For Income to be Taxable 1. There must be GAIN 2. It must be REALIZED or RECEIVED, actually or constructively 3.

It must NOT be EXCLUDED by law or by treaty Examples of NOT INCOME 1. Money held in TRUST 2. Increase in the value of the property prior to disposition 3. Deposit without interest 4. Proceeds are mere return in capital 1. COMPUTATION OF TAXABLE INCOME Individual earning PURELY COMPENSATORY INCOME Gross Compensation Personal & Additional Exemption Premium payments on health or hospital insurance (P2400/year) TAXABLE INCOME Individual DOING BUSINESS Gross Revenue/Sales Cost of Sales GROSS INCOME Allowable Deductions Personal & Additional Exemption TAXABLE INCOME Domestic or FC doing business Gross Revenue/Sales Cost of Sales GROSS INCOME Allowable Deductions TAXABLE INCOME SITUS OF TAXATION The place or authority that has the right to impose and collect taxes Interest Compensation for personal services Rent and royalty Gain from sale of real property Gain from sale of personal property Residence of the debtor Place of performance Location of the property Place of Produced here and Sold without Produced without and Sold here Taxpayer sells it abroad through a sales office Produced here and Sold here sale Partly within, partly without Minimum Corporate Income Tax (MCIT) In General Optional Gross Income Taxation

Gain from sale of shares of stock of DOMESTIC CORPORATION Dividend income

Purchased without and sold within Purchased within and Sold within Purchased within and Income without Sold without Regardless of place of sale, it is Philippine source From DC From FC Income Income within the Philippines IF within the more than 50% corporations Philippines worldwide income is derived from Philippine sources

TAX ON CORPORATIONS DOMESTIC CORPORATIONS 30% of TAXABLE INCOME from ALL sources 15% of GROSS INCOME Election of such will be irrevocable for 3 consecutive taxable years Gross Sales Sales returns, discounts and allowances Cost of goods sold GROSS INCOME For sale of service: Gross Receipts Sales returns, discounts and allowances GROSS INCOME 2% of GROSS INCOME *same Gross Income computation as with Optional Gross Income Taxation When applied: a. Beginning on the 4th taxable year immediately following the year in which such corporation commenced its business operation b. The computation of MCIT is greater than the regular taxable income c. Where corporation has zero or negative taxable income To whom applied: a. Domestic corporations b. Resident Foreign corporations Taxation I P a g e |1

2.

3.

Income within

Carry-over of Excess MCIT: Excess of MCIT over the regular income tax shall be carried forward and credited against regular income tax for the succeeding 3 years when regular income tax is higher than MCIT MCIT may be suspended by the Sec. of Finance on 1. Prolonged labor dispute 2. Force majeure 3. Legitimate business reverses Exempted from MCIT: a. RFC international carrier b. RFC offshore banking unit c. RFC regional operating headquarters d. Those under Economic Zones 10% of IAET of domestic and closely-held corporations Closely-held Corporations a. Those at least 50% in value of the outstanding capital stock, or b. At least 50% of total combined voting power of all classes of stock c. Owned directly or indirectly by not more than 20 individuals Prima facie evidence of IAET: 1. Corporation is a mere investment company holding company or Non-profit and nonstock education institutions

Those considered as reasonable needs: 1. Allowance for increase of accumulated earnings up to 100% of paid-up capital 2. Earnings reserved for expansion, improvement and repairs as approved by Board of Directors 3. Earnings reserved for compliance with any loan or obligation established under a legitimate business agreement 4. In case of subsidiaries of foreign corporation, reserved or intended for investments in the Philippines 5. Those required by law to be retained 6. Anticipated losses or reverses in business Corporations NOT COVERED by IAET: a. Banks and other financial institutions b. Insurance companies c. Publicly held corporations d. Taxable partnerships e. General Professional Partnerships f. Non-taxable joint ventures g. Those registered in Economic Zones 10% of TAXABLE INCOME on related 30% on ENTIRE trade, business or activity except TAXABLE INCOME IF on certain PASSIVE INCOMES gross income from unrelated trade, Private educational institutions are business or activity exempt from VAT exceeds 50% of total income EXEMPT from tax on revenues and assets ACTUALLY, DIRECTLY and EXCLUSIVELY used for educational purposes Liable a. b. c. GSIS / SSS / PHIC / PCSO / Local Water District Corporation EXEMPT from taxation under Section 30 Incentives to Registered Enterprises under Investment Priorities Plan Taxation I for taxes on: Income derived from any of their real properties Any activity conducted for profit Interest income from any bank deposits and foreign currency deposits EXEMPT Subject to INCOME TAX on their income from a. Any of their properties, real or personal b. Activities conducted for profit regardless of the disposition made of such income Income Tax Holiday Pioneer firms 6 years from commercial operation Non-pioneer firms 4 years from commercial operation P a g e |2

Improperly Accumulated Earnings Tax (IAET)

Non-Profit Proprietary educational institutions hospitals

and

Holding company corporation having practically no activities except holding property and collecting income therefrom 2. Earning or profits of corporation are permitted to accumulate beyond the reasonable needs of the business Exception: The use of undistributed earnings and profits for REASONABLE NEEDS of the BUSINESS a. Immediate needs of the business b. Reasonably anticipated needs 3. 4. 5. Substantial investment of earning in an unrelated business Investment in bonds and other long term securities Accumulation of earnings in excess of 100% of paidup capital

Newly registered firms fully exempt from income taxes (all above can be extended for more than 1 year but no registered firm may avail of this for a period exceeding 8 years) Registered expanding firms exempt for 3 years from commercial operation (no extension is allowed) 1st 5 years from registration 50% of the wages

For a flight which originates in the Philippines and transshipment takes place in any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of GPB When not applicable: 1. To domestic corporations like PAL or CebuPac 2. Offline carriers those who have no landing rights in the Philippines If selling tickets in the Philippines, income from such shall be subject to regular income tax of a resident foreign corporation 3. 2.5% on GROSS PHILIPPINE BILLINGS 10% FINAL TAX of EXEMPT any interest Income derived by OBU from income derived foreign currency transactions from foreign from currency loans a. non-residents granted from b. other OBU residents c. local commercial banks d. branches of foreign banks authorized by BSP to transact with OBU EXEMPT 10% on TAXABLE INCOME

Additional deduction for labor expense Special Zone Economic

The above is doubled if the activity is located in less developed areas In lieu of taxes, 5% of the Gross Income shall be remitted to the national government RESIDENT FOREIGN CORPORATIONS

International Shipping Offshore Banking Units

In General Optional Gross Income Taxation Minimum Corporate Income Tax (MCIT) Brach Profit Remittance

Same with Domestic Corporations except it will be based on INCOME sourced WITHIN the Philippines 15% of the total profits applied for remittance or earmarked for remittance without any deduction for the tax component Remittance by a branch to its head office except those registered in Economic Zones What is not included: Any income from sources not connected with the conduct of its business in the Philippines 2.5% on GROSS PHILIPPINE BILLINGS (GPB) GPB: Gross revenue derived from a. Carriage of persons, excess baggage, cargo and mail b. Originating from Philippines c. In a continuous and uninterrupted flight d. Irrespective of the place of sale and the place of payment of ticket or passage document

Regional Area Headquarters Regional Operating Headquarters

NON-RESIDENT FOREIGN CORPORATIONS In General 30% on GROSS INCOME from all sources within the Philippine even passive incomes EXCEPT capital gains on sale of domestic shares 25% on GROSS INCOME 4.5% on GROSS INCOME 7.5 on GROSS INCOME

International Air Carrier

Cinematographic Film owner, lessor or distributor Owner or lessors of vessel chartered by Philippine nationals Owner or lessors of aircraft, machineries and other equipment

Taxation I

P a g e |3

ITEMS INCLUDED IN GROSS INCOME 1. 2. Derived from conduct of trade or business or exercise of a profession Rents Sale of received Dividends Improvements by Lessee: a. Lessee introduced improvements per agreement with lessor, lessor may report income either 1. At the time of completion on the basis of FMV of such building or improvement 2. Spread over the life of the lease considering the estimated depreciated value of such at the termination of the lease b. Lease is terminated not through purchase by lessor and lessor comes into possession prior to the time originally fixed, lessor is considered to receive additional income for that year IF value of building exceeds the amount already reported as income c. Destroyed before expiration of lease, lessor is entitled to deduct as loss the amount previously reported as income less any salvage value to the extent that such loss was not compensated for by insurance (see Allocation of Income and Deductions at the last page) Not allowed to deduct any other deduction from their salary 9. Gains derived from dealings in property Stock as

Basis is FMV at the time the dividend becomes payable GR: stock dividends are NOT TAXABLE

3. 4. 5. 6. 7. 8.

Interests Prizes & winnings Compensation services Annuities Royalties Dividends for

Notes on Dividends

Dividends paid in Securities other than Stock Dividends paid in Property

When corporation receives interest which are tax free it becomes TAXABLE as DIVIDENDS when it DISTRIBUTES the same to its SHAREHOLDERS b. Dividend paid by DC to NRFC taxable in FULL Considered as income, in the amount of FMV, when received by stockholder If paid in stock of another corporation not considered a stock dividend

a.

10. Pensions 11. Partners distributive share from net income of GPP

Exception: When it causes CHANGE in the corporate identity or in the nature of the shares issued whereby proportional interest of the stockholders after distribution is ESSENTIALLY DIFFERENT from his former interest Sale of Stock GAIN or LOSS from such sale received as is treated as arising from sale Dividends or exchange of CAPITAL ASSET Stock Declaration If after stock dividends are and Subsequent declared, a corporation Redemption cancels or redeems the same making such redemption essentially equivalent to a DISTRIBUTION of a TAXABLE DIVIDEND Distribution in When corporation distributes Liquidation ALL its properties or assets in COMPLETE LIQUIDATION, GAIN realized is TAXABLE Gain or loss in exchange of property is recognized when: a. Property received in exchange is essentially different from the property disposed b. Property received has market value EXEMPT GPP is TAX EXEMPT BUT the income of the individual partners are subject to tax

Income derived from other sources Recovery of damages (compensation for injury; from tortuous act) Recovery of items previously deducted from gross income Forgiveness of indebtedness Not taxable Taxable If it amounts to 1. Payment of income (person performing a service) Taxable P a g e |4

Taxation I

Income derived from illegal business Recovery of lost earnings Refunds and Tax Credits

Capital transaction (corporation forgiving the debt of a stockholder) Taxable 3. Gift Exempt Taxable Taxable GR: taxes previously claimed and allowed as deductions BUT subsequently was refunded or granted as tax credit should be declared as part of gross income of that year Exceptions: (some) a. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed b. Taxes which are not allowable as deductions under the law

2.

Sale of Shares of Stock not listed and not traded through a local stock exchange held as Capital Asset Sale of shares of stock listed and traded through local stock exchange Sale of Real property held as Capital Asset Sale of Real property held as Capital Asset made to Government or GOCCs Sale of Real Property held as Ordinary Asset when seller is habitually engaged in real estate business Sale of Real Property held as Ordinary Asset when seller is not habitually engaged in real estate business Sale of Real Property held as Ordinary Asset when seller is exempt from creditable withholding tax

5% or 10% of net capital gains

.5% of gross selling price or gross value 6% of gross selling price or current market value, whichever is higher 6% of gross selling price or current market value OR under normal income tax rate 1.5%, 3% or 5% of gross selling price or current market value 7.5% of gross selling price or current market value Normal corporate tax

PASSIVE INCOME Domestic Corporation Interest under FCDU Income derived by depositary BANK from Foreign Currency transactions with NON-RESIDENTS, OBUs, etc Interest income from Foreign Currency loans granted by a BANK to RESIDENTS other than OBUs Royalty of all types WITHIN the Philippines Royalty WITHOUT the Philippines Interest on Bank Deposits Dividend from Domestic Corporations (Intercorporate Dividends) 7.5% Exempt Resident Foreign Corporation 7.5% Non-Resident Foreign Corporation Exempt

Exempt

10%

ITEMS EXCLUDED FROM GROSS INCOME 20% Taxable Income under 30% tax rate 20% Exempt 20% Exempt 30% 1. Gifts, Bequests & Devices Must be characterized by a. Disinterested generosity, and b. Pure liberality Most critical consideration: Givers intention or motive 15% 2. Income Treaty exempt under But, income derived from those properties shall be included in the gross income

Exempt

Taxation I

P a g e |5

3.

Amount received insured as Return Premium Life Insurance

by of

4.

Received either a. during the term b. at the maturity of the terms c. upon surrender of the contract Proceeds of such paid to the heir or beneficiaries upon the DEATH of the insured to avail of the total exemption 7. If the insured SURVIVES, there is only PARTIAL EXEMPTION to the extent that the proceeds constitute return of capital If such is held by the insurer under an agreement to pay interest, the interest payments shall be included in the gross income Includes the AMOUNT OF DAMAGES received on account of such injuries (physical) or sickness However, if damages only amount to return of capital, it is EXEMPT Includes: a. Amount received as a consequence of SEPARATION for any cause beyond control Sickness must be job threatening rendering the taxpayer incapable of working b. Benefits received from a foreign government by non-resident citizens or aliens who reside permanently in the Philippines Veterans benefit SSS benefit GSIS benefit Benefit from RA 7641 Conditions: 1. At least 60 years old 2. 5 years of service at the time of retirement Limited exemption: month salary for every year of service Reasonable Private Benefit Plan Conditions: 1. At least 50 years old 2. In the service of the same employer for at least 10 years at the time of retirement 3. Approved by BIR Taxation I Definition Fringe Benefit = a. b. c. d. Miscellaneous items

h.

Terminal Leave pay Amount paid for the commutation of leave credits

a. b. c. d. e. f. g. h.

5.

Compensation for Injuries or Sickness

6.

Retirement Benefits, Gratuities, Pensions

Excludable only for government employees Income derived from FOREIGN GOVERNMENTS Income derived from GOVERNMENT or its political subdivisions Prizes, awards in SPORTS competition sanctioned by National Sports Associations wherever held Prizes and awards 13th month pay and other benefits GSIS, SSS, Medicare, Pag-ibig contributions & Union dues of individuals Gains from sale of bonds, debentures or other certificate of indebtedness with a MATURITY OF MORE THAN 5 YEARS Gains from REDEMPTION OF SHARES in mutual fund

FRINGE BENEFITS

any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee except rank and file employees hence, only FB given or furnished to managerial or supervisory employees are subject to FBT

c. d. e. f.

Imposition of a Final tax of 32% on the grossed up monetary value of the fringe benefits Actual Monetary Value = Grossed up monetary value 68% Grossed up Monetary value X 32% = Fringe Benefit Tax Managerial Employees = those who are vested with powers or prerogatives to lay down and execute management polices and/or hire, transfer, suspend, etc. employees Supervisory Employees = those who effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires use of independent judgment

g.

P a g e |6

Rank-and-file Employees = all employees who are holding neither managerial nor supervisory positions

vehicles for the use of the business and the employees Use of yacht

Acquisition interest 5 years

cost

exclusive

of

Special Cases for Fringe Benefit Tax Received by non-resident alien not engaged in trade or business Received by alien or Filipino employed by ROH or RAH Received by employees in a SPEZA Items of Fringe Benefits Taxable: a. Housing Monetary Value Employer leases a residential property for the use of the employee and such is the usual place of residence of the employee Employer purchases a residential property on installment basis and allows the employee to use it as his usual residence Employer purchases a residential property and transfers ownership to the employee b. Expense account those personal expenses such as groceries, paid for or reimbursed by the employer even if these are duly receipted for in the name of the employer Vehicle of any kind Monetary Value Employer purchases vehicle in the name of the employee regardless of usage of such Employer pays for the car on installment basis and ownership of the car is placed in the name of the employee Employer shoulders a portion of the amount of the purchase price of a vehicle owned by the employee EXCEPT when the subsidy is declared part of the employees taxable compensation income subject to withholding tax Employer owns and maintains a fleet of 100% of the acquisition cost Acquisition interest 5 years Amount shouldered employer by the cost exclusive of 25% 15% 25% or 15%

Depreciated value at an estimated useful life of 20 years

d. e.

Household personnel, such as maid, driver, etc Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate are granted Monetary Value Employer extends a loan employee free of interest to an Computed at 12% Difference of the interest and the 12%

Loan given at a rate lower than 12%

f. g.

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 Monetary Value 30% of the value 100% of the value

50% of the value of the benefit

Cost of first class ticket given to an employee Travel expense of family members of the employee h. i. j. Holiday and vacation expenses

Educational assistance to employee or his dependents Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows

c.

Certain exemptions on those taxable fringe benefits: a. Housing 1. 2. 3. b. Military officials Situated inside or adjacent to the premises of a business or factory within 50 meters thereof Temporary housing for employee who stays for not more than 3 months Expense duly receipted for and in the name of the employer and is not in the nature of a personal expense attributable to the employee

Expense Account 1.

50% of the Taxation I P a g e |7

2. c. d.

RATA which are fixed in amount and regularly given as part of monthly compensation since it will be treated as income of the employee Use of aircraft owned and maintained by the employer If it is reasonable for the purposes of attending business meetings or conventions If it is for local travel expenses not more than $300 per day not including lodging Cost of economy or business class tickets Employee was granted a scholarship by the employer and the education is directly connected to the trade or business of the employer, and there is a written contract that the employee must remain in employ for a period of time Assistance was extended to the employees dependents and was provided through a scholarship program of the company Contribution is pursuant to existing law such as GSIS or SSS If it is group insurance of the employees

c. d. e. f. g.

Rice subsidy of P1 500 or 1 sack of rice per month Uniform and clothing allowance not exceeding P4 000 per year Medical benefits not exceeding P10 000 Laundry allowance of P300 per month Employee achievement awards in the form of tangible personal property other than cash with an annual monetary value not exceeding P10 000 received under an established written plan Flowers, fruits, books given under special circumstances (illness, marriage, etc) Christmas and major anniversary celebration for employees not exceeding P5 000 per year Daily meal allowance for overtime work not exceeding 25% of the basic minimum wage

Vehicle o 1. 2. 3. Expenses for Foreign Travel

h. i. j.

e.

Educational Assistance 1.

The amount of de minimis benefit is not computed in determining the P30,000 ceiling of other benefits provided in Sec. 32(b) o But, if the employer pays more than the ceiling prescribed, the excess is taxable as fringe benefit to the employee only

2. f.

Life or Health Insurance, etc. Premiums in excess of what the law allows 1. 2.

Any amount given by the employer as benefits, whether deminis or not, shall be deductible as business expense DEDUCTIONS FROM GROSS INCOME

Not Taxable: a. b. c. d. FB which are authorized and exempted from tax under special laws Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans Benefits given to rank and file employees, whether granted under a collective bargaining or not De minimis benefits

Who may AVAIL deductions?

of

Individuals

De Minimis Benefits Facilities or privileges furnished or offered by an employer to his employees that are of relatively small value and are offered and furnished by the employer merely as a means of promoting the health, goodwill, contentment or efficiency of his employees Items of De Minimis Benefits: a. b. Monetized unused vacation leave credits not exceeding 10 days during the year Medical allowance for employees dependents not exceeding P125 per month Taxation I

Who CANNOT AVAIL of deductions Allowable Deductions

Citizen Resident alien Non-resident alien doing business in the Philippines 4. Members of GPP Corporations 1. Domestic corporations 2. Resident Foreign corporations 3. Proprietary educational institutions & hospital 4. GOCCs 1. Individuals earning purely compensation income 2. Non-resident aliens not engaged in trade or business 3. Non-resident Foreign corporations Individuals with gross a. Premium payments income from EMPLOYERon health or hospital EMPLOYEE RELATIONSHIP insurance ONLY b. Personal and additional exemptions Individuals with gross a. Optional Standard income from BUSINESS or Deduction or P a g e |8

1. 2. 3.

PROFESSION

Itemized Deductions (For discussion on OSD, see attached Reviewer ) Premium payments on health or hospital insurance c. Personal and additional exemptions Itemized Deductions b.

ORDINARY & NECESSARY Requisites: a. It must be ordinary AND necessary b. It must be paid or incurred during the taxable year c. For the purpose of carrying on the TBP d. Including reasonable allowance for 1. Salaries 2. Travel expenses in pursuit of TBP 3. Rentals 4. Entertainment, amusement & recreational expenses directly connected with TBP Substantiation requirement: There must be sufficient evidence to substantiate a. Amount of expenses deducted b. Direct connection of the expense to the development, management, operation and/or conduct of TBP Ordinary expense = normal or usual in the TBP Necessary expense development of TBP = appropriate and helpful in the

Corporations ITEMIZED DEDUCTIONS 1. Bad debts

Requisites to be deductible: a. Existing indebtedness due to taxpayer b. Debt is valid and legally demandable c. Debt is connected to TBP d. It must not be sustained in a transaction between related taxpayers e. Actually ascertained to be WORTHLESS and UNCOLLECTIBLE as of the end of taxable year f. Actually charged to the taxpayer at the end of the taxable year Tax-Befit Rule: Recovery of bad debts previously allowed as deduction shall be included part of gross income in the year of recovery Ascertainment of worthlessness: 1. Taxpayer did in fact ascertain the debt to be worthless in the year which the deduction is sought 2. He acted in good faith When Bad Debts are not deductible: a. For a bank, it is the BSP which determines the worthlessness of the debts b. For insurance company, it must be declared insolvent for bad debts to arise In General, to be deductible: a. Amount of expenses must be reasonable b. It must be substantiated c. It must not be contrary to law, morals or public policy d. If it is required to be withheld, it must have been paid to BIR

Business expense = expenditure related to TBP that is deductible in the year incurred Capital expense = expenditure that improves or adds to the value of property or equipment Not immediately deductible Deductible over time such as in the form of depreciation Bribes, Kickbacks & Other Similar Payments: not deductible Representation Expense = expenses incurred in connection with conduct of TBP a. Entertaining, providing amusement and recreation to, or meeting with guests b. At a dining place, place of amusement, country club, theater, etc. If the taxpayer is the registered member of country club, the presumption is that such expenses are Fringe Benefits unless he can prove that these are actually representation expenses Entertainment facilities = refers to yacht, vacation home and similar item of real or personal property used by taxpayer primarily for entertainment of guests or employees Taxation I P a g e |9

2.

Expenses

3.

Losses

Requisites for deductibility of ORDINARY LOSS: a. Loss must be of the taxpayer b. Actually sustained during the taxable year c. Not compensated for by insurance or other forms of indemnity d. Incurred in TBP or property connected with TBP through force majeure or from robbery, theft or embezzlement e. Evidenced by a completed transaction f. Not claimed as deduction for estate tax purposes g. Notice of loss filed with BIR within 45 days from date of discovery Types of LOSSES: 1. Ordinary losses a. Incurred in TBP NET OPERATING LOSS CARRY-OVER (NOLCO) Excess of allowable deduction which has not been previously offset as deduction from gross income Requisites: 1. Taxpayer was not exempt from income tax in the year of such NOL 2. There has been no substantial change in the ownership of the business enterprise How applied: NOL shall be carried over as deduction from gross income for the next 3 consecutive taxable years immediately following the year of such loss For mines other than oil and gas wells, if loss is incurred within its 1st 10 years, carry-over will be for the next 5 years Notes on NOLCO: 1. If there is change of ownership, for NOLCO to be available the surviving entity must be the one which accumulated the NOLCO or that the transferor GAINS CONTROL of at least 75% of outstanding issues or paid-up capital of transferee 2. When individual claimed OSD or taxpayer paid income tax under MCIT, he cannot claim deduction of NOLCO simultaneously and the 3year period for NOLCO shall continue to run b. Incurred by property connected with TBP through force majeure or robbery, theft or embezzlement Taxation I 3.

How applied: 1. Total destruction replacement cost in restoring the property in its normal operating condition This shall not be more than the net book value of the property immediately before the casualty 2. Partial destruction excess over the net book value immediately before the casualty should be capitalized subject to the depreciation over the remaining useful life of property Special losses a. Capital losses Allowed only to the extent of gains from such losses 1. Losses from sale or exchange of capital asset 2. Losses resulting from securities (capital assets) becoming worthless 3. Losses from short sales of property 4. Losses due to failure to exercise privilege or option to buy or sell property b. Losses from wash sales of stock or securities GR: not deductible Exception: claim is made by a dealer in stock or securities and made in ordinary course of business c. Wagering losses Allowed only to the extent of gains from such losses d. e. f. Abandonment losses Losses due to voluntary removal of building incident to renewal of replacements Loss of useful value of capital assets due to charges in business conditions Deductible to the extent of actual loss sustained after improvements, depreciation or salvage value Losses from sales or exchanges of property between related taxpayers not deductible Requisites for deductibility: a. Paid or incurred within the taxable year b. In connection with TBP c. Imposed directly on the taxpayer d. Not specifically excluded by law from being deducted from gross income P a g e | 10 g.

4.

Taxes

Deductible Taxes: a. National or local taxes b. Paid or incurred during the taxable year c. In connection with taxpayers TBP Non-deductible Taxes: a. Philippine income tax b. Income tax imposed by authority of any country EXCEPT when taxpayer signifies his desire to avail of tax credit c. Estate and donors taxes d. Taxes assessed against local benefits of a kind tending to increase the value of property assessed e. Final taxes f. Special assessments Tax-Benefit Rule Taxes, when refunded or credited, shall be included as part of gross income in the year of receipt For NRA-ETB and RFC, taxes paid or incurred shall be allowed as deduction insofar as they are connected to income within Philippines TAX CREDIT Right of an income taxpayer to deduct from his income tax payable the foreign income tax he has paid to his foreign country Who can claim? a. Citizen b. Resident aliens deriving income from within or without the Philippines IF there is reciprocity c. Domestic corporation d. Members of GPP

Requisites for deductibility: a. Allowance for depreciation must be reasonable b. It must be for property used for employment in TB c. Allowance must be charged off d. Schedule of the allowance must be attached to the return e. The depreciation value cannot be beyond the acquisition cost Methods of Depreciation: 1. Straight-line method Cost Salvage value Estimated Life 2. Declining balance method Cost Accumulated depreciation X rate Estimated Life 3. Sum of years digit method Nth period X (Cost Salvage value) Sum of the years digits Special types of Depreciation: a. Petroleum operations Useful life: 10 years or shorter as may be permitted by Commissioner Useful life of property not used directly: 5 years under straight line method b. Mining operations Useful life: 10 years If expected life greater than 10 years: depreciate over any number of years between 5 and the expected life Requisites for deductibility: a. There must be an indebtedness b. Indebtedness must be that of the taxpayer c. Indebtedness must be connected with TBP d. There must be an interest expense paid or incurred upon such indebtedness and during the taxable year e. Interest must have been stipulated in writing f. Interest must be legally due and demandable g. Interest payment arrangement must not be between related taxpayers P a g e | 11

Limitation on the amount that may be taken as tax credit: Not to exceed the same proportion of tax against which such credit is taken When a. b. a. credit may be taken: Year in which the taxes accrued Year in which the taxes were paid A gradual diminution in the 1. service or useful value of tangible property 2. amortization of intangible property b. Due from exhaustion, wear and tear, and normal obsolescence 6. Interest

5.

Depreciation

For NRA-ETB and NRC, applicable only when such property is located in the Philippines Taxation I

Limitation on deduction: It is only 33% of the interest income subject to final tax Example: Interest expense = P3000 Interest income = P2000 Deductible interest expense = P3000 (P2000 x 33%) Non-deductible interest expense: a. Interest paid in advance through discount or otherwise Allowed as deduction in the year it is paid b. Payments made between: 1. Members of family 2. Individual and a corporation where more than 50% of outstanding capital stock is owned by such individual 3. 2 corporations where more than 50% of outstanding stock is owned by the same individual 4. Grantor and fiduciary / beneficiary 5. Indebtedness is incurred by a service contractor to finance petroleum corporation 6. Interest on preferred stock which in reality is dividend 7. Interest on unpaid salaries and bonuses Reduction of cost or value as such are converted into inventories No further allowance is granted if it equals the capital invested For NRA and FC, only to those located in the Philippines Requisites for deductibility: a. Contribution or gift must be actually paid b. It must be given to organizations specified c. Net income of the institution must not inure to the benefit of any private stockholder or individual Contributions FULLY DEDUCTIBLE: 1. Donations to the government for priority activities according to National Priority Plan determined by NEDA 2. Donations to certain foreign institutions or international organizations 3. Donations to accredited NGOs Contributions PARTIALLY DEDUCTIBLE: 1. Donations to the government exclusively for public purposes 2. Donations to accredited domestic corporations or association 3. Donations to social welfare institutions Taxation I 9. Research & development

4.

Donations to non-accredited NGOs

For individuals, not more than 10% of taxable income before deducting the charitable contribution For corporations, not more than 5% of taxable income before deducting the charitable contribution Valuation of property donated other than money = Acquisition cost Requisites for deductibility: a. Paid or incurred during the taxable year b. Ordinary and necessary expenses in connection with TBP c. Not chargeable to capital account Can be fully deducted or amortized Requisites for amortization: a. Paid or incurred in connection with TBP b. Not treated as expense c. Chargeable to capital account but not to property of a character which is subject of depreciation or depletion d. Amortized over a period of not less than 60 months as may be elected by taxpayer Requisites for deductibility: a. Employer must have established a pension or retirement plan b. Such must be reasonable and actuarially sound c. It must be funded by the employer d. Amount contributed must be no longer subject to control or disposition of the employer e. Payment has not been allowed as deduction f. Deduction is apportioned in equal parts over a period of 10 consecutive years

7.

Depletion of oil and gas wells and mines

10. Pension trusts

8.

Charitable and other contributions

OPTIONAL STANDARD DEDUCTION Optional Standard Deduction (OSD)deduction which an individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, or a corporation, in an amount not exceeding 40% of its gross income. In lieu of taking itemized deductions Optional Standard Deduction for Individuals 1. Individuals covered a. b. c. Citizen, resident or non-resident Resident alien Taxable estate and trust P a g e | 12

2. o

Determination of amount of OSD40% of gross sales or gross receipts during the taxable year is allowed to individual taxpayer Scenarios when it will be on gross sales or gross receipts Gross receipts Individual employs the cash basis of accounting for his income and deductions Gross sales Individual is on the accrual basis of accounting for his income and deductions e.

ii. iii.

Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies For banks and other financial institutions only, this include interest expense

Gross Receiptsamounts actually or constructively received during the taxable year o For taxpayers engaged as sellers of services but employing the accrual basis of accounting amounts earned as gross revenue during the taxable year

Optional Standard Deduction for Corporations 1. Corporations covered a. b. 2. a. i. Domestic corporation Resident corporation

f.

All items of gross income which are required to be declared to be in the income tax return are part of the gross income against which the OSD may be deducted Passive incomes shall not form part of the gross income for purposes of OSD

g.

Determination of amount of OSD40% of their gross income is allowed Gross Income In case of sellers of goods o ii. Gross sales less sales returns, discounts, allowances, and cost of goods sold Gross receipts less sales returns, allowances, discounts, and cost of services 1. OSD for General Professional Partnerships and the Partners o o General Professional Partnership (GPP) is not subject to income tax However, the partners shall be liable to pay income tax in their separate and individual capacities for their respective shares in the net income of the GPP For purposes of computing the distributive share of the partnersnet income of the GPP shall be computed in the same manner as a corporation o 2. Hence, GPP may claim IDs or in lieu thereof, opt to avail the OSD allowed to corporations

In case of seller of services o

b. c.

Gross Salesinclude only sales contributory to the taxable income of the corporation Cost of Goodsincludes the purchase price or cost to produce the merchandise and all expenses directly incurred in bringing them to their present location and use For trading or merchandising concern o Invoice of cost of goods sole + (import duties + freight in transporting the goods to the place where it is actually sold + insurance while the goods are in transit) All costs incurred in the production of the finished goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse

The distributable net income, from which the share of each partner is to be determined, is the net income determined by either claiming the ID or OSD from the GPPs gross income In computing taxable incomethe individual partner can still claim either ID or OSD from his share in the net income of the GPP because said share is considered as gross income in the hands of the partners In claiming ID, the partners are precluded from claiming expenses already claimed by the GPP 4 possibilities resulting from election of deductions a. b. c. d. GPP claim ID and a partner may also claim ID GPP claim ID while a partner may claim OSD GPP claim OSD and partner may also claim OSD GPP claim OSD while a partner may claim ID

i.

3.

4. 5.

ii.

For manufacturing concern o

d.

Cost of Servicesall direct costs and expenses necessarily incurred to provide the services required by the customers and clients including i. Salaries and employee benefits of personnel, consultants and specialists directly rendering the services

Other Implications of the Optional Standard Deduction 1. GR: taxpayer chooses ID P a g e | 13

Taxation I

o 2. 3.

intention to elect OSD must be specifically signified in his income tax return

determining gain Layman: Selling price or proceeds > Cost Mode of Acquisition: Purchase Inheritance Gift

amount realized

Once OSD is chosen and is signified in his return, it shall be irrevocable for the taxable year for which it is made Individual who is entitled and claimed for the OSD is no longer required to submit with his return such financial statements otherwise required by the Tax Code Except when the Commissioner otherwise permits, the individual shall keep such records pertaining to his gross sales or receipts, or in the case of corporation, such records pertaining to its gross income as may be required by the Tax Code and by revenue rules and regulations In filing of the quarterly income tax returns, taxpayer may opt to use either ID or OSD o However, in filing the final adjustment income tax return, taxpayer must make a choice CAPITAL GAINS AND LOSSES

4.

5.

Acquired for less than adequate consideration Property acquired where gain or loss is not recognized

Layman: Cost > Selling price or proceeds Basis of determining gain or loss from sale or disposition of property Cost of the property Fair market value at the time of acquisition, hence, at the time of death Cost to the donor who did not acquire it as gift BUT if such is greater than the FMV at the time of the gift, FMV shall be the basis Amount paid by transferee Same as the basis of property exchanged a. Increased by 1. Dividends 2. Amount of any gain recognized by the exchange b. Decreased by 1. Money received 2. FMV of other property received 3. Liability assumed by transferee

of property (other than money) received

Ordinary Assets

a. Stock in trade of taxpayer b. Merchandise inventory c. Depreciable assets used in TB d. Real property used in TB Capital Assets Property of taxpayer other than capital assets, those not connected with TB Net Capital Gain Gains > Loss from sales or exchanges of capital assets Net Capital Loss Loss > Gains from sales or exchanges of capital assets Percentage taken into account: a. 100% if capital asset is held (actually held) for more than 12 months b. 50% if capital asset is held for less than 12 months Limitation on Capital Loss: Only to the extent of the gains Example: Gains = P5000 Loss = P15000 Net Capital Loss = P10000 However, in this case, only P5000 is deduction (only to the extent of the gain) Scenarios: 1. Capital Gains Tax on Stock trade = 5% -- 10% 2. Capital Gains Tax on Real property = 6% 3. Ordinary asset on Stock trade or Real property = Gross Income 4. Ordinary asset Not on Stock trade or Real property = Gross Income 5. Capital asset Not on Stock trade or Real property = Gross Income Computation of GAIN LOSS AMOUNT REALIZED Gain or Loss: Amount realized > Basis or adjusted = Basis or adjusted basis for Money received + basis for determining loss > fair market value Taxation I

P a g e | 14

Example: Contract price is P100000 Gross profit is P25000 Payable in 2 equal annual installments To compute the rate = GP Contract Price ACCOUNTING PERIODS AND METHODS OF ACCOUNTING ACCOUNTING PERIODS Fiscal year Calendar year Ending on the last day of any January 1 to December 31 month other than December Taxable income is computed based on this if: a. Accounting period is other than fiscal year b. Taxpayer has no accounting period c. Taxpayer does not keep books d. Taxpayer is an individual METHODS OF ACCOUNTING Accrual Method Income, gains and profits are included in gross income when earned, whether received or not Expenses are allowed as deductions when incurred, although not yet paid Long term contracts: Building, installation or construction contracts covering a period in excess of 1 year Persons whose gross income are derived in whole or in part from such contracts shall report such income upon the basis of PERCENTAGE of COMPLETION Example: Contract for building a condominium is P10M for 5 years. On the 1st year, the completed construction is 30%; hence, the gross income to be declared is P3M (30% of P10M) Sales of Dealers Proportion of the installment in Personal payments actually received in that Property year, which the gross profit realized or to be realized when payment is completed, bears to the contract price Taxation I Sale of Real property and Casual sale of Personal property To compute the income = Receivable X Rate Computation: SAME as that of Sale of Dealers in Personal Property When applicable: a. Price is casual sale is greater than P1000 b. Initial payment in sale of real property does not exceed 25% of selling price May pay the CAPITAL GAINS TAX in installments under BIR Rules

Cash Method Recognition of income and expense dependent on inflow or outflow of cash Accounting for LONGTERM Contracts

Change from Accrual to Installment Basis Allocation of Income and Deductions

Sale of Real property considered as Capital Asset by an Individual Amounts received in prior years are not excluded

To whom applied: 2 or more organizations or TB owned or controlled directly or indirectly by the same interest How applied: Commissioner is authorized to distribute, apportion or allocate gross income or deductions between or among such in order to prevent evasion of taxes or to clearly reflect the income of any such organization or TB

RETURNS AND PAYMENT OF TAXES Income Tax Returna tax return where the statement or declaration of what is reported is the income of the taxpayer and the allowable deductions for the taxable year Individuals Required to File Income Tax Return 1. 2. 3. 4. Resident citizen regardless of the source of his income Non-resident citizen on his income from sources within the Phils. Resident alien on his income from sources within the Phils. Non-resident alien engaged in trade or business or in the exercise of profession in the Phils. as to his income from souces within the Phils. P a g e | 15

Installment Basis

Individual Not Required to File Income Tax Return 1. Individual whose gross income does not exceed his total personal and additional exemptions for dependents o Citizens and any alien individual engaged in business or practice of profession within the Phils. shall file ITR regardless of the amount of gross income Earning pure compensation income Derived from sources within the Phils From one employer Income tax on which has already been correctly withheld o o o o o o 2. ii.

final consolidated return on or before April 15 cover all stock transactions of the preceding taxable year Gains from sale or disposition of real property = within 30 days following each sale or other disposition

2.

Individuals a. b. c. d.

Where to file (file-where-you-live or work-rule)except in cases where the Commissioner of Internal Revenue otherwise permits, where the taxpayers legal residence or principal place of business is located, with an a. b. c. d. authorized or Accredited Agent Bank Revenue District Officer Revenue Collection Officer Duly authorized Treasurer of the City or Municipality

3.

Regardless of the amount of income since the final income tax imposed thereon is to be withheld by the payor-corporation and/or person and paid to the BIR a. Individuals whose income consists solely of royalties, interests, prizes, winning, dividends, and share of an individual person in partnership or association, joint venture or consortium Aliens employed by regional or area headquarters and regional operating headquarters of multinational corporations with respect to compensation income Aliens employed by offshore banking units with respect to compensation income Aliens employed by foreign service contractors and subcontractors engaged in petroleum exploration in the Phils. with respect to compensation income Such individuals will no longer have to personally file his own but instead, the employers annual information return filed will be considered as the substituted ITR of the employee 2. o

filed in triplicate, 2 copies for Bank / BIR Office and 1 copy for the taxpayer Legal Residenceaddress where the taxpayer normally resides Principal Place of Businessplace where the main business activity of the taxpayer is conducted If at the time of filing, taxpayer has no legal residence in the Phils be filed with the Office of the Commissioner of Internal Revenue Employer-Taxpayer file his return with the revenue office with jurisdiction over his place of work or employment Non-resident Citizens with income derived from sources within Phils. file with Phil. Embassy or the nearest Phil. Consulate, or it may be mailed to the Commissioner of Internal Revenue Exempts from this rule: (they can file their return with the revenue district officer or municipal treasurer nearest their current place of assignment) a. b. Filipinos abroad, including those employed by Phil. Govt Members of AFP temporarily assigned to places other than their legal residence

b.

c. d.

4.

Minimum Wage Earner or individual who is exempt from income tax o

Filing of Individual ITR 1. When to fileon or before April 15 of each year, or, in meritorious cases, within the extension which may be granted by the Commissioner of Internal Revenue o Individuals engaged in trade or business or the practice of a profession file first, second and third quarter returns on or before April 15, August 15, and November 15, respectively Individuals subject to tax on capital gains i. Gains from sale or exchange of shares of stock not traded through a local stock exchange = within 30 days after each transaction and a Taxation I

Return of Husband and Wifefile a return to include income of both spouses If this is not practicable, each spouse may file a separate return of income but the returns so filed shall be consolidated by the BIR for purposes of verification Return by Parent Representative of Taxpayerincome of unmarried minors derived from property received from a living parent shall be included in the return of the parent o This is not required when donors tax has been paid on such property or when transfer of such property is exempt from donors tax P a g e | 16

3.

Return may be made by his duly authorized agent or representative or by the guardian or other person charged with the care of his person or property if he is unable to make his own return because of disability Attachmentsprescribed statements and BIR forms duly signed must be attached Quarterly Income Tax Returnthose individuals receiving self-employment income shall file a quarterly income tax return of his estimated income and pay the estimated tax o Made in 4 installments: a. b. c. d. o On or before April 15 On or before August 15 On or before November 15 On or before April 15 of the following calendar year for the final adjusted ITR

Filing of Corporate Income Tax Return and Payment of the Tax 1. When to filecorporation may employ either a calendar year (Jan. 1 to Dec. 31)or fiscal year as basis for filing its annual ITR a. Every corporation subject to tax, except non-resident foreign corporations, shall render quarterly ITR of its gross income and deductions on a cumulative basis for the preceding quarter/s and a final or adjustment return covering the total taxable income for the preceding calendar or fiscal year Corporate quarterly declaration shall be filed within 60 days following the close of each of the first 3 quarters of the taxable year Final adjustment return be filed on or before April 15 or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be In case of excess tax payments, taxpayer has option of either to i. ii. 2. File a claim for the tax refund or tax credit certificate Carry-over and apply the excess against the income tax due for the taxable quarters of the succeeding taxable year

4. 5.

b. c.

d.

Any excess of the total quarterly payments and taxes withheld over the income tax computed in the final ITR shall, at the option of the taxpayer, either be a. b. Issued a tax refund or tax credit certificate Applied as credit against the quarterly income tax liabilities for the taxable quarters of the immediately succeeding year

Where to Fileexcept as the Commissioner otherwise permits, the quarterly income tax declarations and the final adjustment return shall be filed, within those having jurisdiction over the location of the principal office of the corporation or where the main books of accounts and other data from which the return as prepared are kept, with the a. b. c. d. authorized or Accredited Agent Bank Revenue District Officer Revenue Collection Officer Duly authorized Treasurer of the City or Municipality

Payment of Individual Income Tax 1. When and Wherepaid by the person subject thereto at the time the return is filed (pay-as-you-file) o o 2. Last day of payment of income tax coincides with the last day for filing the return It is paid at the place where the return is filed 3.

When and Where to Paypaid at the time and place of filing the declaration or return WITHHOLDING TAX

Payment of Tax in Installmentsif the tax dues is in excess of P2,00, the taxpayer may elect to pay the tax in 2 equal installments a. b. o o First installment be paid at the time the return is filed Second installment, on or before July 15 following the closing of the calendar year Withholding tax on Wages or Compensation

GR: every employer must withhold from compensation paid an amount computed in accordance with the regulations Exceptions: where such compensation a. Does not exceed the statutory minimum wage b. P5000 monthly or P60000 a year Liability for Tax: 1. Employer a. Liable for withholding and remittance of correct amount of tax

If any installment is not paid, whole amount of the tax unpaid becomes due and payable together with the delinquency penalties If the tax withheld from salaries is more than of the tax due taxpayer pays nothing in his first installment while the second installment will be the total tax due less the excess withholding tax

Taxation I

P a g e | 17

Final Withholding Tax Creditable Withholding Tax

Failure to withhold and remit, employer is liable for the tax plus penalties 2. Employee a. Failure to file withholding exemption certificate or supplied inaccurate or false information, the tax shall be collected from him plus penalties b. Excess taxes withheld by the employer shall not be refunded if due to: 1. Failure or refusal to file withholding exemption certificate 2. False or inaccurate information Once withheld and paid, nothing is further to be done Once withheld, the individual must further deduct this in his scheduler rate since what he received is considered as income but deducted with what was already withheld Example: Receivable = P10M Withholding tax = 15% Income = P8.5M (P10M x 15%) X 17% (35% scheduler rate 15% already withheld)

b.

Taxation I

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