Académique Documents
Professionnel Documents
Culture Documents
Income Taxation
Page 1
Frequently Asked Questions
Survey of Bar Questions on Income Taxation for 2006 to 2016
Topic Frequency
Deductions from gross income 15
General principles of income taxation under Sections
12
22 and 23 of the Tax Code
Tax treatment of sale of real property (whether
9
subject to Capital Gains Tax or Ordinary Income Tax)
Rules on situs of income, particularly on income for
6
services rendered outside the Philippines
Personal and additional exemptions 5
Exclusions from gross income 5
Page 2
Frequently Asked Questions
Survey of Bar Questions on Income Taxation for 2006 to 2016
Topic Frequency
Tax treatment of sale of shares (whether subject to
Capital Gains Tax, Stock Transaction Tax or to 4
Ordinary Income Tax)
Accounting Period, including changes in accounting
2
period
Accounting for long-term contracts (percentage of
2
completion)
Tax treatment of interest income 2
General principles of withholding taxes 2
Double taxation 2
Page 3
New topics (2015 & 2016 Bar Examinations)
Topic
Minimum corporate income tax (MCIT) vs. Regular corporate
income tax (RCIT)
Tax credit certificates (effect to transferee of post-audit
disqualification)
Requirements on the filing of Income Tax Return (ITR)
Special taxation of hospitals
Sale-leaseback transaction
Page 4
Outline
Page 5
Philippine taxation overview
Page 6
Structure of Philippine tax system
Constitution
Philippine Taxes
Page 7
Philippine tax administration & adjudication
Supreme Court
Page 8
General principles
Page 9
What is income?
Page 10
Tests to determine whether income is
earned for tax purposes
Realization test Economic benefit test
(Severance test)
There is no taxable income until there Any economic or financial benefit
is a separation from capital of conferred on the employee as
something of exchangeable value, compensation, whatever the form or
thereby supplying the realization or mode by which it is effected. The
transmutation which would result in employee received "compensation for
the receipt of income. personal service" and hence, taxable
income in each year in which stock
(Eisner vs. Macomber, 252 U.S. 189, was acquired, through effective
as cited in Commissioner of Internal exercise of the option in that year, in
Revenue vs. Court of Appeals, Court the amount of the difference between
Of Tax Appeals and A. Soriano Corp, the option price and the then market
G.R. No. 108576. January 20, 1999) value of the stock.
(Commissioner vs. Smith, 324 U.S.
177, 1945).
Page 11
Tests in determining whether income is
earned for tax purposes
Claim of right doctrine (Doctrine of Ownership,
Command or Control)
A taxable gain is conditioned upon the presence of a claim of right to the
alleged gain and the absence of a definite unconditional obligation to return or
repay that which would otherwise constitute gain. Without some bona fide legal
or equitable claim, even though it be contingent or contested in nature, the
taxpayer cannot be said to have received any gain or profit.
(North American Oil v. Burnet, 286 U.S. 417, 1932, as applied in Commissioner
vs. Javier, G.R. No. 78953 July 31, 1991) applied in Ayala Hotels vs.
Commissioner of Internal Revenue, CTA Case No. 6002.
Page 12
Taxation of individuals
Sections 23 and 22, Tax Code
Foreign
Classification Basic Personal Additional
Taxable Income Tax Rates Tax
of Individuals Exemption* Exemption**
Credit
5% to 32%
Resident
Worldwide Allowed Allowed (Creditable Allowed
Citizen
tax)
5% to 32%
Non-resident
Philippine-source Allowed Allowed (Creditable Allowed
Citizen
tax)
5% to 32%
Not
Resident Alien Philippine-source Allowed Allowed (Creditable
Allowed
tax)
Page 13
Taxation of individuals
Sections 23 and 22, Tax Code
Foreign
Classification Basic Personal Additional
Taxable Income Tax Rates Tax
of Individuals Exemption* Exemption**
Credit
Non-resident
Alien 5% to 32%
Allowed Not
ENGAGED in Philippine-source Not Allowed (Creditable
(reciprocity) Allowed
trade or tax)
business
Non-resident
Alien NOT
25% (Final Not
ENGAGED in Philippine-source Not Allowed Not Allowed
tax) Allowed
trade or
business
Page 14
Taxation of individuals
Sections 23 and 22, Tax Code
Overseas contract worker is taxable only on income from sources within
the Philippines.
A seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad for a vessel engaged exclusively
in international trade shall be treated as an overseas contract worker.
Page 16
Taxation of corporations
Sections 23 and 22, Tax Code
Domestic corporation
Foreign corporation
Resident foreign corporation
Non-resident foreign corporation
Page 17
GENERAL PRINCIPLES
Recent jurisprudence/ BIR issuances
Taxability of salaries and emoluments received by ADB
employees who are resident citizens
CTA (First) Division Case 9075, promulgated February 9, 2017
Facts
Page 19
Taxability of salaries and emoluments received by ADB
employees who are resident citizens
CTA (First) Division Case 9075, promulgated February 9, 2017
Issue
Can the BIR subject to income tax the salaries and other
emoluments of resident citizens employed by ADB without
violating the ADB Charter?
Decision
Page 20
GENERAL PRINCIPLES
BAR Question and Answer
Page 21
GENERAL PRINCIPLES
BAR Question and Answer
Page 22
GROSS INCOME
Page 23
Gross income
Section 32 (A), Tax Code
Page 25
Gross income Cont.
Section 32 (A), Tax Code
The following gains, profits, and income are included in gross income:
Gains arising from expropriation of property which constitute income from
dealings in property;
Gambling gains and income derived from illegal business or from
embezzlement;
Compensation for damages if it represents payment for loss of expected
profits (BIR Ruling dated September 8, 1954; BIR Ruling dated
September 20, 1990).
The amount of debt, where the stockholder is indebted to a corporation
and the latter forgives such debt, because the transaction has the effect of
payment of dividend (Sec. 50, RR No. 02-40)
Bad debts previously charged-off but afterwards recovered (Sec. 102, RR
No. 02-40)
Taxes paid and subsequently refunded
Page 26
Situs of income: Philippine-source
Section 42, Tax Code
Page 27
Situs of income
Section 42, Tax Code
Page 28
Situs of income
Section 42, Tax Code
Gains, profits and income from Derived partly from sources within
the sale of personal property and partly from sources without the
produced (in whole or in part) by Philippines
the taxpayer without and sold
within the Philippines
Page 29
Capital vs. ordinary asset
Page 31
Sale of real property located in the Philippines
Page 32
Sale of real property located in the Philippines
Page 33
Sale of real property not located in the
Philippines
Page 35
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
RC, NRC, RA,
2. Long-term deposit or investment EXEMPT, if held for
NRA-ETB
5 years or more
in the form of savings, common or
individual trust funds, deposit Subject to 5%, 12%
or 20% if terminated
substitutes, investment before the 5th year
management accounts and other
investments evidenced by 25% FWT
[Sec. 25(B)of the Tax NRA-NETB
certificates in such form prescribed Code; RMC No. 7-2015]
by the BSP
30% RCIT
[Secs. 27(A) and
28(a)(1) of the Tax DC, RFC
Code; RMC No. 7-2015]
30% FWT
[Sec. 28(B)(1) of the
Tax Code; RMC No. 7- NRFC
2015]
Page 36
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
3. Deposits in a depository bank under 7.5% FWT RC, NRC,
the expanded foreign currency RA
deposit system (EFCDS) DC, RFC
EXEMPT NRA
NRFC
4. Foreign currency loans granted 10% FWT RC, RA
by FCDUs to residents other than DC, RFC
OBUs in the Philippines or other
depository banks under EFCDS
Page 37
Taxation of interest income
Revenue Regulations No. 014-12
Interest Income From Tax Rate Payee
5. Foreign currency loans granted 10% FWT RC, RA
by OBUs to residents other than DC, RFC
OBUs or local commercial banks,
including local branches of foreign
banks that may be authorized by
the BSP to transact business with
offshore banking units
6. Foreign currency loans contracted 20% FWT NRFC
on or after August 1, 1986
Legend:
RC Resident Citizen DC Domestic Corporation
NRC Nonresident Citizen RFC Resident Foreign Corporation
RA Resident Alien NRFC Nonresident Foreign Corporation
NRA-ETB Nonresident Alien Engaged in Trade or Business
NRA-XTB Nonresident Alien Not Engaged In Trade or Business
Page 38
GROSS INCOME
Recent jurisprudence/ BIR issuances
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax
On the other hand, BIR alleged that the royalty payments received by
Iconic is subject to the regular corporate income tax of 30%
considering that the payments resulted from the active conduct of
trade or business.
Page 40
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax
Ruling:
Royalties received not passive income and subject to the 30% regular
corporate income tax.
Page 41
Royalty income generated from the active pursuit and
performance of the corporations primary purpose is subject
to regular corporate income tax
The 20% FWT provided under Section 27(D) of the Tax Code pertain
to certain passive income.
Iconic has (1) no operating expenses incurred for its alleged main
trade or business; (2) no other sources of income other than royalty
and interest; and (3) cash flows from its operating activities consist
only of royalty and interest income.
Page 42
GROSS INCOME
BAR Question and Answer
Page 43
GROSS INCOME
BAR Question and Answer
Page 44
Exclusions from gross income
Page 45
Rationale for the exclusions
Page 46
Exclusions vs. deductions vs. tax credit
Exclusions Deductions
Tax Credit
Section 32(B) Section 34
Amounts earned or received Amounts spent or paid in Amounts allowed as
by the taxpayer but do not the process of earning deduction from the tax due
form part of gross income gross income in the form of withholding
tax on wages, rents and
other creditable withholding
taxes and foreign income
tax paid or accrued
Pertain to the computation Pertain to the computation Used in computing income
of gross income of net income tax payable
Not part of gross income Deducted from gross Deducted from income tax
because: income to arrive at the due to arrive at the income
1. Represents return of taxable income by express tax payable by the taxpayer
capital provision of the Tax Code
2. Subject to another kind
of internal revenue tax
3. Exempted by the
Constitution, by statute
or by a tax treaty
Page 47
Exclusions from gross income under the
Constitution
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets
shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those
cooperatively owned, may likewise be entitled to such
exemptions, subject to the limitations provided by law,
including restrictions on dividends and provisions for
reinvestment.
Section 4(3), Article XIV of the 1987 Constitution
Page 48
Exclusions from gross income under the
Constitution Cont.
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
directly, and exclusively for educational purposes shall
be exempt from tax.
Section 4(3), Article XIV of the 1987 Constitution
Page 50
Exclusions from Gross Income
Section 32 (B), Tax Code
Page 51
Taxpayer not deprived of treaty benefit for
failure to follow the 15-day requirement
Deutsche Bank AG Manila Branch vs. CIR
Supreme Court (1st Division) G.R. No. 188550 promulgated August 19, 2013
The denial of the tax treaty availment for failure to apply within the 15-
day period would impair the value of the tax treaty.
At most, the application for a tax treaty relief from the BIR is merely
confirmatory. The BIR must not impose additional requirements that
would negate the availment of the reliefs provided for under
international agreements.
Page 52
EXCLUSIONS FROM GROSS INCOME
Recent jurisprudence/ BIR issuances
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities
CIR vs. St. Lukes Medical Center, Inc. G.R. No. 195909; G.R. No.
195960 promulgated September 26, 2012
Page 54
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities
Ruling:
No. Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) & (G).
Section 27(B) on one hand, and Section 30(E) and (G) on the other
hand, can be construed together without the removal of such tax
exemption.
Page 55
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities
Ruling:
Page 56
A Proprietary Non-profit Hospital is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities
I s St. Lukes liable for deficiency income tax under Section 27(B)?
Ruling:
Facts
St. Lukes
Medical Center
(SLMC)
CIR
Charitable nonprofit
organization exempt from Proprietary hospital subject
income tax. [Sec 30(E)/(G) to 10% income tax. [Sec.
of Tax Code] 27(B) of Tax Code]
Page 58
Taxability of St. Lukes Medical Center
GR No. 203514 dated February 13, 2017
Issue #1
Decision
Page 59
Taxability of St. Lukes Medical Center
GR No. 203514 dated February 13, 2017
Issue #2
Decision
Good faith
No Honest belief
Page 60
The revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.
Facts:
DLSU is a NSNP domestic educational institution. BIR assessed
DLSU for deficiency income tax derived from rental income on
restaurants and bookstores.
Page 61
The revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.
Issue:
Is DLSUs rental income exempt from income tax?
Ruling
Page 62
Revenues and assets of NSNP educational institutions used
actually, directly, and exclusively for educational purposes shall be
exempt from taxes and duties.
The rental revenue from canteens and bookstores are specifically used to
pay DLSU's promissory note to Philippine Trust Company, the loan used
in the construction of the University Physical Education Sports Complex
and repairs and renovation of the physical assets. It has a policy to obtain
funding for all disbursements for educational purposes primarily from
rental revenue earned from its lease contracts.
Page 63
Taxability of government educational institutions
BIR Ruling No. 259-2017 dated May 29, 2017
Facts
Issue
Page 64
Taxability of government educational institutions
BIR Ruling No. 259-2017 dated May 29, 2017
Ruling
Page 65
Exclusion from 13th month pay and other benefits increased
to PhP82,000
Page 67
EXCLUSION
BAR Question and Answer
b) May Mr. A's prize money qualify as an exclusion from his gross
income? Why? (2%)
c) The US already imposed and withheld income taxes from Mr. A's
prize money. How may Mr. A use or apply the income taxes he paid
on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (4%)
Suggested Answer:
Page 69
EXCLUSION
BAR Question and Answer
b) May Mr. A's prize money qualify as an exclusion from his gross
income? Why? (2%)
Suggested Answer:
b) No, prizes and awards that may be excluded from the computation
of gross income are those received from authorized sports
competitions, which do not include a professional boxing match.
Page 70
EXCLUSION
BAR Question and Answer
c) The US already imposed and withheld income taxes from Mr. A's
prize money. How may Mr. A use or apply the income taxes he paid
on his prize money to the US when he computes his income tax
liability in the Philippines for 2013? (4%)
Suggested Answer:
Page 71
Deductions from gross income
Page 72
General rules
Substantiation requirements
Page 73
Deductions from gross income
Page 74
Itemized deductions
Ordinary and necessary expenses
Interest
Taxes
Losses
Bad debts
Depreciation of property
Depletion of oil and gas wells and mines
Charitable and other contributions
Research and development
Pension trust contributions of employees
Premium payments on health and/or hospitalization
insurance
Page 75
Ordinary and necessary trade, business or
professional expenses
Page 76
Ordinary and necessary trade, business or
professional expenses Cont.
Page 77
General rules
Additional requirement relating to withholding
Page 78
Interest Expense
Page 79
Interest Expense Cont.
Page 80
Interest Expense Cont.
Page 81
Taxes
Page 82
Losses
Page 84
Net operating loss carry-over
Illustration:
Gross income Deductions NOLCO
2012 100,000 200,000 (100,000)
2013 150,000 300,000 (250,000)
2014 250,000 100,000 ?
Page 85
Bad debts
Page 86
Depreciation of property
Page 88
Charitable and other contributions Cont.
Page 89
Research and development
Page 90
Pension trust contributions of employees
Page 91
Premium payments on health and/or
hospitalization insurance
Page 92
Optional Standard Deduction (OSD)
Page 93
Optional Standard Deduction (OSD)
(R.A. No. 9504 or the An Act Amending Section 22, 24, 34, 35, 51,
And 79 Of Republic Act No. 8424, As Amended Otherwise Known As
The National Internal Revenue Of 1997)
Page 94
Optional Standard Deduction
Illustrative Example in Determining the basis of the 40% OSD for
Corporations
Personal exemptions
An arbitrary amount allowed by law to cover the personal, living or
family expenses of the taxpayer.
Kinds:
Basic personal exemption - PhP50,000 for each individual
taxpayer, whether single, married or head of the family.
Additional exemption PhP25,000 per dependent child, but not
to exceed four (4)
(R.A. No. 9504 or the An Act Amending Section 22, 24, 34, 35, 51, And
79 Of Republic Act No. 8424, As Amended Otherwise Known As The
National Internal Revenue Of 1997)
Page 96
Basic personal and additional exemptions
Cont.
Who is a dependent for purposes of claiming
additional exemptions?
1. A taxpayers child, whether legitimate or illegitimate or legally
adopted child
2. Chiefly dependent for support upon the taxpayer
3. Living with the taxpayer
4. Not more than 21 years old, unmarried and not gainfully
employed; OR regardless of age, is incapable of self-support
because of mental or physical defect.
Page 97
Basic personal and additional exemptions
Cont.
Who may claim personal exemptions?
1. Citizens (whether resident or non-resident)
2. Resident aliens may avail of basic personal and additional
exemptions
3. Non-resident aliens engaged in trade or business may avail of
basic personal exemption only by way of reciprocity.
Limit of basic personal exemption allowed: An amount equal to
the exemption allowed by the non-resident aliens country to
Filipino citizens not residing therein but deriving income
therefrom, but not to exceed the amount fixed by the Tax Code.
Page 98
Basic personal and additional exemptions
Cont.
Status at the end of the year rule
The status of the taxpayer at the end of the calendar year shall be
used for determining his personal and additional exemptions.
A change of status of the taxpayer during the taxable year
generally benefits, but does not prejudice him.
Page 99
DEDUCTIONS
Recent jurisprudence and BIR issuances
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.
Page 101
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.
2. Annual ITR for 2005 shows that PhP1,890,604.00, accrued bonus, was deducted
from the net income per books for 2005, hence, an additional expense, to arrive at
the taxable income/loss for the year 2005.
Issue:
Page 102
Under the accrual method of accounting, expenses not claimed as
deductions in year incurred cannot be claimed as deduction from
income for the succeeding year.
Reason:
1. Income, in a broad sense, means all wealth which flows into the taxpayer other
than as return of capital. The accrual of the PhP1,890,604.00 bonus due to
employees does not involve an inflow of wealth.
3. Acer is liable for deficiency income tax on the overclaimed salaries and allowances
of PhP1,887,603.30 for taxable year 2005.
Page 103
Taxpayer should signify in its ITR the intention to elect the optional
standard deduction (OSD) to avail of the 40% standard deduction
Section 34(L) of the Tax Code dictates that the taxpayer should signify
in its return the intention to elect the OSD. Otherwise, it shall be
considered to have availed of the other deductions allowed in Sec. 34
of the Tax Code.
Page 104
DEDUCTIONS
BAR Question and Answer
UU has a famous chapel located within the campus where the old folks used to
say that anyone who wanted to pass the medical board examinations should
offer a dozen roses on all the Sundays of October. This was what Dr. Taimtim
did when he was still reviewing for the board examinations. In his case, the folk
saying proved to be true because he is now a successful cardiologist. Wanting
to give back to the chapel and help defray the costs of its maintenance, Dr.
Taimtim donated P50,000.00 to the caretakers of the chapel which was
evidenced by an acknowledgment receipt.
In computing his net taxable income, can Dr.Taimtim use his donation to the
chapel as an allowable deduction from his gross income under the National
Internal Revenue Code (NIRC)? (4%)
Suggested Answer:
No, Dr.Taimtim may not use his donation to the caretakers of the chapel as an
allowable deduction from his gross income.
Contributions which may be deductible under the NIRC are those given to
accredited domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to nongovernment organizations, and provided that the
net income of such institution does not inure to the benefit of any private
stockholder or individual.
Page 107
Accounting Period
Taxable year
Calendar year or the fiscal year ending during such calendar year,
upon the basis of which the net income is computed. (Section
22[P] of the Tax Code)
Fiscal year
An accounting period of twelve (12) months ending on the last day
of any month other than December. (Section 22[Q] of the Tax
Code)
Page 108
Accounting Period
Page 109
Accounting for Long-Term Contracts
Long-term contracts
Refers to building, installation or construction contracts covering a
period in excess of one (1) year.
Percentage of completion
An accounting method for persons whose gross income is derived
in whole or in part from long-term contracts shall report such
income upon the basis of percentage of completion.
The return should be accompanied by a certificate of architects or
engineers showing the percentage of completion during the
taxable year of the entire work performed under contract, subject
to deductions for all expenditures made during the taxable year on
account of the contract. (Section 48 of the Tax Code)
Page 110
Income Tax Return
Page 111
Income Tax Return Cont.
Page 112
Income Tax Return Cont.
Page 113
Income Tax Return Cont.
Page 115
Income Tax Return Cont.
Page 116
Income Tax Return Cont.
Page 117
General principles on withholding tax
Page 118
General principles on withholding tax
Page 119
Minimum Corporate Income Tax (MCIT)
MCIT imposed:
On domestic and resident foreign corporations
Whenever such corporation has zero or negative taxable
income or
Whenever the amount of MCIT is greater than the
Regular Corporate Income Tax (RCIT)
Beginning on the 4th year immediately following the year
of start of commercial operation
Page 120
Minimum Corporate Income Tax
Tax Rate: 2%
Page 121
Improperly Accumulated Earnings Tax
Exceptions:
- Banks and other non-bank financial intermediaries
- Insurance companies
- Publicly-held corporations
- Taxable partnerships
- General professional partnerships
- Non-taxable joint ventures
- Entities duly registered with PEZA, BCDA, and other special economic zones
which enjoy payment of special tax rate on their registered operations
Page 122
Improperly Accumulated Earnings Tax
Page 123
OTHERS
BAR Question and Answer