Documente Academic
Documente Profesional
Documente Cultură
1AxA1lCn
SLClAL 8L-WLLk 8A8 8LvlLW
Atty. vlc c. Momoloteo
SepL. 9, 2010
SAN SL8AS1IAN CCLLLGL CI LAW
INCCML 1Ak
2
lnCCML 1Ax
lnCCML 1Ax
1ax on all yearly proflLs arlslng from properLy, professlons, Lrades or
offlces, or as a Lax on a person's lncome, emolumenLs, proflLs and Lhe
llke (llsbet v. 1tlolJoJ).
lncome Lax ls a dlrecL Lax on acLual or presumed lncome (gross or neL)
of a Laxpayer recelved, accrued or reallzed durlng Lhe Laxable year.
Wl1PPCLulnC 1Ax
lL ls noL an lnLernal revenue Lax buL a mode of collecLlng lncome Lax ln
advance on lncome of Lhe reclplenL of lncome Lhru Lhe payor of
lncome. [nC1L: Sec. 21, nl8C enumeraLes varlous lnLernal revenue
Laxes.]
1here are 2 Lypes of wlLhholdlng Laxes, namely: (1) flnal wlLhholdlng
Lax, and (2) credlLable wlLhholdlng Lax.
llnAL Wl1PPCLulnC 1Ax
llnAL Wl1PPCLulnC lnCCML 1Ax
lW1 wlLhheld by Lhe payor of lncome (e.g., 20 lW1 on lnLeresL
lncome on bank deposlLs) represenLs luLL paymenL of lncome Lax due
on such lncome of Lhe reclplenL.
lncome payee (or reclplenL of lncome) does noL reporL lncome
sub[ecLed Lo lW1 ln hls lncome Lax reLurn, alLhough lncome ls
reflecLed ln hls audlLed flnanclal sLaLemenLs for Lhe year. Powever, he
ls noL allowed Lo clalm any Lax credlL on lncome sub[ecLed Lo lW1.
WlLhholdlng agenL flles Lhe wlLhholdlng Lax reLurn, whlch lncludes Lhe
lW1 deducLed from Lhe lncome payee, and pays Lhe Lax Lo Lhe 8l8.
1here ls no CerLlflcaLe of 1ax WlLhheld lssued Lo lncome payee.
no CerLlflcaLe of 1ax WlLhheld (8l8 lorm 2307) ls aLLached Lo Lhe
lncome Lax reLurn of reclplenL of lncome because he does noL clalm
any Lax credlL ln hls Lax reLurn.
3
lnCCML 1Ax S?S1LMS
GLC8AL 1Ak SS1LM
CompensaLlon lncome noL sub[ecL Lo lW1
8uslness and/or professlonal lncome
CaplLal galns noL sub[ecL Lo lW1
asslve lnvesLmenL lncome noL sub[ecL Lo lW1
CLher lncome noL sub[ecL Lo lW1
SCnLDULAk 1Ak SS1LM
CompensaLlon lncome sub[ecL Lo lW1 (salary of C8u expaL)
CaplLal galns sub[ecL Lo lW1 (real properLy ln Lhe hll and shares of
domesLlc corporaLlon)
asslve lnvesLmenL lncome sub[ecL Lo lW1 (lnLeresL on bank deposlL)
CLher lncome sub[ecL Lo lW1 (auLo won on x'mas raffle)
1he hlllpplnes adopLed Lhe seml-global or seml-schedular Lax
sysLem. LlLher Lhe global or schedular sysLem, or boLh
sysLems may apply Lo a Laxpayer.
lC8MuLA
GLC8AL SS1LM
Cross sales/revenue
Less: CosL of sales/servlce
Cross lncome
Less: ueducLlons
AL (for lndlvldual)
neL Laxable lncome
MulLlplled by appllcable
raLe (graduaLed or flaL)
lncome Lax due
Less: CredlLable W1
8alance
SCnLDULAk SS1LM
Cross selllng prlce or falr
markeL value, whlchever ls
hlgher Llmes appllcable Lax
raLe = 1ax due (real
properLy)
Cross selllng prlce less cosL
or ad[usLed basls = CaplLal
galn Llmes appllcable Lax
raLe = 1ax due (shares of
dom corp)
Cross lncome Llmes
appllcable raLe = 1ax due
(passlve lnv lncome)
4
nA1u8L Cl ASSL1
CkDINAk ASSL1
CAI1AL ASSL1
lnvenLory lf on hand aL end of
Laxable year
SLock ln Lrade held prlmarlly for
sale or for lease ln Lhe course of
Lrade or buslness
AsseL used ln Lrade or buslness,
sub[ecL Lo depreclaLlon
8eal properLy used ln Lrade or
buslness
All oLher asseLs, wheLher or noL
used ln Lrade or buslness, oLher
Lhan Lhe above asseLs
8LAL 8CL81? 18AnSAC1lCnS
Sale of real properLy
Who ls seller?
erson engaged ln real properLy buslness (dealer, developer, or lessor)
erson noL engaged ln real properLy buslness
non-sLock, non-proflL assoclaLlon (chamber of commerce, ?MCA)
naLure of properLy?
Crdlnary asseL
CaplLal asseL
LocaLlon of properLy?
WlLhln Lhe hlllpplnes
CuLslde Lhe hlllpplnes
rlnclpal resldence?
?es - exempL, lf condlLlons for exempLlon are saLlsfled by seller-lndlvldual
no - Laxable
ConslderaLlon?
lull conslderaLlon or falr markeL value
lnadequaLe conslderaLlon
3
klnuS Cl 1AxA?L8S
lnulvluuAL
Cl1lZLn
8esldenL - 1axab|e on wor|dw|de |ncome
non-resldenL - 1axable on lncome from sources wlLhln Lhe hll
lmmlgranL or permanenL worker - n8C from daLe of deparLure from Lhe hll
ClW (seamen) - n8C lf hls aggregaLe sLay ouLslde Lhe hll ls more Lhan 183 days
ALlLn - 1axable on lncome from sources wlLhln Lhe hll
8esldenL
non-resldenL
Lngaged ln Lrade or buslness (more Lhan 180 days ln Lhe hll)
noL engaged ln Lrade or buslness (180 days or less sLay ln hll)
CC8C8A1lCn
uCMLS1lC - 1axable on worldwlde lncome
lC8LlCn - 1axable on lncome from sources wlLhln Lhe hll
8esldenL (e.g., hll branch of forelgn corporaLlon)
non-resldenL
1LS1 lC8 1Ax u8CSLS: Law of lncorporaLlon
A81nL8SPlS
1AxA8LL
arLnershlps, no maLLer how creaLed or organlzed, lncludlng [olnL
venLures or consorLlums
LxLM1
Ceneral professlonal parLnershlp (C), buL parLners are Laxed on
Lhelr share of parLnershlp proflLs acLually or consLrucLlvely pald durlng
Lhe year
!olnL venLure or consorLlum underLaklng consLrucLlon acLlvlLy or
energy-relaLed acLlvlLles wlLh operaLlng conLracL wlLh Lhe governmenL
AgreemenL Lo manage and operaLe mlne denomlnaLed as ower of ALLorney"
ls ln reallLy a parLnershlp. hllex ls a parLner because lL would recelve 30 of
neL proflLs as compensaLlon under Lhe agreemenL, lL does noL appear LhaL
8agulo Cold was uncondlLlonally obllgaLed Lo pay Lhe advances, lL was unllkely
for a buslness Lo lend hundreds of mllllons wlLhouL securlLy or collaLeral and
wlLhouL speclflc daLe when advance shall be due and payable (lbllex Mloloq
cotp v. clk, 2008).
6
8LSluLn1 lC8LlCn CC8S
1AxA8LL
Crdlnary branch of a forelgn corporaLlon ln Lhe hll (30 of neL
Laxable lncome from sources wlLhln Lhe hll)
LZA- & S8MA-reglsLered branch are exempL from branch proflL
remlLLance Lax
8eglonal operaLlng headquarLers (8CPC) - 10 of neL Laxable
lncome from sources wlLhln Lhe hll
Cffshore banklng unlL (C8u) and forelgn currency deposlL unlL
(lCuu) [lnC 8ank Manlla v. Cl8] - 10 on gross lnLeresL lncome on forelgn
currency loans
lnLernaLlonal carrlers by alr or waLer - 2.3 of Cross hll 8llllngs
lorelgn conLracLor or sub-conLracLor engaged ln peLroleum
operaLlons ln Lhe hll - 8 of gross lncome
LxLM1
8epresenLaLlve offlce
8eglonal headquarLers (8PC)
SCu8CLS Cl lnCCML
Interest - lnLeresL from sources wlLhln hll and lnLeresL on bonds and obllgaLlons
of resldenLs, corporaLe or oLherwlse
D|v|dend - lrom domesLlc corporaLlon and from forelgn corporaLlon, unless less
Lhan 30 of gross lncome of forelgn corporaLlon for 3 years prlor Lo declaraLlon of
dlvldends was derlved from sources wlLhln Lhe hll, hence, apply only raLlo of hll-
source lncome Lo gross lncome from all sources
Serv|ces - lace where servlces are performed, excepL ln case of lnLernaLlonal alr
carrler and shlpplng llnes whlch are Laxed aL 2.3 on Lhelr Cross hll 8llllngs.
8evenues from Lrlps orlglnaLlng from Lhe hll are consldered as lncome from
sources wlLhln Lhe hlllpplnes, whlle revenues from lnbound Lrlps are LreaLed as
lncome from sources ouLslde Lhe hlllpplnes.
kenta|s and roya|t|es - LocaLlon or use of properLy or properLy rlghL ln hll
Sa|e of rea| property - LocaLed ln Lhe hlllpplnes
Sa|e of persona| property - LocaLed ln Lhe hlllpplnes
Ga|n from sa|e of shares of stocks of a domest|c corporat|on ls ALWA?S LreaLed as
lncome from sources wlLhln Lhe hlllpplnes.
Cther |ntang|b|e property - Moblllo sepoootot petsooom - lt follows Jomlclle of
owoet
7
C8CSS lnCCML
SALL Cl CCCuS
Cross Sales
Less: CosL of Sales:
8eg. lnvenLory
+ urchases
1oLal avallable for sale
- Lndlng lnvenLory
CosL of Sales
Cross lncome
1lmes 2
MCl1
nC1L: MCl1 ls now compuLed
on quarLerly basls. lf quarLerly
MCl1 > Lhan 8Cl1, excess MCl1
of prlor year ls noL allowed.
SALL Cl SL8vlCLS
Cross 8evenue
Less: CosL of Servlce
conslsLlng of all dlrecL
cosLs and expenses
Cross lncome
1lmes 2
MCl1
nC1L: MCl1 ls lmposed beglnnlng on
Lhe 4
Lh
Laxable year lmmedlaLely
followlng Lhe year ln whlch Lhe
corp commenced bus operaLlons
(5ec 27()(1), Nlkc)
ay MCl1 afLer 4 years lmmedlaLely
followlng Lhe year bank
commenced bus operaLlons
(Moollo 8ook v clk, Ck 168118, Aoq 28,
2006)
lnCCML
lnCCML means cash or lLs equlvalenL comlng Lo a person wlLhln a
speclfled perlod, wheLher as paymenL for servlces, lnLeresL or proflL from
lnvesLmenL. lL covers galn derlved from caplLal, from labor, or from boLh
comblned, lncludlng galn from sale or converslon of caplLal asseLs.
l81 ls a Lax on frlnge beneflLs recelved by employees, alLhough Lhe Lax ls assumed by
Lhe employer-payor of lncome.
8eLurn of caplLal ls exempL from lncome Lax (e.g., Lax-free exchange of
properLy).
1o be Laxable, Lhere musL be lncome, galn or proflL, galn ls recelved,
accrued or reallzed durlng Lhe year, and lL ls noL exempL from lncome Lax
under Lhe ConsLlLuLlon, LreaLy or law.
Mere lncrease ln Lhe value of properLy does noL consLlLuLe Laxable lncome. lL
ls noL yeL reallzed durlng Lhe year.
1ransfer of appreclaLed properLy Lo Lhe employee for servlces rendered ls
Laxable lncome.
8
1LS1 ln uL1L8MlnlnC lnCCML
8eallzaLlon LesL
1here musL be separaLlon from caplLal of someLhlng of
exchangeable value (e.g., sale of asseL)
Clalm of rlghL docLrlne
Cl8 v. !avler, 199 SC8A 824
Lconomlc beneflL LesL
SLock opLlon glven Lo Lhe employee
aymenL of real properLy LhaL has appreclaLed ln value by
employer Lo lLs employee
lncome from whaLever source
All lncome noL expressly exempLed from lncome, lrrespecLlve of
volunLary or lnvolunLary acLlon of Laxpayer ln produclng lncome
nA1u8L Cl lnCCML
CCMLnSA1lCn lnCCML
LxlsLence of employer-employee relaLlonshlp
8uSlnLSS Anu/C8 8ClLSSlCnAL lnCCML
nC employer-employee relaLlonshlp
CAl1AL CAln
8eal properLy ln Lhe hll and shares of sLock of domesLlc corporaLlon
CLher sources of caplLal galn
ASSlvL lnvLS1MLn1 lnCCML
lnLeresL, dlvldend, and royalLy lncome
8l8 cannoL compuLe compounded lnLeresL on delay ln paymenL of
promlssory noLes ln Lhe absence of sLlpulaLlon ln conLracL (clk v. lsobelo
coltotol cotp, Ck 1722J1, leb 12, 2007).
C1PL8 lnCCML
rlzes and wlnnlngs
All oLher lncome, galn or proflL noL covered by Lhe above classes
9
CCS1 C8 Au!uS1Lu 8ASlS
lC8MuLA
AmounL reallzed/Selllng prlce 100
Less: CosL or ad[usLed basls 80
Caln/(loss) from sale 20
AmounL reallzed" shall be Lhe sum of money recelved plus Lhe falr markeL
value of Lhe properLy (oLher Lhan money) recelved (Sec 40A, nl8C).
8asls of properLy:
lf acqulred by purchase, cosL,
lf acqulred by lnherlLance, lMv aL daLe of acqulslLlon,
lf acqulred by donaLlon, basls ln Lhe hands of donor,
lf acqulred for lnsufflclenL conslderaLlon, amounL pald by
Lransferee for Lhe properLy (Sec 40(8), nl8C).
C8CSS PlL 8lLLlnCS
A. C8 applles on revenue from LransporL of passengers,
cargoes or mall orlglnaLlng from Lhe hlllpplnes
ln1L8nA1lCnAL Al8 CA88lL8
lrom hll Lo forelgn desLlnaLlon
ConLlnuous and unlnLerrupLed fllghL
1ranshlpmenL of passenger ln anoLher counLry on anoLher forelgn alrllne: C8 Lax
applles only on allquoL porLlon of revenue on hlllpplne leg (hll Lo forelgn
counLry)
lrom forelgn counLry Lo Lhe hll
1hls ls LreaLed as lncome from forelgn sources, hence, exempL from hll lncome Lax
ln1L8nA1lCnAL SPllnC LlnL
lrom hll Lo flnal forelgn desLlnaLlon ls Laxable
lrom forelgn counLry Lo hll ls exempL
8. C8ulnA8? lnCCML
uemurrage fees (for laLe reLurn of conLalners) are akln Lo
renLal lncome sub[ecL Lo ordlnary corporaLe lncome Lax
raLe based on neL Laxable lncome from sources wlLhln Lhe
hlllpplnes
10
ln1L8LS1 lnCCML
1?LS Cl ln1L8LS1 lnCCML
Sub[ecL Lo lW1:
(a) lnLeresL lncome of deposlLor on bank deposlLs, deposlL subsLlLuLes,
LrusL and oLher slmllar arrangemenLs
20 lW1 - peso deposlL
7.3 lW1 - forelgn currency deposlL wlLh C8u/lCuu (lf deposlLor ls
resldenL) and exempL from Lax, lf deposlLor ls a non-resldenL
(b) lnLeresL lncome of C8u/lCuu on forelgn currency loans Lo (1)
resldenLs - 10 of gross lnLeresL lncome, or (2) non-resldenLs, C8us,
local commerclal banks, lncludlng branches of forelgn banks - exempL
from all Laxes.
nC1 sub[ecL Lo lW1 buL sub[ecL Lo regular Lax raLes (3-32, lf lndlvldual, 30, lf
corporaLlon): All oLher lnLeresL lncome or flnanclng lncome
LxempL lncome:
Long-Lerm deposlL or lnvesLmenL by lndlvlduals
1axable lncome:
referenLlal Lax raLe - re-LermlnaLlon of long-Lerm deposlL by lndlvldual (20: 1- less
Lhan 3 yrs, 12: 3 yrs-less Lhan 4 yrs, 3: 4 yrs-less Lhan 3 yrs), and lnLeresL on forelgn
loan
8egular Lax raLe (30) - All oLher cases
ulvluLnu lnCCML
8LCulSl1LS lC8 ulvluLnu uLCLA8A1lCn
resence of reLalned earnlngs
no prohlblLlon Lo declare dlvldend ln loan agreemenL
ueclaraLlon of dlvldend by 8oard of ulrecLors
1?LS Cl ulvluLnuS
1axable
Cash dlvldend
roperLy dlvldend
LxempL
SLock dlvldend (excepL when Lhere ls change ln proporLlonaLe lnLeresL
among sLockholders and Lhere ls subsequenL cancellaLlon or redempLlon
of shares declared as sLock dlvldend)
LlquldaLlng dlvldend - dlsLrlbuLlon of asseLs Lo sLockholders
1axable on Lhe parL of sLockholder under Lhe global Lax sysLem
11
ulvluLnu lnCCML
lnLer-corporaLe dlvldend: LxempL from Lax
CorporaLlon paylng dlvldend: uomesLlc corporaLlon
8eclplenL of dlvldend: AnoLher domesLlc corporaLlon or resldenL
forelgn corporaLlon
ulvldend pald Lo non-resldenL forelgn corporaLlon
CorporaLlon paylng dlvldend: uomesLlc corporaLlon
8eclplenL of dlvldend
lorelgn head offlce makes dlrecL lnvesLmenL ln hll company: 13 lW1
hll branch of forelgn corporaLlon makes lnvesLmenL ln hll company:
LxempL from lncome Lax
1ax-sparlng provlslon
lf forelgn counLry does noL lmpose lncome Lax on dlvldend pald by forelgn
corporaLlon
C1PL8 lnCCML
Income from any source whatever
1he words lncome from any source whaLever" dlscloses a leglslaLlve
pollcy Lo lnclude all lncome noL expressly exempLed from Lhe class of
Laxable lncome under our laws {MoJtlqol vs. koffetty, sopto, commlsslooet vs.
8OAc). 1he words lncome from any source whaLever" ls broad enough Lo
cover galns conLemplaLed here. 1hese words dlsclose a leglslaLlve pollcy
Lo lnclude all lncome noL expressly exempLed wlLhln Lhe class of Laxable
lncome under our laws, lrrespecLlve of Lhe volunLary or lnvolunLary acLlon
of Lhe Laxpayer ln produclng Lhe galns (Cotlettez vs. collectot, c1A cose 65, Aoq. J1,
1955).
Any economlc beneflL Lo Lhe employee whaLever may have been Lhe
mode by whlch lL ls effecLed ls Laxable. 1hus, ln sLock opLlons, Lhe
dlfference beLween Lhe falr markeL value of Lhe shares aL Lhe Llme Lhe
opLlon ls exerclsed and Lhe opLlon prlce consLlLuLes addlLlonal
compensaLlon lncome Lo Lhe employee (commlsslooet vs. 5mltb, J24 u.5. 177).
12
LxCLuSlCnS
Llfe lnsurance proceeds
AmounL recelved by lnsured as reLurn of premlum
ClfLs, bequesLs and devlses
CompensaLlon for ln[urles or slckness
lncome exempL under LreaLy
8eLlremenL beneflLs, penslons, graLulLles
8.A. 7641 (3 yrs & 60 yrs) and 8.A. 4917 (10 yrs & 30 yrs)
lnLeresL lncome of employee LrusL fund or accredlLed reLlremenL plan ls exempL
from lW1 (clk v. Ccl ketltemeot lloo, 207 5ckA 487)
AmounL recelved as a consequence of separaLlon because of deaLh, slckness
(tbot wlll eoJooqet llfe of employee) or oLher physlcal dlsablllLy or for any
cause beyond Lhe conLrol of employee
Mlscellaneous lLems
lncome of forelgn governmenL
lncome of governmenL or lLs pollLlcal subdlvlslons from any publlc uLlllLy or
exerclse of governmenLal funcLlon
LxLM1 ASSCClA1lCnS
1he phrose "ony of their octivities conducted for profit" does not quo/ify the
word "properties."-- 1he phrase any of Lhelr acLlvlLles conducLed for proflL" does noL
quallfy Lhe word properLles." 1hls makes lncome from Lhe properLy of Lhe organlzaLlon
Laxable, regardless of how LhaL lncome ls used - wheLher for proflL or for lofLy non-proflL
purposes. 1hus, Lhe lncome derlved from renLals of real properLy owned by Lhe ?oung Men's
ChrlsLlan AssoclaLlon of Lhe hlllpplnes, lnc. (MCA), esLabllshed as a welfare, educaLlon and
charlLable non-proflL corporaLlon, ls sub[ecL Lo lncome Lax. 1he renLal lncome cannoL be
exempLed on Lhe sollLary buL unconvlnclng ground LhaL sald lncome ls noL collecLed for proflL
buL ls merely lncldenLal Lo lLs operaLlon. 1he law does noL make a dlsLlncLlon. Where Lhe law
does noL dlsLlngulsh, nelLher should we dlsLlngulsh. 8ecause Laxes are Lhe llfeblood of Lhe
naLlon, Lhe CourL has always applled Lhe docLrlne of sLrlcL lnLerpreLaLlon ln consLrulng Lax
exempLlons. ?MCA ls exempL from Lhe paymenL of properLy Laxes only buL noL lncome Laxes
because lL ls noL an educaLlonal lnsLlLuLlon devoLlng lLs lncome solely for educaLlonal
purposes. 1he Lerm educaLlonal lnsLlLuLlon" has acqulred a well-known Lechnlcal meanlng.
under Lhe LducaLlon AcL of 1982, such Lerm refers Lo schools. 1he school sysLem ls
synonymous wlLh formal educaLlon whlch refers Lo Lhe hlerarchlcally sLrucLured and
chronologlcally graded learnlngs organlzed and provlded by Lhe formal school sysLem and for
whlch cerLlflcaLlon ls requlred ln order for Lhe learner Lo progress Lhrough Lhe grades or
move Lo hlgher levels (commlsslooet vs. coott of Appeols ooJ McA of tbe lblls., C.k. No.
12404J, Oct. 14, 1998).
13
uLuuC1lCnS
klnuS Cl uLuuC1lCnS
lLemlzed ueducLlons
CpLlonal SLandard ueducLlons
Speclal ueducLlons
l1LMlZLu uLuuC1lCnS
8uslness expenses, lncl. research and developmenL
lnLeresLs
1axes
Losses
8ad debLs
uepreclaLlon
uepleLlon
CharlLable conLrlbuLlons
ConLrlbuLlons Lo penslon LrusL
PealLh or hosplLallzaLlon premlum
uLuuC1lCnS
8uSlnLSS LxLnSLS
1. 1he expense musL be ordlnary and necessary,
2. ald or lncurred durlng Lhe Laxable year,
3. ln carrylng on or whlch are dlrecLly aLLrlbuLable Lo Lhe develop-
menL, managemenL, operaLlon and/or conducL of Lhe Lrade,
buslness or exerclse of professlon,
4. SupporLed by adequaLe lnvolces or recelpLs,
3. noL conLrary Lo law, publlc pollcy or morals. CperaLlng expenses
of an lllegal or quesLlonable buslness are deducLlble, buL
expenses of an lnherenLly lllegal naLure, such as brlbery and
proLecLlon paymenLs, are noL.
6. 1he Lax requlred Lo be wlLhheld on Lhe amounL pald or payable ls
shown Lo have been pald Lo Lhe 8l8.
CCnvLnlLnCL Cl 1PL LMLC?L8 8uLL: Llvlng quarLers or meals furnlshed Lo
employee shall be added Lo compensaLlon lncome sub[ecL Lo Lax. Powever, lf such
llvlng quarLers or meals are furnlshed Lo an employee for Lhe convenlence of Lhe
employer, Lhe value Lhereof need noL be lncluded as compensaLlon (88 2-86 & 3-
98)
14
AuvL81lSlnC LxLnSL
An expense ls ordlnary" when lL connoLes a paymenL, whlch ls normal ln
relaLlon Lo Lhe buslness of Lhe Laxpayer and Lhe surroundlng
clrcumsLances.
An expense ls necessary" where Lhe expendlLure ls approprlaLe or helpful
ln Lhe developmenL of Laxpayer's buslness or LhaL Lhe same ls proper for
Lhe purpose of reallzlng a proflL or mlnlmlzlng a loss.
9.4 M pald ln 1983 for adverLlslng a producL was sLaggerlng lncurred to
stlmolote fotote soles Lo creaLe or malnLaln some form of goodwlll for Lhe
Laxpayer's Lrade or buslness or for Lhe lndusLry or professlon of whlch Lhe
Laxpayer ls a member."
Coodwlll" generally denoLes Lhe beneflL arlslng from connecLlon and
repuLaLlon, and efforLs Lo esLabllsh repuLaLlon are akln Lo acqulslLlon of
caplLal asseLs. 1herefore, expenses relaLed LhereLo are noL buslness
expenses buL caplLal expendlLures (clk vs. Ceoetol looJs lbl., Ck No. 14J672, Apt.
24, 200J).
8ClLSSlCnAL lLLS
Legal and accounLanL's fees for prlor years were noL bllled ln
correspondlng years (1984-1983). lL was pald by Laxpayer ln succeedlng
year (1986) when lL was bllled by Lhe lawyer and accounLanL. 1axpayers
uses accrual meLhod of accounLlng.
Accrual of lncome and expense ls permlLLed when Lhe a|| events test" has
been meL. 1hls LesL requlres (1) flxlng a rlghL Lo lncome or llablllLy Lo pay,
and (2) Lhe avallablllLy of reasonably accuraLe deLermlnaLlon of such
lncome or llablllLy. lL does noL, however, demand LhaL Lhe amounL of
lncome or llablllLy be known absoluLely, lL only requlres LhaL a Laxpayer
has aL lLs dlsposal Lhe lnformaLlon necessary Lo compuLe Lhe amounL wlLh
reasonable accuracy, whlch lmplles someLhlng less Lhan an exacL or
compleLely accuraLe amounL.
Moreover, deducLlon Lakes Lhe naLure of Lax exempLlon, lL musL be
consLrued sLrlcLly agalnsL Lhe Laxpayer (commlsslooet vs. lsobelo coltotol cotpototloo,
C.k. No. 1722J1, leb. 12, 2007).
Legal fees pald for defendlng LlLle Lo properLy ls a caplLal expendlLure LhaL
should form parL of Lhe cosL of Lhe asseL, buL ls recovered by way of
depreclaLlon over Lhe llfe of Lhe asseL.
13
uLuuC1lCnS
IN1LkLS1 LkLNSL
1. 1here musL be a valld and exlsLlng lndebLedness,
2. 1he lndebLedness musL be LhaL of Lhe Laxpayer,
3. 1he lnLeresL musL be legally due and sLlpulaLed ln wrlLlng,
4. 1he lnLeresL expense musL be pald or lncurred durlng Lhe Laxable year,
3. 1he lndebLedness musL be connecLed wlLh Lhe Laxpayer's Lrade, buslness or
exerclse of professlon,
6. 1he lnLeresL paymenL arrangemenL musL noL be beLween relaLed Laxpayers as
mandaLed ln SecLlon 34(8)(2)(b), ln relaLlon Lo SecLlon 36(8), of Lhe 1ax Code,
7. 1he lnLeresL ls noL expressly dlsallowed by law Lo be deducLed from Lhe Laxpayer's
gross lncome (e.g., lnLeresL on lndebLedness Lo flnance peLroleum operaLlons),
and
8. 1he amounL of lnLeresL deducLed from gross lncome does noL exceed Lhe llmlL seL
forLh ln Lhe law. ln oLher words, Lhe Laxpayer's oLherwlse allowable deducLlon for
lnLeresL expense shall be reduced by forLy-Lwo percenL (42) of Lhe lnLeresL
lncome sub[ecLed Lo flnal Lax beglnnlng november 1, 2003 under 8.A. 9337, and
LhaL effecLlve !anuary 1, 2009, Lhe percenLage shall be LhlrLy-Lhree percenL (33)
j5ec. J4(8)(1), Nlkc].
uLuuC1lCnS
1AkLS
1. aymenLs musL be for Laxes, naLlonal or local,
2. 1axes are lmposed by law upon Lhe Laxpayer,
3. 1axes musL be pald or accrued durlng Lhe
Laxable year ln connecLlon wlLh Lhe
Laxpayer's Lrade, buslness or professlon, and
4. 1axes are noL speclflcally excluded by law from
belng deducLed from Lhe Laxpayer's gross lncome.
Ways Lo avold double LaxaLlon: Lax credlL or Lax deducLlon
lorelgn Lax credlL ls deducLed from hll lncome Lax, buL amounL of Lax
credlL ls sub[ecL Lo a maxlmum amounL based on formula.
1ax deducLlon ls deducLed from gross lncome, wlLhouL any llmlLaLlon.
16
uLuuC1lCnS
LCSSLS {kev. keqs. No. 12-77 ooJ kev. keqs. No. 10-79)
1. 1he loss musL be LhaL of Lhe Laxpayer,
2. 1he loss ls acLually susLalned and charged off wlLhln Lhe Laxable
year,
3. 1he loss ls evldenced by a closed and compleLed LransacLlon,
4. 1he loss ls noL clalmed as a deducLlon for esLaLe Lax purposes,
3. 1he loss ls noL compensaLed for by lnsurance or oLherwlse,
6. ln Lhe case of an lndlvldual, Lhe loss musL be connecLed wlLh hls
Lrade, buslness or professlon, or lncurred ln any LransacLlon
enLered lnLo for proflL Lhough noL connecLed wlLh hls Lrade,
buslness or professlon, and
7. ln Lhe case of casualLy loss, lL has been reporLed Lo Lhe 8l8
wlLhln forLy-flve days from daLe of occurrence of Lhe loss.
CaplLal losses are deducLlble only Lo Lhe exLenL of caplLal galns.
Sale of real properLy classlfled as caplLal asseL locaLed ln Lhe hll
Sale of shares of sLocks of a domesLlc corporaLlon
Sale of [ewelry held for more Lhan 12 monLhs
uLuuC1lCnS
8Au uL81S
1. 1here musL be an exlsLlng lndebLedness due Lo Lhe Laxpayer
whlch musL be valld and legally demandable,
2. 1he same musL be connecLed wlLh Lhe Laxpayer's Lrade, buslness
or pracLlce of professlon,
3. 1he same musL noL be susLalned ln a LransacLlon enLered lnLo
beLween relaLed parLles enumeraLed under Sec. 36(8) of Lhe 1ax
Code of 1997,
4. 1he same musL be acLually charged off Lhe books of accounLs of
Lhe Laxpayer as of Lhe end of Lhe Laxable year, and
3. 1he same musL be acLually ascerLalned Lo be worLhless and
uncollecLlble as of Lhe end of Lhe Laxable year.
17
uLuuC1lCnS
1Ax 8LnLll1 8uLL
1he Laxpayer ls obllged Lo declare as Laxable lncome any
subsequenL recovery of bad debLs ln Lhe year Lhey were
collecLed Lo Lhe exLenL of Lhe Lax beneflL en[oyed by Lhe
Laxpayer when Lhe bad debLs were wrlLLen off and clalmed
as deducLlon from gross lncome.
lL also applles Lo Laxes prevlously deducLed from gross
lncome buL whlch were subsequenLly refunded or credlLed
by Lhe 8l8. Pe has Lo reporL lncome Lo Lhe exLenL of Lhe
Lax beneflL derlved ln Lhe year of deducLlon.
uLuuC1lCnS
DLkLCIA1ICN
1. 1he allowance for depreclaLlon musL be reasonable,
2. lL musL be for properLy arlslng ouL of lLs use ln Lhe Lrade or
buslness, or ouL of lLs noL belng used Lemporarlly durlng Lhe year,
3. lL musL be charged off durlng Lhe Laxable year from Lhe Laxpayer's
books of accounLs,
4. uepreclaLlon shall be compuLed on Lhe basls of hlsLorlcal cosL or
ad[usted bas|s. Wh||e f|nanc|a| account|ng a||ows computat|on based on
appra|sed va|ue, recovery of |nvestment for tax purposes sha|| be ||m|ted to
h|stor|ca| cost.
18
uLuuC1lCnS
CPA8l1A8LL CCn18l8u1lCnS
1. 1he charlLable conLrlbuLlon musL acLually be pald or made Lo Lhe
hlllpplne governmenL or any pollLlcal subdlvlslon Lhereof excluslvely for
publlc purposes, or any of Lhe accredlLed domesLlc corporaLlon or
assoclaLlon speclfled ln Lhe 1ax Code,
2. lL musL be made wlLhln Lhe Laxable year,
3. lL musL noL exceed 10 (lndlvldual) or 3 (corporaLlon) of Lhe
Laxpayer's Laxable lncome before charlLable conLrlbuLlons (wheLher
deducLlble ln full or sub[ecL Lo llmlLaLlon),
4. lL musL be evldenced by adequaLe recelpLs or records, and
3. 1he amounL of charlLable conLrlbuLlon of properLy oLher Lhan money
shall be based on Lhe acqulslLlon cosL of sald properLy (5ec. J4(n), Nlkc).
1he llmlLaLlon ls lmposed Lo prevenL abuse of donaLlng palnLlngs and
oLher valuable properLles and clalmlng excesslve deducLlons Lherefrom.
uLuuC1lCnS
D. Cpt|ona| Standard Deduct|on
rlvllege ls avallable only Lo clLlzens or resldenL allens as well
corporaLlons sub[ecL Lo Lhe regular corporaLe lncome Lax,
Lhus, non-resldenL allens and non-resldenL forelgn
corporaLlons are noL enLlLled Lo clalm Lhe opLlonal sLandard
deducLlon.
SLandard deducLlon ls opLlonal, l.e., unless Laxpayer slgnlfles
ln hls/lLs reLurn hls/lLs lnLenLlon Lo elecL Lhls deducLlon, he/lL
ls consldered as havlng avalled of Lhe lLemlzed deducLlons,
Such elecLlon when made by Lhe quallfled Laxpayer ls
lrrevocable for Lhe year ln whlch made, however, he can
change Lo lLemlzed deducLlons ln succeedlng year(s),
19
uLuuC1lCnS
AmounL of sLandard deducLlon ls llmlLed Lo 40 of Laxpayer's gross sales or
recelpLs (ln Lhe case of an lndlvldual) or gross lncome (ln Lhe case of a
corporaLlon). lf Lhe lndlvldual ls on Lhe accrual basls of accounLlng for hls
lncome and deducLlons, CSu shall be based on Lhe gross sales durlng Lhe year.
lf he employs Lhe cash basls of accounLlng, CSu shall be based on hls gross
recelpLs durlng Lhe year. lL should be noLed LhaL cosL of sales or cosL of servlces
shall noL be allowed Lo be deducLed from gross sales or recelpLs.
A general professlonal parLnershlp (C) may clalm elLher Lhe lLemlzed
deducLlons or ln lleu Lhereof, Lhe CSu allowed Lo corporaLlons ln clalmlng Lhe
deducLlons ln an amounL noL exceedlng 40 of lLs gross lncome. 1he neL
lncome deLermlned by elLher Lhe lLemlzed deducLlon or CSu from Lhe C's
gross lncome ls Lhe dlsLrlbuLable neL lncome from whlch Lhe share of each
share ls Lo be ascerLalned.
roof of acLual expenses ls noL requlred, hence, he ls noL also requlred Lo keep
books of accounLs and records wlLh respecL Lo hls deducLlons durlng Lhe year.
L8SCnAL LxLM1lCnS
8A 8424: !an 1, 1998
Slngle and esLaLe or LrusL -
20,000
Pead of famlly - 23,000
Marrled - 32,000
lor each chlld, noL Lo
exceed 4 - 8,000
8A 9304: !uly 6, 2009
lndlvldual, wheLher slngle,
PCl, or marrled - 30,000
lor each chlld, noL Lo
exceed 4 - 23,000
Law exempLs lncome of
mlnlmum wage earners and
lncreases CSu from 10 Lo
40 of gross sales or
recelpLs, for lndlvlduals, and
of gross lncome, for
corporaLlons.
20
L8SCnAL LxLM1lCnS
Status-at-the-end-of-the-year ru|e
SLaLus-aL-Lhe-end-of-Lhe-year rule" whlch means LhaL whaLever ls Lhe
sLaLus of Lhe Laxpayer aL Lhe end of Lhe calendar year shall be used for
purposes of deLermlnlng hls personal and addlLlonal exempLlons generally
applles. A change of sLaLus of Lhe Laxpayer durlng Lhe Laxable year
generally beneflLs, buL does noL pre[udlce, hlm. 1hus, lf he marrles aL Lhe
end of Lhe year, he shall be enLlLled Lo personal exempLlon of
32,000/30,000. lf a chlld ls born aL any Llme durlng Lhe calendar year,
even on Lhe lasL day of Lhe year, Lhe Laxpayer ls enLlLled Lo clalm hls chlld
as a dependenL enLlLllng hlm Lo deducL addlLlonal exempLlon of
8,000/23,000 for LhaL year. Cn Lhe oLher hand, lf one of hls quallfled
dependenL chlldren dles durlng Lhe year, Lhe law conslders LhaL Lhe chlld
dled on Lhe lasL day of Lhe year, hence, he ls enLlLled Lo clalm Lhe full
amounL of addlLlonal exempLlon of 8,000/23,000 for Lhe deceased chlld
for Lhe year.
LuuCA1lCnAL lnS1l1u1lCn
roprleLary educaLlonal lnsLlLuLlons (lncludlng Lhose
admlnlsLered by lndlvlduals or groups wlLh an lssued
permlL Lo operaLe from uLCS, CPLu, or 1LSuA) and
hosplLals whlch are non-proflL shall pay 10 Lax on neL
Laxable lncome, excepL Lhose covered by Sec u hereof
(l.e., lncome sub[ecL Lo lW1), provlded LhaL gross
lncome from school-relaLed acLlvlLles exceeds 30 of
LoLal gross lncome.
Powever, lf gross lncome from unrelaLed (noL
subsLanLlally relaLed Lo Lhe exerclse of educaLlonal
lnsLlLuLlon or hosplLal) Lrade, buslness or oLher acLlvlLy
exceeds 30 of LoLal gross lncome from all sources, neL
lncome shall be sub[ecL Lo 8Cl1 (30).
21
lM8CL8L? ACCuMuLA1Lu
LA8nlnCS 1Ax
8A1lCnALL: lf proflLs were dlsLrlbuLed, shareholders would
be llable Lo pay lncome Lax Lhereon, lf noL so dlsLrlbuLed,
no Lax. 1hus, lAL1 ls a penalLy Lax for lmproper
accumulaLed of earnlngs and a form of deLerrenL Lo Lhe
avoldance of Lax on shareholders.
lAL1 = 10 x accumulaLed Laxable lncome of corporaLlon
lAL1 does noL apply Lo banks, lnsurance companles,
publlcly-held corporaLlons, Laxable parLnershlps,
enLerprlses reglsLered wlLh LZA, S8MA, and 8Cl.
Cnce proflL has been sub[ecLed Lo lAL1, Lhe same shall no
longer be sub[ecLed Lo lAL1 ln laLer years, even lf noL
declared as dlvldends.
lAL1
1he followlng are consldered reasonable needs
of buslness":
8eLalned earnlngs ls equal Lo or less Lhan 100 of
pald-up caplLal of corporaLlon,
Larnlngs reserved for:
ueflnlLe corporaLe expanslon pro[ecL or program requlrlng
conslderable caplLal expendlLure,
8ulldlng, planLs or equlpmenL acqulslLlon,
Compllance wlLh any loan covenanL or pre-exlsLlng
obllgaLlon under a leglLlmaLe buslness agreemenL,
ln case of subsldlarles of forelgn corporaLlons,
earnlngs lnLended or reserved for lnvesLmenLs wlLhln
Lhe hll as proven by corporaLe records.
22
1Ax-l8LL LxCPAnCL
CLnL8AL 8uLL: 1he enLlre amounL of galn or loss shall
be recognlzed upon Lhe sale or exchange of properLy.
LxCL1lCnS: no galn or loss aL Lhe Llme of exchange ls
recognlzed:
1. ML8CL8 C8 CCnSCLluA1lCn, where a corporaLlon,
shareholder, or securlLy holder exchanges properLy, shares
or securlLles solely for shares of sLocks of a corporaLlon,
whlch ls a parLy Lo Lhe merger.
2. 18AnSlL8 Cl 8CL81? lC8 SPA8LS Cl S1CCkS, as a
resulL of whlch, he, alone or LogeLher wlLh oLhers noL
exceedlng four, galns conLrol of sald corporaLlon.
ACCCun1lnC ML1PCuS
Cash meLhod
Accrual meLhod
All evenLs LesL, amounLs recelved ln advance are noL LreaLed as
revenue of Lhe perlod ln whlch recelved buL as revenue of fuLure
perlods ln whlch earned (Moollo MooJotlo notels vs. clk, c1A cose No. 5046, Mot
24, 1997).
lnsLallmenL sales
Sale on Lhe lnsLallmenL plan
lnlLlal paymenLs do noL exceed 23 of CS
ueferred paymenL sale, noL on Lhe lnsLallmenL plan
lnlLlal paymenLs exceed 23 of CS
ercenLage of compleLlon
Crop year meLhod
23
llLlnC Cl 1Ax 8L1u8n
Su8S1l1u1Lu llLlnC Cl l18: no lndlvldual lncome Lax reLurn
for Lhe year wlll be flled by Lhe employee concerned, and Lhe
employer ls Lhe one LhaL flles Lhe reLurn for hlm
Applles only Lo lndlvlduals
WlLh only one (1) employer
Who correcLly wlLhholds Lhe lncome Lax on compensaLlon lncome pald
Lo Lhe employee and remlLs Lhe same Lo Lhe 8l8
SubsLlLuLed flllng of reLurn does noL apply when Lhe
condlLlons above are noL meL, such as when Lhe lndlvldual has
(a) Lwo or more employers, (b) mlxed lncomes, correcL W1
was noL deducLed from compensaLlon lncome, eLc.
llLlnC Cl 1Ax 8L1u8n
lndlvldual derlvlng mlxed lncome, or purely buslness/ professlonal lncome,
or oLher lncome musL flle hls quarLerly lncome Lax reLurns (8l8 lorm 1700
C) and annual lncome Lax reLurn (8l8 lorm 1700 ) as follows:
erlod uue uaLe for llllng 8eLurn
24
llLlnC Cl 1Ax 8L1u8n
A domesLlc corporaLlon and resldenL forelgn corporaLlon shall flle quarLerly
corporaLe lncome Lax reLurn (8l8 lorm 1702 C) and annual corporaLe lncome Lax
reLurn (8l8 lorm 1702 as follows:
C1 8eLurn May 31 of same year
C2 8eLurn AugusL 31 of same year
C3 8eLurn november 30 of same year
Annual 8eLurn Aprll 13 of Lhe followlng year (lf on calendar
year), or 13Lh day of Lhe fourLh monLh followlng
Lhe close of Lhe flscal year (lf on flscal year).
CompuLaLlon of Lhe quarLerly and annual Lax reLurns of lndlvlduals (excepL Lhose
recelvlng purely compensaLlon lncome) and corporaLlons shall be made on Lhe
cumu/otive bosis, l.e., gross lncome and deducLlons are consolldaLed and Lhe
lncome Lax llablllLy ls compuLed on Lhe consolldaLed neL lncome, and Lhe lncome
Laxes pald for Lhe precedlng quarLer(s) are credlLed agalnsL Lhe consolldaLed
lncome Lax due.
LND CI kLSLN1A1ICN
4tty. vic c. Momo/oteo
Moblle: 0918-9037436
Lmall: vlc.mamalaLeo[vcmlaw.com.ph,
vlcmamalaLeo[yahoo.com