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NIRC SECTION 1 83
August 31, 2016
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NIRC being a special law prevails over a general law like Civil Code.
Revenue law, is a law passed for the purpose of authorizing the levy and
collection of taxes.
Revenue derived from taxes are exempt from execution.
Revenue refers to all funds or income derived by the government whether
from tax or other source.
Enforcement and collection of tax is executive in character.
La Suerte Cigar vs. CA, 134 SCRA 29 when an administrative agency
renders an opinion by means of circular or memo, it merely interprets a preexisting law, and no publication is necessary for its validity. Construction by
an executive branch of government of a particular law although not binding
upon the courts must be given weight. These agencies are the one called to
implement the law.
Rulings or interpretation while entitled to great weight, are not judicially
binding.
BIR RULINGS and DOJ Opinions are less general interpretation of tax laws of
the administrative level issued by the BIR and the DOJ. These two will take a
character of substantive rules and are generally binding and effective, if not
otherwise contrary to law or constitution.
It is the BIR who will seek DOJ opinion on tax laws not the taxpayer.
Ruling of first impression means rulings, opinions & interpretations without
established precedents. Only the CIR can issue this ruling. Those with
precedents are called Ruling with established precedents.
Requisites for valid regulations. (a) They must not be contrary to law; (b)
They must be published in the Official Gazette; (c) They must be useful, practical and
necessary for law enforcement; (d) They must be reasonable in their provisions; and (e)
They must be in conformity with the legal provisions.
Rational Basis Test - It is sufficient that the legislative classification is rationally
related to achieving some legitimate state interest. (British American Tobacco vs.
Camacho, G.R. No. 163583, April 15, 2009)
In order to stand the test of judicial scrutiny, the assessment must be based on
actual facts. The presumption of correctness of assessment being a mere presumption
cannot be made to rest on another presumption x x x. (Collector vs. Benipayo, 4 SCRA
182)
A tax assessment is prima facie valid and correct and the taxpayer has the
burden of proof to impugn its validity. (Behn Meyer & Co. vs. Collector of Internal Revenue,
27 Phil. 647) The validity of a tax assessment is a disputable presumption. (Perez vs.
CTA, et al., G.R. No. L-10507, prom. May 30, 1948; Collector vs. Bohol Land Transportation,
G.R. Nos. L-13099 and L13462, prom. April 29, 1960)
All presumptions are in favor of the correctness of tax assessments. The good
faith of tax assessors and the validity of their actions are presumed. The burden of proof
is upon the taxpayer to show clearly that the assessment is erroneous, in order to
relieve himself from it.
Where a taxpayer question the correctness of an assessment against him and is
apparently not acting in bad faith or merely attempting to delay payment, but is deprived
of the best means of proving his contention because his books of accounts were lost by
the BIR agent who examined them, said taxpayer must be given an opportunity to prove
by secondary evidence that the assessment is incorrect. (Santos vs. Nable, et al., 2 SCRA
21)
As the law provides that any person who is aggrieved by an assessment issued
by the Commissioner of Internal Revenue is given only 30 days to appeal therefrom to
the Tax Court, the only effect should be that after that period, the assessment can no
longer be questioned by the taxpayer; otherwise, the assessment which has become
final, executory and demandable under Section 11 of Republic Act No. 1125 would be
an absurdity. (Republic vs. Antonio Albert, G.R. No. L-12996, prom. Dec. 28, 1961)
The taxpayers failure to appeal to the Court of Tax Appeals in due time made the
assessment in question final, executory and demandable. (Republic vs. Manila Port
Service, G.R. No. L-18208, prom. Nov. 27, 1964) And when the present action for collection
of the tax was instituted, said taxpayer was already barred from disputing the
correctness of the assessment or invoking any defense that would reopen the question
of its tax liability on the merits. (Republic vs. Albert, 3 SCRA 717) Otherwise, the period of
thirty days for appeal to the Court of Tax Appeals would make little sense. (Republic vs.
Lopez, 2 SCRA 566)
Acquittal in a criminal case does not exonerate taxpayers civil liability to pay the
tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
Best evidence obtainable, explained. It refers to the findings gathered by
internal revenue examiners and agents from the records of the register of deeds,
corporations, employers, clients or patients, tenants, lessees, vendees and the like with
whom the taxpayer had previous transactions or from whom he acquired any income.
It will be noted that under Section 5 of the said Code, the Commissioner of
Internal Revenue may obtain information on potential taxpayers from government
offices or agencies.
Networth method of investigation. As stated above, the Commissioner of
Internal Revenue may make tax assessments on the best evidence obtainable. He can
avail of methods in order to arrive at a correct and reasonable assessment of taxes.
One method is the networth method of investigation.
The power or authority of the Commissioner to choose the method of determining
taxable income is quite comprehensive, and the only limitation to the exercise of such
power of authority is that the method chosen or adopted must clearly reflect the
income. Consequently, Tax Code (Sec. 43) authorizes the Commissioner of Internal
Revenue to employ the networth method, where a taxpayer keeps no books or records
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or where such books or records do not clearly reflect his income. (Commissioner vs.
Enrique Avelino, G.R. No. L-14847, prom. Sept. 19, 1961)
It is not required in networth cases that the Government prove with absolute
certainty the sources from which petitioner derived his unreported income. It is sufficient
if evidence is adduced of the likely source or sources of such income. In this case, there
is ample evidence of the probable sources from which petitioner could have derived his
undeclared income such as flourishing business in optical goods, office equipment, and
haberdashery; horse racing, and real estate transactions. (Reyes vs. Collector, G.R. Nos.
L-11534 & L-11558, prom. Nov. 25, 1968)
(2) Any taxpayer who has filed an application for compromise of his tax liability under
Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his
claim that hi financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under
Republic Act No. 1405, Republic Act No. 6426, otherwise known as the Foreign Currency Act of
the Philippines, or under other general or special laws, and such waiver shall constitute the
authority of the Commissioner to inquire into the bank deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of tax
information from a foreign tax authority pursuant to an international
convention or agreement on tax matters to which the Philippines is a signatory
or a party of: Provided, That the information obtained from the banks and other
financial institutions may be used by the Bureau of Internal Revenue for tax
assessment, verification, audit and enforcement purposes.1
In case of a request from a foreign tax authority for tax information held by banks and
financial institutions, the exchange of information shall be done in a secure manner to
ensure confidentiality thereof under such rules and regulations as may be promulgated
by the Secretary of finance, upon recommendation of the Commissioner.
The Commissioner shall provide the tax information obtained from banks and financial
institutions pursuant to a convention or agreement upon request of the foreign tax
authority when such requesting foreign tax authority has provided the following
information to demonstrate the foreseeable relevance of the information to the request:
(a) The identity of a person under examination or investigation;
(b) A statement of the information being sought including its nature and the form
in which the said foreign tax authority prefers to receive the information from
the Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines
or is in the possession or control of a person within the jurisdiction of the
Philippines;
(e) To the extent known, the name and address of any person believed to be in
possession of the requested information;
(f) A statement that the request is in conformity with the law and administrative
practices of the said foreign tax authority, such that if the requested
information was within the jurisdiction of the said foreign tax authority then it
would be able to obtain the information under its laws or in the normal course
of administrative practice and that it is in conformity with a convention or
international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would
give rise to disproportionate difficulties.
The Commissioner shall forward the information as promptly as possible to the
requesting foreign tax authority. To ensure a prompt response, the Commissioner shall
confirm receipt of a request in writing to the requesting tax authority and shall notify the
latter of deficiencies in the request, if any, within sixty (60) days from receipt of the
request.
If the Commissioner is unable to obtain and provide the information within ninety (90)
days from receipt of the request, due to obstacles encountered in furnishing the
information or when the bank or financial institution refuses to furnish the information,
he shall immediately inform the requesting tax authority of the same, explaining the
nature of the obstacles encountered or the reasons for refusal.
The term foreign tax authority, as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.
Q. How do banks respond to an order of a competent court?
A. For peso deposits, banks comply with orders for disclosure in court cases subject to these
requirements: (a) there must be a court order; (b) the order must be issued by a competent
court specifically directing the bank concerned to disclose the required information; and (c) the
bank should check and satisfy itself that the deposits or investment in government bonds being
inquired into are either the subject of a case of bribery or dereliction of duty of public officials, or
of a case where the deposit or investment itself is the subject matter of the litigation. If these
requirements are not met, there would be basis for the bank to request the court to excuse
compliance with the court order.
In impeachment cases, it is necessary that there be an order issued by the impeachment court
or by its authorized officer. For foreign currency deposits, the law does not provide an instance
for disclosure upon a court order. As mentioned above, there is only a single instance for
disclosure under RA 6426 and, that is, upon written permission of the depositor. Thus, for
foreign currency deposit accounts subject of a court order, the bank can invoke RA 6426 to
excuse compliance.
Q. What is the liability of the banks and/or its officers and employees for violating the
laws against disclosure?
A. Violations of the prohibitions against disclosures under RA 1405, RA 6426 and under the
General Banking Law of 2000 are subject to stiff criminal penalties.
Under RA 1405, the offender is subject to imprisonment of not more than five years or a fine of
not more than P20,000, or both, in the discretion of the court. Under RA 6426, the penalty is
imprisonment of not less than one year not more than five years or a fine of not less than
P5,000 nor more than P25,000, or both, in the discretion of the court. The violation of Sec. 55 of
the General Banking Law of 2000, the penalty is imprisonment of not less than two years nor
more than 10 years or a fine of not less than P50,000 nor more than P200,000, or both, in the
discretion of the court; and in addition, if the offender is a director or officer of a bank, he is
subject to suspension or removal by the Monetary Board.
INCOME TAX
A. Income Tax Systems
There are three kinds of income tax systems:
o Global (unitary) tax system
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Here, all items of gross income, deductions, personal and additional exemptions
are reported in one income tax return and a single tax is imposed on all income
received or earned, regardless of the activities which produced the income.
It is akin to putting all income into one basket and taxing the entire basket.
D. Situs of Taxation
Now that we know that only resident citizens and domestic corporations are
taxed from income sources worldwide, it is important to determine whether such income
is realized in the Philippines or abroad. This brings us to Section 42.
The place of the signing of a contract is NEVER an issue or a factor for determining
the source of income.
Do not forget the turnkey contract case of CIR v. Marubeni (G.R. No. 137377,
December 18, 2001), when it comes to situs problems.
Expenses of a multinational corporation directly allocated or identified with the
operations of the Philippine branch. So, the company can claim as its deductible
share a ratable part of such expenses based upon the ratio of the local branchs
gross income to the total gross income, worldwide, of the multinational corporation.
(CIR v. CTA and Smith Kline & French Overseas Co., G.R. No. L-54108, January
17, 1984)
The source of income is the property, activity, or service that produced the income.
o It is the place of activity creating the income which is controlling, and not the
place of business or residence of a corporation.
Hence, reinsurance premiums ceded to foreign reinsurers are considered
income from Philippine sources. (Howden & Co., Ltd. V. CIR, G.R. No. L19392, April 14, 1965)
Also, the sale of airline tickets through a general sales agent in the
Philippines is considered income from Philippine sources, even if the tickets
pertain to an airline company which does not maintain any flights to and from
the Philippines. (CIR v. British Overseas Airways Corporation, G.R. No. L65773, April 30, 1987, wherein the Court considered the sale of the tickets
as the source of income, and not the activity of actually transporting
passengers)
When the sale is consummated within the Philippines (as in the title to the
property was transferred in the country), the situs of the sale is in the
Philippines and is therefore taxable here. (A. Soriano Y Cia v. CIR, G.R. No.
L-5896, August 31, 1955)
Income
Interest income
Dividend Income:
1) From domestic corporation
2) From foreign corporation
Service Income
Rent income
Royalty income
Gain on sale of real property
Gain on sale of personal property
Gain on sale of domestic shares of stock
Place of performance
Location of Property
Place of use of intangible
Location of property
Place of sale
Income within
Resident aliens
Resident alien is an individual:
1. Whose residence is within the Philippines, and
2. Who is not a citizen
Mere physical or body presence is enough, not intention to make the country ones
abode. (Garrison v. CA, G.R. No. L-44501, July 19, 1990)
An alien actually present in the Philippines who is not a mere transient or sojourner
is a resident of the Philippines for purposes of income tax. Whether he is a transient
or not is determined by his intentions with regard to the length and nature of his
stay.
o A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient.
o But if his purpose is of such a nature that an extended stay may be necessary for
its accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to
return to his domicile abroad when the purpose for which he came has been
consummated or abandoned. (R.R. 2-1940)
The BIR has ruled that there is intention on the part of an alien to stay in the
Philippines indefinitely when the alien:
o Had a Special Resident Retirees Visa;
o Acquired real property and is actually present most of the time in the Philippines;
and
o Registered as a taxpayer with the BIR. (BIR Ruling No, 252-11)
Non-resident citizens
Meaning of non-resident citizen:
1. Citizens who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein;
2. Citizen who leaves the Philippines during the taxable year to reside abroad,
either as an immigrant or for employment on a permanent basis;
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable
year;
4. Citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
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Non-resident citizens who are exempt from tax with respect to income derived from
sources outside the Philippines shall no longer be required to file information
returns from sources outside the Philippines beginning 2001. (R.R. 5-2001)
The phrase most of the time shall mean that the said citizen shall have stayed
abroad for at least 183 days in a taxable year.
o However, citizens who work outside of the Philippines for at least 183 days in a
taxable year due to a contract of employment with a Philippines employer (such
as employees seconded to a foreign country) is not considered a non-resident
citizen because they are not considered employed abroad. They do not fall
within Section 22(E)(3) because their employment remains with the Philippines
employer. (BIR Ruling No. 116-12)
The wage or income of an OFW/OCW which is earned from outside the Philippines
is exempt from income tax.
o An OCW is a Filipino citizen who:
Holds a job outside the Philippines;
Is physically present in that foreign country where the job is;
Is registered with the POEA;
Has valid overseas employment certificate;
Their salaries and wages are paid by an employer abroad and is not borne by
any entity or person in the Philippines. (R.R. 1-2011)
One who comes to the Philippines for a definite purpose which in its nature may be
promptly accomplished is a transient or non-resident. (R.R. 2-1940)
Discounts for senior citizens are now treated as tax deductions for business, as per
The Expanded Senior Citizens Act of 2003 (R.A. 9257). This can be very bad for the
taxpayer because he doesnt get the peso for peso benefit which he would have
gotten if it were considered a tax credit as before. (M.E. Holdings Corp. v. CIR &
CTA, G.R. No. 160193, March 3, 2008)
partnership should not be required to file quarterly returns if they received their shares
in the net income of the partnership at the end of the calendar year or the fiscal year of
the partnership.
In reply thereto, I have the honor to inform you that pursuant to Sections 2 & 3,
Revenue Regulations No. 7-93 prescribing the procedures for the filing of quarterly
returns and payment of the quarterly income tax by individuals receiving selfemployment income, a return of summary declaration or gross income and deductions
(BIR Form No. 1701 Q) for each of the first three quarters of the calendar year, and a final
or adjustment return (BIR Form No. 1701) shall be filed by all individuals, including
estates and trusts. The tax returns shall be filed on or before indicated dates:
First quarterly return
Second quarterly returnThird quarterly return Final return
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The corresponding income tax, as computed, shall be paid at the same time that
the returns are filed based on declarations of actual income and deductions for the
particular quarter. The filing of the returns and payment of taxes shall be in lieu of the
filing of a declaration of estimated income for the current taxable year and the payment
of the estimated tax as provided for in Section 67(a) and (b) (now 60) of the NIRC
primarily for the reason that the procedure prescribed in Section 67 (now 60) of the NIRC
of estimating the amount of income and tax to be paid by the individual.
Such being the case, your opinion that professional partnerships are not required
to file quarterly returns of their income is hereby confirmed. However, individual partners
of a professional partnership are required to file a return of summary declaration of
gross income and deduction for each of the first three quarters of the calendar year and
a final or adjustment return. The corresponding tax, as computed, shall be paid at the
same time that the returns are filed based on declarations of actual income and
deductions for the particular quarter. (BIR Ruling No. 94-60)
Joint venture. A joint venture was created when two corporations while
registered and operating separately were placed under one sole management which
operated the business affairs of said companies as though they constituted a single
entity thereby obtaining substantial economy and profits in the operation. (Collector vs.
Bantangas Transportation, et al, 102 Phil. 822; See also BIR Ruling Nos. 020(b)-020-80-187-82
dated June 3, 1982; 24-000-00-115-86 dated July 17, 1986; 069-90 dated May 9, 1990)
Thus, Empire Venture which has been constituted as a single entity whereby
Empire and Uniphil agreed to pool their resources for the development of a parcel of
land and the construction of condominium units thereon as well as the eventual sale of
said units is a joint venture which is subject to the 35% Section 27 of the Tax code, as
amended. However, the respective 70% and 30% shares of Uniphil and Empire from the
profits of the joint venture are not subject to income tax Section 27 of the Tax Code, as
amended. (BIR Ruling No. 91-254)
Note: The term corporation mentioned in joint venture refers to a corporation as
defined by the corporation law.
Unregistered partnerships. They, in order to be subject to corporate income
tax, must be engaged in joint venture for profit. To constitute said unregistered
partnership, the character of habituality peculiar to business transactions for the
purpose of gain must be present. (BIR Ruling No. 89-124)
STOCK DIVIDEND
- The payment by a corporation of a dividend in the form of shares usually of its
own stocks without change in per value.
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Dividends out of quarterly profits. This refers to your letter requesting opinion
as to whether your company can declare cash and/or stock dividends out of quarterly
profits and/or surplus.
It is represented that your company has been issuing cash and stock dividends
for the last five (5) years; that during the early part of this year, you have issued 50%
dividend out of accumulated retained earnings; and that since your company has been
making profits as early as the first quarter of this year, you intend to declare cash and/or
stock dividend out of quarterly profit.
Ruling: An ordinary dividend is the most common type of corporate distribution,
and is defined as (1) a distribution of property by a corporation to its stockholder (2)
made in the ordinary course of its business (3) out of its earnings and profits. (par. 2251,
2d Am. Jur. 33) Thus, a dividend is a corporate profit set aside, declared and ordered by
the directors to be paid to the stockholders on demand or at a fixed time. (Fisher vs.
Trinidad, 43 Phil. 973)
It is distinguished from profits for the profits in thousands of a corporation do not
become dividends until they have been set apart, or at least declared, as dividends and
transferred to the separate property of the individual stockholders. Such being the case,
your company can declare cash and/or stock dividends out of its quarterly profit. (BIR
Ruling No. 87-172)
Domestic Corporations and Foreign Corporations
The term domestic, when applied to a corporation means created or organized
in the Philippines or under its laws (Se. 22[C], NIRC), while the term foreign, when
applied to a corporation, means a corporation which is not domestic (Sec. 22[D], NIRC).
The branches of a domestic corporation, whether located in the Philippines or abroad,
are merely extensions of the local head office. Accordingly, their incomes in the
Philippines and abroad of the head office and foreign branches are to be reported by
the Philippine head office in its corporate income tax return, and the branch profits
remitted by its foreign branches to the Philippine head office shall no longer be subject
to the branch profit remittance tax because (a) the income of the foreign branch had
already been subjected to Philippine income tax, and (b) the branch profit remittance tax
applies only to Philippine branches of foreign corporations operating in the Philippines
operating in the customs territory and exempts from the tax profits remitted by the
Philippine branch operating in special economic zones to their head offices abroad.
A resident foreign corporation is a foreign corporation engaged in trade or
business within the Philippines (Sec. 22[H], NIRC), and a nonresident foreign
corporation is a foreign corporation not engaged in trade or business within the
Philippines (Sec. 22[I], NIRC).
Test in determining Status of Corporations
Following the above provisions, it can be said that the Philippines adopted the
law of incorporation test under which a corporation is considered (a) as a domestic
corporation,, if it is organized or created in accordance with or under the laws of the
Philippines, or (b) as a foreign corporation, if it is organized or created in accordance
with or under the laws of a foreign country. Corollarily, a domestic corporation may be
formed or organized by foreigners under the Philippine Corporation Code, provided that
it is organized under the laws of the Philippines. On the other hand, a corporation
established by Filipino citizens under the laws of a foreign country will be treated as a
foreign corporation, and the branch that such foreign corporation sets up in the
Philippines is a resident foreign corporation. In other words, the nationality of the
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requisites are not met, the joint venture becomes liable to the corporate income tax.
Each member of the joint venture not taxable as a corporation shall report and pay
taxes on their respective shares to the joint venture profit. Since it is not considered as a
separate taxable entity, the net income or loss of the joint venture or consortium is taken
up and reported by the co-venturers or consortium members in accordance with their
participation in the project as set forth in their agreement. The participation in the project
as set forth in their agreement. The two (2) elements unincorporated entity (or entity
not registered with the Securities and Exchange Commission) and for the purpose of
undertaking construction or energy-related project must be present in order that the
joint venture or consortium may not be considered as a separate taxable entity.
Tax-exempt joint venture shall not include those who are mere suppliers of
goods, services or capital to a construction project.
Joint Venture (JV) involving foreign contractors may be treated as non-taxable
corporation only if:
1. Member foreign contractor is covered by a special license as contractor by
PCAB; and
2. Construction project is certified by the appropriate Tendering Agency
(government office) that the project is a foreign-financed/internationallyfunded project and that international bidding is allowed under the Bilateral
Agreement entered into by and between the Philippine government and the
foreign/international financing institution, pursuant to the rules and regulations
of R.A. 4566 (Contractors License Law)
Each member of the joint venture not taxable as corporation shall report and pay
taxes on their respective shares on the joint venture profit, received by a joining
corporation.
All licensed local contractors must enroll to BIRs eFPS at the RDO where local
contractors are registered as taxpayers.
Foreign joint venture or consortium that does not sell goods nor perform
services in the Philippines. A joint venture or consortium formed among nonresident foreign corporations in connection with a local project in the Philippines is not
subject to Philippine income tax, where said foreign joint venture or consortium does not
sell goods nor perform any service in the Philippines. This rule is anchored on the fact
that a foreign corporation is taxable only on income from sources within the Philippines
(BIR Ruling No. 23-95). Accordingly, no withholding tax is required to be deducted and
withheld by the Philippine payor from income payments from foreign sources made to
the foreign joint venture or consortium.
Exempt joint venture or consortium may become taxable partnership. An
exempt joint venture or consortium undertaking a construction of office tower project
may subsequently become subject to income tax as a separate joint venture or
consortium, where after the construction period, the joint venture partners engaged in
the business of leasing the building floors or portions thereof separately owned by them
(BIR Ruling No. 317-92, October 28, 1992). The tax exemption of the joint venture granted
under the law is valid only up to the completion of the construction project and does not
extend to the subsequent sale or lease of the developed condominium floors or units to
customers.
BIR Rulings prior to Revenue Regulations No. 10-2012:
Corporations does not include joint venture undertaking construction
activity; allocation of floors, units, or lots is a mere return of capital. The joint
ventures described above are not subject to corporate income tax under Section 27 of
the 1997 Tax Code, since the term corporation does not include a joint venture or
consortium formed for the purpose of undertaking construction projects pursuant to
Section 22(B) of the 1997 Tax Code. Accordingly, the memorandum of agreement, joint
venture agreement, or exclusive development and marketing agreement between or
among the contracting parties, as the case may be, will not give rise to a taxable joint
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venture, and the allocation of specific floors or units or subdivision lots in the project is
not a taxable event and is not subject to income tax and expanded withholding tax,
because the allocation is a mere return of the capital that each party has contributed to
the project.
Transfer of land to joint venture is similar to capital contribution;
distribution of developed lots/units is merely an act of partitioning commonly
owned property. Joint venture agreements for the construction and development of
real property may or may not be treated as a separate taxable unit, depending on
whether or not a separate taxable unit, depending on whether or not a separate taxable
entity is established by the joint venture partners. If the parties did not form nor register
a separate entity and merely agreed to pool their resources to a common fund, no
separate taxable unit is created. In this case, each joint venture partner has to account
for his respective share in the net revenue earned from the joint venture project
separate income tax returns partners. Hence, the partners may file separate income tax
returns for its net revenue for the project less its respective proportionate share in the
joint venture expenses. The contribution of land to the joint venture is not a taxable
event that will give rise to capital gains tax on sale or transfer of land. Such transfer is
similar to a capital contribution that does not give rise to income tax. The distribution of
developed lots/units is merely an act of partitioning the commonly owned property. It is
nothing more than an act of terminating the co-ownership by making each partner
specific owner of the identifiable lot or unit. At this stage, no taxable sum has yet been
realized by the joint venture partners. That act of allocation or assigning portions of the
developed lots to each member of the joint venture cannot be treated as a taxable
event. The same is true despite the fact that the shares allocated to or received by the
partners may not necessarily correspond to the lot area originally contributed by them to
the joint venture. Hence, the titling of the land back to the joint venture partners is not
subject to income tax, expanded withholding tax, and value added tax (BIR Ruling DA165-03-18-99).
Sale of developed floor, unit or lot is subject to income tax. Should the
corporate landowner or developer sell any of the floors or portions of the floors allocated
to them to third parties, the gain that may be realized by them from such sale will be
subject to the regular corporate income tax and to the expanded withholding tax under
Revenue Regulations No. 6-85 (now Rev. Regs. No. 2-98), as amended (BIR Ruling No.
274-92, September 30, 1992). This rule applies even if the sale takes place before or
during the construction period.
Taxable Joint Ventures
There are two (2) instances when a joint venture becomes a taxable entity. First,
a domestic corporation jointly owned by individuals and by two or more existing
domestic corporations and/or foreign corporations that is incorporated under the laws of
the Philippines (e.g., D.M. Consunji, Inc.), or duly registered with or licensed by the
Securities and Exchange Commission [e.g., Marubeni Corporation Philippine Branch]
is a taxable corporation, even if it is engaged in the business of construction or energyrelated activity. Second, if the unincorporated joint venture or consortium (or
unregistered partnership) is engaged in any other line of business than construction or
energy-related activity with operating contract with the government, the same will also
be treated as a taxable corporation. The income and expenses of the taxable joint
venture must be reported by it during the taxable year.
Immediacy Test Improperly Accumulated Earnings Tax (Cyanamid vs. CA, G.R.
No. 108067, January 20, 2000)
Taxation of Co-ownership (Read)
1. Ona vs. Commissioner, 45 SCRA 74
2. Pascual vs. Commissioner, 166 SCRA 560
3. Obillos vs. Commissioner, 139 SCRA 436
18
- Gross Income
(A) General Definition the term all income derived from whatever source means
from legal or illegal sources.
The enumeration of items of income from no. 1 to 11 is not exclusive. Meaning that
incomes that are not mentioned in the enumeration are also included as part of gross
income.
Sources of income might be from the following activity:
1. Exercise of profession;
2. Services rendered;
3. Rentals;
19
c.
d.
e.
f.
g.
All of the following tests are followed in the Philippines for purposes of
determining whether income is received by the taxpayer of not during the year.
Significance of knowing the Type of Character of Income
In general, it is important to know the types of income realized by the taxpayer,
since the Philippines has adopted the semi-global or semi-schedular tax system. Under
21
this tax system, compensation income, and other income not subject to final income tax,
are added together to arrive at the amount of gross income of an individual, and after
deducting the allowable deductions from business and professional income, capital
gains, passive income, and other income not subject to final income tax as well as
personal and additional exemptions, if qualified, the graduated income tax rates ranging
from five percent (5%) to 32% are applied in the resulting net taxable income to arrive at
the income tax due and payable.
The passive investment income are generally subject to the final withholding tax;
hence, the income recipient does not file a tax return covering such passive investment
incomes, although the withholding agent-payor of income is held responsible under the
law to deduct, withhold and remit the final income tax thereon to the BIR.
Capital assets subject to the final capital gains tax such as shares of stock of a
domestic corporation and real property located in the Philippines, except when sold or
transferred by a dealer in securities or real estate dealer, are covered by the capital
gains tax return; hence, not included in the taxable income of the individual taxpayer
subject to the global tax system and the graduated income tax rates.
The rules for individuals discussed above apply also to a corporation, except that
the corporation does not receive compensation income and are not entitled to deduct
personal and additional exemptions from their gross income during the year.
Compensation Income
In general, the term compensation means all remuneration for services
performed by an employee for his employer under an employer-employee relationship
(See Sec. 2.78.3, Rev. Regs. No. 2-98, as amended), unless specifically excluded by the
Tax Code. In determining the existence of an employer-employee relationship, the
elements that are generally considered are: (a) the selection and engagement of the
employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employers
power to control the employee with respect to the means and methods by which the
work is to be accomplished. It is the so-called control test that is the most important
element (Brotherhood Labor Unity Movement of the Philippines v. Zamora, L-48645, January 7,
1987).
Who is an employee?
For taxation purposes, a director is considered an employee under Section 5 of
Revenue Regulations No. 12-86, to wit: An individual, performing services for a
corporation, whether as an officer and director or merely as a director whose duties are
confined to attendance at and participation in the meetings of the Board of Directors, is
an employee. The non-inclusion of the names of some of petitioners directors in the
companys Alpha List for 1997 does not ipso facto create a presumption that they are
not employees of the corporation, because the imposition of withholding tax on
compensation hinges upon the nature of work performed by such individuals in the
company. Moreover, Section 2.57.2.A(A) of Revenue Regulations No. 2-98 cannot be
applied to this case as the latter is a later regulation, while the accounting books
examined were for the year 1997 (First Lepanto Taisho Insurance Corporation v. CIR, G.R.
No. 197117, April 10, 2013). [NOTE: Beginning 1998, a director who is not an officer or
employee of a corporation is NOT an employee of said corporation; hence, the
applicable withholding tax to be deducted from such income shall be 10% EWT, which
is creditable against his ordinary income tax liability for the year, provided it is
evidenced by BIR Form 2307. However, said directors fee is taxed also under the
global tax system].
The term employee refers to any individual who is the recipient of wages and
includes an officer, employee or elected official of the government or any political
subdivision, agency or instrumentality thereof. It includes also an officer of a
corporation. Thus, a juridical entity that performs services to another person is not an
22
employee of the latter. Accordingly, the proper withholding tax on such income payment
is the expanded withholding tax (not withholding tax on compensation income). To
create an employer-employee relationship, the person that performs the service to
another must be an individual.
The term compensation income means all remuneration for services
performed by an individual employee for his employer, including the cash value of all
remuneration paid in any medium other than cash. There are various types of taxable
compensation income, such as salaries, wages, bonus, remuneration, honorarium,
benefits and allowances (including representation and transportation allowance (RATA),
personal emergency relief allowance (PERA), longevity pay, subsistence allowance,
hazard pay, annuities, pensions, etc. Additional compensation allowance (ACA) given to
government employees pursuant to E.O. 219 shall not be subject to withholding tax
pending its formal integration into the basic pay. While its nature shall continue to be
that of compensation, it shall be treated as part of the other benefits which are
excluded from compensation income, provided that the total amount does not exceed
30,000 (BIR ruling No. 034-2002, August 16, 2002 modified BIR ruling No. 179-99, November
22, 1999). BIR Ruling Nos. 120-96, November 8, 1996 and 062-2000, November 20,
2000 exempt benefits and allowances such as longevity pay, subsistence allowance,
and hazard pay granted to uniformed policemen and jail guards under R.A. 6975
(DILG Act of 1990). However, if the recipient is an AFP personnel, all remunerations
(monetary and non-monetary) are taxable, except allowances for quarters, clothing and
subsistence which are exempt from income tax pursuant to RMC 15-87 (BIR Ruling No.
143-96, December 24, 1996).
Compensation Income of Philippine Nationals and Aliens Employed by Foreign
Governments and International Organizations in the Philippines
Section 23 of the Tax Code lays down the general principles in taxing citizens
and alien individuals. Resident citizens are taxed on worldwide income, while resident
aliens are taxed only on their Philippine-source income. As an exception to the general
rule, most international agreements which grant withholding tax immunity to foreign
governments/embassies/diplomatic missions and international organizations also
provide exemption to their officials and employees who are foreign nationals and/or
non-Philippines residents from paying income taxes on their salaries and other
emoluments.
Since the withholding tax is merely a method of collection of income tax, the
exemption from withholding taxes on compensation income of foreign
governments/embassies/diplomatic missions and international organizations does not
equate to the exemption from paying the income tax itself by the recipients of said
income.
Foreign Embassies and Diplomatic Missions
Articles 34 and 37, Vienna Convention on Diplomatic Relations, exempts: (a)
diplomatic agents who are not nationals or permanent residents of the Philippines; (b)
members of family of diplomatic agent forming part of his/her household who are not
Philippine nationals; (c) members of administrative and technical staff of the mission
plus members of their families who are not Philippine nationals or permanent residents
of the Philippines; (d) members of service staff of the mission who are not Philippine
nationals or permanent residents of the Philippines; and (e) private servants of
members of the mission who are not Philippine nationals or permanent residents of the
Philippines. The applicable rules are as follows:
Aid Agencies of Foreign Governments
JICA: Only JICA resident representatives and his/her staff who were dispatched
from japan shall not be subject to Philippine income tax.
23
decision of the court awarding the backwages. The said backwages, allowances and
benefits are subject to withholding tax on wages. However, when the judgment awarded
in a labor dispute is enforced through garnishment of debts due to the employer or other
credits to which the employer is entitled, the person owning such debts or having in
possession or control of such credits (e.g.., banks or other financial institutions) would
normally release and pay the entire garnished amount to the employee. As a result,
employers who are mandated to withholding taxes on wages pursuant to Section 79 of
the Tax Code, as implemented by Revenue Regulations No. 2-98, cannot withhold the
appropriate tax due thereon. In this regard, the employer also refers to the person
having control of the payment of the compensation in cases where the services are or
were performed for a person who does not exercise such control. Thus, the person
owning or having possession or control of the credit shall withhold the required tax.
Backwages, Allowances, and Benefits Awarded in Labor Dispute
Backwages, allowances, and benefits awarded in a labor dispute constitute
remuneration for services that would have been performed by the employee in the year
when actually received, or during the period of his dismissal from the service which was
subsequently ruled to be illegal.
The employee should report as income and pay the corresponding income taxes
by allocating or spreading his backwages, allowances and benefits thru the years from
his separation up to the final decision of the court awarding the backwages.
The backwages, allowances, and benefits are subject to withholding tax on
wages.
However, when the judgment awarded in a labor dispute is enforced thru
garnishment of debts or having in possession or control of such credits (e.g., banks or
other financial institutions) would normally release and pay the entire garnished amount
to the employee. As a result, employers who are mandated to withhold taxes on wages
cannot withhold the appropriate tax due thereon.
In order to ensure the collection of the appropriate withholding tax on wages,
garnishees of a judgment award in a labor dispute are constituted as withholding agents
with the duty to withhold tax on wages equivalent to five percent (5%) of the portion of
the judgment award, representing the taxable backwages, allowances and benefits
(RMC 39-2012, August 3, 2012).
25
Some Principles:
A tax free income is different from a tax free organization.
Doctrine of Constructive Receipt of Income means that it was already set aside,
without limitations, restrictions or conditions for its withdrawal. Example share of the
partner in a general partnership.
Doctrine of Cash Equivalent in Transaction means that if a property is exchanged
with another property the difference of a Fair Market Value (FMV) would be considered
income.
The Material Benefit rule (CIR vs. Javier, 199 SCRA 824), means that under the solutio
indebiti rule, if the holder of the property has the obligation to return it and instead use it
for his own benefit, the amount to be returned would be considered an income.
Exclusions from Gross Income simply means that these incomes are not subject to
income tax:
There are only instances an item of income would not be subjected to income
tax:
1. If it is exempted by the Constitution.
2. If it is exempted by the statute or law.
3. When it does not come within the definition of income.
Example: increase of appraisal value of the property
1. Life Insurance proceeds of life insurance being only an indemnity of life lost is
not subject to income tax. However, it can be subjected to estate tax if the rules
of the estate taxes will apply. If it is an accident insurance and it includes
coverage of life insurance the proceeds would not be subjected to income tax.
2. Return of Premium not subject to income tax because it is just a mere return of
capital.
3. Gifts, Bequests, and Devises not subject to income tax but subject to estate tax
or donors tax.
4. Compensation for Injuries or Sickness includes physical, moral and psychological
injuries.
Lost profits recovered are subject to income tax.
5. Income Exempt under Treaty would not be subject to tax because of the treaty
(International Comity) entered into by the government with other countries.
6. Retirement Benefits covered by a private benefit plan maintained by the
employer would be exempted from income tax if the following conditions will be
present:
(1)
(2)
(3)
The retiring employee is in the service of the same employer for at least ten (10) years;
He is not less than fifty (50) years of age at the time of retirement.
You retired under the private benefit plan of the employer.
The aforestated conditions would be applicable if there is a reasonable private
benefit plan of the employers.
Retiring person which has no private retirement plan by the employer:
A. Private Employee - labor code will govern. Requirements are the following:
(1) At least sixty (60) years old but not more than sixty-five (65) years old.
(2) Has served at least five (5) years of service with the same employer.
27
(3) Entitled retirement salary for every year of service but not less than one
month salary.
If it is a government employee, retirement will be governed either by the retirement
plan of the government agency or by the GSIS.
B. Pseudo retirement, or involuntary retirement, or compulsory retirement.
Involuntary retirement is present if the employee did not ask, did not initiate, and it is
not of his own choice that he is retired. The reasons may be because of the death,
sickness or other physical disability, or for any cause beyond the control of the said
official or employee. Some other grounds like retrenchment, redundancy, closure of
business, are also other forms of involuntary retirement. The retirement benefits
received from involuntary retirement not subject to income tax.
BIR Ruling No. 071-95, April 11, 1995 retirement under CBA is taxable for being
voluntary. If the company has no BIR approved retirement plan an employee who is
separated against his will but who signed a CBA, the retirement benefits under the CBA
is taxable because by signing the CBA it will make his separation voluntary.
C. Foreign retirement benefits gratuitously received by a resident or non-resident citizen of
the Philippines or alien who come to reside permanently in the Philippines are
exempted from income tax.
D. Benefits given to persons residing in the Philippines whether alien or citizen by the
USVA exempted from income tax.
SSS and GSIS benefits are exempted from income tax.
7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).
a) Income Derived from Foreign Government are exempt because of
reciprocity between countries, if there is a treaty or law that exempts it. Take
note of the source of income.
b) Income Derived by the Government or its Political subdivisions not subject
to tax because it is an inherent limitation, provided that the government
agency is performing governmental function.
c) Prizes and Awards conditions to exempt from income tax:
I.
28
E. 13th Month Pay and Other Benefits Gross benefits received by officials and employees
of public and private entities: Provided, however, that the total exclusion under this
subparagraph shall not exceed 82,000.00. (R.A. 10653, February 12, 2015)
13th month pay are exempted if received by public or private entities. The first
82,000.00 would be exempted, the excess would be subjected to income tax.
The term other benefits includes Christmas bonus, monthly bonus, quarterly bonus,
etc.
Nota Bene take note of the tax provisions for minimum wage earners which
exempt compensation and other benefits.
F. GSIS, SSS, Medicare, Pag-IBIG contributions (which are employers share) are
exempted from income tax including union dues but not including contributions made by
employers which are not enumerated in par. F to be exempt.
G. Self-explanatory.
H. Self-explanatory.
Section 33 - Fringe Benefit this tax is imposed to the employee but payable by the
employer under the withholding tax system.
Rank and file employees are exempt from Fringe Benefit Tax (FBT)
Only supervisory or managerial employee are liable to pay FBT, except if:
1) The FB is required by the nature of the employment;
2) Necessary to the trade, business or profession of the employer;
3) FB is for the convenience and advantage of the employer.
The tax base is grossed up monetary value of the FB.
FB given to employees which are non-residents alien individual not engaged in trade
or business within the Philippines including the special alien individuals under Section
25 shall not be subject to FBT but the regular rates imposed under Section 25.
Memorize definition of FB under Sec. 33.
FB means employees benefits supplementary to a money wage or salary.
Example of FB - see par. B, Section 33, no. 1-10
FB that are not taxable refer to par. C, Section 33. (memorize)
If the FB is already subjected to FBT it is no longer subject to tax as compensation
income. So that if the FB is exempted from FBT it would still be subject to compensation
income tax unless if the employee is also exempted from the income tax.
De minimis benefits (benefits of small value) is exempted both from FBT and
compensation income tax.
Examples of De minimis benefits:
1) monetized unused vacation leave not exceeding ten (10) days for private
employees; for public employees no limit.
2) Medical cash allowance to dependents not exceeding 700.00/semester or
125.00/month;
3) Rice subsidy 1,000.00/month or less;
29
Itemized Deductions (the same requisites with the ordinary but with additional
conditions):
1. Interest Expense (4 requisites)
- there must be an indebtedness
- proceeds of the loan is utilized in the business
- there must be a legal liability to pay interest
- indebtedness must be that of the taxpayer
- Tax Arbitrage Scheme the amount of interest of loans will be deducted
from business income net of the interest income received by the taxpayer
from his bank deposits subject to Final Tax
Example:
Interest Expense
Less : Bank deposit interest income
50,000 x 38% (effective Jan. 1, 2000)
Deductible interest expense
-
60,000
19,000
41,000
Different treatment if the taxpayer used the CASH METHOD and the
interest on loans was prepaid interest expense. The entire prepaid interest
expense will not be deducted on the year the loan was incurred. The
interest to be deducted must be prorated with the payment of the principal
loan.
Sec. 36(b). interest expense on loans obtained from related persons [Sec.
36(b)] NOT DEDUCTIBLE.
Interest on indebtedness incurred to finance petroleum exploration NOT
DEDUCTIBLE.
30
2.
Taxes that are not enumerated above are deductible from business income provided
it is connected.
Foreign Tax Credit is a portion of foreign income tax which can be used as a
deduction from the Philippine Income Tax due.
Two approaches:
1. Gross Income (within and without)
Less : Deductions (including Foreign Income Tax)
Taxable income
OR
2. Gross Income (within and without)
Less : Deductions (not including Foreign Income Tax)
Taxable income
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
FTC will only arise if the taxpayer is taxable in the Philippines of income derived
within and without the Philippines
C to determine FTC there is a Formula. The entire foreign tax paid cannot be used
as FTC.
3.
Losses
Kinds of Losses
A. Ordinary losses operation of the business
- NOLCO will apply
- connected with business
B. Casualty losses - properties used in business
- loss arises from fires, storms, shipwreck, or other
casualties, robbery, theft or embezzlement.
- to be reported to the BIR not less than 30 days and
not more than 90 days.
- not used as a losses deduction for estate tax
purposes
- proof of loss (par. 2 of par. D). study carefully.
31
4.
5.
Depreciation
- property, plant and equipment are normally usable for a number of
years. A point will be reached when such property may not be
useful anymore in the business die to exhaustion, wear and tear.
- the owner will be able to recover the cost of the property because
it will gradually or periodically deducted from his gross income as
deduction called depreciation.
- depreciation will only apply to extraordinary expenditures or capital
expenditures.
Depreciation for income tax purposes, depreciation means the reduction in service
value or property used in business or trade arising from exhaustion, wear and tear, and
obsolescence. (Sec. 195, Rev. Reg. No. 2)
Depreciation commences with the acquisition of the property or with its erection.
Depreciation of properties used in petroleum operations is allowable.
Requisites for claiming depreciation deductible are as follows:
(a) It must be charged off
(b) Must be deducted directly from the book value of the assets
(c) Must be reasonable allowance
(d) Property must be used or employed in business or trade or must be determined
if it is not being used.
The proper allowance for depreciation of any property used in trade or business, or
out of its not being used, is that sum which should be set aside for the taxable year in
accordance with a reasonable consistent plan whereby the aggregate of the sums so
set aside, plus salvage value, will, at the end of the useful life of the property, suffice to
provide an amount equal to the original cost. (Sec. 195, Rev. Regs. No. 2)
Depreciation a deduction from gross income for depreciation is allowed but limits
the recovery to the capital invested in the asset being depreciated. The law does not
authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction
over and above such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges not matters of right. They are not created
32
by implication but upon clear expression of the law. (Basilan Estates, Inc. vs.
Commissioner, G.R. No. L-22492, Sept. 5, 1967)
Such being the case, the value assigned on the trademarks which is computed on
the basis of future sales can be discounted to its present value at the time of acquisition
and can be amortized for tax purposes over the average remaining lives of the different
trademarks purchased. Moreover, the cost of the different formulae can be amortized
33
over the (a) remaining life of the trademarks purchased or (b) the expected period within
which your client proposes to continue manufacturing said products using the said
formulae.
-
Methods
Cost Salvage Value
Life (years)
1.
Straightline method -
2.
3.
6.
Depletion
- it is the cost or value of the exhaustion of natural resources, such
as mines and oil and gas wells, as a result of severance of
production. Only persons having an economic interest in a mineral
land or oil gas wells are entitled to a depletion allowance (which
should not be more than the capital invested). To acquire an
economic interest, the taxpayer must have a capital investment in
the property and not a mere economic advantage.
7.
9.
Pension Trust
Requisites:
1. Employer contributes for the pension trust for the payment of
reasonable pension for employees. The contribution is a deductible
business expense.
Note: The change of status rule as single, HF or married is already irrelevant because
the BASIS is now 50,000.00 regardless of STATUS.
If the taxpayer dies during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependent(s) as if he died at the close of
such year.
If the spouse or any of the dependents dies or if any of such dependents marries,
becomes 21 years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became 21 years old or became gainfully
employed at the close of such year.
Example: Jan. 1, 2010 X is single; June 2, 2010 X got married; December 1, 2010 X
became a widower when the wife died after she delivered twin babies. On
December 10, one of the twins died. How much basic exemption for the
2010?
Personal Exemption Allowable to Nonresident Alien Individual a nonresident
alien individual engaged in trade, business or in the exercise of a profession in the
Philippines shall be entitled to a personal exemption in the amount equal to the
exemptions allowed in the income tax law in the country of which he is a subject or
citizen, to citizens of the Philippines not residing in such country not to exceed the
amount fixed in this Section as exemption for citizens or residents of the Philippines.
Provided, that said nonresident alien should file a true and accurate return of the total
income received by him from all sources in the Philippines, as required by this Title.
Rules to observe
1. Reciprocity Rule
2. Whichever is lower rule
3. Can avail only basic personal exemption
Senior Citizen
- those 60 years old and above
- Exemption from the payment of individual income tax provided that their
annual taxable income does not exceed the poverty level of P60,000.00 or
such amount as may be determined by the NEDA for a certain taxable year.
Taxability of senior citizen to other internal revenue taxes.
a.
b.
c.
d.
e.
A senior citizen whose annual taxable income exceeds the poverty level of
60,000 or such amount as may thereafter be determined by the NEDA for a
certain taxable year shall be liable to the individual income tax in the full amount
thereof on his taxable income net of allowable deductions.
Regardless of the amount of taxable income, a senior citizen who derives
income from self-employment, business and practice of profession shall be
subject to other internal revenue taxes which include but are not limited to the
value-added tax, caterers tax, documentary stamp tax, overseas
communications tax, excise taxes, and other percentage taxes. He shall,
therefore, file the corresponding business tax returns in accordance with existing
laws, rules and regulations.
He shall be subject to the 20% final withholding tax on interest income from
Philippine Currency bank deposit, yield and other monetary benefit from deposit
substitutes, trust fund and similar arrangements; royalties, prizes (except prizes
amounting to 3,000 or less which shall be subject to income tax at the rates
prescribed under Section 21, par. (a) or (f), NIRC) as the case may be, and
winnings (except Philippine Charity Sweepstakes winnings).
Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC)
Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)
36
Basic personal exemption only for benefactor a qualified senior citizen living
with and taken cared of by a benefactor whether related to him or not, shall be treated
as a dependent and his benefactor shall be entitled to the basic personal exemption of
20,000 as head of the family, as defined in Section 2(e) of these regulations. (This rule
no longer applicable because of the 50,000.00 exemptions regardless of status.)
For purposes of claiming personal exemption as head of the family with dependent
senior citizen, the identification card number issued by the OSCA shall be indicated in
the ITR to be filed by the benefactor. The senior citizen shall indicate in a certification to
be submitted to the RDO and the OSCA his benefactor who will be granted the
exclusive right to claim him as dependent for income tax purposes.
Caring for a dependent senior citizen shall not, however, entitle the benefactor to
claim the additional exemption allowable to a married individual or head of family with
qualified dependent children under Sec. 29(1) (2) (now 34) of the NIRC, as amended.
Section 36. - Items not deductible
1. Absorb by personal exemptions
2. Capital expenditures absorb by depreciation
3. Extraordinary repairs. To be deducted through depreciation. The cost of repair
added to the value of the property to be depreciated.
4. Not allowed if the taxpayer is the beneficiary of the life insurance. If the
beneficiary is not the employer the premium is a deductible business expense.
Query: A lawyer, exercising his profession, paid premium for his own life insurance. If
he dies the proceeds will go to his estate. Premium is deductible? How about if
the beneficiary is his GF and he is married?
5. Not allowed in order to avoid evasion and collusion. The prohibition is on losses.
It includes also interests on loans. See notes on interest expenses.
Why? (Sec. 36B)
1. Between members of the family. Take note of the degree of relationship being
covered.
No. 2-6 -- considered one (1) personality in the eyes of the law.
Section 38 Losses from Wash Sales (WS)
- WS is a taxpayer scheme to recognize a deductible loss in his tax return by
selling shares at a loss when the shares sold are substantially identical stock
or securities of that which were purchased or acquired beginning 30 days
before the date of sale and ending 30 days after the sale.
- wash sales losses are not deductible from gains derived from wash sales
transactions
- this rule applies only to securities (e.g., bonds) which are capital assets. Not
on the stocks because of the capital gains on sale of stocks rule on taxation.
- wash sales gains are to be reported and recognized as income
- this rule of nondeduction does not apply if the dealers transaction of stocks
and securities is made in the ordinary course of business.
- loss of WS is disallowed to prevent the taxpayer from manipulating a
pretended or engineered loss purely to establish a tax deduction
37
- WS gains are taxable under schedular rates (individual) and regular corporate
tax (corporation).
READ: Calasanz vs. CIR, 144 SCRA 664
Section 39 Taxation of Capital Gains and Losses on Capital Assets
- the rules do not apply to sale of capital assets (real property) of an individual
and sale of capital assets (land or buildings) of corporations, which are
subject to Final Taxes. This rule will not also apply to capital gains on sale of
shares of stocks, because subject also to final taxes (5% or 10% rates).
- if the capital gain/net capital gain arise the applicable tax rates would be
schedular rates (individual) and the regular corporate tax (corporation)
- memorize the following:
1. Ordinary Assets (four groups)
a. Stock in Trade and Inventories for sale in the regular conduct of
business.
b. Properties primarily held for sale in trade or business.
c. Property used in trade or business subject to depreciation.
d. Real property used in business.
2. Net Capital Gain (NCG)
3. Net Capital Loss (NCL)
4. Net Capital Loss Carry Over (NCLCO)
- Rules
1. A capital loss is only deductible
from a capital gain
Individual
Applicable
Corporation
Applicable
-do-
Not Applicable
-do-
-do-
38
NCLCO
arise from capital assets
transaction [Sec. 39(D)]
to be carried over only once,
following the year the NCLCO
was sustained.
Ex. Net capital loss in 2010
can be deducted from the net
capital gain in 2011. If after
the deduction there is still a
balance of the 2010 net capital
loss, it can no longer be
carried over to 2012.
subject to limitation. What can
be carried over is not more
than the ordinary net income of
that year the net capital loss
Any loss from SS is deductible from the gain of SS except it is a WS. (Not
applicable under the present tax laws)
Short Sale For income tax purposes, a short sale is not deemed to be
consummated until the delivery of property to cover the short sale. If the short
sale is made through a broker and the broker borrows property to make
delivery, the short sale is not deemed to be consummated until the obligation
of the seller created by the short sale is finally discharged by delivery of the
property to the broker to replace the property borrowed by such broker.
Section 40.
(A) Query:
Consolidation -
The source rules to determine whether income shall be treated as income from
within or outside the Philippines can be found in Section 42 of the 1997 Tax Code.
There are different source rules for different types of income. The following incomes are
considered as income from sources within the Philippines:
1. Interests: Residence of the debtor or obligor. If the obligor or debtor
(corporation or otherwise) is a resident of the Philippines, the interest income
is treated as income from within the Philippines. It does not matter whether
the loan agreement is signed in the Philippines or abroad or the loan
proceeds will be used in a project inside or outside the country.
2. Dividends: Residence of the corporation paying dividend. Dividends
received from a domestic corporation or from a foreign corporation are treated
as income from sources within the Philippines, unless less than 50% of the
gross income of the foreign corporation for the three (3)-year period
preceding the declaration of such dividends was derived from sources within
the Philippines, in which case, only the amount which bears the same ratio to
such dividends as the gross sources within the Philippines bears to its gross
income from all sources shall be treated as income from sources within the
Philippines.
3. Services: Place of performance of the service. If the service is
performed in the Philippines, the income is treated as from sources within the
Philippines.
Gross income from sources within the Philippines includes compensation for
labor or personal services performed within the Philippines, regardless of the residence
of the payor, of the place in which the contract for service was made, or of the place of
payment. If a specific amount is paid for labor or personal services performed in the
Philippines, such amount shall be included in the gross income. If there is no accurate
allocation or segregation of compensation for labor or personal services performed in
the Philippines, the amount to be included in the gross income shall be determined on
apportionment of time basis; i.e., there shall be included in the gross income an amount
which bears the same relation to the total compensation as the number of days of
performance of the labor or services within the Philippines bears to the total number of
days of performance of labor or services for which the payment is made. Wages
received for services rendered inside the territorial limits of the Philippines and wages of
an alien seaman earned on a coastwise vessel are to be regarded as from source within
the Philippines (Sec. 155, Rev. Regs. No. 2).
A non-resident alien is taxed only on her commission income for services
rendered in the Philippines. Baier-Nickel, a non-resident German, is the President
of Jubanitex, Inc., a domestic corporation engaged in manufacturing, marketing,
acquiring, importing and exporting and selling embroidered textile products. Through its
General Manager, the corporation engaged the services of Baier-Nickel as commission
agent, who will receive 10% sales commission on all sales actually concluded and
collected through her efforts. In 1995, Baier-Nickel received commission income, which
Jubanitex withheld 10% and remitted to the BIR. Baier-Nickel filed her income tax return
on October 17, 1997 and on April 14, 1998, she filed a claim for refund, contending that
her commission income is not taxable in the Philippines because it was compensation
for her services rendered in Germany.
Non-resident aliens, whether or not engaged in trade or business, are subject to
Philippine income tax on their income received from all sources with the Philippines.
The underlying theory is that the consideration for taxation is protection of life and
property and that the income rightly to be levied upon to defray the burdens of the
Government is that income which is created by activities and property protected by the
Government or obtained by persons enjoying that protection. The important factor,
therefore, which determines the source of income of personal services is not the
residence of the payor, or the place where the contract for service is entered into, of the
40
place of payment, but the place where the services were actually rendered (Baier-Nickel
v. Commissioner, G.R. No. 156305, February 17, 2003).
questions of administrative implementation arising after the legal question has been
answered. (Commissioner v. Procter & Gamble PMC, 204 SCRA 377)
The fact that Switzerland does not impose any tax on the dividends received
from a domestic corporation should be considered as full satisfaction of the condition
that the 20% differential is deemed credited by the Swiss government (as against the
Commissioners contention that the tax-sparing credit should apply only if the foreign
country allows a foreign tax credit). The court observed that to deny private respondent
the privilege to withhold only 15% provided for under P.D. 369 would run counter to the
very spirit and intent of said law and definitely will adversely affect foreign corporations
interest and discourage them from investing capital in our country (Commissioner v.
Wander Philippines, 160 SCRA 573).
b.
c.
d.
42
e.
f.
Hence, Gross Income within the Philippines (trade, business or profession) shall
only be deducted by expenses incurred within the Philippines. Application of the
connected/related rule on expenses.
Except : Interest paid on loans abroad, the proceeds of the loans is actually used
in connection with the conduct or operation of the business in the Philippines.
(B)
(C)
Cash, property, or services earned during the taxable year, though not received have
accrued to the taxpayer, and are classed as income. In the same way, expenses
incurred during the taxable year are usually deductible even if they are not received
during that year.
All events test means all events fixing an accrued method, taxpayers right to receive
income, or incur expenses must occur before the taxpayer can report an item of income
or expense. (CIR vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007)
All events test (deductions) is met:
1. All events have occurred that fix the fact of liability
2. The liability can be determined with reasonable accuracy.
-
TAXABLE PERIOD the rule is that the taxable period of a taxpayer covers a
period of 12 months. The exceptions are as follows:
(a)
(b)
(c)
(d)
(e)
(f)
This applies further to casual sales of personality (other than property includible in
the taxpayers inventory) for a price exceeding 1,000 and where the initial payment
does not exceed 25% of the selling price.
Methods of determining taxable income.
(a) Percentage method
(b) Net-worth expenditure method
(c) Excess cash expenditure method
(d) Bank deposits
Requirements for use of net-worth method
(a) That the taxpayers books do not clearly reflect the income, or the taxpayer
has no books, or if he has books, he refuses to produce them.
(b) That there is evidence of a possible source or sources of income to account
for the increases in the networth or for expenditures.
(c) That there is a fixed starting point or opening networth, a date beginning with
the taxable year or prior to it at which the taxpayers financial condition can be
affirmatively established, with same definiteness; and
(d) That the circumstances are such that the method does clearly reflect the
taxpayers income with reasonable accuracy and certainty, and proper and just
additions of personal expenses and other non-deductible expenditures were
made, and correct, fair and equitable credit adjustments were given by way of
eliminating non-taxable items.
- Period for which deductions and credits taken = apply as paid or incurred rule
Section 51-59. Returns and Payment of Taxes
A.
Individuals
Required to file Income Tax Return
1. RC within and without income
2. NRC within income
3. RA within income
4. NRA within income
B.
NOT REQUIRED
1. If the gross income does not exceed his personal or additional
exemptions. But this rule does not apply if engaged in trade, business
or exercise of profession.
2. Compensation earners purely derived in the Phil. and the income tax
correctly withheld. This rule does not apply if deriving compensation
income from two (2) employers within the taxable year.
3. Those whose sole income is subject to the final withholding taxes.
4. Minimum wage earner
Question:
1. How many copies of tax return will be filed?
2. Where to file the income tax returns?
3. When to file?
4. If both H and W are working, who will file?
5. If the child is a minor, but has income, who will file his return?
How about persons under disability?
The financial statements required to be attached with the income tax returns:
1. Statement of Net Worth and Operations. This statement is to be attached with the
income tax return of individual taxpayers if the gross sales, receipts or output
from business does not exceed 50,000 in any one quarter.
2. Balance Sheet and Profit and Loss Statements. These statements are to be
attached with the income tax return of individual taxpayers if the gross sales,
earnings, receipt or output from business in any one quarter exceed 150,000.
a. Balance Sheet and Profit and Loss Statement certified by an independent
Certified Public Accountant.
b. Comparative profit and Loss Statements for the current and preceding taxable
years.
c. Schedule of income producing properties and corresponding income
therefrom.
The said taxpayers books of accounts shall be audited and examined yearly by an
independent Certified Public Accountant and their income tax returns accompanied with
a duly accomplished Account Information lifter from certified balance sheets, profit and
loss statements, schedules listing income producing properties and the corresponding
income therefrom and other relevant statements.
Annual Declaration and Quarterly Payments of Income tax for Individual
Taxpayers.(Applies only to those who are engage in trade, business or exercise
of their profession).
1. On or before April 15 of the following year for the taxable income of the previous
year.
2. April 15 of the same taxable year for the estimated income of the current year.
In general, except as otherwise provided by the law, every individual subject to
income tax under Sections 24 and 25 (A) of the National Internal Revenue Code who is
receiving self-employment income, whether it constitutes the sole source of his income
or in combination with salaries, wages and other fixed or determinable income, shall
make and file a declaration of estimated income for the current taxable year on or
before April 15 of the same taxable year.
3. Return and Payments of Individuals Estimated Income tax.
FILING OF DECLARATIONS
AND PAYMENTS
First
DATES
April 15 of the current taxable year
Second
Third
Fourth
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Section 52 (A) of the National Internal Revenue Code provides that every
corporation subject to the tax herein imposed, except foreign corporations not engaged
in trade or business in the Philippines, shall render, in duplicate, a true and accurate
quarterly income tax return and final or adjustment return.
The return shall be filed by the president, vice president or other principal officers
and shall be sworn to by such officer and by the treasurer or assistant treasurer.
Taxable Year of Corporation
A corporation may employ either calendar year or fiscal year as a basis for filing its
annual income tax return.
A corporation shall not change the accounting period employed without prior
approval from the Commissioner in accordance with the prohibitions of Section 47 of the
Tax Code.
Rules in filing and payment of corporate income tax:
1. The corporate quarterly return shall be filed within sixty (60) days following the
close of each of the first three quarters of the taxable year. (three times)
Example:
Calendar Year Jan., Feb., Mar. = File in the months of April and May
Fiscal Year June, July, Aug. = file in the months of Sept. and Oct.
2. The income tax due on the corporate quarterly returns and the final adjusted
income tax returns computed in accordance with Section 75 and 76 shall be paid
at the time the declaration or return is filed. (Pay as you file system)
3. The final adjustment return shall be filed on or before the 15 th day of April, or on
before the 15th day of the fourth month following the close of the fiscal year, as
the case may be.
Note : Corporate Returns are filed four (4) times a year. Three quarterly and one
final adjustment return
CORPORATE QUARTERLY TAX
To ease the burden of paying taxes for a lump-sum amount, income tax expense of
a corporation may be paid in an aggregate quarterly periodic payment.
Rules:
1. A corporation files a quarterly income tax return within 60 days after the end of
each first three quarters of the taxable year.
2. A final income tax return covering the total taxable income of the taxable year
should be filed on or before April 15 of the following year. The amount of total
income tax computed thereof shall be reduced by income taxes paid during the
first three quarters of the taxable year.
3. The amount of tax previously paid for the preceding quarters should reduce the
amount of tax computed on the cumulative taxable income.
4. If the total quarterly tax paid during the taxable year is more than the tax due on
the final return the corporation may claim tax credit carry over or refunded with
the excess amount.
Section 57 to 59. Withholding Taxes
47
- in FWT no more tax liability if properly withheld. In CWT it may or may not result to
a balance of tax liability.
Taxes withheld on compensation is an example of CWT.
Section 60 to 66. - Estates and Trusts
TAX ON INCOME OF ESTATE
The estate is composed of all properties, rights and obligations including those
properties, earnings or obligations that have accrued thereto since the opening of the
succession. The estate is to be transferred from the decedent to his successors.
During the period when the title to the properties is not yet finally transferred to the
successors, there may be earnings generated from the estate. These earning are
subject to income tax.
Estates or Trusts Taxable Income and Tax
For taxation purposes, the taxable income of the estate/trust shall be determined in
the same manner and basis as in the case of individual taxpayers. The items
composing the taxable income and tax of the income from estates/trusts are as follows:
Treated as Individual Taxpayers
1. Gross Income
The items of gross income of the estate are the same items with the items of
gross income of individual taxpayers.
2. Deduction
Deductions from the gross income of the estates/trusts are the same with the
items of deduction allowed to individual taxpayer.
3. Special Deduction
In addition to the allowable deductions under Section 34 of the Tax Code, the
estate is also allowed to deduct the amount of income of the estate during the
taxable year that is paid or credited to the legatee, heir or beneficiary, subject
to a creditable withholding tax of fifteen percent (15%)
However, the amount so allowed as a deduction shall be a part of the taxable
income of the legatee, heir or beneficiary. It is to be noted that any portion of
the gross estate paid to the heir is not deductible from the gross income of the
estate.
4. Exemption
Generally, the income from estate/trusts is allowed for an exemption of
20,000.
5. Tax Rate
The tax rate applicable is the tax rate prescribed for individual taxpayers.
TAX ON INCOME OF TRUSTS
A trust is an obligation imposed or a right to administer over a property given to a
person for a benefit of another.
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REVOCABLE TRUSTS
Generally, revocable trusts exist when the trustor (grantor) reserves the power to
change at any time any part of the terms of the trust. For tax purposes, the rule is that
the grantor is liable for the income of a revocable trust (because the revocable trust by
itself is not subject to income tax except if the trust is irrevocable (because irrevocable
trust is subject to income tax, so that the grantor is already exempted from income tax
on the income derived from the irrevocable trust).
Illustration:
Mrs. Caduda Duda created a trust naming his eldest son as revocable beneficiary
who will receive the income of the trust. If the eldest son could not abide with the rules
provided in the trust instrument, Mrs. Duda could change outright the terms of the trust.
For the year, the trust earned a total income of 200,000. How much would be the
taxable income of the trust?
There is no taxable income of the trust because it is a revocable trust. The income
should be reported as taxable income of the grantor, Mrs. Caduda Duda.
Trusts, explained. These are taxable entities created by will or trust deeds
where the transfer of property to such trusts is irrevocable and the income of which is to
be accumulated for designated beneficiaries other than the grantor.
Estates and trusts are subject to the rates of income tax applicable to individuals.
Income of estate or trust includes the following:
(a) Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust.
(b) Income which is to be distributed currently by the fiduciary to the beneficiaries,
and income collected by a guardian of an infant which is to be held or distributed
as the court may direct.
(c) Income received by estates of deceased persons during the period of
administration or settlement of the estate; and
(d) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
Trusts not subject to tax.
(a) Revocable trusts the income of which is held or distributed for the benefit of the
grantor
(b) Employees pension trusts.
The taxable income of the estate or trust shall be computed in the same manner and
on the same basis as in the case of an individual. However, when it comes to allowable
deductions, the guidelines in Section 61 of the Tax Code, should be followed.
Exemption allowed to estates and trusts.
(a) 20,000.00 is allowed as an exemption.
Revocable trusts. Where at any time the power to revest in the grantor title to any
part of the corpus of the trust is vested (a) in the grantor, either alone or in conjunction
with any person not having a substantial adverse interest in the disposition of such part
of the corpus or the income therefrom, or (b) in any person not having a substantial
51
adverse interest in the disposition of such part of the trust shall be included in
computing the net income of the grantor.
Income for the benefit of grantor. Where any part of the income of a trust
(a) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be held or
accumulated for future distribution to the grantor;
(b) may, in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income, be distributed to
the grantor;
(c) is, or in the discretion of the grantor or of any person not having a substantial
adverse interest in the disposition of such part of the income may be, applied to
the payment of premiums upon policies of insurance on the life of the grantor;
such part of the income of the trust shall be included in computing the net
income of the grantor.
Requisites for exemption of employees pension trust.
(a) The employees trust must be part of a pension, stock bonus or profit-sharing
plan of an employer for the benefit of some or all of his employees;
(b) Contributions are made to the trust by such employer, such employees, or both;
(c) Such contributions are made for the purpose of distributing to such employees
both the earning and principal of the fund accumulated by the trust;
(d) The fund is accumulated by the trust in accordance with the plan of which the
trust is a part;
(e) The trust instrument makes it impossible for any part of the trust corpus or
income to be used for, or diverted to, purposes other than for the exclusive
benefit of such employees.
It may be noted that under Republic Act No. 4917, retirement benefits received by
officials and employees of private firms under a reasonable private benefit plan
maintained by the employer are exempt from all taxes.
Section 78 to 83. Withholding on Wages
INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME
Basic Rules on Withholding Taxes
As a general rule, all salaries earned by persons as government or non-government
employees are subject to withholding tax, except of the following items:
1. Commissions paid by an insurance agent to his sub-agents.
2. Compensation for services by a citizen or resident of the Philippines for a
foreign government or an international organization.
3. Remuneration for causal labor not in the course of employers trade or business.
4. Remuneration for private service performed by maids, cooks, gardeners, family
drivers and the like.
5. Remuneration paid to agricultural labor and paid entirely in products of the farm.
52
54
The withholding tax return, whether creditable or final shall be filed and payments
should be made within 10 days after the end of each month except for taxes withheld for
December, which shall be filed on or before January 25 of the following year.
For large taxpayers, the filing of the return and the payment of tax shall be made
within 25 days after the end of each month.
The return for final withholding taxes on interest from any currency bank deposit and
yield, or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements shall be filed and the payment made within 25 days from the close
of each calendar quarter.
Withholding Tax Statement
Every payer required to deduct and withhold taxes under there regulations shall
furnish each payee, whether individual or corporate, with a withholding tax statement,
using the prescribed form (BIR Form 2307) showing the income payments made and the
amount of taxes withheld there from, for every month of the quarter within 20 days
following the close of the taxable quarter employed by the payee in filing his/its quarterly
income tax return. Upon request of the payee, simultaneously with the income payment.
For final withholding taxes, the statement should be given to the payee on or before
January 31 of the succeeding year.
Annual Information Return for Income Tax Withheld
The payor is required to file to the Commissioner, Revenue Regional Director,
Revenue District Officer, Collection Agent in the city or municipality where the payor has
his legal residence or principal place of business, where the government office is
located in the case of a government agency, on or before January 31 of the following
year in which payments were made, and Annual Information Return of Income Tax
Withheld at Source (Form No. 1604), showing among others the following information:
1. Name, address and taxpayers identification number (TIN);
2. Nature of income payments, gross amount and amount of tax withheld from
each payee and such other information as may be required by the
Commissioner.
If the payor is the Government of the Philippines or any political subdivision or
agency thereof, or any government-owned or controlled corporation, the return shall be
made by the officer or employee having control of the payments or by any designated
officer or employee.
DUE DATES
Due dates refer to the last day for filing return and payment of tax. The following are
the due date prescribed by laws for filing of return and payment of taxes.
Events
Due Date
1.
2.
55
3.
4.
Estate tax
a. Notice of death ..
b. Estate tax return
5.
Donors tax
6.
Value-added tax:
a. On sale of goods, services or property
(1) Monthly declaration .
(2) Quarterly return
b. On importation ..
7.
8.
9.
10.
Nota Bene A withholding agent (WA) is a taxpayer but not a statutory taxpayer.
WA can claim a tax refund if there is overpayment.
Take note of the following:
Meaning of : 1.
2.
3.
4.
56
pc3
Updated August 2016
57