Académique Documents
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INCOME TAX
In general
Q1.What is an income?
Income means the gain derived from capital, from
labor, or from both combined, including profits gained
from dealings in property or as well as any asset
clearly realized whether earned or not.
It refers to all wealth which flows into the taxpayer
other than as a mere return on capital. (RR No.2)
Page | 1
Direct taxes are those taxes wherein both the tax liability as well
as the impact or burden of the tax falls on the same person
6
Progressive taxes are those taxes imposed where the tax rate
increases as the tax base increases
Q4.2. How
do
you
distinguish
schedular treatment from global
treatment as used in income
taxation?
Definition of Terms
Q5.Define the following terms:
In Section 22(A) to (I), (Z), (GG), and (HH), Tax
Code:
Person
Corporation
General
Professional
Partnerships
(GPPs)
Domestic
(Corporation)
Foreign
(Corporation)
Nonresident
citizen
Nonresident
alien
Resident
foreign
corporation
Nonresident
foreign
corporation
Ordinary
Income
Statutory
Minimum
Wage
Minimum
Wage earner
Dependent
Capital Assets
Net
Gain
Capital
Net
loss
Capital
which defines what capital assets are and those which are not.
are
considered
citizens
of
the
Non-resident citizens
Q9.Who is a non-resident citizen?
The term non-resident citizen means a citizen of
the Philippines:
1. who establishes to the satisfaction of the
Commissioner the fact of his physical
presence abroad with intention to reside
therein
2. who is an one who leaves the Philippines
during the taxable year to reside abroad
either as an immigrant or for employment on
a permanent basis
3. who is one who works and derives income
from abroad and whose employment thereat
requires him to be physically present
abroad most of the time during the taxable
year.
4. who has been previously considered a nonresident citizen and who arrives in the
Philippines at any time during the taxable
year to reside permanently in the Philippines
with respect to his income derived from
sources abroad until date of his arrival in
the Philippines
(See Section 22E, NIRC and Section 2, RR No. 0179 [January 8, 1979])
Corporations
Q11.
Q12.
Q12.2.1.
Q12.2.2.
A
group
of
insurance
companies in the Philippines
decided to form a pool and
entered into a reinsurance
treaty with a non-resident
reinsurance company. Is such
a pool subject to corporate
taxes and withholding taxes
on dividends paid to the nonresident
reinsurance
company?
Q12.3.1.
Q12.3.2.
Q12.2.3.
8.
9.
10.
11.
Annuities
Prizes and winnings
Pensions; and
Partners distributive share from the net
income of the GPP
16
Income15
Statutory Inclusions
Q13.
Rents
1. Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions and similar
items;
2. Gross income derived from the conduct of
trade or business or the exercise of a
profession;
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
14
It is also important to note in this BIR Ruling that the CIR held
that the allocation of saleable units does not constitute as a taxable
event as no income is actually realized by Avida or Aurora.
15
Previously, we looked into the types of taxpayers. Now, before
proceeding to general principles and source of income rules, let us
look into what is included in the term income; and what is
excluded therefrom.
16
Dividends
Q13.4. What are dividends?
The term dividends means any distribution made
by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders,
17
whether in money or in other property.
Q13.6.1.
10
Q13.8.2.
May
cancellation
or
forgiveness
of
indebtedness amount to a
gain subject to income tax?
Q13.8.3.
Inventories
Q13.9.1.
Exclusions
Q14.
21
23
The CIR shall not exercise this authority more often than every 3
years.
11
Q15.
24
ii.
pensions,
from
6. Certain
retirement
benefits,
gratuities, more particularly:
i.
7. Miscellaneous
including:
items,
likewise
exempt,
12
b.
c.
d.
e.
f.
g.
h.
Retirement benefits
Q15.1. What are the requirements to
exempt retirement benefits from
income tax?
For the retirement benefits to be exempt from income
tax, the taxpayer is burdened to prove the
concurrence of the following elements:
1. a reasonable private benefit plan is
maintained by the employer;
2. the retiring official or employee has been in
the service of the same employer for at least
ten (10) years;
3. the retiring official or employee is not less
than fifty (50) years of age at the time of his
retirement; and
4. the benefit had been availed of only once
5. The retirement plan must be submitted to
and
approved
by
the
BIR
(see
INTERCONTINENTAL
BROADCASTING
CORPORATION VS. AMARILLA [OCTOBER
29, 2006])
Q15.2. An
employer
maintains
an
employees trust to provide
retirement,
pension,
disability
benefits to its employees. The
trust made investments and
earned therefrom interest income.
Is it proper to subject the interest
income to withholding tax?
No. As held by the Supreme Court in CIR V. CA &
GCL RETIREMENT PLAN [M ARCH 23, 1992], said
retirement benefits received by officials and
27
13
De Minimis/PERA
Q15.6. What are de minimis benefits?
As defined by RR 3-98 [MAY 21, 1998], de minimis
benefits are benefits of relatively small value offered
or furnished by the employer to his/her employees as
a means of promoting the health, goodwill,
contentment, efficiency of his/her employees. These
benefits are exempt from the withholding tax on
compensation income, and consequently from
income tax, regardless of whether or not the
recipients of the benefits are managerial or rank-andfile employees.
Q15.6.1.
14
Q15.6.2.
Is the enumeration of de
minimis benefits exclusive?
28
General Principles
Q16. What are the general principles of
income taxation in the Philippines
(Section 23, Title II, NIRC)?
Except as otherwise provided in this Code, the
general principles are:
Resident
Citizen
Non-Resident
Citizen
15
Alien (whether
resident
or
non-resident)
Domestic
corporation
Foreign
corporation
Philippines
[By definition of a non-resident
citizen, this applies to an
overseas contract worker (a
citizen working and deriving
income from abroad)]
taxable only on income derived
from
sources
within
the
Philippines
taxable on all income derived
from sources within and outside
the Philippines
taxable only on income derived
from
sources
within
the
Philippines
(This applies whether the foreign
corporation is engaged or not in
trade or business in the
Philippines)
Interests
Dividends
Additionally, it must be noted that only a nonresident alien not engaged in trade or business in
the
Philippines
and
non-resident
foreign
corporations are taxed on gross income while all
other types of taxpayers are subject to tax on net
income (i.e. may claim deductions).
Rents and
Royalties
38
16
Sale
of
Real
Property
Sale
of
Personal
Property
39
17
Note that in this case, Baier-Nickel argued that the services were
done in Germany. However, she failed to prove hat such was the
fact. Thus, the services were deemed performed in the Philippines,
and, as such, is subject to income tax.
44
A use tax is a type of excised tax levied in the United States
upon otherwise "tax free" tangible personal property purchased by
a resident of the assessing state for use, storage or consumption
of goods in that state (not for resale), regardless of where the
purchase took place.
18
The Indian taxing authorities argued that this was a lookthrough provision a look through provision so that if there was a
transfer, of a capital asset, situated in India, it meant income from
capital gains accruing or arising outside India would be fictionally
deemed to accrue or arise in India.
49
The Indian Supreme Court also noted that the existence of the
Direct Tax Code Bill of 2010 which expressly stated that income
accuring even from indirect transfer of capital assets situated in
India would be deemed to accrue in India but this is not yet in
force.
19
Deductions
2. Deductions
from
business
and/or
professional income refers to the itemized
deductions in Section 34 (A) to (M) including
those deductible from compensation income,
which a self-employed individual or professional
engaged in the practice of a profession may
deduct.
3. Deductions from corporate income refers to
the itemized deductions in Section 34 (A) to (J)
which corporations (including partnerships other
than GPPs) engaged in trade or business are
authorized to claim
4. Special deductions refer to the deductions
allowed in addition to the itemized deductions
allowable to corporations which may be availed
of by insurance companies and proprietary
educational institutions and non-profit hospitals
as well as estates and trusts.
Business expenses
Q21. What are the requisites for deductibility
of business expenses?50
The requisites are:
1. The expense must be ordinary and
necessary
2. Paid or incurred during the taxable year
3. In carrying on the trade or business of the
taxpayer
4. Reasonable in amount
5. Substantiated by sufficient evidence
50
20
2. Republic Act
Development Act)
51
8502
(Jewelry
Industry
21
Name
some
revenue
regulations
implementing
special laws which provide for
deductible business expenses.
Are
litigation
deductible as a
expense?
expenses
business
22
Q21.5.1.
23
Q21.7. Are
bonuses
to
employees
allowable deductions from gross
income?
Yes provided that:
1. They are made in good faith
2. They are given for personal services actually
rendered
3. They do not exceed a reasonable
compensation for the services rendered
when added to the stipulated salaries.
Q21.7.1.
Is
there
a
ceiling
on
entertainment,
amusement
and recreational expenses?
24
25
Interest arbitrage
Q26. What is interest arbitrage?
Interest arbitrage results in the reduction of the
interest expense by a percentage of the interest
income subject to final tax. It is also defined as a
circumstance which is presumed to exist because by
putting excess funds in deposits/securities subject to
20% withholding, taxpayers are able to avoid the
32% tax which will happen if the same funds are
invested in revenue-generating activities.
53
26
Taxes
Q27. Are all taxes deductible from gross
income?
No. Section 34(C)(1) provides that all taxes, national
or local, paid or accrued during the taxable year in
connection with the trade or business or
profession of the taxpayer are deductible from
gross income except:
Note that at the time this case was decided, resident aliens were
still allowed to claim a tax credit. The present rule is that only
resident citizens and domestic corporations can claim a tax credit.
Also, in this case, their net income for foreign sources was zero
and, thus, there was no need to apply the tax credit.
27
2.
Losses
28
from
wash
sales
29
Q32.1. What are the rules on the carryover of net operation loss by a
taxpayer?
1. The net operating loss of the business or
enterprise for any taxable year immediately
preceding the current taxable year, which had not
been previously offset as deduction from gross
income shall be carried over as a deduction from
gross income for the next 3 consecutive taxable
years immediately following the year of such loss
2. Any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax
shall not be allowed as a deduction
3. A net operating loss carry-over shall be allowed
only if there has been no substantial change in
the ownership of the business or enterprise in
that
(a) not less than 75% in nominal value of
outstanding issued shares, if the business is in
the name of a corporation is held by or on behalf
of the same persons; or
(b) Not less than 75% of the paid-up capital of the
corporation. If the business is in the name of a
corporation is held by or on behalf of the same
persons.
Forex losses
Q33. Are
foreign
deductible?
exchange
losses
30
Bad Debts
Q34. What are bad debts?
Bad debts shall refer to those debts resulting from
the worthlessness or uncollectibility, in whole or in
part, of amounts due the taxpayer by others, arising
from money lent or form uncollectable amounts of
income from goods sold or services rendered.
by
actually
No.
In
PHILEX
MINING
CORPORATION
VS.
COMMISSIONER OF INTERNAL REVENUE [APRIL 16,
2008], the Supreme Court held that Philex cannot
deduct the amounts as bad debt. The agreement
31
Depreciation
Q35. What is depreciation?
Depreciation is the gradual diminution in the useful
56
value of tangible property resulting from wear and
tear and normal obsolescense.
The term is also applied to amortization of the value
57
of intangible assets, the use of which in the trade or
business is definitely limited in duration.
rationale
behind
32
33
Depletion
Q36. What is depletion?
Depletion is the exhaustion of natural resources like
mines and opil and gas wells as a result of production
or severance from such mines or wells.
34
Q37.3. What
is
a
organization?
Is an
international
NGO
qualified
to
be
granted
accreditation?
58
Q38.1. When
is
the
inapplicable?
above
rule
non-government
35
1. For individuals
a. If on accrual basis of accounting, the OSD
shall be based on gross sales
b. If on cash basis of accounting, the OSD shall
be based on gross receipts
c. Cost of sales and cost of services are not
allowed to be deducted for purposes of
determining the basis of the OSD
2. For corporations
a. It shall be based on gross income
60
36
Non-deductible expenses
Section 36, Tax Code
61
Q42.1. Are
margin
fees
business expenses?
deductible
61
37
income
tax
payable
62
63
38
Individuals
Ordinary and Passive Income
Q47. Differentiate ordinary
passive income.
income
from
For ordinary income over P10,000 but not over P30,000 and
upper brackets, a fixed amount is added to the taxable amount
subject to the graduated income tax rate.
65
Only difference really is the source of income
Q47.3.1.
39
Exceptions:
1. For royalties from books, literary works, musical
compositions, the final tax is 10%.
2. Prizes amounting to P10,000 or less shall form
part of ordinary taxable income and, subject, to the
graduated income tax rates.
Final tax in case of citizens, resident aliens and nonresident aliens engaged in trade or business is
66
20%.
In case of non-resident aliens not engaged in trade or
business, the amount received shall form part of their
67
gross income subject to flat 25% income tax.
Q47.3.2.
long-term
Deposit
substitutes
The
Q47.3.3.
68
66
40
Ordinary loss
Capital Assets
69
other
Derived by FCDUs:
all
derived
Net
Gain
Capital
Net
Loss
Capital
70
41
Dealer
securities
in
Bank
Non-bank
financial
institution
Quasi-banking
activities
42
The tax base shall only be the gain on the sale and
such sale will always be subject to capital gains tax
without any exemption.
The capital gains tax must be paid within 30 days
following each sale or disposition. In case of
installment sale, the return shall be filed within 30
days following the receipt of the first down payment
and within 30 days following the subsequent
installment payments.
(See RR 06-2008 [APRIL 22, 2008])
respect
to
property
made
by an
individual
43
to
the
Yes. The buyer can retain the amount for the capital
74
gains tax and pay it upon authority of the seller, or
the seller can pay the tax, depending on the
agreement of the parties.
The buyer has more interest in having the capital gains tax paid
immediately since this is a pre-requisite to the issuance of a new
Torrens title in his name.
75
Note Section 47 of the General Banking Act, judicial persons
whose property is being sold pursuant to an extrajudicial
foreclosure shall have the right to redeem the property until, but
not after, the registration of the certificate of foreclosure sale with
the Register of Deeds which in no case shall be more than 3
months after foreclosure
44
OCWs/Senior Citizens/Disabled
76
45
Personal
PERA
and
additional
77
Exemptions/
Q56.1. Which
kinds
of
individual
taxpayers can avail of personal
and additional exemptions?
Citizens and resident aliens are allowed personal
and additional exemptions; nonresident aliens
engaged in trade or business in the Philippines
are entitled to personal exemptions only by way of
78
reciprocity but not to additional exemptions.
78
46
rule
for
married
Are
illegitimate
considered
for
exemptions?
children
additional
Q54.1.3.
80
82
47
Corporations
Q63. Define taxable income and gross
income for purposes of corporate
income taxes.
Taxable
Income
Partnerships (GPPs)83
Q61. What is the tax treatment of a GPP?
The GPP as an entity is not liable for income tax.
However, the persons engaging in business as
partners in a GPP shall be liable for income tax only
in their separate and individual capacities for their
respective distributive share in the net income of the
GPP.
Gross Income
Domestic Corporations
Ordinary Income
Q64. What is the regular corporate income
tax imposed on corporations?
The rate of RCIT imposed on corporations is 30%.
84
83
84
48
subject
to
corporate
Passive Income
Q65. May the President allow domestic and
resident foreign corporations the option
to be taxed on their gross income?
Yes. As provided under Section 27(A)(1) and
Section
28(A)(1),
the
President
upon
recommendation of the Secretary of Finance may
allow domestic and resident foreign corporations the
option to be taxed at 15% of gross income after the
following conditions have been satisfied:
1. a tax effort ratio of 20% of the GNP
2. a ratio of 40% of income tax collection to total
tax revenues
3. a VAT tax effort of 4% of GNP
4. a 0.9% ratio of Consolidated Public Sector
Financial Position (CPSFP) to GNP
85
49
are
from
domestic
Domestic and resident foreign corporations are taxexempt as they are treated as inter-corporate
dividends. However, for resident foreign corporations,
they are subject to the 15% branch profit remittance
tax.
For non-resident foreign corporations, the dividend is
subject to:
1. Tax treaty rate, if applicable
2. 15% if no tax treaty but satisfies the tax-sparing
provision
3. 30% if no tax treaty and does not comply with the
tax-sparing provision
2. If the dividends are from a foreign corporation:
The income shall form part of the gross income of the
corporation but the situs of the income becomes
material except for a domestic corporation which is
taxed on worldwide income.
In general
Q70. What is the difference between a branch
and a subsidiary?
For purposes of taxation, a subsidiary is considered a
domestic corporation while a branch is a resident
foreign corporation.
86
50
International Carrier
Q72. For purposes of income taxation, what
is an international carrier?
An International carrier shall refer to a foreign airline
corporation doing business in the Philippines having
been granted landing rights in any Philippine port to
perform
international
air
transportation
services/activities or flight operations anywhere in the
world (see RR NO. 15-2002)
87
51
OBUs/FCDUs92
52
Regional
ROHQs
or
Area
Headquarters
and
Regional
Operating
Headquarters
(ROHQs)
53
54
the
non-resident
foreign
corporations whose income is subject to
preferential tax rates.
96
Such corporation shall pay a tax of 25% of its gross income from
sources within the Philippines
97
Such corporation shall be subject to a tax of 4.5% of gross
rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Marina
98
Such corporations shall be subject to a tax of 7.5% of gross
rentals of fees
55
400
200
120
120
80
120
Q80.2.1.
What
is
provision?
tax-sparing
This means that, at the end of the day, the foreign investor
would be paying the same total amount of taxes due to the foreign
country and the Philippines.
400
200
60
60
140
60
100
56
400
200
60
105
120
80
60
105
Q80.2.5.
106
57
Withholding Tax
In general
Q81. What is the withholding tax system?
The withholding tax system is a procedure through
which taxes (including income taxes) are collected.
58
obligation
to
Either when:
1. It is paid
2. It becomes payable (i.e. it is legally due,
demandable, or enforceable)
3. It is accrued as an asset or expense
In FILIPINAS SYNTHETIC FIBER CORPORATION V. CA
[OCTOBER 12, 1999], the Supreme Court stated that
the Tax Code is silent as to when the duty to withhold
taxes arises. In this case, to determine when the duty
to withhold the taxes arose, the Court inquired into
the nature of accrual method of accounting, the
procedure used by the taxpayer, and to the modus
vivendi of withholding tax at source come. It noted
that under the accrual basis method of accounting,
income is reportable when all the events have
occurred that fix the taxpayers right to receive the
income and the amount can be determined with
reasonable accuracy. Such method is allowed by law
in reporting incomes.
types
of
CWT
Taxes withheld on certain
income payments are
intended to equal or at
least approximate the tax
due of the payee on said
income.
Payee
of
income
59
is
The
payee
is
not
required to file an income
tax
return
for
the
particular income.
60
Q85.2. Since
CWT
is
but
an
approximation, what happens if
there is excess payment or
deficiency in payment?
Withholding on Wages
61
Q88. Are
backwages,
allowances
and
benefits awarded in a labor dispute
subject to withholding tax?
Yes. Backwages, allowances, and benefits awarded
in a labor dispute constitute remunerations for
services that would have been performed by the
employee in the year when actually received, or
during the period of his dismissal from the service
which was subsequently ruled to be illegal. The said
back wages, allowances and benefits are subject to
withholding tax on wages. (see RMC 39-2012
[August 3, 2012])
62
Withholding
Agencies
Tax
by
Government
Special Rules
Minimum Corporate Income Tax
Q90. What is the minimum corporate income
tax (MICT?)
A minimum corporate income tax of 2% of gross
income shall be imposed on a domestic
corporation and resident foreign corporation
beginning on the fourth taxable year immediately
following the year in which such corporation
commenced its business operations when:
1. the MCIT is greater than the RCIT for the taxable
year.
2. such operation has zero or negative taxable
income
(see Section 27(E), Section 28(A)(2), Tax Code and
RR 9-98 [August 5, 1998], as amended by RR 122007 [October 10, 2007])
63
RCIT
MCIT
112
Excess
MCIT
against
RCIT
This only shows that deductions are not taken into account in
MCIT.
113
This means that the term "gross income" will also include all
items of gross income enumerated under Section 32(A) of the Tax
Code, as amended, except income exempt from income tax and
income subject to final withholding tax
1998
50,000
1999
60,000
2000
100,000 (tax
to
be
115
paid)
75,000 (tax
to
be
114
paid)
100,000 (tax
to be paid)
60,000
25,000
40,000
114
64
119
65
66
Q91.9. Abbot-Phils,
a
domestic
corporation, is a wholly owned
subsidiary of Abbot-US, a nonresident
foreign
corporation.
Abbot-Phils claims that by virtue
of this, it is exempt from the IAET.
Is this contention correct?
Yes. In BIR RULING 25-02 [JUNE 25, 2002], the CIR
ruled that Abbot-Phils was exempt from IAET. Since
Abbott-Phils. is a wholly-owned subsidiary of AbbottUS, such shares will be considered as being owned
proportionately by the Abbott-US shareholders. The
ownership of a domestic corporation for purposes of
determining whether it is a closely held corporation or
a publicly held corporation is ultimately traced to the
individual shareholders of the parent company. Thus,
where at least 50% of the outstanding capital stock or
at least 50% of the total combined voting power of all
classes of stock entitled to vote in a corporation is
owned directly or indirectly by at least 21 or more
individuals, the corporation is considered publiclyheld corporation. As of the year-end 2000, Abbott-US
had 101,272 shareholders holding a combined
1,545,934,133 shares of common stock and the
twenty largest shareholders of Abbott-US as of
September 30, 2001 own an aggregate of 30.1
percent of Abbott-US' issued and outstanding shares.
Thus, Abbot-Phils is a publicly-held corporation
exempt from IAET.
6.
7.
8.
9.
10.
Housing;
Expense account;
Vehicle of any kind;
Household personnel, such as maid, driver and
others;
Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted;
Membership fees, dues and other expenses
borne by the employer for the employee in social
and athletic clubs or other similar organizations;
Expenses for foreign travel;
Holiday and vacation expenses;
Educational assistance to the employee or his
dependents; and
Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows.
67
How
is
the
grossed-up
monetary value of the fringe
benefit determined?
Transfer Pricing
Q93. What is transfer pricing?
It is the power of the CIR to distribute, apportion,
allocate, and shift income and expenses between
related taxpayers to reflect their true taxable income
or to prevent evasion of taxes.
At present, the Philippines does not have any
guidelines on transfer pricing unlike in other
jurisdictions. RMC 026-08 [March 24, 2008] states
that while the BIR is still revising the final draft of the
RR on transfer pricing, the BIR as a matter of policy
subscribes to the OECD Transfer Pricing Guidelines
in the interim.
126
68
Filinvest
Development
Corporation (FDC) extended
advances in favour of its
affiliate. The BIR assesses
FDC for deficiency income by
unilaterally imputing an arms
length interest rate on its
advances. FDC disputes this
by saying the CIR lacks
authority to impute theoretical
interest and the rule is that
interests cannot be demanded
in the absence of a stipulation
to that effect. Is FDCs
contention correct?
Special Entities
Proprietary Educational Institutions and
Hospitals
Q94. What is the tax treatment of proprietary
education institutions and hospitals
which are non-profit?
127
The arm's length interest rate shall be the rate of interest which
was charged or would have been charged at the time the
indebtedness arose in independent transaction with or between
unrelated parties under similar circumstances.
128
69
129
70
GOCCs
Q95. Are
GOCCs,
agencies
and
instrumentalities owned and control by
the government liable to pay income
tax?
All corporations, agencies, or instrumentalities owned
or controlled by the government shall pay such rate
of tax upon their taxable income except:
1.
2.
3.
4.
5.
GSIS
SSS
Phil Health
133
Local Water Districts
PCSO
133
Inserted by RA 10026.
The Court, however, made clear that PAGCOR remains to be
exempt from indirect taxes.
134
Exempt Corporations
Q96. What are the exempt corporations
enumerated in Section 30 of the Tax
Code?
1. Labor, agricultural or horticultural organization
not organized principally for profit
2. Mutual savings bank not having a capital stock
represented by shares and cooperative bank
without capital stock organized and operated for
mutual purposes and without profit
3. A beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or a mutual
aid association or a non-stock corporation
organized by employees providing for the
payment of life, sickness, accident, or other
benefits exclusively to the members of such
society, order, or association, or non-stock
corporation or their dependents
4. Cemetery company owned and operated
exclusively for the benefit of its members
5. Non-stock corporation or association organized
and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the
benefit of any member, organizer, officer or any
specific person
6. Business league, chamber of commerce, or
board of trade, not organized for profit and no
part of the net income of which inures to the
benefit of any private stockholder or individual
7. Civil league or organization not organized for
profit but operated exclusively for the promotion
of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution
10. Farmers or mutual typhoon or fire insurance
company, mutual ditch or irrigation company,
mutual or cooperative telephone company or like
organizstion of a purely local character, the
income of which consists solely of assessments,
dues, and fees collected from members for the
sole purpose of meeting its expenses; and
11. Farmers, fruit growers, or like association
organized and operated as a sales agent for the
purpose of marketing the products of its
members and turning back to them the proceeds
of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by
them.
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clubs
exempt
Q96.3. Are
all
the
activities
of
corporations enumerated in Q90
exempt from tax?
No. Notwithstanding that they are exempt
corporations, the income of whatever kind and
character of the organizations mentioned above from
any of their properties, real or personal, or form any
of their activities conducted for profit regardless of the
disposition made of such income shall be subject to
tax imposed under the Code.
If a non-stock, non-profit
educational
institution
charges tuition and other fees
for the different services it
renders, does the institution
lose its tax-exempt status?
72
135
73
A REIT
shall be subject to income tax on its
taxable net income defined in the Act as the pertinent
items of gross income less all allowable deductions,
less the dividends distributed by the REIT out of its
141
distributable income. In no case, shall the REIT be
subject to MCIT.
Note, however, that if the REIT (1) fails to maintain its
status as a public company as defined in the Act; (2)
fails to maintain the listed status of the investor
securities on the Exchange; and (3) fails to distribute
at least 90% of its distributable income, the income
tax shall be imposed on taxable net income not as
defined in the Act but as defined in the Tax Code.
Capital
assets/income
Assets/income
v.
Ordinary
140
74
142
75
Capital
Net
loss
Capital
76
Basis
of
Stocks
and
Securities
acquired
in
Wash Sales
Exchange
of
Exchanges)
Property
(Tax-Free
Definitions
2. The FMV as of the date of
acquisition if the same was
acquired by inheritance
3. If the property was acquired
by gift, the basis shall be the
same as if it would be in the
hands of the donor or the last
preceding owner by whom it was
not acquired by gift except if
such basis is greater than FMV
of the property at the time of the
gift then, for purpose of
determining loss, the basis shall
be such FMV;
4. If the property was acquired
for less than an adequate
consideration in money or
moneys worth, the basis of such
property is the amount paid by
the transferee for the property
5. The basis as defined in
paragraph (C)(5) of Section 40 if
the property was acquired in a
transaction where the gain or
loss is not recognized under
paragraph (C)(2) of Section
145
40.
Merger
or
Consolidation
144
77
Control
substantial
portion
of
the
property of the transferor,
property shall be taken to
include cash assets
Means ownership or stocks in a
corporaion possessing at least
51% of the total voting power of
all classes of stock entitled to
vote
as
tax-free
Merger or Consolidation
Q101.1. A,
B,
C
were
majority
stockholders of ABC Theatrical
78
Q101.6. What
are
the
differences
between a de facto merger and a
statutory (ordinary) merger?
In a de facto merger, the Transferor is not
automatically dissolved unlike in the case of a
statutory merger. Likewise, there is no automatic
transfer to the Transferee of all the rights, privileges,
and liabilities of the Transferor in the case of de facto
merger.
79
Assumption
Exchanges
of
Liability
in
Tax-Free
80
Business Purpose
Q101.12. A owns all the stock of ABC
Corp. ABC Corp. had 1,000
shares of XYZ Corp. A formed
a new corporation called DEF
Corp. A had ABC transfer all
1,000 XYZ shares to DEF. She
then
dissolved
DEF
and
liquidated the assets (the XYZ
shares). A then sold the XYZ
shares
and
paid
the
corresponding CGT based on a
lower cost basis. Is the transfer
valid?
.
Rulings
Q101.13. Is there a prescriptive period
for
rulings
issued
in
connection
to
tax-free
exchanges?
Yes. RMC 40-2012 [August 3, 2012] provides that
rulings issued under Section 40 (C) (2) of the NIRC,
as amended, shall be valid only for ninety (90) days
counted from the date of receipt of the ruling by any
of the parties to the exchange transaction. The
properties and shares of stocks involved in the
transfer should be conveyed to the transferee/s and
transferor/s, respectively, within this period.
81
Administrative Provisions
Accounting Methods
Q102. What are accounting methods that
may be used by taxpayers?
The methods are:
1. Cash Method a method of accounting
whereby all items of gross income received
during the year shall be accounted for in
such taxable year and that only expenses
actually paid shall be claimed as deductions
during the year
2. Accrual Method method of accounting for
income in the period it is earned, regardless
of whether it has been received or not.
Expenses are accounted for in the period
they are incurred and not in the period they
are paid.
3. Installment Method method of accounting
considered appropriate when collections of
the proceeds of sales and incomes extend
over relatively long periods of time and there
is strong possibility that full collection will not
be paid. As customers make installment
payments, the seller recognizes the gross
profit on sale in proportion to the cash
collected during the year. (see Section 49,
Tax Code)
4. Percentage of Completion Method
method of accounting applicable in the case
of a building, installation or construction
contract covering a period in excess of one
year, whereby gross income derived from
such contract may be reported upon the
Hybrid Method
Q102.1. Can
a
taxpayer
use
a
combination of two or more
methods of accounting?
No. The rule is that a taxpayer may use any one
method of accounting but not a combination of two or
more methods of accounting for each type of
business during the taxable year. The use of a hybrid
method of accounting is not allowed (see
CONSOLIDATED MINES VS. CTA [AUGUST 29, 1974])
Installment Basis
Q102.3. A sold lots to ABC Corp and was
paid less than 25%, the balance
was covered by 4 checks. On the
same day, the checks were
discounted (exchange for cash
at an amount lower than face
value) also ABC Corp. A reported
82
Accounting Period
Q103. What is the general rule for computing
the taxpayers taxable income?
The taxable income shall be computed upon the
basis of the taxpayers annual accounting period
fiscal year or calendar year as the case may be.
his
83
Individual Return
4. An individual who is exempt from income
tax
Where to file
Q107. Where will the income tax return be
filed?
The return shall be filed with the
1.
2.
3.
4.
When to file
Q108. When is the income tax return filed?
84
Where to pay
Corporation Returns
Q111. Who are required to file a corporate
return?
Every corporation, except foreign corporations not
engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly
income tax return and final or adjustment return.
147
The return shall be filed by the president, vicepresident or other principal officer, and shall be sworn
to by such officer and by the treasurer or assistant
treasurer.
85
Where to file
Q114. Where should the quarterly income
tax declaration and final adjustment
return be filed?
They shall be filed with the
1.
2.
3.
4.
When to file
Q115. When should the quarterly income tax
declaration and final adjustment
return be filed?
The corporate quarterly declaration shall be filed
within 60 days following the close of each of the first
here quarters of the taxable year.
The final adjustment return shall be filed on or before
th
th
April 15, or on on or before the 15 day of the 4
month following the close of the fiscal year, as the
case may be.
When to pay
Q116. When should the income tax due be
paid?
The income due on the corporate quarterly returns
and final adjustment income tax returns shall be paid
at the time the declaration or return is filed.
86
Return of GPPs
Yes. Although
Return of Receivers,
Bankruptcy or Assignees
Trustees
in
87
88