realize LESS 0ost or a (uste basis)D

#o% to deter+i'e the co&t or adO(&ted 3a&i&T ??? It de2e'd& (2o' the +a''er of acR(i&itio'$ 5$ If it %a& acR(ired thro(4h 2(rcha&e7 it i& the co&t of the 2ro2erty$ E1a+2le + sell a property in the amount of P1JJ,JJJ) +t is previously purchase the same at P4J,JJJ, this P4J,JJJ is the cost of property) 9$ If the 2ro2erty &old %a& 2re,io(&ly acR(ired thro(4h i'herita'ce7 it i& the fair +arLet ,al(e (.0/) of the 2ro2erty at the ti+e of the acR(i&itio'$ AAt the ti+e of acR(i&itio'B means at the time of the eath of the ece ent or testator) :$ If the 2ro2erty &old %a& acR(ired thro(4h do'atio'7 the 3a&i& &hall 3e the &a+e a& if it %o(ld 3e i' the ha'd& of the do'or$ Sit(atio' 1, the onor onate property to B, the onee) Subse#uently, such onate property was sol by the onee for P"JJ,JJJ) <hat must be the costB A'&%er *he law says, the same basis in the han s of the onor) So, the onee shoul as% the onor the basis) +t is also that 1, the onor ac#uire the property from another either through purchase or onation) So, you shoul as% 1, the last onor, his basis) E1ce2tio' to the 4e'eral r(le +f the basis is greater than the /M@ of the property at the time of the onationFgift then, for the purpose of etermining loss, the basis shall be such /M@) ;$ If the 2ro2erty &old %a& acR(ired for le&& tha' a' adeR(ate co'&ideratio' i' +o'ey or +o'eyS& %orth7 the 3a&i& of &(ch 2ro2erty i& the a+o('t 2aid 3y the tra'&feree for the 2ro2erty$ Sit(atio' *he seller ac#uire the property from 1 in the amount of P5J,JJJ) *he /M@ of sai property is P1JJ,JJJ) So, the seller here is the transferee an 1 is the transferor) *he seller sol the property at P"JJ,JJJ) <hat must be the costB A'&%er +t is the amount pai by the transferee) 1n the amount pai by the transferee who subse#uently sol the property is P5J,JJJ) So, he will have a gain of P1$J,JJJ) OOO ,emember, it is not the /M@ of the property but the amount pai bv the transferee) S(22o&e the 2ro2erty %a& acR(ired i' a tra'&actio' %here 4ai' or lo&& i& 'ot reco4'iPedT (NO GAIN7 NO LOSS RECOGNI@ED)

2"

Before we answer that, we shoul %now these transactions where the gain is not recognize 3meaning it is not taxable) an the loss is not recognize 3meaning, it is not e uctible)) *he basic rule is, in the sale or exchange of property if there is a gain, the gain taxable! +f there is loss, the loss is e uctible)) E1ce2tio' to the 3a&ic r(le ('o 4ai' or lo&& &hall 3e reco4'iPed) 5$ Tra'&actio'& +ade 2(r&(a't to 2la' of +er4er or co'&ideratio'$ Sometimes, we call this CTa1 E1e+2t Tra'&actio'&B or ATra'&actio'& Solely i' Ci'dB$ a) 1 corporation, party to merger or consoli ation exchanges its properties solely for stoc% in corp), which is a party to the merger or consoli ation)

Ill(&tratio' Pro2erty Cor2$ A Cor2$ ! StocL b) 1 stoc%hol er of a corp) party to a merger or consoli ation exchanges his stoc% solely for stoc% in another corp) party to that merger or consoli ation) 2ro2erty for StocL

Ill(&tratio' Sec(rity or StocL StocLholder """""""""""""""""""""""" Cor2$ 5$ StocL for StocL 9$ Sec(ritie& for &tocL :$ Sec(ritie& for Sec(ritie& Sec(rity or StocL ?? Sometimes, we call the above6mentione transactions as ATra'&actio'& &olely i' Li'dB or ATa1 E1e+2t Tra'&actio'&B$ ") +f a person alone or together with others or not excee ing four 3&) 3so, the total number shoul be five 32) exchanges his property for stoc% in a corp) an this person or persons, after this exchange, ac#uire controlling interest over that corp) *his means that they ac#uire at least 12M of the shares of stoc% of such corp) 6 *his is also a transaction solely in %in ) -(e&tio' Suppose these persons, at the time of transaction, alrea y ac#uire controlling interest over such corp), is the transaction or exchange taxableB A'&%er ;ven if these persons ac#uire controlling interest at the time of the transaction, the rule is still applicable in which case that is still tax exempt) -(e&tio' So, if these properties ac#uire ispose of, how will you etermine the basisB un er this tax exempt transactions are subse#uently

A'&%er *he basis of the stoc% or properties ac#uire un er this no gain, no loss recognize shall be the same basis in the han s if the transferor) S(22o&e the 2ro2erty %a& acR(ired ('der tra'&actio'& %here 4ai' i& reco4'iPed a'd lo&& i& 'ot reco4'iPedT (GAIN RECOGNI@ED7 LOSS NOT RECOGNI@ED) Tra'&actio' &olely i' Li'd D this means that there are other consi eration given other than those mentione un er transactions solely in %in 3nos) 1 an " above, but cash is a e )) E1a+2le 0orp) 1 party merger or consoli ation transfers its cash an property to 0orp) B, also a party to such merger or consoli ation) 0orp) B, in exchange, transfers its stoc%s to 0orp) 1)

2$

Ill(&tratio' Pro2erty a'd Ca&h Cor2$ A StocL Cor2$ ! Pro2erty P<E7EEE Ca&h P<E7EEE P5EE7EEE .0/ D StocL P5EE7EEE

8et us say that /M@ of stoc% given by 0orp) B is P1JJ,JJJ) *he value of the property transferre by 0orp) 1 is P2J,JJJ while cash is also P2J,JJJ) So if you a all of these, the amount receive or realize is P"JJ,JJJ)

9ow, you e uct the cost of the stoc% ispose of) 8et us say that the cost of stoc% is PAJ,JJJ) So, 0orp) B erive gain of P1"J,JJJ) +& thi& ta1a3leT A'&%er K;S, but only P1JJ,JJJ is the amount that is taxable) *his is so because of the limitation that it must not excee the total cash an the /M@ of the property) 1n if you a the /M@ of the property an the total cash given, the total is P1JJ,JJJ) >n er the law, there is that limitation in transactions which involves not only the property but also cash) *he gain is recognize or taxable but the taxable gain must not excee the cash given an the /M@ of the property which forms part of the consi eration) .n the other han , suppose the cost of stoc% ispose of or transferre to 0orp) 1 is P"2J,JJJ) So, there is a loss of P2J,JJJ, is this recognize or e uctibleB 9.) If thi& 2ro2erty recei,ed ('der thi& tra'&actio'& %hich i& 'ot &olely i' Li'd i& &(3&eR(e'tly di&2o&ed of7 ho% do yo( deter+i'e the 3a&i& of thatT A'&%er *he basis of the property in the han s of the transferor less the /M@ of the property, less cash receive plus the gain recognize , if any, plus the ivi en that may be treate as such, if there is any) !a&i& i' the ha'd& of the tra'&feror Le&& /M@ of the property 0ash receive Pl(& 'ain recognize , if any -ivi en recognize , if any Tra'&actio'& %ere 4ai' i& reco4'iPed a'd lo&& i& 'ot reco4'iPed (+ea'i'47 if there i& a 4ai'7 the 4ai' i& ta1a3le a'd if the lo&& i& 'ot ded(cti3le) are 6*$I$R$N$8 1) <ash Sale ") +llegal transactions $) *hose transactions involving ,elate taxpayers &) *ransactions 9ot solely in %in ) S#ORT SALE 6 this is also consi ere as 0apital *ransaction) 6 Short sale is really a' o3li4atio' 2aya3le 'ot i' ca&h 3(t i' 4ood&$ *he seller of securities or stoc% will ecline) 1n if it eclines, he earns profit) :owever, if the price of securities increases, he incurs loss) 6 E1a+2le + borrow your securities on Nune 1J an +?ll pay it on Nune 12) *he price of securities on Nune 1J is P2J an you speculate that sai price will ecline on Nune 12) .n Nune 12, the price has been lowere to P&J) So, you earn a profit of P1J because + will pay my obligation at P2J on Nune 12 an not P&J) Ta1 co'&eR(e'ce of &hort &ale OO +f there is a gain, the gain is taxable) <e call this 0apital 'ain) OO +f there is a loss, the loss is e uctible

*AS# SALE ,&$ S#ORT SALE ? B.*: may be classifie as Ca2ital Tra'&actio'&$

2&
? *he basic istinction is in wash sale, the loss that may be incurre is not e uctible, whereas in short sale, the loss is e uctible) TRANS.ER TAXES ;S*1*; 7 *,>S*S ;S*1*; E refers to the mass of properties left by ece ent or testator to his heirs or beneficiaries) *,>S* E is the right to the property, real or personal, exercise by one person for the benefit of another parties) Parties to a *rust: a) Tr(&tor or 4ra'tor 6 one who create the trust b) Tr(&tee or fid(ciary E one who may hol the property for the benefit of other person %nown as 3e'eficiary$ Sometimes, the fi uciary is also the nbeneficiary$ c) Beneficiary ;state may be the sub(ect to tax, if it is un er your a ministration) +t may only be un er a ministration or settlement if the properties of the ece ent are settle un er (u icial settlement) +f the estate is un er extra6(u icial settlement, it is not sub(ect to tax because that will not earn income consi ering that the heirs agree to settle the estate extra6(u icially) <hen we spea% of (u icial settlement, this may inclu e estate or intestate procee ings) Tr(&t +ay 3e &(3Oect to ta1 if the tr(&t i& irre,oca3le)

No'"ta1a3le tr(&t are 5$ Re,oca3le Tr(&t$ *he income here will be taxe in so far as the recipient of the same is concerne ) 9$ E+2loyeeS& Tr(&t$ +f an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable) The tr(&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr(&t i& ,e&ted 1) in the grantor or in con(unction with other person who oes not have the substantial a verse interest in the isposition of the property ") in any person who oes not have substantial a verse interest in the isposition of the property) +n irrevocable trust, you cannot transfer or revest the title of the property) C9o substantial interest in the beneficiary) isposition of the propertyD E he must not be the

+f the properties of the estate is not investe in a business, so ten heirs are (ust co6owners of the property, that is not taxable because co6ownership as a rule is not taxable) +f the heirs eci e to continue the business, such that the a ministrator may manage the same, that will become an unregistere taxable partnership) ;state an trust may be taxe on the same manner an on the same basis as in the case of in ivi ual taxpayers) So, they may claim the e uctions un er Section $& as long as these e uctions were pai or incurre in connection with the business of that estate or trust) ;state an trust are entitle to personal exemptions P"J,JJJ)

SPECIAL DEDUCTIONS (thi& ca' 3e a,ailed of o'ly 3y e&tate a'd tr(&t) 1) +n the case of intestate, the executor, or a ministrator may e uct the income istribute to the heirs uring the particular year when such estate is still un er settlement) ") +n the case of a trust, the income may be istribute to the beneficiaries uring that year may also be e ucte ) *he trustee or fi uciary may istribute the income or accumulate the income) *he trustee has the iscretion whether to istribute the income to the beneficiaries uring the taxable year or to accumulate the same an istribute such income after the lapse of certain perio of time or year) +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as e uctions)

22

-(e&tio'& that trustB

+f there are two 3") trust create by one trustor or grantor, how o we tax the income of

A'&%er >n er the law, the taxable income of these two 3") trust must be consoli ate ) *hat trust shoul be taxe as if they constitute one trust) Sit(atio' 'rantor = create " trust) .ne is 1 trust create an the other is B trust) *here is only one beneficiary name K) 8et us assume that the taxable income of trust 1 is P1J,JJJ) *he taxable income of B trust is P"J,JJJ) *he total taxable income is P$J,JJJ) <e will tax these " trust separately but through consoli ation) +n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax ue shoul be apportione to trust 1 an B) So, for purposes of income tax, the taxable income of these " trust shoul be consoli ate , but for purposes of paying the tax, the tax ue shoul be apportione ) TRANS.ER TAXES *axes may be impose on onerous transmission of properties or on the gratuitous transmission of properties) Tra'&fer ta1e& that are i+2o&ed o' the o'ero(& tra'&+i&&io' of 2ro2ertie& 1) @1* 3value6a e tax) ") Percentage *ax 3exclu e this 1IIA Bar) $) ;xcise *ax 3also exclu e ) CONTENTS OF THE BACK PAGES DIVISION OF GROSS ESTATE: 1. INDIVIDUAL WHO DIED SINGLE - G. E. includes all t at e !"ns at t e ti#e !$ deat %. &ARRIED DE'EDENT - is estate includes is e(clusi)e *+!*e+ties and is s a+es in t e c!n,u-al *+!*e+ties .UT NOT t e e(clusi)e *+!*e+ties !$ t e su+)i)in- s*!use /RO/ERT0 OWNERSHI/ 1et. S/OUSES - N'' 2 1e$!+e Au-. 34 1566 7 '/G - E8'LUSIVE /RO/ERT0 unde+ N.'.'. 1. 1+!u- t int! t e #a++ia-e as is9 e+ !"n %. ac:ui+ed du+in- t e #a++ia-e 1; LU'RATIVE TITLE 3. ac:ui+ed 1; RIGHT !$ REDE&/TION !+ E8'HANGE "it !t e+ e(clusi)e *+!*e+ties <. *u+c ased "it e(clusi)e #!ne; - '/G unde+ N.'.'. 1. ac:ui+ed 1; ONEROUS TITLE - c!##!n $und %. ac:ui+ed 1; INDUSTR09WOR=4 SALAR0 !+ eit e+ 3. FRUITS> RENTS !+ INTERESTS ?c!n,u-al9e(clusi)e@ <. all *+!*e+ties n!t dete+#ined t! 1e e(clusi)e s all 1e *+esu#ed t! 1e c!n,u-al FA&IL0 'ODE - a$te+ Au-. 34 1566 - A'/ - E8'LUSIVE /RO/ERT0 unde+ t e F.'. 1. -i$t4 d!nati!n4 c!nt+i1uti!n e(clusi)el; -i)en t! !ne !$ t e s*!uses !nl; - -i$t and $+uits9inc!#e c!nside+ed e(clusi)e %. INHERITAN'E -i)en e(clusi)el; t! !ne s*!use - -i$t !+ $+uits9inc!#e c!nside+ed e(clusi)e 3. ac:ui+ed !$ *e+s!nal and e(clusi)e use - e(ce*t AEWELR0

24
<. e(clusi)el; !"ned 1e$!+e #a++ia-e includin- $+uits 9inc!#e IF s*!use as c ild+en $+!# t e $!+#e+ #a++ia-e B. *u+c ased $+!# e(clusi)e $und. E8E&/TIONS FRO& ESTATE TA8 - s*ecial la"s 1. .ene$its +ecei)ed ?GSIS4 SSS@ %. *+!ceeds !$ GSIS li$e insu+ance 3. .ene$its +ecei)ed 2 U. S. Vete+ans <. RE/ARATIONS 2 WW II Vete+ans B. RETIRE&ENT .ENEFITS - i$ included in -+!ss estate C. *+!ceeds !$ -+!u* insu+ance DE'EDENTDS INTEREST assets t at a+e still !"ned 1; decedent at t e ti#e !$ deat t! t e e(tent !$ is e:uit; !+ inte+est in an; *+!*e+t; " et e+ as e(clusi)e !"ne+4 c!n,u-al !"ne+4 !+ c!##!n !"ne+. 'O&/OSITION OF GROSS ESTATE ?DI4 T-G/A4 RT4 T-I'4 /-LI4 T-'D@ 1. DE'EDENTDS INTEREST %. TRANSFER 1; VIRTUE OF GENERAL /OWER OF A//OINT&ENT 3. REVO'A.LE TRANSFER <. TRANSFER $!+ INSUFFI'IENT 'ONSIDERATION B. /RO'EEDS $+!# LIFE INSURAN'E C. TRANSFER in 'ONTE&/LATION !$ DEATH FUNERAL E8/ENSES IN'LUDE: 1. e(*enses $!+ inte+#ent %. #!u+nin- cl!t in- ?"id!"4 c ild+en@ 3. e(*enses $!+ "aEe 1e$!+e 1u+ial <. c a+-es $!+ +ites and ce+e#!nies incident t! inte+#ent B. c!st !$ 1u+ial *l!t C. t!#1st!ne !+ #!nu#ent F. !1itua+; !+ deat n!tices AUDI'IAL E8/ENSES 1. acc!untants $ee %. a**+aise+s $ee 3. ad#inist+at!+Ds $ee <. att!+ne;Ds $ee B. d!cEet $ee C. sten!-+a* e+sD $ee F. !t e+ e(*enses !$ c!u+t ea+in-s 'LAI&S AGAINST THE ESTATE - !1li-ati!ns !$ t e decedent c!nt+acted in -!!d $ait " ile still ali)e 1ut +e#ains un*aid at t e ti#e !$ deat UN/AID &ORTGAGES OR INDE.TEDNESS RULES: Gclai#ed as deducti!nsH 1. t e said #!+t-a-e9inde1tedness #ust a)e 1een c!nt+acted du+in- t e decedentDs li$eti#e in -!!d $ait $!+ an ade:uate and $ull c!nside+ati!n in #!ne; !+ #!ne;s "!+t %. t e )alue !$ t e decedents inte+est in t e *+!*e+t; #!+t-a-ed is included in t e )alue !$ t e -+!ss estate

25
6 #ust 1e undi#inis ed 1; said #!+t-a-e9inde1tedness

3. #ust n!t include: A. an; inc!#e ta( u*!n inc!#e +ecei)ed a$te+ t e deat !$ decedent .. *+!*e+t; ta(es n!t acc+ued 1e$!+e is deat '. an; estate ta( LOSSES 2 $i+e4 st!+#4 s i*"+ecE !+ !t e+ casualt;4 +!11e+;4 t e$t4 e#1eIIle#ent RULES: 1. #ust n!t 1e c!#*ensated 1; insu+ance %. #ust a)e 1een incu++ed du+in- t e settle#ent !$ t e estate .UT NOT LATER t an t e last da; $!+ t e *a;#ent !$ t e estate ta( GC #!s.H 3. n!t clai#ed as deducti!n in an inc!#e ta( +etu+n !$ t e ta(a1le estate TA8ES " ic a+e n!t DEDU'TI.LE 1. inc!#e ta( !+ inc!#e +ecei)ed a$te+ deat %. *+!*e+t; ta(es n!t acc+ued 1e$!+e deat 3. estate ta( 'O&/UTATION !$ VANISHING DEDU'TION FOR&ULA: INITIAL .ASIS GROSS ESTATE 8 E. L. I. T. and t+ans$e+s $!+ *u1lic *u+*!ses SHARE OF SURVIVING S/OUSE RULES: 1. t e -+!ss c!n,u-al estate s all 1e di#inis ed 1; e(*enses and c a+-es E8'E/T t !se c a+-ea1le t! t e e(clusi)e *+!*e+ties %. t e NET a#!unt s all 1e di)ided int! t"! G%H 3. J -!es t! t e su+)i)in- s*!use and deducted $+!# t e estate !$ t e decedent ALLOWA.LE DEDU'TIONS - NON-RESIDENT DE'EDENT ?ELIT-TVS@ 1. ELIT Ge(*enses4 l!sses4 inde1tedness4 ta(esH FOR&ULA: /HIL. GROSS ESTATE WORLD GROSS ESTATE ( ELIT %. t+ans$e+ $!+ *u1lic *u+*!ses 3. )anis in- deducti!ns <. s a+e !$ t e su+)i)in- s*!use NOTI'E OF DEATH - i$ )alue e(ceeds / *%K4KKK - FILE n!tice "it .IR "it in t"! #!s. O$ decedentDs deat electi!n !$ :uali$ied e(ecut!+ !+ ad#inist+at!+

!+ "it in t"! #!s. A$te+

ESTATE TA8 RETURN 6 i$ -+!ss )alue !$ estate e(ceeds /%KK4KKK !+ i$ -+!ss estate c!nsists !$ +e-iste+ed *+!*e+t;4 FILE in du*licate and unde+ OATH 6 i$ )alue !$ -+!ss estate e(ceeds /%4KKK4KKK4 +etu+n #ust 1e su**!+ted 1; a ce+ti$icate !$ './.A. TI&E FOR FILING RETURN 6 "it in C #!s. F+!# decedentDs deat 6 E8TENSION: n!t e(ceed 3K da;s

2A
/A0&ENT OF ESTATE TA8 6 u*!n $ilin- !$ t e estate ta( +etu+n and 1e$!+e deli)e+; t! an; 1ene$icia+; !$ is dist+i1uti!nDs s a+e !$ t e estate 6 E8TENSION: n!t t! e(ceed B ;ea+s 6 I$ e(t+a-,udiciall; settled4 % ;ea+s 6 It #ust $ile 1!nd 2 n!t t! e(ceed d!u1le t e )alue t! 1e *aid

SUR'HARGE - %BL $!+ late $ilin-4 $!+ late *a;#ent - BKL $!+ $ilin- !$ $alse !+ $+audulent +etu+n INTEREST 2 %KL *e+ annu# /ARTIES TO A DONATION 1. DONOR 2 -+atuit!usl; dis*!ses %. DONEE 2 +ecei)es and acce*ts =INDS OF DONATION 1. /ERSONAL /RO/ERT0 2 #a; 1e !+all; !+ in "+itinE8'E/T: e(ceeds /B4KKK 2 d!nati!n and acce*tance #ust 1e in "+itin%. REAL /RO/ERT0 2 /U.LI' DO'U&ENT A''E/TAN'E - sa#e deed !$ d!nati!n !+ se*a+ate inst+u#entM d!ne du+in- t e li$eti#e !$ t e d!n!+ RULE: HUS.AND AND WIFE G.R.: E)e+; d!nati!n 1et"een Hus1and and Wi$e du+in- t e #a++ia-e is VOID E8'E/TION: 1. d!nati!n #!+tis causa %. #!de+ate -i$ts - $a#il; a$$ai+ NNN -i$ts c!#in- $+!# t e c!n,u-al *+!*e+t; #ade 1; 1!t s*!uses a+e ta(a1le4 J t! eac s*!use RULE !n INADEOUATE 'ONSIDERATION N i$ t e *+!*e+t; t+ans$e++ed is +eal *+!*e+t; classi$ied as ca*ital asset4 t e t+ans$e+ is su1,ect t! ca*ital -ains ta( !$ CL and n!t t! d!n!+Ds ta( N " e+e t e c!nside+ati!n is $ictiti!us4 t e enti+e )alue !$ t e *+!*e+t; t+ans$e+ s all 1e su1,ect t! d!n!+Ds ta( N t e a#!unt 1; " ic t e )alue !$ t e *+!*e+t; e(ceed t e a#!unt !$ c!nside+ati!n s all 1e dee#ed a -i$t $!+ *u+*!ses !$ t e d!n!+Ds ta( VALUATION OF GROSS GIFTS - F&V at ti#e !$ d!nati!n 1. Real /+!*e+t; - .IR I!nal )alue !+ F&V $i(ed 1; cit;9*+!)incial assess!+ " ic e)e+ is i- e+ %. S a+es !$ St!cE A. I$ listed 2 a)e+a-e )alue at t e date !$ d!nati!n .. I$ n!t listed 2 1!!E )alue at t e date !$ d!nati!n 3. /e+s!nal /+!*e+ties 2 F&V at t e ti#e !$ d!nati!n N F&V P *a"n )alue ( 3

E8E&/TIONS9ALLOWA.LE DEDU'TIONS 1. DOWRIES RULES: A. E(e#*t u* t! 1st /1K4KKKM

2I
.. Le-iti#ate +ec!-niIed !+ le-all; ad!*ted c ild+enM '. &ade 1e$!+e #a++ia-e !+ "it in !ne ;ea+ t e+e!$. 2. GIFTS TO NATIONAL GOVT. or POL. SUB. - n!t c!nducted $!+ *+!$it 3. GIFTS TO E, C, R, C, S, N, T, P, or R orgs. - n!t #!+e t an 3KL used $!+ ad#inist+ati)e *u+*!ses - #a; 1e a sc !!l !+ n!n-st!cE entit; DEDUCTIONS ALLOWABLE 1. ENCUMBRANCES !+ d!nated *+!*e+t;4 i$ assu#ed 1; t e d!nee 2. DIMINUTION !$ t e d!nated *+!*e+t; as s*eci$ied 1; t e DONOR RULE ( o !r"s#$" % $o or& 1. Sa#e all!"a1le deducti!ns as +esident d!n!+s e(ce*t t at t e sa#e #ust 1e c!nnected "it d!nated *+!*e+t; situated in t e / ils. %. NO deducti!ns $!+ Qd!"+iesR RULE #' Do "" #s ( S%r( g"r 1. TA8 /A0A.LE 2 3KL !$ net -i$t STRANGER 2 !ne " ! is n!t a 1+!t e+4 siste+ G" !le !+ al$-1l!!dH4 s*!use4 ancest!+4 lineal descendant !+ +elati)e 1; 'ONSANGUINIT0 in t e 'OLLATERAL LINE "it in t e < t de-+ee. RULE ON /OLITI'AL 'ONTRI.UTIONS - c!nside+ed TA8A.LE GIFTS - d!nee in t is case is dee#ed t! +ecei)e a $inancial ad)anta-e -+atuit!usl; AD&INISTRATIVE /ROVISIONS - d!n!+Ds ta( +etu+n #ust 1e $iled unde+ !at and in du*licate - $iled "it in 3K da;s $+!# date !$ d!nati!n E8TENSION: n!t e(ceedin- 3K da;s - WHEN /AID - ti#e t e +etu+n is $iled E8TENSION: n!t e(ceedin- C #!s. /ROVIDED 2 .OND- d!u1le t e a#!unt !$ TA8 TA8 'REDIT $!+ d!n!+s ta( *aid t! a $!+ei-n c!unt+; - d!n!+ "as a Fili*in! citiIen !+ +esident alien at t e ti#e !$ $!+ei-n d!nati!n - d!n!+Ds ta(es !$ an; c a+acte+ !+ desc+i*ti!n a+e i#*!sed and *aid 1; t e aut !+it; !$ a $!+ei-n c!unt+; LI&ITATIONS: 1. T e a#!unt !$ c+edit in +es*ect t! t e ta( *aid t! an; c!unt+; s all NOT E8'EED t e sa#e *+!*!+ti!ns !$ t e ta( a-ainst " ic suc c+edit "as taEen %. T e t!tal a#!unt !$ c+edit s all n!t e(ceed t e sa#e *!+ti!n !$ t e ta( a-ainst " ic suc c+edit is taEen Tra'&fer ta1e& i+2o&ed o' 4rat(ito(& tra'&+i&&io' of 2ro2ertie& are 1) ;state tax ") -onor?s *ax ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of a ece ent or testator DONORSS TAX D tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same) *his transmission of properties occurs uring the lifetime of the onor an the onee) ESTATE TAX

4J
NATURE O. ESTATE TAX E +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself) PURPOSES O. ESTATE TAX D to avoi the un ue accumulation or concentration of wealth 1) *he primary purpose is to raise revenue in or er to support the government! ") *o supplement income tax! $) *o re uce successive ine#ualities in wealth, meaning, to achieve social e#uality) CINDS O. ESTATE TAXPAYER 5$ Re&ide't e&tate ta12ayer D inclu es citizen of the Phils), resi ent alien who ie in the Phils), an such alien, at the time of his eath, is a resi ent of the Phils! 9$ No'"re&ide't e&tate ta12ayer D is limite to non6resi ent alien in ivi ual) ,eal properties, personal tangible properties an resi ent ece ent 3,-) are taxe wherever situate ) personal intangible properties of

,eal an personal tangible properties of non6resi ent ece ent 39,-) are taxable only if they are locate in the Phils) ,eal an personal tangible properties of 9,- are taxable only if they ac#uire tax situs in the Phils)

Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed to ha,e acR(ired Phil$ &it(& are 6.7 SO! (DC7 .C" I<J7 .C"SP)7 SR D P8 1) /ranchise which is exercise in the Phils) ") Shares of stoc%, obligation or bon s issue by omestic corporation or sociedad anonima $) Shares of stoc%, obligation or bon s issue by foreign corp), A2M of the business of which is con ucte in the Phils &) Shares, obligations or bon s ac#uire business suits in the Phils) L Such shares, obligations or bon s ac#uire business situs in the Phils) of they are use by foreign corp) in furtherance of its tra e or business) 2) Shares or rights in any partnership, business or in any partnership, business or in ustry, establishe in the Phils) T +f the personal intangible properties of a 9,- oes not belong to the above6mentione enumeration, they may not form part of his gross income or we may also apply the octrine of mo%ilia se<untur personam! T "obilia seDuntum personam, accor ing to the Supreme 0ourt, is a mere fiction of law) So, it must yiel to the provision of law which provi es tax situs) -(e&tio' Suppose the personal intangible properties of 9,- ac#uire tax situs in the Phils), can this be exempt from real estate taxB A'&%er K;S, by applying the rule on reciprocity) RULE ON RECIPROCITY D the foreign country of that 9,- oes not impose or allows exemption on tax on the properties of the citizens of the Phils) who ie in that foreign country) *he phrase C oes not imposeD an Callows exemptionD are ifferent from each other) <hen we say C oes not imposeD, this means totally exempt) C1llows exemptionD means this may not cover all properties but only certain properties) Ca&e 0ountry of Morocco has no international personality) +f it grants exemptions to the intangible personal properties if /ilipino citizens who ie in that country, will you apply also that rule on reciprocityB #eld K;S) +t oes not matter whether the country has international personality or not) <hat is important is it allows or grants exemption from estate tax) ASec$ I<7 9ross %state D *he value 3/M@) of the gross estate of the ece ent shall be etermine by inclu ing the value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate : Provi e , however, *hat in the case of a non6resi ent ece ent who at the time of his

41
eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall be inclu e in his taxable estate)D The co+2o&itio' of the 4ro&& e&tate +ay i'cl(de 5$ Decede'tS& I'tere&t$ 3inclu es yiel s, fruits an interest) 6 *he gross estate may inclu e the fruits an income of the properties an that may constitute the ece ent?s interest) 6 +n the case of parcel of lan , it may pro uce income in the form of harvest which harvest may form part of the gross estate) 6 +n the case of apartment, the rental of such apartment shoul also be inclu e , not only the value of the property) 6 -ivi en s 6 Partnership profits 6 ,ights of usufruct 9$ Tra'&fer 3y ,irt(e of 4e'eral 2o%er of a22oi't+e't 6 +t implies that if the transfer is ma e un er special power of appointment that shoul be exclu e from gross estate) 6 +n general power of appointment, the power is exercisable or in favor of the estate, executor, a ministrator or a cre itor of the estate) +f the power is exercisable other than these 3estate, a ministrator, a ministrator or cre itor of the estate), that may be consi ere as special power of appointment) :$ Re,oca3le Tra'&fer D 1ny transfer ma e by the ece ent uring his lifetime where the ece ent has reserve the right to 18*;,, 1M;9-, *;,M+91*;, or ,;@.Q;) such transfer! it is sufficient that the ece ent ha the power to ,;@.Q;, though he i not exercise such power) 6 +rrevocable transfers shoul be exclu e from gross estate) 6 ,evocable transfers are transfers which are sub(ect to alteration, termination, amen ment or mo ification by the ece ent) ;$ Tra'&fer& for I'&(fficie't Co'&ideratio' 6 *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consi eration given) E1a+2le +f the property has a /M@ of P1JJ,JJJ an the consi eration given is only P2J,JJJ, the ifference of P2J,JJJ represents insufficient consi eration) <$ Proceed& of Life I'&(ra'ce Policy 6 Proceed& of life i'&(ra'ce 2olicy +ay 3e i'cl(ded if a) the beneficiary esignate is the estate executor, a ministrator or heirs of the ece ent E whether revocable or not revocable b) the beneficiary esignate is a $r person who is revocably esignate as beneficiary 6 Proceed& of life i'&(ra'ce 2olicy i& e1cl(ded fro+ the 4ro&& e&tate i' the follo%i'4 ca&e& a) $r person is irrevocably esignate as beneficiary b) procee s of group insurance policy E ta%en out by the co) for its employees c) procee s of acci ent insurance policy except acci ent insurance policy as characteristic ) procee s of 'S+S 8ife +nsurance Policy 3govt) employees) e) procee s of life insurance payable to the heirs of ecease >) S) an Phil) 1rmy Note 1s regar s the estate executor, a ministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable) G$ Tra'&fer i' Co'te+2latio' of Death 6 +f such transfer was in uce by the thought of eath principally, ,;'1,-8;SS of whether the eath is impen ing forthcoming or not 6 *,19S/;, may be one before, at the time of or even after the ece ent?s eath 6 $6K;1, P,;S>MP*+.9 G elete by P)-) 15J2) 1ug) 1, 1IA4) GM>69*, /, *61S*6B, B6S00H EXCEPTINS>EXCLUSIONS fro+ GROSS ESTATE 1) merger of >S>/,>0* in the M1Q;- *+*8; ") /+-;+0.M+SS1,K $) transmission from 1st heir to another beneficiary 6 will of the testator &) B;R>;S*, -;@+S;;S, 8;'10+;S or *,19S/;, 6 S.0+18 <;8/1,;, 0>8*>,18 an 0:1,+*1B8; institutions

4"
6 no part of net income inures to any in ivi ual 6 not more than $JM for a min) purposes DEDUCTIONS .RO0 GROSS ESTATE DEDUCTIONS .RO0 GROSS ESTATE T#AT 0AY !E 1) 0on(ugal e uctions G/:, N;, /;, M;, 01;, 8, >3MF+),*, S-, SP, 06+PH ") 1bsolute e uctions $) ;xclusive e uctions G@-, *6P>, >M, ;6;PH 3share of SS) .*:;,S: GM6>, /, *61S*6B, '60+H I$ CON)UGAL AND A!SOLUTE DEDUCTIONS i'cl(de 1) /amily home ") Nu icial of funeral expenses $) 0asualty losses &) +n ebte nessFunpai claim against the estate 2) 1ccrue taxes 3before the eath of the ece ent) 4) Stan ar -e uction 5) Separation pay given to the heirs of the ece ent on account of eath Di&c(&&io' 5$ .a+ily ho+e E 3even unmarrie person may have a family home) sub(ect to the following con itions: a) there must be only one 31) family home! b) there must be certification issue by the Barangay 0aptain that the ece ent is a resi ent of an own that family home in that particular locality! c) the amount that is e uctible or the /M@ of the family home shoul not be more than P1M! excess shall be sub(ect to tax ) the /M@ must be inclu e in the gross estate of the ece ent) +f the /M@ of the family home is P2M, this shoul be inclu e in the gross estate of the ece ent) But when you claim e uctions, you can only claim up to P1M) 9$ ;xpenses which may be in the nature of O(dicial e12e'&e& or f('eral e12e'&e&$ U 0edical e12e'&e& are also e uctible sub(ect to the following con itions: a) the amount e uctible, is limite only to P2JJ,JJJ! b) it must be incurre within one 31) year before the eath of the ece ent! c) this must be substantiate by receipts U +n the case of funeral expenses, the amount e uctible is the actual funeral expenses on the amount which is not more than 2M of the gross estate whichever is lower, but in no case to excee P"JJ,JJJ) U *here is no limitation as to amount with regar to (u icial expenses) 1s long as it is pai or incurre in connection with the preservation, a ministration or settlement of the estate, it may be claime as e uctions) Nu icial expenses also inclu e extra6(u icial expenses) :$ 8osses that may arise from casualty or ca&(alty lo&&e& such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses) U *hese losses must be sustaine not later than six 34) months after the eath of the ece ent) U not compensate by insurance ;$ I'de3ted'e&& which parta%e of the nature of the ('2aid clai+& a4ai'&t the e&tate$ U *hese must be supporte by notarize years prior to eath of the ece ent) ocuments) *hese obligations must be incurre within three 3$)

U 1nother in ebte ness which may be claime as e uction is claim against insolvent persons) :ere, the claimant is the ece ent) +n or er to be e uctible, this claim must be inclu e in the gross estate) U e uction from the gross estate shall be the collectible portion <$ Ta1e& which must accr(e 3efore the eath of the ece ent) G$ Sta'dard ded(ctio'

4$
U P1M) *he amount is P1M) So, this may only be applie if the gross estate of the ece ent is more than

H$ Se2aratio' 2ay given to the heirs of the ece ent on account of eath) U *he proce ure is to inclu e the amount in the gross estate an e uctions) II$ EXCLUSI/E DEDUCTIONS U *hese are e uctions against exclusive properties) *hese may inclu e: 3@P60;) 1) @anishing e uctions E whether inherite or ac#uire by -onation ") *ransfer for public use $) .ther charges against the exclusive property &) ;ncumbrance on exclusive property -iscussion:

then claim this thereafter

5$ /ANIS#ING DEDUCTION 6<7 IP7 I"GE7 PD7 PT7 N"P"/D8 6 is an allowable e uction against the exclusive property of the ece ent 6 may be claime as e uction ('der the follo%i'4 co'ditio'& a) -eath of a ece ent which must ta%e place within /+@; K;1,S from the eath of the prior inci ent or before gift was given)

Sit(atio' 1 ie ) B is the heir) 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property) .ne of the properties of 1 which forms part of his gross estate ha alrea y been taxe ) *his property will be transmitte to B by way of succession) +f B ie , ta%e note that one of his properties was ac#uire through inheritance from 1 an that is an exclusive property) *his property ha alrea y been taxe because that forms part of the gross estate of 1) 1gain, this same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B) *here seems to be ouble taxation) *hat is why, the purpose of vanishing e uction is to mitigate the harshness of ouble taxation) So, B may be entitle to that vanishing e uction which may re uce his estate tax) *he con ition set by law is that B must have ie within the 26year perio ) +f B ie 4 years after the eath of 1, B can no longer claim such vanishing e uctions) 3$ Ide'tity of Pro2erty D locate in the Phils) So, there must be evi ence to that effect that this is the same property which forms part of the gross estate of 1) c$ I'cl(&io' of the ta1 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$

d$ Pre,io(& ta1atio' *he estate of 1 which inclu e the property sub(ect of vanishing e uction ha been taxe ! meaning, that estate tax ha been pai by prior estate) e$ No 2re,io(& ,a'i&hi'4 ded(ctio'&$

-(e&tio' So, if B ie an the property is transmitte to 0, his heir, that property is also consi ere as exclusive property of 0 because it was ac#uire through inheritance) 0an 0 claim vanishing e uctionsB A'&%er 9., because this ha alrea y been claime by B) Kou can only claim vanishing e uction once) +t is impossible that B ac#uire the property not through inheritance but through onation) -onor?s tax ha alrea y been pai ) *his is an exclusive property of B because un er the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate) 0an we apply this vanishing e uctionB K;S) :ere, B must have ie within the 26year perio from the ate of onation) AcR(i&itio' a'd tra'&+i&&io' e1e+2t fro+ e&tate ta1 are

4&
a) b) c) ) *he merger of usufruct in the owner of the na%e title *ransmission or elivery of the inheritance or legacy by the fi uciary heir or legatee of the fi eicommisssary) *ransmission of the property from the first heir, legatee or onee in favor of another beneficiary, in accor ance with the esire of the pre ecessor) Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any in ivi ual an not more than $JM of sai be#uests, evises, legacies or transfers be use by such institutions for a ministrative purposes)

So, transfers to non6stoc%, non6profit e ucational institution is not exempt from estate tax because this is not inclu e from the enumeration B>* exempt from onor?s tax) 9$ Tra'&fer .or P(3lic U&e *he onee must be the government or any political sub ivision) +t must be use exclusively for public use) *he transfer must be one orally but testamentary isposition an must be at its present value) :$ Other Char4e& A4ai'&t The E1cl(&i,e Pro2erty So, if the property has been mortgage with a ban%, we consi er that as unpai mortgage) ;$ E'c(+3ra'ce O' E1cl(&i,e Pro2erty /ALUATION O. T#E GROSS ESTATE valuation as of the time of eath 1) Real Pro2erty *he /M@ e#uivalent to the value as etermine by the B+, or zonal value ., that of the value as etermine by the provincial or city assessor whichever is higher) ") Per&o'al Pro2erty a) *angible Personal Property if not being sol ! pawn value x $! *he /M@ is e#uivalent to the selling price of the property) 3Bran new items) b) +ntangible Property E inclu es interest, shares of stoc% 6 +t must be the /M@ of the interest or shares of stoc%) 6 +f the intangible personal property is account receivable, it shoul be Principal P8>S interest unpai upon the eath of the ece ent except if worthless) 6 +f it is in the nature of usufruct, we must ta%e into consi eration the basic stan ar of mortality rate) 6 1merican tropical experience table 6 +/ 8+S*;- E mean or ave) value between the highest an lowest stoc% #uotation 6 +/ 9.* 8+S*;- E B..Q value DONORSS TAX DONORSS TAX E is an excise tax because what is being tax here is the right or privilege to transmit or ispose of property gratuitously in favor of another) 6 *ax impose on the privilege of transmitting property by an living person to another by way of onation 6 Prevents avoi ance of estate tax PURPOSE O. DONORSS TAX 1) *he primary purpose is to raise revenue! ") *o supplement income tax an estate tax) DONATION D the act of liberality whereby a person isposes gratuitously of a *:+9' or a ,+':* in favor of another who accepts it) DONATIONS SU!)ECT TO DONORSS TAX 6 trust or not 6 real or personal 6 tangible or intangible 1) +n irect onation E ;xample: 0ancellation of in ebte ness ") -irect onation -onor?s tax applies to both natural an (uri ical persons *he law says, C onor?s tax apply whether the transfer is in trust or otherwiseD) So, property hel in trust may be the sub(ect of onation) But, this contemplates of a transfer where the ominion, the right over such property, use, en(oyment of the same other rights, must all be transferre to the onee so that it will constitute as taxable onation)

42
,ea Section 1J&)

C#ARACTERISTICS O. /ALID DONATION 6.7 A7 C7 I7 D8 1) +t must be given uring the lifetime of the onor) ") +t must be irrevocable) $) +t must comply with the formalities of onation) &) 1cceptance of the onee) RE-UISITES O. /ALID DONATION 1) +t must comply with the for+alitie& of onation) 6 +f the amount of personal property is P2,JJJ or less, the onation may be ma e orally) 6 +f the amount of personal property is more than P2,JJJ the acceptance shall be in writing) 6 -onation of real property must be ma e in a public instrument irrespective of the amount ") Acce2ta'ce by the onee of the onation) 6 1cceptance must be ma e uring the lifetime of the onor) 6 +f the amount of personal property is P2,JJJ or less, acceptance may be ma e orally) 6 +f the amount of personal property is more than P2,JJJ, the acceptance shall be in writing) 6 +n the case of onation of real property, acceptance must be ma e in the same ee of onation or in a separate public instrument) $) Ca2acity of the onor an the onee: a) *hose ma e between persons who were guilty of a ultery or concubinage at the time of the onation) b) *hose ma e between persons foun guilty of the same criminal offense, in consi eration thereof! c) *hose ma e to a public officer or his wife, escen ants an ascen ants by reason of his office) I'ca2acitated do'ee& are 6P7 R"P7 G7 D7 NPL8 a) *he priest who hear the confession of the onor uring his illness, or the minister of the gospel who exten e spiritual ai to him uring the same perio ) b) *he relatives of such priest or minister of the gospel within the & th egree, the church, or er, chapter, community, organization or institution to which such priest or minister belongs) c) 1 guar ian with respect to onation ma e by a war in his favor before the final accounts of the guar ianship have been approve , even if onor shoul ie after the approval thereof! nevertheless, any onation ma e by war in favor of the guar ian when the latter is his ascen ant, brother an sister, or spouse, shall be vali ) ) 1ny physician, surgeon, nurse, health officers or ruggist who too% care of the onor uring his last illness) e) +n ivi uals, association 7 corporations not permitte by the law to receive onations) ?The follo%i'4 are al&o i'ca2a3le of recei,i'4 do'atio'& 3y rea&o' of ('%orthi'e&& : 6P (AC7 ID7 A/)7 C"AL7 A"G yr&$7 #"C/D7 A or C7 ."D7 .8 a) b) c) ) Parents who have aban one their chil ren or in uce their aughters to lea a corrupt or immoral life, or attempte against their virtue) 1ny person who has been convicte of an attempt against the life of the onor, his or her spouse, escen ants or ascen ants) 1ny person who has accuse the onor of a crime for which the law prescribes imprisonment for 4 years or more, if the accusation has been foun groun less) 1ny heir full of age who, having %nowle ge of the violent eath of the onor, shoul fail to report it to an officer of the law within a month unless the authorities have alrea y ta%en action, this prohibition shall not apply to cases wherein, accor ing to law, there is no obligation to ma%e an accusation) 1ny person convicte of a ultery or concubinage with the spouse of the onor) 1ny person who by frau , violation, intimi ation, or un ue influence shoul cause the onor to ma%e a onation or to change one alrea y ma e) 1ny person who by the same means prevents another from ma%ing a onation, or from revo%ing one alrea y ma e, or who supplants, conceals, or alters the latter?s onation) 1ny person who falsifies or forges a suppose onation of the ece ent)

e) f) g) h)

>n er 1rt) A5 of the /)0), husban an wife are prohibite from ma%ing onation to each other) ;$ I'te'tio' to onate the property of the onee 3or -.91*+@; +9*;9*)) E1ce2tio' *ransfer of insufficient consi eration in the case of a contract of sale) ;xample:

44
+f the /M@ of the property is P1JJ,JJJ an P2J,JJJ was the consi eration given) *he ifference of P2J,JJJ is consi ere a onation) O *he amount receive by a isinherite heir is sub(ect to onor?s tax because he has no right to such property an the same was gratuitously given, so there is no onative intent) <$ Deli,ery of the property) 9ote: +f there is no vali onation, the recipient is sub(ect to income tax because of the provision C from 'hatever source derived!D Cla&&ificatio' of do'or &(3Oect to do'orS& ta1 1) Re&ide't do'or (RD) " this inclu es citizen of the Phils) or a resi ent alien) ") No'"re&ide't alie' (NRD) D he must be a non6resi ent alien) RD E ,eal properties, personal tangible properties, an personal intangible properties of resi ent onor are sub(ect to onor?s tax wherever situate ) NRD E ,eal properties an personal tangible properties of a non6resi ent onor are sub(ect to onor?s tax only if they are locate in the PhilsW Personal intangible properties of 9,- are sub(ect to onor?s tax only if they ac#uire tax situs in the PhilsW Per&o'al I'ta'4i3le 2ro2ertie& that are dee+ed &it(ated or acR(ire &it(& i' the Phil&$ are GROSS GI.TS 6.7 SO! (DC7 .C"I<J7 .C"SP)7 SR7 P8 5$ .ra'chi&e which is exercise in the Phils) 9$ Share& of &tocL7 obligation or bon s issue by do+e&tic cor2$ or sociedad anonima. :$ Share& of &tocL7 obligations or bon s i&&(ed 3y forei4' cor2oratio'7 I<J of the 3(&i'e&& of %hich i& co'd(cted i' the Phil&$ ;$ Share&7 obligations, bon s i&&(ed 3y a forei4' cor2$ %hich acR(ire& 3(&i'e&& &it(& i' the Phil&$ Such shares, obligations or bon s ac#uires business situs in the Phils) if they are use by such foreign corp) in furtherance <$ Share& or rights in any partnership, business or in ustry establishe in the Phils) G$ Real7 I'ta'4i3le a'd I'ta'4i3le Per&o'al 2ro2erty or 0i1ed ;ven if the personal intangible properties of the 9,- ac#uire tax situs in the Phils) it may still be exempt from onor?s tax by applying the rule on reciprocity) R(le o' Reci2rocity D +f the foreign country of that 9,- oes not impose, or allows exemption on the onor?s tax on the properties of citizens of the Phils) who ie in that foreign country) Sec) 1J& is applicable to both estate tax an onor?s tax)

TARI.. AND CUSTO0S CODE 0>S*.MS 81< E oes not refer only to the provisions of *ariff an 0ustoms 0o e) +t also inclu es other laws an regulations sub(ect to enforcement by the Bureau of 0ustoms) Other la%& &(3Oect to e'force+e't 3y the !(rea( of C(&to+& 1) 9+,0 E Sec) 1J5) +mportation of goo s or articles sub(ect to @1*) *he @1* must be pai before these goo s are release from 0ustoms 0usto y) ") 9+,0 E Sec) 1$1) +mportation of 1rticles sub(ect to excise taxes) *he payment of excise tax must be ma e before the goo s are release from 0ustoms custo y) $) ,egulations that may be issue by the 0B, the implementation of such regulation is veste in the Bureau of 0ustoms) C(&to+& d(tie& E are uties which are charge upon commo ities on their being importe in or exporte out of a country) Tariff D means a boo% of rates! a table or catalogue rawn usually in alphabetical or er containing the names of several states that hol commerce together) Office& char4ed %ith e'force+e't or ad+i'i&tratio' of C(&to+& la%& 1) *ariff 0ommission 3*0)

45
") Bureau of 0ustoms 3B.0) Po%er& of TC (TRACER) *he power of the *0 are investigatory in nature: *hey investigate the following matters: 1) Matters relative to *ariff relations between the Philippines an the foreign countries) So, that inclu es commercial treaties) ") ,elation between the rate on raw materials an finishe pro ucts) $) Matters relative to the 1rrangement of sche ules of values &) Matters pertinent to the 0lassification of articles 2) +t shall also investigate the ;ffects of foreign competition) 4) +t shall investigate the operation of the *ariff 8aws an submit ,eport regar ing the same) 1fter investigation, *0 shall submit its report to the Bureau 0ommissioners or to Secretary of /inance) P.<;,S ./ *:; B.0: 3P;,1S) 1) B.0 has the power to Prevent an suppress smuggling an other frau s upon B.0) Co'&i&te't %ith thi& 2o%er7 the !OC ha& a) Power to control an supervise the clearance, as well as the entrance of vessels, aircrafts originating from foreign countries) b) Police power to exercise over :arbor, 1irport, ,iver an Port) c) *he right of pursuit against vessel sub(ect to seizure even if it is seize beyon the maritime zone) *his is calle the e1tra"territorial O(ri&dictio' of the !OC$ Sometimes, we call this right of pursuit) *he B.0 may exercise this power when: c)1) the vessel was sub(ect to seizure or forfeiture c)") there %a& ,iolatio' of the C(&to+& la% co++itted %ithi' the Phil&$ 1s regar s smuggle goo s importe not in accor ance with the provisions of the 0ustoms law, it may be pursue by the B.0 even if it is transporte through air, lan or water) 0onsistent with this power, the B.0 may enter in a buil ing, house, structure, enclosure an warehouse) 9o search warrant is re#uire ) 1s long as they reasonably believe that the place store smuggle goo s, seizure or search may be ma e) But it must be shown that the place must not constitute a welling place or unit) *his is also because if it is a welling place that is covere by the 0onstitutional provision where warrant must be secure ) Sit(atio' Suppose the watchman or security guar an his family live in that place or buil ing where smuggle goo s are store can there be seize without search warrantB 0an we consi er that a welling placeB A'&%er 9o, that will ma%e the buil ing a welling place) ;ven if it is outsi e of its istrict such that it came from Uamboanga an was unloa e at 0ebu, the collector of 0ebu may still seize the goo s) <hat is only re#uire is that it came from a port of entry within the Phils) ") ;nforcement of the *ariff an a ministration of *ariff laws) 0ustoms 8aw inclu ing other laws an regulation affecting the

$) ,ecommen to the Sec) of /inance nee e rules an regulations necessary for the effective enforcement of the provisions of the *00) &) 1ssessment an collection of lawful revenues from importe articles) 1lso, assessment an collection of fines, penalties, fees an other charges accruing un er the provisions of the *00) 2) +t has the exclusive an original (uris iction over Seizure an forfeiture cases) Meaning, to the exclusion of regular courts) Article& &(3Oect to C(&to+& d(tie& 1rticles means wares, merchan ise, goo s an anything which may be ma e sub(ect of importation or exportation) 1rticles inclu e Philippine money) So, if the Philippine money is transmitte or ta%en out of the Phils) without authority from the 0entral Ban%, that may be the sub(ect matter of seizure) Article& &(3Oect to C(&to+& d(tie& 1) -utiable articles E are articles sub(ect to 0ustom uties ") Prohibite articles: a) A3&ol(tely 2rohi3ited article& (S*ING) 1) those prohibite by Special 8aws

4A
") <eapons of <ar $) +nsi ious, obscene or immoral articles &) 9arcotic or prohibite rugs 2) 'ambling evices -(alifiedly 2rohi3ited D meaning sub(ect to restrictions or limitations) +/ these limitations are not complie with) *hey will be prohibite )

b)

$) -uty free importe articles E these are articles not sub(ect to custom uties) *hese are: (0ASARAP) a) 0e als, ba ges use as trophies or awar s b) Animals an plants for experimental purposes c) Sample articles ) A#uatic resources e) Repair materials f) Articles necessary for the ta%e6off an lan ing of an airplane or for safe navigation of vessels g) 1rticles for Public exposition) +nclu e here are historical boo%s an personal househol effects C(&to+& d(tie& +ay 3e cla&&ified a& 1) Re4(lar or ordi'ary c(&to+ d(tie& D these are the a valorem tax an specific tax) /or purposes of etermining the a valorem tax, the basis must be the home consumption value) #o+e co'&(+2tio' ,al(e is the price state in the commercial, tra e or sales invoice) +f there is a reasonable oubt as to this value, recourse may be ha to the commercial an revenue attachX report, the B.0 shoul refer to the available information that may help the B.0 etermine the applicable a valorem tax) Ca&e 90,6Napan has a subsi iary in the Phils) which is 90,6Phil) *en a ing machines were importe from 90,6Napan an they use , for purposes for etermining a valorem, the home consumption value, the price state in the sales invoice) +nstea , we shoul refer to the commercial revenue attachY report to etermine the basis of that a valorem tax) ") S2ecial c(&to+ d(tie& (DC0D) a) -umping uties b) 0ountervailing uties Note The 2(r2o&e of d(+2i'4 a'd co('ter,aili'4 d(tie& i& to 2rotect o(r local 2rod(ct& a4ai'&t ('fair forei4' co+2etitio' c) Mar%ing uties E the purpose of this is to prevent possible public eception) ) -iscriminatory uties E uties which are impose for the purpose of protecting our national interest D(+2i'4 d(ty D uty levie on importe goo s where it appears that a specific %in or class of foreign article being importe into or sol is li%ely to be sol in the Phils) at a price less than its fair value) +mpose on specific %in or class of foreign article which is being importe into, or sol or is li%ely to be sol for exportation to or in the Phils) at a price less than its fair value, the importation or sale of which is li%ely to in(ure an in ustry imposing li%e goo s in the Philippines) *he uty is e#ual to the ifference between the actual purchase price an the fair value of the articles in #uestion in the country or exportation as etermine by the Sec) of /inance)

*hese are special uties impose on importe articles) *his may be impose sub(ect to the ff) re#uisites: 1) *here must be a eliberate an continuous sale of importe article in the Philippines as price lower than the prices in the exporting country) ") *his must pre(u ice or cause or li%ely to cause in(ury to our local in ustry) Sit(atio' *here are articles of foreign origin the prevailing price of which in the >S is e#uivalent to P1JJ) *hese articles are sol or umpe in the Phils) at lower than the prevailing price in the >S because they are saleable in the >)S) So, this will pre(u ice our local in ustries) +n or er to protect our local pro uct or to iscourage people from buying this importe pro uct, we shoul be impose special uties in a ition to the regular uties) -umping uties shoul be impose )

4I
Co('ter,aili'4 d(ty D uty e#ual to the ascertaine or estimate amount of the sub si y or bounty or subvention grante by the foreign country on the pro uction, manufacture, or exportation into the Phils) of any article li%ely to in(ure an in ustry in the Phils) or retar or consi erably retar the establishment of such in ustry) +mpose on articles, upon the pro uction, manufacture or export of which any bounty or subsi y is irectly or in irectly, grante in the country of origin an Fexportation) 9o nee to show proof that the imports cause in(uries to omestic in ustries pro ucing the same pro ucts) *he uty is e#ual to the ascertaine or estimate amount of the bounty or subsi y given)

Sit(atio' Sometimes importe pro ucts en(oys certain subsi y from their government) So, they have an a vantage) .ur local pro ucts for example, oes not en(oy similar subsi y) <e shoul counter that a vantage by imposing countervailing uties) *he purpose there is to protect our local pro ucts against unfair competition) *his represents the inlan excise tax on locally manufacture articles of the same %in to off6set this a vantage) 1s regar s umping uties, the extent of the special uty is the amount that represents un er6 pricing) 1s regar s countervailing uties, the extent is the excise inlan tax or the amount of a vantage en(oye by that importe article) 0arLi'4 d(ty D uty on a valorem basis impose for improperly mar%e articles) *he re#uirement that foreign importation must be mar%e in any official language of the Phils), the name of the country of origin of the article) *he purpose is to prevent eception of consumers) *he articles must be properly mar%e , otherwise a special uty of 2M of the value shall be impose )

Retaliatory or Di&cri+i'atory d(ty D uty impose on importe goo s whenever it is foun as a fact that the country of origin iscriminates against the commerce of the Philippines in such manner as to place it at a isa vantage compare with the commerce of any foreign country) *he amount may be increase in an amount not excee ing 1JJM ad valorem when the Presi ent fin s the public interest may be serve thereby) *his may be impose iscriminate against) by the Presi ent of the Philippines when our goo s are

-(e&tio'

1s regar s umping, countervailing an mar%ing uties, it is the Sec of /inance, upon recommen ation of the *ariff 0ommission, who may impose these uties) <hat is the extent of the flexible power of the Presi ent of the Phils) un er the *00B

A'&%er *hat inclu es the power to impose iscriminatory uties) *he Presi ent upon recommen ation of the *ariff 0ommission may increase the tariff rates by not more than 2x or meaning 2JJx of the tariff rates) :e may also ecrease the tariff rates by not less than 2JM) :e can only exercise these powers in the interest of the national economy, national security an general welfare of the people) 9$ Other d(tie& a) Stora4e fee D this is charge on the goo s or articles store in a warehouse un er the control an supervision of the B.0) 1rticles owne by the government are exempt from storage fee is these articles are store in a government warehouse) b) ?*harfa4e d(e& E ;ven if there is no wharf where the goo s may be unloa e , wharfage ues may still be impose because it is not a uty or charge on the use of the wharf) ;ven if the goo s are unloa e in a private wharf or seashore, wharfage ues still be impose because this is a uty impose on the cargoes or articles which are unloa e ) *hese are taxes) *hese are not really custom uties) *he significance of this is that when tax exemption is grante from all forms of taxes, this may be inclu e ) +f the exemption is only from custom uties, wharfage ues is not inclu e ) Arra&tre char4e& D this is a uty impose on goo s or articles for han ling, receiving or custo y of such articles)

c)

5J

) e$ f)

To''a4e fee& D this is base on weight or tonnage of vessel) #ar3or fee& !erthi'4 fee& D this is impose on the vessel for mooring berthing at a particular pier or port) Berthing fees may only be impose if the vessel is wharfe or berthe at national port) So, if it is wharfe at privately owne port, that is not sub(ect to berthing fees)

Ste2& i' the i+2o&itio' of c(&to+ d(tie& 1) -eclaration of goo s or articles ") 1ssessment by an appraiser) -etermine the value applying the sche ule of values state in the tariff rates an that is sub(ect to the approval of the 0ollector of 0ustoms) $) 8i#ui ation which may be: 3a) Partial E means the value cannot be promptly ascertaine ) 3b) /inal 6 meaning custom uties ha been ascertaine or finally etermine ) +f these uties are not pai by the taxpayer, the government or the B.0 has the power to impose the following a ministrative sanctions: 31) 3") 3$) Surcharges may be impose un er certain situations /ines may be impose un er certain situations Seizure or forfeiture

/orfeiture is the penalty , seizure is the reme y) Situations where goo s may be seize or forfeite by the government: 3a) 1rticles, vessels, aircraft may be the sub(ect matter of seizure if they are unlawfully use in the importation of foo s into the Philippines or exportation of goo s form the Phils) Ca&e: Nose ha a vessel, MF@ Maria @ictoria) +t was unlawfully use for the importation of cargo) <hen this was seize by the government, Nose raise the efense of goo faith) #eld 31) +t is an action irecte against the articles an in fact, the caption of the case is ,epublic of the Phils) vs) MF@ Maria @ictoria) +t is a procee ing in rem, so goo faith is not a efense) 3") ;ven if the vessel i not carry the contraban , that may be the sub(ect matter of seizure if the vessel facilities the importation of that contraban ) +t is not also re#uire that the vessel must come from the foreign country) Ca&e 0ruz was caught carrying a bul% of foreign currencies) *hese were seize by the government because she ha no license issue by the 0B to carry sai sum of foreign currency) #eld 0ruz must prove that she ha a license otherwise seizure was proper) *he bur en of proof lies on the importer) 3b) 3c) ;xcessive sea stores) Sea stores are the provisions of the vessel necessary for a ministration an maintenance) ;xcessive sea stores for aircraft) Sea stores must be in the place where it shoul be isplaye ) +f these are %ept in the cabin of the crew, these may be the sub(ect matter of seizure because these are consi ere excessive) >nlawful transfer of cargoes from one vessel to another before reaching the point of estination) >nmanifeste articles Prohibite articles -evices, receptacles ;nvelopes, boxes, trun%s

3 ) 3e) 3f) 3g) 3h)

51

3i) 3()

Beast *hing of value or money which is inten e to influence B+, officers)

Ta1 Re+edie& ('der the Tariff a'd C(&to+& Code Re+edie& 31) 1 ministrative or extra6(u icial 3") Nu icial Go,er'+e't 3a) ;nforcement of tax lien 3b) Seizure 3a) /iling of civil action 3b) /iling of criminal action if there is frau an it must be serious I+2orter 3a) *ax refun 3b) 1ban onement 3c) Protest 3a) 1ppeal to 0*1, 01, S0 3b) /iling of criminal action against erring 0ustoms officials

EN.ORCE0ENT O. TAX LIEN ReR(i&ite& 31) 3") 1rticles must neither be prohibite nor irregular *he articles must be in the possession of the B.0 +f the articles are prohibite or irregular, the reme y is seizure 1ban onment may be express or implie ) Ca&e& co4'iPa3le 3y the !OC 31) 3") Seizure cases on the part of the government an Protest case on the part of the importer

SeiP(re ca&e& *he issue here pertain to the vali ity of the importation because you may raise the efense that these are not prohibite importation) Prote&t *he issue here is the vali ity of the assessment or collection, or the vali ity of the classification of articles where customs uties are impose ) PROCEDURE IN PROTEST Re+edy 31) /ile a protest *here to file Collector of C(&to+& 6I&&(e& %hich +ay 3e rai&ed8 3a) @ali ity if the assessment or collection 3b) @ali ity of classification of articles Ruestions of fact or Ruestion of law Ruestion of fact or Ruestion of law Ruestion of fact or Ruestion of law Ruestion of law Pre&cri2ti,e Period 5< day& from the payment of 0ustoms uties <ithin 5< day& from receipt of the 0ollector?s ruling <ithin :E day& from receipt of the ecision of the 00) <ithin 5< day& from receipt of 0*1 ecision <ithin 5< day& from receipt of 01 ecision

3") +f protest is enie , A22eal collector?s ruling 3$) +f 00 affirm collector?s ruling, A22eal 3&) +f 0*1 affirm collector?s ruling, A22eal 32) +f 01 affirm 0*1, A22eal

C(&to+& Co++i&&io'er 300) CTA CA SC

TRANS.ER TAXES
ESTATES F TRUSTS ESTATE E refers to the mass of properties left by ece ent or testator to his heirs or beneficiaries)

5"

TRUST D is the right to the property, real or personal, exercise by one person for the benefit of another parties) Partie& to a Tr(&t a$ Tr(&tor or 4ra'tor " one who create the trust) 3$ Tr(&tee or fid(ciary E one who may hol the property for the benefit of other person %nown as 3e'eficiary$ Sometimes, the fi uciary is also the beneficiary) c$ !e'eficiary Z ;state may be the sub(ect to tax if it is un er a ministration) +t may only be un er a ministration or settlement if the properties of the ece ent are settle un er (u icial settlement) Z +f the estate is un er extra6(u icial settlement, it is not sub(ect to tax because that will not earn income consi ering that the heirs agree to settle the estate extra6(u icially) Z <hen we spea% of (u icial settlement, this may inclu e estate or intestate procee ings) Z Tr(&t +ay 3e &(3Oect to ta1 if the tr(&t i& irre,oca3le$ No'"ta1a3le tr(&t are 5$ Re,oca3le Tr(&t$ *he income here will be taxe insofar as the recipient of the same is concerne ) 9$ E+2loyeeS& Tr(&t$ So, if an employer establishes a pension trust for the benefit of the employees, that pension trust is not taxable) The tr(&t i& re,oca3le if the 2o%er to re,e&t the title to the 2ro2erty of the tr(&t i& ,e&ted 1) +n the grantor or in con(unction with other person who oes not have substantial a verse interest in the isposition of the property) ") +n any person who oes not have substantial a verse interest in the isposition of the property) Z +n irrevocable trust, you cannot transfer or revest the title of the property) Z C9o substantial interest in the isposition of the propertyD E he must not be the beneficiary) Z +f the properties of the estate is not veste in a business, so the heirs are (ust co6owners of the property, that is not taxable because co6ownership as a rule is not taxable) Z +f the heirs eci e to continue the business, such that the a ministrator may manage the same, that will become an unregistere taxable partnership) Z ;state an trust may be taxe on the same manner an on the same basis as in the case of in ivi ual taxpayers) S, they may claim the e uctions un er Section $& as long as these e uctions were pai or incurre in connection with the business of that estate or trust) Z ;state an trust are entitle to personal exemptions to P"J,JJJ) SPECIAL DEDUCTIONS (thi& ca' 3e ,alid of o'ly 3y e&tate a'd tr(&t) $) +n the case of estate, the executor or a ministrator may e uct the income istribute to the heirs uring the particular year when such estate is still un er settlement) &) +n the case of trust, the income may be istribute to the beneficiaries uring that year also be e ucte ) *he trustee or beneficiary may istribute the income or accumulate the income) *he trustee has the iscretion whether to istribute such income after the lapse of certain perio of time or year) +n the event that income of the trust is istribute to the beneficiary, this particular amount may also be claime as e uctions) Z -(e&tio' +f these are two 3") trust create by one trustor or grantor, how o we tax the income of that trustB Z A'&%er >n er the law, the taxable income of these two 3") trust may be consoli ate ) *hat trust shoul be taxe as if they constitute one trust) Z Sit(atio' 'rantor = create " trust) .ne is 1 an the other is B) *here is only one beneficiary name K) 8et us assume that the taxable income of trust 1 is P1J,JJJ) *he taxable income of B trust is P"J,JJJ) *he total taxable income is P$J,JJJ) <e will tax these " trust separately but through consoli ation) +n paying the tax after applying the applicable tax rate to the taxable income of P$J,JJJ, the tax ue shoul be apportione to trust 1 an B)

5$
So, for purposes of income tax, the taxable income of these " trust shoul be consoli ate , but for purposes of paying the tax, the tax ue shoul be apportione ) TRANS.ER TAXES Ta1e& +ay 3e i+2o&ed o' the o'ero(& tra'&+i&&io' of 2ro2ertie& or o' the 4rat(ito(& tra'&+i&&io'& of 2ro2ertie&$ Tra'&fer ta1e& that are i+2o&ed o' the o'ero(& tra'&+i&&io' of 2ro2ertie& 1) @1* 3value6a e tax) 3exclu e this "JJJ Bar) ") Percentage *ax 3also exclu e ) $) ;xcise *ax 3also exclu e ) Tra'&fer ta1e& i+2o&ed o' 4rat(ito(& tra'&+i&&io' of 2ro2ertie& are 1) ;state *ax ") -onor?s *ax ESTATE TAX E tax impose on the right or privilege to transmit properties upon eath of the ece ent or testator) DONORSS TAX E tax impose on the right or privilege to transmit properties gratuitously in favor of another who accepts the same) *his transmission of properties occurs uring the lifetime of the onor an the onee) ESTATE TAX NATURE O. ESTATE TAX +t is an excise tax since the sub(ect of the tax is the right or privilege to transmit properties an not the property itself) PURPOSES O. ESTATE TAX 1) *he primary purpose is to raise revenue in or er to support the government! ") *o supplement income tax! $) *o re uce excessive ine#ualities in wealth! meaning, to achieve social e#uality) CINDS O. ESTATE TAXPAYER 1) Re&ide't e&tate ta12ayer E inclu es citizen of the Phils), resi ent alien who ie in the Phils), an such alien, at the time of his eath, is a resi ent of the Phils)! ") No'"re&ide't e&tate ta12ayer E is limite to non6resi ent alien in ivi ual) [ ,eal properties, personal tangible properties an personal intangible properties of resi ent ece ent 3,-) are taxe wherever situate ) [ ,eal an personal tangible properties of non6resi ent ece ent 39,-) are taxable only if they are locate in the Phils) [ Personal intangible properties of 9,- are taxable only if they ac#uire tax situs in the Phils) [ Per&o'al i'ta'4i3le 2ro2ertie& that are dee+ed &it(ated or dee+ed to ha,e acR(ired Phil$ &it(& are 1) /ranchise which is exercise in the Phils) ") Shares of stoc%, obligation or bon s issue by omestic corporation or sociedad anonima $) Shares of stoc%, obligations or bon s issue by foreign corp) A2M of the business of which is con ucte in the Phils) &) Shares, obligations, bon s issue by a foreign corp) which ac#uire business situs in the Phils) Such shares, obligations or bon s or in any partnership, business or in ustry establishe in the Phils) if they are use by such foreign corp) in furtherance of its tra e or business) 2) Shares or rights in any partnership, business or in any partnership, business or in ustry establishe in the Phils) [ +f the personal intangible properties of a 9,- oes not belong to the above6mentione enumeration, they may not from part of his income or we may also apply the doctrine of mo%ilia se<untur personam! [ "obilia seDuntur personam7 accor ing to the Supreme 0ourt, is a mere fiction of law) So, it must yiel to the provision of law which provi es tax situs) -(e&tio' Suppose the personal intangible properties of 9,- ac#uire tax situs in the Phils), can this be exempt from estate taxB

5&
A'&%er K;S, by applying the rule on reciprocity) RULE ON RECIPROCITY D the foreign country of that 9,- oes not impose or allows exemption on estate tax on the properties of citizens of the Phils) who ie in that foreign country) *he phrase C oes not imposeD an Callows exemtionD are ifferent from each other) <hen we say C oes not imposeD, this means totally exempt) C1llows exemptionD means this may not cover all properties but only certain properties) Ca&e 0ountry of Morocco has no international personality or not) <hat is important is it allows or grants exemption from estate tax) ASec$ I<$ 9ross %state$ D *he value of the gross estate of the ece ent shall be etermine by inclu ing the value, at the time of his eath, of all property, real or personal, tangible or intangible, wherever situate ) Provi e , however, *hat in the case of a non6resi ent ece ent who at the time of his eath was not a citizen of the Philippines, only that part of the entire gross estate which is situate in the Philippines shall be inclu e in his taxable estate)D The co+2o&itio' of the 4ro&& e&tate +ay i'cl(de 5$ Decede'tS& I'tere&t$ 6 *he gross estate may inclu e the fruits an income of the properties an that may constitute the ece ent?s interest) 6 +n the case of parcel of lan , it may pro uce income in the form of harvest which harvest may form part of the gross estate) 6 +n the case of apartment, the rental on such apartment shoul also be inclu e , not only the value of the property) 9$ Tra'&fer 3y ,irt(e of 4e'eral 2o%er of a22oi't+e't 6 +t implies that if the transfer is ma e un er special power of appointment that shoul be exclu e from gross estate) 6 *he general power of appointment, the power is exercisable or in favor of the estate, executor, a ministrator or a cre itor of the estate) +f the power is exercisable other than these 3estate, a ministrator or cre itor of the estate), that may be consi ere as special power of appointment) :$ Re,oca3le Tra'&fer 6 +rrevocable transfer shoul be exclu e from gross estate) 6 ,evocable transfers are transfers which are sub(ect to alteration, termination, amen ment or mo ification by the ece ent) ;$ Tra'&fer for I'&(fficie't Co'&ideratio' 6 *he amount that may form part of the gross estate is the ifference between the /M@ of the property an the consi eration given) E1a+2le +f the property has a /M@ of P1JJ,JJJ an the consi eration given is only P2J,JJJ, the ifference of P2J,JJJ represents that insufficient consi eration) <$ Proceed& of Life i'&(ra'ce 2olicy$ 6 Proceed& of life i'&(ra'ce 2olicy +ay 3e i'cl(ded if a) $r person is irrevocably esignate is the estate executor, a ministrator or heirs of the ece ent b) the beneficiary esignate is a $r person who is revocably esignate as beneficiary 6 1) ") $) &) 6 Proceed& of life i'&(ra'ce 2olicy i& e1cl(ded fro+ the 4ro&& e&tate i' the follo%i'4 ca&e& $r person is irrevocably esignate as beneficiary procee s of group insurance policy procee s of acci ent insurance policy except if acci ent insurance policy has a characteristic Procee s of 'S+S 8ife +nsurance Policy Note: 1s regar s the estate executor, a ministrator or heirs as beneficiary, it is immaterial whether the esignation is irrevocable or revocable)

52

DEDUCTIONS .RO0 GROSS ESTATE DEDUCTIONS .RO0 T#E GROSS ESTATE 0AY !E 5$ Con(ugal e uctions 9$ Absolute e uctions :$ Exclusive e uctions I$ CON)UGAL AND A!SOLUTE DEDUCTIONS i'cl(de 1) /amily home ") Nu icial or funeral expenses $) 0asualty losses &) +n ebte nessFunpai claim against the estate 2) 1ccrue taxes 3before the eath of the ece ent) 4) Stan ar -e uction 5) Separation pay given to the heirs of ece ent on account of eath) Di&c(&&io' 5$ .a+ily ho+e7 sub(ect to the following con itions: a) there must be only one 31) family home! b) there must be certification issue by the Barangay 0aptain that the ece ent is a resi ent of an own that family home, in that particular locality! c) the amount that is e uctible or the /M@ of the family home shoul not be more than P1M! ) the /M@ of the family home is P2M, this shoul be inclu e in the gross estate of the ece ent) But when you claim e uctions, you can only claim up to P1M) 9$ ;xpenses which may be in the nature of O(dicial e12e'&e& or f('eral e12e'&e&$ +n the case of funeral expenses, the amount e uctible is the actual funeral expenses or the amount e uctible is limite only to P2JJ,JJJ! *here is no limitation as to amount with regar to (u icial expenses) 1s long as it is pai or incurre in connection with the preservation, a ministration or settlement of the estate, it may be claime as e uctions, (u icial expenses also inclu e extra6(u icial expenses)

:$ 8osses that may arise from casualty or ca&(alty lo&&e& such as fire, storm, shipwrec%, robbery, embezzlement, theft an other casualty losses) *hese losses must be sustaine not later than six 34) months after the eath of the ece ent) ;$ I'de3ted'e&& which parta%e of the nature of ('2aid clai+& a4ai'&t the e&tate$ *here must be supporte by notarize ocument) *hese obligations must be incurre within three 3$) years prior to the eath of the ece ent) 1nother in ebte ness which may be claime as e uction is claim against insolvent persons) :ere, the claimant is the ece ent) +n or er to be e uctible, this claim must be inclu e in the gross estate) <$ Ta1e& which must accr(e 3efore the eath of the ece ent) G$ Sta'dard Ded(ctio' *he amount is P1M) So, this may only be applie if the gross estate an the ece ent is more than P1M) H$ Se2aratio' 2ay is given to the heirs of the ece ent on account of eath) *he proce ure is to inclu e the amount in the gross estate an then claim this thereafter as e uctions) II$ EXCLUSI/E DEDUCTIONS *hese are e uctions against exclusive properties) The&e +ay i'cl(de (/P"CE) 1) O /a'i&hi'4 ded(ctio' ") Tra'&fer for 2(3lic (&e $) Other char4e& a4ai'&t e1cl(&i,e 2ro2erty &) E'c(+3ra'ce o' e1cl(&i,e 2ro2erty Di&c(&&io'

54

1) O /ANIS#ING DEDUCTION 6 is an allowable e uction against the exclusive property of the ece ent) 6 May be claime as e uction ('der the follo%i'4 co'ditio'& Death of the decede't %hich +(&t taLe 2lace %ithi' .I/E (<) YEARS fro+ the death of the 2rior i'cide't$ Sit(atio' 1 ie ) B is the heir) 9ow, you may recall that properties ac#uire through gratuitous title uring the marriage is classifie as exclusive property) .ne of the properties of 1 which forms part of his gross estate ha alrea y been taxe ) *his property will be transmitte to B by way of succession) +f B ie , ta%e note that one of his properties was ac#uire through inheritance from 1 an that is an exclusive property) *his property ha alrea y been taxe because that forms part of the gross estate of 1) again, this same property may be sub(ect to estate tax because this exclusive property forms part of the gross estate of B) *here seems to be ouble taxation) *hat is why, the purpose of vanishing e uction is to mitigate the harshness of ouble taxation) So, B may be entitle to that vanishing e uction which may re uce his estate tax) *he con ition set by law is that B must have ie within the five6year perio ) +f B ie 4 years after the eath of 1, B can no longer claim such vanishing e uctions) 3$ Ide'tity of Pro2erty So, there must be evi ence to the effect that this is the same property which forms part of he gross estate of 1) c$ I'cl(&io' of the 2ro2erty i' the 4ro&& e&tate of the 2rior decede't$ a$

d$ Pre,io(& ta1atio' *he estate of 1 which inclu e the property sub(ect of vanishing e uction ha been taxe ! meaning, that estate tax ha been pai by prior estate) e$ No 2re,io(& ,a'i&hi'4 ded(ctio'&$

-(e&tio' So, if B ie an the property is transmitte to 0, his heir, that property is also consi ere as exclusive property of 0 because it was ac#uire through inheritance) 0an 0 claim vanishing e uctionB A'&%er 9., because this ha alrea y been claime by B) Kou can only claim vanishing e uction at once) +f it is impossible that B ac#uire the property not through inheritance but through onation) -onor?s tax ha alrea y been pai ) *his is an exclusive property of B because un er the law, property ac#uire uring the marriage by gratuitous title is an exclusive property an forms part of his gross estate) 0an we apply this vanishing e uctionB K;S) :ere, B must have ie within 26year perio from the ate of onation) AcR(i&itio'& a'd tra'&+i&&io'& e1e+2t fro+ e&tate ta1 are 1) *he merger of usufruct in the owner of the na%e title ") *ransmission or elivery if the inheritance or legacy by the fi uciary heir or legatee to the fi eeeicommissary) $) *ransmissions of the property from the first heir, legatee or onee in favor of another beneficiary in accor ance with the esire of the pre ecessor) &) Be#uests, evises, legacies or transfers to social welfare, cultural an charitable institutions, no part of the net income of which inures to the benefit of any in ivi ual an not more than $JM of sai be#uests, evises, legacies or transfers shall be use by such institutions for a ministrative purposes) 9$ Tra'&fer for P(3lic U&e 6 *he onee must be the government or any political sub ivision) +t must be use exclusively for public use) :$ Other Char4e& A4ai'&t the E1cl(&i,e Pro2erty 6 So, if the property has been mortage with a ban%, we consi er that as unpai mortgage) ;$ E'c(+3ra'ce o' E1cl(&i,e Pro2erty /ALUATION O. T#E GROSS ESTATE 5$ Real Pro2erty

55
[ *he /M@ e#uivalent to the value as etermine by the B+, or zonal value an that of the value as etermine by the provincial or city assessor whichever is higher) 9$ Per&o'al Pro2erty a) Ta'4i3le Per&o'al Pro2erty D *he /M@ is e#uivalent to the selling price of the property) b) I'ta'4i3le Per&o'al Pro2erty D inclu es interest, shares of stoc%) 6 it must be the /M@ of the interest or shares of stoc% 6 +f the intangible personal property is account receivable, it shoul be Principal P88>S interest unpai upon the eath of the ece ent) 6 +f it is in the nature of usufruct, we must ta%e into consi eration the basic stan ar of mortality rate) TAX RE0EDIES 1ccor ing to the S0, government an taxpayers must stan on reasonably e#ual terms) Basically, the reme ies that may be availe of by the 'overnment or the taxpayer may be groupe into: a) 1 ministrative reme ies b) Nu icial reme ies +f the tax law is silent on a ministrative reme ies, the government may still avail of the usual a ministrative reme ies such as Di&trai't of personal property, or Le,y on real property) But that may be resorte to by the government in the collection of taxes are: a) Di&trai't of personal property b) E'force+e't of tax lien c) Le,y on real property$ -istrain an levy can only be one if 'otice is given) +f the tax law is silent on a ministrative reme ies, the taxpayer may still avail of the usual a ministrative reme ies of protest an refun for purposes of convenience an expe iency) +f the tax law is explicit on a ministrative reme ies, the taxpayer must observe the principle of exhaustion of a ministrative reme ies) >n er the *ax 0o e, if an assessment is ma e by the B+,, the reme y of the taxpayer is to protest first the assessment) +t is the ecision of the B+, on that ispute assessment that is being appeale to the 0*1) +n claiming for tax refun , the taxpayer have to file first a written claim for refun with the B+, 0ommissioner) E1ce2tio' to the Pri'ci2le of E1ha(&tio' of Ad+i'i&trati,e Re+edie& a) if it involves O(dicial R(e&tio'& b) if it involves di&re4ard& of d(e 2roce&& c) if it involves an ille4al act)

)(dicial Re+edie& +/ the tax law is silent on (u icial reme ies, the government can still avail of the usual (u icial reme y) ;xample: filing an action for collection with the court) +f the tax is silent on (u icial reme ies, the taxpayer may file a special civil action for eclaratory relief) But this oes not apply as far as the 98,0 or the *00 is concerne because these particular tax laws are explicit on this (u icial reme ies) +f the tax law is explicit on (u icial reme ies, the government shoul observe the provisions of the law) E1a+2le *he filing of an action for collection with the 0ourt must be approve by the B+, 0ommissioner) Di&ti'ctio' 3et%ee' the Di&trai't a'd Le,y Di&trai't of 2er&o'al 2ro2erty 1) *he sub(ect matter is personal property, stoc%s an securities, ban% accounts, ebts an cre its) ") +n the event that the taxpayer faile to pay the tax, the B+, will issue warrant of istraint) $) *he only re#uirement is posting of notice of sale in " public or conspicuous places &) +f the bi is not e#ual to the amount of tax liability, the B+, may purchase the property istraine for an in behalf of the government) 2) *here is no right of re mption 4) *here is that reme y of constructive istraint of personal property)

5A
Le,y of real 2ro2erty 1) *he sub(ect property is real property ") <hat is issue is in the nature of an authenticate certificate escribing the property an stating the name of the taxpayer as well as the amount ue $) ,e#uires not only posting but also publication of the notice of sale in a newspaper of general circulation in $ consecutive wee%s) &) +f the bi is not e#ual to the tax liability of there is no bi er, the B+, may forfeit such real property levie by the government) 2) *here is right of re emption within 1 year from the ate of sale plus 12M interest) 4) *here is no such reme y as constructive levy of property) Co'&tr(cti,e Di&trai't ca' o'ly 3e re&orted to ('der the follo%i'4 &it(atio' Code C$A$R$L$) 1) <hen a taxpayer cancels or hi es his property ") +f he performs any act which will obstruct the collection efforts of the B+, $) +f he is retiring from business sub(ect to tax &) <hen he is about to leave the Philippines ;nforcement of the tax lien: +f the taxpayer faile espite receipt of notice to pay the B+,, a lien is create against the properties of the taxpayer) +t is the iscretion of the B+, to avail itself of reme ies which may result in the expe itious collection of taxes)

Ca&e <hich is preferre , the claim of the government arising from tax lien or the claim of the wor%ers pre icate on the (u gment ren ere by the 98,0B #eld *he claim of the government arising from tax lien is superior to the claim of a private litigant pre icate on a (u gment) E1ce2tio' *he claim of the laborers may be superior un er 1rt) 11J of the 8abor 0o e when the employer was eclare ban%rupt of (u icial li#ui ation) O+n observing the provisions of the tax co e in regar to istraint or levy, the B+, cannot apply or invo%e the presumption of regularity in a ministrative procee ings) So, if the proce ure ha been #uestione by the taxpayer, it is not for the taxpayer to prove that the proce ures un er the 98,0 in regar to istraint on levy ha been complie with) ,evenue taxes are self6assessing taxes)

ReR(i&ite& of A&&e&&+e't 1) <ritten notice stating that the amount is ue as tax) ") <ritten notice must contain a eman for the payment of such tax) 1ssessment is not a con ition sine #ua non for purposes of collecting taxes) *his is so because eman is not re#uire ) *he rule un er 1rt) 114I of the 900 that eman is re#uire before a person may incur in elay cannot be applie ) *axpayer incurre in elay if he fails to pay the tax on ate fixe by *ax 0o e) 1ssessments, ma e by the B+, 0ommissioner are presume correct) *he presumption oes not violate the ue process un er the 0onstitution because the presumption is merely isputable) 9ormally, the B+, may re#uire the taxpayer to submit reports, ocuments, boo%s of accounts an other report to establish his tax liability) +n the absence of these reports, ocuments, etc), the B+, may etermine the tax liability by using other metho s) O*he B+, can etermine the tax liability of the taxpayer on the basis of that so6calle best evi ence obtainable in the absence of sai reports etc) +n one case, agents of the B+, use the boo%s of account seize as a result of rai by means of search warrant)

NET *ORT# OR IN/ENTORY 0ET#OD (al&o called Net I',e&ti4atory 0ethod)

5I
6 *his is another metho that may be employe by the B+, in etermining the tax liability of the taxpayer) *his is an expansion of that accounting principle, a&&et& le&& lia3ilitie& eR(al& 'et %orth)

A&&e&&+e't i& +ade %he' it i& +ailed7 relea&ed or &e't$ E1a+2le +f it was receive by the taxpayer in a particular ate 3-ec) 2, 1II5), you shoul count the prescriptive perio for ma%ing an assessment from the ate it was maile , release or sent by the B+, an not from the receipt of the notice of assessment by the taxpayer) *he assessment may be sub(ect to revision by the B+,) +f revise , the prescriptive perio will commence to run from the safe when such revise assessment is maile , release or sent) So, it is not from the ate the original assessment is maile etc) but from the ate the revise assessment has been maile ) *he ma%ing of assessment is prescriptible) The r(le i&7 the !IR +ay collect ta1e& %ith or %itho(t 2rior a&&e&&+e't$ PRESCRIPTI/E PERIOD .OR 0ACING AN ASSESS0ENT F COLLECTION +) ,eturn file is not false or frau ulent a) ,eturn was file but there exist a eficiency b) ,eturn was file but no payment has been ma e ++) /ailureF/alsifyF/rau ulent a) +ntentional failure to file a return b) /alse return c) /rau ulent return *ith 2rior a&&e&&+e't : year& fro+ the date of act(al fili'4$ +f it was file earlier than the ate fixe by the *ax 0o e) 0.88;0*+.9: <ithin : year& from the ate of assessment 5E year& fro+ the di&co,ery of such omission of failure, falsity or frau COLLECTION : year& from the ate of assessment) *axes may be collecte even without prior assessment an prescriptive perio is 5E year& from the iscovery of failure or omission, falsity or frau ) *itho(t 2rior a&&e&&+e't : year& fro+ the date of act(al fili'4 or from the last ay fixe by law for filing such return)

Note& *he rule is if prior assessment has been ma e, the B+, can avail of the a ministrative an (u icial reme y) But if without prior assessment, the B+, can only avail of the (u icial reme ies) ,eturn must be the one prescribe by the B+,) S., if you file your Boo%s of 1ccounts in lieu of that return, that oes not constitute return) PRINCIPLES GO/ERNING T#E .ILING O. AN ACTION .OR COLLECTION !Y T#E !IR Collectio' i& 2ro2er ('der the follo%i'4 &it(atio'& a) B+, assessment is consi ere final an executory, if no protest or ispute has been ma e by the taxpayer) +/ proteste by the taxpayer but he i not appeal, the B+, ecision on such protest, the effect is that the B+, ecision shall be consi ere final an executory) b) +/ he appeal the ecision of the B+, of the 0ommissioner to the 0*1 but he i not appeal the ecision of the 0*1 to 01, the ecision of the 0*1 shall be final an executory) c) +f he appeal to the 01 but the 01 ecision affirming that ecision of the B+, was not appeale to the S0, 01 ecision shall be final an executory) ) +f appeale to S0 but S0 affirm the ecision of the 01, S0 ecision is final an executory) +f the ecision of the B+, is final an executory, the assessment ma e cannot be #uestione ) *he issue of prescription can no longer be raise except if the B+, submitte the particular issue for the resolution of the 0ourt, that is consi ere as waiver on the part of the B+, an such issue of prescription may be sub(ect to resolution) *here is no provision in the *1= 0o e that prohibits the B+, from filing an action for collection even if the resolution on the motion for reconsi eration on the assessment ma e is still pen ing) <hen the case is pen ing before the 0*1, collection may also be ma e by filing of an answer to the petition for review with the 0*1) *his is tantamount to a filing of collection of tax) *his will also stop the running of the prescriptive perio for collection of taxes) 0ollection of taxes is prescriptible)

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GROUNDS .OR T#E SUSPENSION O. PRESCRIPTI/E PERIOD IN T#E COLLECTION O. TAXES 30o e: N$A$P$O$C$A$R$) 1) No property coul be allocate ! ") Agreement between the B+, an the taxpayer to the effect that the prescriptive perio shall be suspen e pen ing the negotiation! $) +f the B+, is Prohibite from a istraint or levy of real property! &) +f the taxpayer is Out of the Philippines! 2) +f the a ress of the taxpayer Cannot be locate ! 4) *he filing of an Answer to the petition for review execute by a taxpayer with the 0*1! 5) <hen a Re#uest for reinvestigation has been grante by the B+,) PRINCIPLES IN CRI0INAL ACTION 1) *he filing of an action re#uires the approval of the B+, 0ommissioner) 1lso, the filing of civil action re#uires the approval of the B+, 0ommissioner) B>* this is not (uris ictional) *his is merely a formal efect which can be cure ) ") *he purpose of filing criminal action is to impose statutory penalties) $) *he payment of tax liability oes not extinguish the criminal liability of the taxpayer arising from the violation of the provision of the *ax 0o e) *his is so because the civil liability arises from the failure of the taxpayer to pay an this oes not arise from felonious act) &) *he ac#uittal of the taxpayer from criminal liability oes not carry with it the extinguishments of civil liability) 2) *he penalty of subsi iary imprisonment applies only to the failure of the taxpayer to pay the penalties) But, the *ax 8aw is silent on the failure of the taxpayer to pay his eficiency or elin#uency tax) DE.ICIENCY /S$ DELIN-UENCY +n eficiency, the taxpayer file a return but the same was eficient) -eficiency is the ifference between the tax ue an the tax pai ) +n elin#uency, the taxpayer i not file a return)

.ALSE RETURN ,&$ .RAUDULENT RETURN +n the case of fal&e ret(r', this is a eviation from the truth) +t may be the result of mista%e, error, or negligence of the taxpayer) +t is not always intentional because it may be the result of an honest opinion of the 0P1) +n fra(d(le't ret(r', there is always the intent to efrau the government to eva e taxes) +t is always intentional an eliberate) 0riminal action may be suspen e if the taxpayer is absent from the Philippines) .I/E (<) year& D the prescriptive perio for filing a criminal action for violations of the provision of the *ax 0o e) +n the case of refusal to pay the tax, the 26year prescriptive perio will commence to run from the ate final notice or eman has been serve upon the taxpayer) 1s regar s violation of the *ax 0o e, if the violation is %nown the 26year prescriptive perio shall commence to run from the ate of the iscovery of the violation an the institution of (u icial procee ings for investigation an punishment) *he law uses the con(unction Can D) So, it will commence to run only from the time the B+, referre the case to the /iscal?s .ffice or 0ity Prosecutor) +n effect, it is always in the control of the B+,)

RE0EDIES O. T#E TAXPAYER B;/.,; P1KM;9*, the taxpayer may ispute or protest the assessment) :e ma also invo%e the power of the B+, 0ommissioner to compromise tax liability) +f you ,;0;+@;- 19 1SS;SSM;9* by the B+,, the reme ies are: a) /ile a re#uest for reconsi eration of the assessment or this is a claim for re6evaluation of the assessment base on the existing recor s) b) /ile a re#uest for investigation of the assessment 666 it is also a claim for a re6evaluation of the assessment on the basis of newly iscovere evi ence, or a itional evi ence that the taxpayer inten s to present in the reinvestigation)

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<:;,; *. /+8;: 3a) 7 3b) LLLLL B+, 0ommissioner +SS>;S which may be raise LLLLL Ruestion of law or fact or both #uestions of law an fact <:;9 LLLLLLLLLLLLLLLLLLLLLLL *ithi' :E day& from receipt of such assessment I. the reR(e&t for i',e&ti4atio' or reco'&ideratio' ha& 3ee' de'ied 3y the !IR 1) /ile a motion for reconsi eration of the ecision with the B+,! ., ") 1ppeal the ecision with the 0*1) OOO Motion for reconsi eration must raise new groun s, meaning groun s which have not been raise in that re#uest for reconsi eration or reinvestigation) .therwise, it is (ust a pro6forma motion, it will not suspen the perio within which to appeal the B+, ecision to the 0*1 which is $J ays from receipt of the B+, ecision) +SS>;S that may be raise on appeal with the 0*1 LLL Ruestions of 8aw or fact ., both If CTA affir+& the deci&io' of the !IR 1ppeal the 0*1 ecision to 01) ISSUES LLLLLLLLLLLLLLLLLLLLLLLLLLLLLL Ruestions of law *#EN QQQQQQQQQQQQQQQQQQQQQQQQQQQQQQ <ithin 12 ays from receipt of the 01 ecision *he taxpayer may, instea of filing a protest, file a written claim for refun ) RE-UISITES .OR .ILING RE.UND 1) *his must be file within the two 3") year perio from the ate of payment! ") *he fact of withhol ing must be proven! $) *his must be inclu e in the income tax return of the taxpayer! &) +t must be shown that the payment or the amount state in the return was receive by the government) <:;,; *. /+8; ,;/>9-: 666 B+, +SS>;S: 666 Ruestions of law or fact ., 666 both ., 666 the taxes are illegally or erroneously collecte ILLEGALLY COLLECTED TAX ,&$ ERRONEOUSLY COLLECTED TAX Ille4ally collected ta1 means it violates certain provision of the law) +t may not be authorize by a peculiar *ax 8aw or statute) Erro'eo(&ly collected ta1 means there may be a law passe but there was a mista%e in the collection) *#EN TO .ILE *ithi' 9 year& from the ate of payment L Payment must be proven in contemplation of *ax 8aw, there is payment when the tax liability is fully pai ) So, if it is payable in installment, there can only be payment when the final installment has been pai )