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EXPLANATORY NOTES
By: Judge Gil Bollozos
- 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 pre-
existing 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.
CIR vs. Hantex, G.R. No. L-136075, March 31, 2005
- Mere photocopies not admissible. Exert effort to get the original
- Hearsay evidence is admissible by the technical rules of evidence. BIR not
bound. It depends on trustworthiness for evidence to be admissible.
Even an assessment based on estimates is prima facie valid and lawful where it
does not appear to have been arrived at arbitrarily or capriciously. (Marcos vs. CA, 273
SCRA 47, 1987)
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An assessment fixes and determines the tax liability of a taxpayer. As soon as it
is served, an obligation arises on the part of the taxpayer concerned to pay the amount
assessed and demanded. Hence, assessments should not be based on mere
presumption no matter how reasonable or logical said presumption may be.
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.
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 taxpayer’s 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 taxpayer’s civil liability to pay the
tax due (Republic vs. Patanao, G.R. No. L-22317, July 21, 1967)
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.
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avail of methods in order to arrive at a correct and reasonable assessment of taxes.
One method is the networth method of investigation.
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)
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.
A nonresident alien who shall come to the Philippines and stay there in an
aggregate period of more than one hundred eighty days during any calendar year shall
be deemed a nonresident alien doing business in the Philippines. (Sec. 25A)
The length of stay is the criterion. Hence, a non-resident alien shall not be
considered engaged in trade or business in the Philippines if he stays in the Philippines
for less than 180 days notwithstanding the fact that during such stay he actually
performs personal services, or engages in a commercial activity therein. And the whole
period of more than 180 days must cover a calendar year.
The entire gross income of non-resident aliens not engaged in trade or business
received from all sources within the Philippines is subject to income tax. He must not be
engaged in trade or business in the Philippines.
The sources of the income are interests, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical or casual gains, profits and income, and capital gains.
The GPP as a juridical entity is exempted from income taxes. It would be the
individual members who will be liable on their net income share from the GPP.
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A partner in a general professional partnership shall report in his income tax
return, whether distributed or not, his share of the profits of the partnership. If he reports
his net share in the profits, he shall be deemed to have elected the itemized deduction
and may no longer claim the optional standard deduction. In case he declares his
distributive share in the gross income undiminished by his share in the deduction, he
may avail the 40% optional standard deduction in lieu of the itemized deduction.
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 self-
employment 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:
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)
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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)
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.
- The stock distributed is a stock dividend. It is not subject to a dividend tax or
passive income. However, if the stockholder owns a common stock and the
stock dividend is preferred stock or vice – versa, then the stock dividend is
subject to tax because there is already change of interest. -
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.
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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.
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
owners of the corporation has no bearing in ascertaining the status or residence of
corporations, for income tax purposes.
Doing Business
Partnerships
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Joint Ventures
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 BIR’s eFPS at the RDO where local
contractors are registered as taxpayers.
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Foreign joint venture or consortium that does not sell goods nor perform
services in the Philippines. – A joint venture or consortium formed among non-
resident 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.
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subject to income tax, expanded withholding tax, and value added tax (BIR Ruling DA-
165-03-18-99).
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.
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 energy-
related 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.
However, a corporation is not simply exempted from tax because it is not organized
and operated for profit, it is still subjected to income tax no matter how these
corporation are created. Hence, if they will have income of whatever kind and character
from any of their properties real or personal or from any of their activities conducted for
profit regardless of the disposition made of such income, they will be liable for income
tax.
For instance a non-profit corporation will sell their property and derive income
therein, that income would be subjected to income tax.
The rule that “regardless of their disposition made of such income” do not apply to
non-profit educational institution, because under the constitution all revenues and
assets of these institutions it actually, directly and exclusively used for educational
purposes will make these institution exempted from all taxes. Thus, if Xavier University,
for example, who is a non-stock, non-profit educational institution will use their rental
income from the gym for education purposes, the same is not subject to income tax.
However, if the gym rental is used for charitable purposes it would already be subjected
to income tax because what the constitution provides is only to educational purposes.
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2) Commissioner vs. YMCA, G.R. No. 124043, October 14, 1998
3) CIR vs. St. Luke, G.R. No. 195909 – 60, September 26, 2012
(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.
1. Exercise of profession;
2. Services rendered;
3. Rentals;
4. Profits from sale or exchange of asset;
5. Business or trade;
6. And from other sources such as interest in bank deposits, dividends, and
royalties.
Definition of Income
Income may include: (a) increase in inventory at the end of the taxable year;
however, mere increase in the value of property is not income but increase in capital;
(b) transfer of appreciated property to employee for services rendered; and (c) just
compensation paid by government for property acquired by expropriation.
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Income is an amount of money coming to a person within a specified time, whether
as payment of services, interests or profits from investments.
“Income in taxation does not solely mean profit. Hence, SP may be considered an
income if provided by law. But capital is never treated as “Income”.
There is no statutory definition of income under the tax code. However, under
Section 36 of the Revenue Regulation No. 2, income is defined that in its broad sense,
means all wealth which flows into the taxpayer, other than as a mere return of capital.
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declare it as income. The court ruled that the amount received is income
subject to tax, but the tax return filed cannot be considered as fraudulent
because petitioner literally “laid his cards on the table” for respondent to
examine. Error or mistake of fact or law is not fraud (Commissioner v.
Javier, 199 SCRA 824).
c. Income from whatever source. – All income not expressly excluded or
exempted from the class of taxable income, irrespective of the voluntary or
involuntary action of the taxpayer in producing the income, and regardless of
the source of income, is taxable (Blas Gutierrez v. Collector, 101 Phil. 713).
d. Economic benefit test. – Any economic benefit to the employee that
increases his networth (i.e., total assets less total liabilities), whatever may
have been the mode by which it is effected, is taxable. Thus, in stock options,
the difference between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional compensation
income to the employee at the time of exercise (not upon the grant or vesting
of the right) (Commissioner v. Smith, 324 US 177).
e. Severance test – as capital or investment is not income subject to tax, the
gain or profit derived from the exchange or transaction of said capital by the
taxpayer for his separate use benefit or disposed income subject to tax.
f. Substantial alteration of interest lost – income to be returnable for taxation
must be fully and completely realized. When there is no separation of gain or
profit, or separation of the increase in value from capital, there is no income
subject to tax.
g. Flow of wealth test –anything/implying existence of capital
a) Capital is fund income is the flow;
b) Capital is wealth income service of wealth;
c) Property is tree income is fruit;
d) Labor is tree income is fruit.
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
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.
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Compensation Income
Who is an employee?
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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).
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.
Aid Agencies
Ford Foundation, Rockefeller Foundation, Agricultural dev Council, and Asia
Foundation: only non-Filipino staff members thereof who receive salaries
and stipends in US dollars shall be exempt.
IRRI (PD 728 and RA 3538)
Catholic Relief Services – NCWC and Tools for Freedom Foundation (R.A. 4481)
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Asian Development Bank (ADB) – Section 45(b), Article XII of the Agreement
between ADB and RP: Only officers and staff of ADB who are not Philippine nationals
shall be exempt from Philippine income tax (because exemption is “subject to the
power of the Government to tax its nationals.” Any exemption from Philippine
income tax must be granted under duly recognized international agreements or
particular provisions of existing law. Affected individuals (of foreign embassies and
international organizations) who were not granted such exemption must file their income
tax returns and pay the tax due thereon on or before the 15 th day of April following the
close of the taxable year (RMC 31-2013, April 12, 2013).
Hazard pay shall mean the amount paid by the employer to MWE’s who were
actually assigned to danger or strife-torn areas, disease-infested places, or in distressed
or isolated stations and camps, which expose them to great danger of contagion or peril
to life. Any hazard pay paid to MWE’s which does not satisfy the above criteria is
deemed subject to income tax and withholding tax.
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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.
Compensation shall not include remuneration paid: (a) for agricultural labor paid
entirely in products of the farm where the labor is performed; or (b) for domestic service
in a private home; or (c) for causal labor not in the course of the employer’s trade or
business; or (d) for services by a citizen or resident of the Philippines for a foreign
government or an international organization (Sec. 78[A], NIRC).
As a general rule, the income recipient is the person liable to pay the income tax.
In order to improve the collection of income on the compensation income of employees,
the State requires the employer to withhold the tax upon payment of the compensation
income, such that at the end of the calendar year, the employee needs only to file a tax
return and no tax is paid, because his total withholding tax during the year is equal to
his income tax liability. [Beginning 2002, qualified employees need not file their income
tax returns and the employer may file a substituted return for its employees.]
Other Income
The phrase “income from any source whatever” is broad enough to cover
gains contemplated here. These words disclose a legislative policy to include all income
not expressly exempted within the class of taxable income under our laws, irrespective
of the voluntary or involuntary action of the taxpayer in producing the gains (Blas
Gutierrez v. Collector, supra).
Any economic benefit to the employee, whatever may have been the mode
by which it is implemented, is income subject to tax. Thus, in stock options, the
difference between the fair market value of the shares at the time the option is
exercised and the option price constitutes additional compensation income to the
employee (Commissioner v. Smith, supra). A stock option is a right, but not an
obligation, to purchase (call option) or sell (put option) a specified number of shares at a
fixed price before or at a certain date in the future
The principle underlying the taxability of an increase in the net worth of a taxpayer
rests on the theory that such an increase in net worth, if unreported and not
explained by the taxpayer, comes from income derived from a taxable source. In
this case, the increase in net worth was not the result of the receipt by it of taxable
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income. It was merely the outcome of the correction of an error in the entry in its books
relating to its indebtedness to the insurance company. The income tax law imposes a
tax on income; it does not tax any or every increase in networth whether or not derived
from income (Fernandez Hermanos, Inc. v. Commissioner, CTA Case 787, June 10,
1963)
The tax code did not indicate the source of income (Blinds Sources). What it
enumerates are specific items of income.
In the case of Commissioner vs. Tours Specialist, 183 SCRA 402, the Supreme
Court stated that taxable income, however, does not include items received which do
not add to the taxpayer’s net worth or redound to his benefit such as amounts merely
deposited or entrusted to him.
The following are not income: (a) deposit of property that does not increase
networth of taxpayer (e.g., the increase in asset has a corresponding increase in
liability); (b) increase in networth is due to correction of errors in book entries; (c)
voluntary assessments by a corporation paid by its shareholders under Revenue
Regulations No. 2; (d) security deposit paid to a lessor until it is applied in payment of
accrued rent; (e) contributions by lot owners for the memorial park care fund; and (f)
loan proceeds received by the borrower.
(B) Exclusion from Gross Income – an income can be exempted from taxes based
on the following reasons:
Some Principles:
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.
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
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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 donor’s tax.
4. Compensation for Injuries or Sickness includes physical, moral and psychological
injuries.
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) The retiring employee is in the service of the same employer for at least ten
(10) years;
(2) He is not less than fifty (50) years of age at the time of retirement.
(3) You retired under the private benefit plan of the employer.
(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.
(3) Entitled retirement ½ salary for every year of service but not less than one
month salary.
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
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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.
7. Miscellaneous Items (READ: CIR vs. Mitsubishi, G.R. No. 54908, Jan. 22, 1990).
All the three (3) conditions must be present to be exempted from income tax.
Mnemonics to remember: R E L A C C S
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.
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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 employer’s 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:
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.
De minimis benefits (benefits of small value) is exempted both from FBT and
compensation income tax.
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;
4) Uniform allowance ₱3,000.00/annum;
5) Medical benefits ₱1,000.00/annum;
6) Laundry allowance ₱300.00/month.
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A. Business Expenses in general: (Sec. 34 A)
II. Itemized Deductions (the same requisites with the ordinary but with additional
conditions):
Example:
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2. Treat the interest as capital expenditures. To be deducted
through depreciation.
2. Taxes
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) ₱xxx
Less : Deductions (including Foreign Income Tax) ₱xxx
Taxable income ₱xxx
OR
2. Gross Income (within and without) ₱xxx
Less : Deductions (not including Foreign Income Tax) ₱xxx
Taxable income ₱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
22
D. Losses from Wash Sales - (to be discussed in Sec. 38)
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.
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
by implication but upon clear expression of the law. (Basilan Estates, Inc. vs.
Commissioner, G.R. No. L-22492, Sept. 5, 1967)
23
(1) Business and income producing property other than land, generally depreciates
or loses its usefulness and value with the passage of time. A deduction for such
depreciation is allowed in computing taxable income. As such, your opinion that the
assigned cost on the plant as determined at the time of purchase can be depreciated for
tax purposes is hereby confirmed.
(2) Goodwill, including trademarks, trade names, and trade brands, are not such
property as are subject to exhaustion. Accordingly, the value assigned on the
trademarks which is computed on the basis of future sales cannot be discounted to its
present value at the time of acquisition and cannot be amortized for tax purposes over
the average remaining lives of the different trademarks purchased.
(3) Right to receive royalties over a given term is depreciable. Accordingly, your
opinion that discounted or present value at the time of acquisition and that it is
acceptable for tax purposes to amortize the said present values and royalties to be paid
on the basis of future sales may be discounted, to determine the present values and
may be paid at said price (i.e., the cash price as discounted) over the agreed period
(say 5 to 8 years) when royalties will have to be paid is hereby confirmed. Moreover,
said royalty payment is subject to the 20% final withholding tax.
(4) Formulas are not subject to annual depreciation. If, however, after acquisition, a
formula is found to be worthless, its cost may be deducted in full as a loss for the year in
which the formula is abandoned as being worthless. Accordingly, the cost of the
different formulas cannot be amortized 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 formulas.
(5) Amounts paid for an agreement not to compete in a trade or business, where
the taxpayer can prove the existence of such an agreement, are capital expenditures
and subject to allowances for depreciation ratably spread over the period mentioned in
the agreement but only where the elimination of competition is for a definite and limited
term may the cost be exhausted over such a term. Accordingly, your opinion that the
value agreed between your client and seller may not compete in the same line of
business that was sold to your client is hereby confirmed.
Patents, copyrights, etc. – Intangibles, the use of which in the trade or business is
definitely limited in duration, may be the subject of a depreciation allowance. Examples
are patents, copyrights and franchises. Intangibles, the use of which in the business or
trade is not so limited, will not usually be a proper subject of such an allowance. If,
however, an intangible asset acquired through capital outlay is known from experience
to be of value in the business for only a limited period, the length of which can be
estimated from experience with reasonable certainty, such intangible asset may be the
subject of a depreciation allowance provided the facts are fully shown in the return or
prior thereto the satisfaction of the Commissioner of Internal Revenue. (Sec. 107,
Income Tax Regulations)
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
over the (a) remaining life of the trademarks purchased or (b) the expected period within
24
which your client proposes to continue manufacturing said products using the said
formulae.
- Methods
Cost – Salvage Value
1. Straightline method - Life (years)
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.
Two kinds
1) Deductible in Full (see par 2(a), (b), (c), and (d)
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.
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- a source of tax avoidance
If the taxpayer failed to elect the kind of deduction in his income tax return, he shall
be considered as having availed himself of the itemized deduction. Deduction elected
for one taxable year is irrevocable for that year. If the taxpayer elected both deductions
in one taxable year, the optional standard deduction will be disregarded. It must be
emphasized that for one taxable year, a taxpayer must elect only one kind of deduction.
The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only
by the spouse who has custody of the child or children. Provided, that the total amount
of additional exemptions that may be claimed by both shall not exceed the maximum of
four (4) children allowed.
26
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?
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.
a. 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.
b. 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, caterer’s 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.
c. 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).
27
d. Capital gains from sales of shares of stock (Sec. 21(d), [now Sec. 24], NIRC)
e. Capital gains from sales of real property (Sec. 21(e), [now Sec. 24], NIRC)
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.
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.
No. 2-6 -- considered one (1) personality in the eyes of the law.
- 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.
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- this rule of nondeduction does not apply if the dealer’s 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
- WS gains are taxable under schedular rates (individual) and regular corporate
tax (corporation).
- 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)
- Difference
NOLCO NCLCO
- losses from business operation - arise from capital assets
transaction [Sec. 39(D)]
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the deduction there is still a
balance of the 2010 net capital
loss, it can no longer be
carried over to 2012.
- the entire Net operating loss - subject to limitation. What can
can be carried over be carried over is not more
than the ordinary net income of
that year the net capital loss
was sustained (2010) or the
actual net capital loss,
whichever is lower, that can be
carried over to the following
taxable year and will be a
deduction from the net capital
gains of that year it was carried
over (2011)
- 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.
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c. Securities (bonds or debentures) vs. Stocks/Securities
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).
31
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.
Income from turnkey contract with onshore and offshore portions. – While
the construction and installation work were completed within the Philippines, the
evidence is clear that some pieces of equipment and suppliers were completely
designed and engineered in Japan. The two (2) sets of ship unloader and loader, the
boats and the mobile equipment for the NDC project and the ammonia storage tanks
and refrigeration units were made and completed in Japan. They were already finished
products when shipped to the Philippines. The other construction supplies listed under
the Offshore Portion such as steel sheets, pipes and structures, electrical and
instrument apparatus, were not finished products when shipped to the Philippines.
They, however, were likewise fabricated and manufactured by the sub-contractors in
Japan. All services for the design, fabrication, engineering and manufacture of the
materials and equipment under Japanese Portion Yen I were made and completed in
Japan. These services were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to tax on the part of a foreign corporation (Commissioner
v. Marubeni Corporation, G.R. No. 137377, December 18, 2011).
A tax sparing credit is a credit granted by the residence country for foreign taxes
that for some reasons were not actually paid to the source country but that would have
been paid under the country’s normal tax rules. The usual reason for the tax not being
paid is that the source country has provided a tax holiday or other tax incentive to
foreign investors as an encouragement to invest or conduct business in the country. In
the absence of tax sparing, the actual beneficiary of a tax incentive provided by a
source country rather than the foreign investment may be the residence country rather
than the foreign investor. This result occur whenever the reduction in source-country tax
is replaced by an increase in residence-country tax.
32
In the leading case of Commissioner v. Procter & Gamble PMC (160 SCRA 560),
the court ruled that the preferential 15% tax on dividend paid to a non-resident foreign
corporation is inapplicable because of the failure of the claimant to show the actual
amount credited by the U.S. government, to present the U.S. income tax returns of
PGMC-USA, and to submit a duly authenticated document evidencing the tax credit of
the 20% differential. Upon motion for reconsideration, the Supreme Court in an en banc
resolution reversed the earlier decision of the court. It pronounced that the 15%
preferential tax rate was applicable to the case at bar, because it was established that
the Philippine Tax Code only requires that the U.S. shall “allow” Procter & Gamble USA
“deemed paid” the tax credit equivalent to 20%. Clearly, the “deemed paid” which must
be allowed by U.S. law to P&G USA is the same “deemed paid” tax credit that Philippine
law allows to a Philippine corporation with a wholly-or-majority-owned subsidiary in the
U.S. The “deemed paid” tax credit allowed in Section 902, U.S. Tax Code, is no more a
credit for “phantom taxes” than is the “deemed paid” tax credit granted in Section
30(C)(8) (now Sec. 28[B][5][b], NIRC). The legal question should be distinguished from
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
Commissioner’s 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).
Example:
1. X is an American residing in Canada but he has bank deposits in the
Philippines. His interest income from the bank deposits will be considered
derived within the Philippines. – this is an application of the territoriality
rule as source of income.
33
Example: In the 2010 FC declared dividend. The accumulated gross
income FC derived in the Philippines for the years 2007, 2008 and 2009
was P1 Million. FC total gross income (2007, 2008 and 2009) within and
without the Philippines was P3 Million. The dividend declared would be
prorated to get the portion taxable within the Phils. Thus:
₱1 million
Dividend declared x ₱3 million
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.
GI Partly within
Example: GI partly within and without x GI within and without
34
METHODS OF ACCOUNTING – There are two main methods generally followed
by taxpayers. They are (a) the cash method, and (b) the accrual method.
“Cash method” is nearly used by individuals. All items of taxable income whether
cash, property, or services actually or constructively received are classed as
receipts. Only amounts actually paid for deductible expenses are classed as
disbursements. Business expenses must be paid within the taxable year. There is no
such thing as constructive payment.
“Accrual method” is used mostly by business concerns. Under this system, net
income is measured, in a broad sense, by the excess of income over expenditures.
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, taxpayer’s 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)
TAXABLE PERIOD – the rule is that the taxable period of a taxpayer covers a
period of 12 months. The exceptions are as follows:
(c) “Crop year basis” is a method where a farmer engaged in producing crops
which take more than a year from the time of planting to the process of gathering and
dispositions, the law allows expenses deducted to be determined upon such basis and
35
such deductions must be taken in the year in which the gross income from the crop has
been realized.
Gross profit times installments received divided by total contract price equals returnable
income.
The method applies also to sales of realty where the initial payment does not exceed
25% of the selling price; if the initial payment of the selling price exceeds 25% thereof,
then the income shall be reported in full.
This applies further to casual sales of personality (other than property includible in
the taxpayer’s inventory) for a price exceeding ₱1,000 and where the initial payment
does not exceed 25% of the selling price.
(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 taxpayer’s financial condition can be
affirmatively established, with same definiteness; and
(d) That the circumstances are such that the method does clearly reflect the
taxpayer’s 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”
Individuals
A. 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
36
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.
The said taxpayer’s 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.
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.
37
FILING OF DECLARATIONS
AND PAYMENTS DATES
First April 15 of the current taxable year
CORPORATE RETURNS
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.
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.
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
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.
38
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.
If withholding tax is not withheld from income payments, there will be a disallowance
of deductible business expenses claimed by the withholding agent in this income tax
return or a penalty shall be imposed on withholding tax agent for failure to withhold the
tax.
A taxation at source is that part of tax system which collects through withholding
agents or employers the appropriate income taxes due as they are earned and before
earnings are paid to the employees.
The income paid to the employees is the net amount after deducting the taxes
withheld which is based on the taxable income after adjustments with respect to
personal, additional exemptions and or other adjustments allowed by the law, if any.
The primary objective of the system is to ensure accurate payment of taxes and to
be able to use taxes collected at an earlier time to finance the operations and projects of
the government.
Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from
the payee on the said income. The liability for the payment of the tax rests primarily on
the payor as a withholding agent. Thus, in case of failure to withhold or in case of under
withholding, the deficiency tax shall be collected from the payor/withholding agent. The
payee is not required to file an income tax return for the particular income, the final tax
on which has been withheld.
39
The finality of the withholding tax is limited only to the payee or recipient’s income
tax liability on the particular income. It does not extend to the payee’s other tax liability
on said income, such as when the said income is further subject to a percentage tax.
Under the creditable withholding tax system, taxes withheld on certain payments are
intended to equal or at least approximate the tax due of the payee on said income. The
income recipient is still required to file his income tax return as prescribed in the Section
51 of the NIRC, either to report the income and/or pay the difference between the tax
withheld and the tax due on the income. A tax withheld in income payments covering
the expanded withholding tax from compensation income is creditable in nature.
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.
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:
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%)
40
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.
Illustration.
Suppose Juan wants his wife to have the income from his estate as long as she
lives. Juan may place his property in a trust, the income of which would go to his wife
for life; the trust might be dissolved at her death and the property distributed to the
children. The trust is assigned to be administered by Attorney Nilo, a trustee.
Under this arrangement, the trustee is required by law to manage the trust strictly in
accordance with the terms of the trust instrument.
When a trust is created, a new entity comes into being, for which returns must be
filed and taxes paid.
A trust created by a written instrument other than a will is known as a “trust inter-
vivos,” if created by will is known as a “testamentary trust.”
Tax imposed upon individual taxpayers shall apply to the income of any property
held in trust, including:
3. Income that, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
The trust, or the beneficiaries or the grantor may pay the tax on income derived from
trusts.
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The computation of the net taxable income of trust shall be in the same manner with
the net taxable income of estate. The net taxable income shall be taxed by using the
scheduler tax of an individual taxpayer based on Sec. 24 A of the Tax Code.
In the case of two or more trusts created by the same person, for the same
beneficiary, the taxable income of all trusts shall be consolidated and the tax shall be
computed based on the consolidated income.
The proportionate amount of the tax computed based on the consolidated income
shall be assessed and collected from each trustee which should be equal to the
proportion of the taxable income of the trust administered by the trustee to the
consolidated income of the several trusts.
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.
(d) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.
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(a) Revocable trusts the income of which is held or distributed for the benefit of the
grantor
(b) Employee’s 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.
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.
(a) The employee’s 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.
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INCOME TAX COLLECTED AT SOURCE ON COMPENSATION INCOME
Every employer must withhold taxes from compensation paid arising from employer
employee relationship. However, no withholding of tax shall be required where the total
compensation income of an individual does not exceed the statutory minimum wage of
₱5,000.00 monthly or ₱60,000.00 a year, whichever is higher.
It is to be noted that employees whose total annual compensation does not exceed
₱60,000.00 in a year shall be given two options with which to pay his income tax due as
follows:
Where the employee has opted to have his compensation income subjected to
withholding so as to be relieved of the obligation of filing an annual income tax return
and paying his tax due on a lump sum basis, he shall execute a waiver in a prescribed
BIR form of his exemption form withholding which shall constitute the authority for the
employer to apply the withholding tax table provided under these Regulations.
The employee who opts to file the Income Tax Return shall file the same not later
than April 15 of the year immediately following the taxable year.
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This method is used when an employer – employee relationship is terminated before
the end of the calendar year and when computing for the year-end adjustment the
employer shall determine the amount to be withheld from the compensation on the last
month of employment or in December of the current calendar year in accordance with
the following procedures.
Section 2.57.3 enumerated the following persons who are hereby constituted as
withholding agents for purposes of the creditable taxes that are required to be withheld
in income payments enumerated in Section 2.57.2:
1. In general, any juridical person, whether or not engaged in business or trade;
2. An individual, with respect to payments made in connection with his trade or
business. However, insofar as taxable sale, exchange or transfer of real
property is concerned, individual buyers who are not engaged in trade or
business are also constituted as withholding agents;
3. All government offices including government-owned or controlled corporations,
as well as provincial, city and municipal governments.
Time of Withholding
The obligation of the payor to deduct and withhold the tax under Section 25.7 of
these regulations arises at the time an income is paid or payable, whichever comes first.
The term “payable” refers to the date the obligation becomes due, demandable or
legally enforceable.
c. Corporations which are exempt from the income tax under Section 10 of
NIRC, to wit: The GSIS, the SSS, the Phil. Health Insurance Corp., the
PCSO and the PAGCOR; However, the income payments arising from
any activity is conducted for profit or income derived from real or
personal property shall be subjected to a withholding tax as prescribed
in these regulations.
Where to File
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Creditable and final withholding taxes deducted and withheld by the withholding
agent shall be paid upon filing a return in duplicate with the authorized agent banks
located within the Revenue District Office (RDO) having jurisdiction over the residence
or principal place of business of the withholding agent. In places where there is no
authorized agent banks, the return shall be filed directed with the Revenue District
Officer, Collection Officer or the duly authorized Treasurer of the city or municipality
where the withholding agent’s residence or principal place of business is located, or
where the withholding agent is a corporation, where the principal office is located except
in cases where the Commissioner otherwise permits.
When to file
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.
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.
DUE DATES
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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.
4. Estate tax
a. Notice of death …………………………………………….. 2 months after
death
b. Estate tax return …………………………………………… 6 months after
death
6. Value-added tax:
a. On sale of goods, services or property
(1) Monthly declaration …………………………………. 25th day after
month’s end
(2) Quarterly return ……………………………………… 25th day after
quarter’s end
b. On importation …………………………………………….. Before release from
Customs
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9. Capital gains tax on sale of real property
(capital asset) by individual
a. Cash sale ………………………………………………….. 30th day after sale
b. Installment sale …………………………………………… 30th day after
receipt of installment
10. Remittance of tax withheld
a. In general
January to November ……………………………………. On or before 10th
day of the
which withholding was made
Nota Bene – A withholding agent (WA) is a “taxpayer” but not a statutory taxpayer.
WA can claim a tax refund if there is overpayment.
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