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TAXABLE INCOME – pertinent items of gross income less deductions, if any, authorized for such types of
income by the Code or other special laws
Income – all such gains, profits or income derived from any source whatever, such as for services,
whether constituting a demandable debt or not, or from or for the use of capital
Capital vs income – capital is a fund, income is a flow; capital is wealth, income is the service of wealth;
capital is the tree, income is the fruit
Stock dividends are generally NOT TAXABLE (because it represents CAPITAL), unless!
These are later on REDEEMED by the corporation for a consideration or otherwise CONVEYED by
the shareholder for such consideration
When the recipient is other than the shareholder
When a change in stockholder’s equity results by virtue of the stock dividend issuance
>Sale of real property classified as CAPITAL ASSET = CGT of 6% of GROSS SELLING PRICE/FMV,
WHICHEVER IS HIGHER
>if an INDIVIDUAL sells real property (capital asset) to the GOVERNMENT or GOCC, he has the OPTION
to treat is either as:
*subject it to 6% CGT
>if an INDIVIDUAL sells his PRINCIPAL RESIDENCE, he may be EXEMPTED from the CGT, provided!!!
Proceeds of which are fully used in acquiring or constructing a new principal residence within 18
MONTHS from the date of sale
Written notice to the Commissioner of intention to avail of exemption
Historical cost or adjusted basis of the real property sold shall be carried over to the principal
residence built or acquired
Availed of only ONCE EVERY 10 YEARS
Fringe benefit tax = 35% of the GROSSED UP MONETARY VALUE (must be given only to
supervisory/managerial employees)
Employer’s convenience rule– if the benefit given is for the convenience of the EMPLOYER, it is not
taxable on the employee
De minimis benefits – benefits of small value given to rank and file employees for the purpose of
enhancing their productivity and goodwill (not taxable)
Equivalent of cash doctrine – subjects to tax any economic benefit to the employee whatever may have
been the mode by which it is effected
*increase in value of property is NOT INCOME until it is realized upon the sale or exchange of the
property (unrealized income is NOT TAXABLE)
EXCLUSIONS FROM NET INCOME (LRG DERM) – in the nature of tax exemptions, and must be proven
convincingly by taxpayer
NOTE: Deductions for individuals/corporations which are taxable only from income within the
Philippines shall only be allowed for those incurred WITHIN the Philippines
1. Charitable contributions
a. Individuals – up to 10% of net income without the contribution
b. Corporations – up to 5% of net income without the contribution
2. Losses (ACNLB)
a. Actual
b. Sustained in a CLOSED AND COMPLETED transaction
c. Not be compensated by insurance or otherwise
d. Liquidated and charged off during the taxable year
e. Related to business, trade or profession
Net Operating Loss Carry Over (NOLCO) – carried over THREE consecutive taxable years
immediately following the year of loss and deducted from gross income
Net operating loss – excess of the allowable deductions over the gross income
Unrealized loss from shrinkage in value of shares of stock are NOT DEDUCTIBLE until they would
have been realized from their sale or disposition
EXCEPT! If the shares (capital assets) become worthless, it shall be considered a CAPITAL
LOSS on the LAST DAY of the taxable year
Cohan rule – where it is certain from the evidence adduced that the taxpayer DID INCUR
expenses, but the actual amount thereof has not been established, the Commissioner should
make a close approximation thereof, and his determination thereof shall bear heavily on the
taxpayer for his own inexactitude
Premium paid on life insurance of an officer, employee, etc. where the TAXPAYER (the one
paying the premiums) is directly or indirectly the beneficiary, is NOT DEDUCTIBLE
TAX BENEFIT RULE – the RECOVERY of amounts DEDUCTED in previous years from gross income is
TAXABLE unless, to the extent thereof, it did not result in any tax benefit to the taxpayer
8. Taxes – NOTE: TAX BENEFIT RULE (if tax is deductible, its refund is taxable)
Tax deduction vs tax credit: tax deduction is considered BEFORE the tax is computed, while a tax credit is
considered AFTER the tax is computed
Income payments required to be withheld must be subjected to withholding, otherwise, such payments
may not be deductible from gross income
PRIVATE EDUCATIONAL INSTITUTIONS have the OPTION to treat CAPITAL EXPENDITURES as either:
a. Expenses as incurred; or
b. Capitalized and depreciated
TAX CREDIT – TWO PROVISOS (this only applies to RESIDENT CITIZENS AND DOMESTIC CORPORATIONS)
1. Compute the total Philippine income tax due on income from ALL SOURCES. Then multiply it to
the proportion (for each country) of the taxable income from that country to the total taxable
income from all sources. Compare the amount computed to the actual tax paid in that country,
WHICHEVER IS LOWER.
2. Multiply the TOTAL FOREIGN TAXABLE INCOME to the proportion of the TOTAL PHILIPPINE
INCOME TAX DUE from ALL SOURCES to the Total TAXABLE INCOME FROM ALL SOURCES.
3. Choose whichever is lower among 1 or 2 === TAX CREDIT
OPTIONAL STANDARD DEDUCTION – Nonresident aliens and nonresident Foreign corporations are NOT
allowed to avail
Two main considerations in resolving whether or not a SALE OR EXCHANGE transaction has taken place:
a. Element of TRANSFER
w/n the taxpayer-transferor RETAINS some interest over the thing sold as would entitle him
some control over it
b. Element of CONSIDERATION – a sale or exchange could not in strictissimi juris be validly effected
without a valuable consideration
Ordinary assets – held primarily by the taxpayer for use in trade, business, or profession. Includes:
Capital assets – not used in the trade or business; NOT ordinary assets
NOTE: parcels of land acquired by a bank through foreclosure and sold is an ORDINARY ASSET
1. Retirement of bonds, notes, etc. issued by corporations with interest coupons or in registered
form
2. Short sales
3. Options to buy or sell property AND securities becoming worthless
INDIVIDUALS
In general
CORPORATIONS
ONLY the Loss Limitation Rule applies (no holding period; no capital loss carry over)
Accounting Methods
Doctrine of constructive receipt – refers to the availability of the income to the taxpayer but, by
his own and exclusive choosing, he prefers not to actually receive the income
Accrual basis
In the case of lease agreements in which the improvements introduced by the lessee would thereby or
later on become the lessor’s property, the lessor has the option to treat the improvement as income
What is the legal basis for employing the other accounting methods?
Section 6. When a report required by law for the assessment of any internal revenue tax is not
forthcoming, or when there is reason to believe that such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence available
INDIVIDUALS
CORPORATIONS
DST Return – on the 5th day of the month following the transaction