a. Amount of interest paid or incurred within a taxable year.
b. Indebtedness in connection with the taxpayers profession, trade or business.
c. the taxpayers otherwise allowable deduction for interest expense shall be reduced by an amount equal to the percentages of the interest income subjected to final tax, 33% beginning January 1, 2009.
See page 179 for illustration
3. Exceptions
No deduction shall be allowed in respect of interest under the succeeding paragraphs:
a. Interest paid in advance
1. If within the taxable year an individual taxpayer reporting income on cash basis incurs indebtedness
2. An interest is paid in advance through discount or otherwise.
3. Such interest shall be allowed as a deduction in the uear the indebtedness is paid.
b. Interest on amortization
If indebtedness is payable in periodic amortizations:
-the amount of interest which corresponds to amount of principal amortized or paid during the year shall be allowed as deduction in such taxable year.
See p 180 for illustration
c. Between members of the family and related taxpayers
-If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. 36(b) d. If the indebtedness is incurred to finance petroleum
exploration
Optional Treatment of Interest Expense
At the taxpayers option, interest incurred in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.
The taxpayer is given the option to charge the interest expense incurred as a capital expenditure or treat the same as part of the cost of the property acquired used in trade or business or exercise of profession and the corresponding deduction. Simply put, it is amortized by way of depreciation expense.
C. Taxes
1. taxes paid or incurred within a taxable year.
2. in connection with the taxpayers profession, trade, or business, shall be allowed as deductions, example: real property tax if the prop. is used in trade, or business, sec. 80 of RR. N0.2 provides the ff. as deductible: import duties, business tax, occupational tax, license, privilege tax, excise tax, stamp taxes, automobile registration fees.
3. Exception:
a. The income tax provided for under this Tile
b. Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of par (3) of this subsection (relating to credits for taxes of foreign countries)
This paragraph pertains to RC and DC considering that their income from sources without are taxable in this jurisdiction and may likewise be taxable in that foreign country, by virtue of this provision may be claimed either as:
i. Itemized deduction
A deduction from G.I (if the taxpayer dies not signify in his return his desire to avail of the benefit of the foreign tax credit); or
ii. Tax credit
As a tax credit against the income tax due.
Take note this is an option on the part of the taxpayer that is in the alternative. Once the taxpayer opted to claim the foreign taxes paid abroad as a tax credit, it cannot be claimed anymore as a deduction or vice versa.
c. Estate and Donor‟s Taxes
d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Taxes allowed under this SubSec., when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.
RR 14-2011 (Sec. 4): all tax credit certificates issued by the BIIR shall not be allowed to be transferred/assigned to any person.
Tax credit certificates are not nego. Inst. For it lack the req. enunciated in Sec.1 of the NIL.
Limitations on Deductions
Non-resident alien engaged in trade and business and Resident foreign corp. – deductions for taxes provided in par. (1) of this SubSec. (C ) shall be allowed only if and to the extent that they are connected with income from sources w/in the phils.
Tax Credit Paid in Foreign Countries
Only RC and DC may avail of this kind of tax credit, coz‟ their income from w/o is taxable in this jurisdiction and may likewise be taxable in Foreign countries where they likewise derive income from trade/bus.
The principle is to minimize the effect of indirect double taxation. The income derived abroad is alreadu taxed in this country and yet, it may also be taxable in foreignt countries. In sec. 34(c)(3), this is otherwise known as the credit against tax for taxes of foreign countries. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this par.
PAT and estates can avail of this tax credit, in the case of any such individual who is a member of a GPP or a beneficiary of an estate or trust, his proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such PAT or trust is reported for taxation under this Title.
The ff. are requisites:
1. Must be a RC or DC
2. The taxpayer signifies in his return his desire to avail of the tax credit for taxes paid in foreign country; and
3. Subject to limitation.
Foreign Tax Credit
1. It simply means taxes paid to foreign countries and such taxes paid are considered as a deduction or credit against taxes due in the Philippines
2. If taken as an item of deduction, under sec. 34(C)(3), in order to be decutible, the taxpayer must not signify in his return his desire to have the benefits availed of or be credited with his taxes due.
3. And if taken as a tax credit, it is imperative that the taxpayer therefore must signify his intention to avail of the same as a tax credit.
4. The tax paid for in the foreign country must be the amount of income taxes paid or incurred during the taxable year to any foreign country.
5. Only the RC and DC who are entitled to the benefits of foreign tax credits for the simple reason that their income derived from sources without are also taxable from such foreign country.
6. An alien individual and FC are not privileged nor allowed to avail of the credits against the tax for the taxes of the foreign countries.
7. The amount of the credit to be taken is subject to the limitations.
Limitations on Credit See sec 34(c)(4)
SIMPLY: if there is only one foreign country involved, apply the 1st par. To wit:
The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year If there are two or more foreign countries apply both paragraphs.
a.The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year.
b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income
from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.
The tax against which such credit is taken simply means the income tax imposed by the Code or the Philippine income tax. It is also specified that the tax credit or the income tax paid to the foreign country shall be subject to the foregoing limitations. Simply, it is the income tax paid to the foreign country or the limit, whichever is lower.
Adjustments on Payments of Incurred Taxes
If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall:
Notify the Commissioner, who shall redetermine the amount of the tax for the year/s affected, and the tax amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer.
In case such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to:
Give a bond with sureties satisfactory to and to be approved by the Commissioner is such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.
Year in which Credit taken
The credits provided for in Subsection ( C) (3) of this section, may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in subsection ( c).
if the taxpayer elects to take credits in the year I which the taxes o the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.
Proof of Credits
The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such
amount to be determined under rules and regulations prescribed by the Secretary of Finance; and
(c) All other information necessary for the verification and computation of such credits.
Carry-Over of Excess Income Tax Payments
Sec. 76 provides that a taxpayer has the option to file a claim for refund or to over its excess income tax payments. The option to carry-over, however is irrevocable.
Once a taxpayer opted to carry-over its excess income tax payments, it can no longer seek refund of the unutilized excess income tax payments.
The taxpayer however may apply the unutilized excess income tax payments as a tax credit to the succeeding taxable years until such has been fully applied pursuant to sec. 76 of the NIRC. (Belle Corp v. cir)
Irrevocability of Carry-over Option
Once the corp. exercises the carry-over option and apply the excess quarterly income tax against the tax due for the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount representing such overpayment.(Cir vs. Mirant operations corp)
D. Losses
Losses speak of two kinds:
Ordinary Losses
-refer to losses incurred in connection with the trade or business or in the exercise of profession or property therein which are considered deductible in arriving at the taxable income. These are legitimate losses incurred in business
e.g. operating losses, casualty losses, losses due to robbery, theft, or embezzlement
Capital Losses
-refer to losses incurred in connection with the sale or exchange of capital assets which are deductible only to the extent of capital gain.
e.g. losses from sale or exchange of capital assts, losses on wash sales, and securities becoming worthless classifies as capital assets.
Losses Deductible from Gross Income
Ordinary loss or losses in general Sec. 34 (D) (1) Casualty loss sec. 34 (D) (1) (b)
Net operating loss cary over sec. 34(D) (2)
Ordinary Loss Sec. 34 (D) (1)
Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties,
or from robbery, theft or embezzlement.
In addition sec 22(Z) of the NIRC states that the term “ordinary loss”
includes:
-any loss from the sale or exchange of property which is not a capital asset.
Proof of Loss
a. In the case of a NRA individual or corp.
b. Actually sustained during the year incurred in business, trade, or exercise of a profession conducted within the Philippines
c. Such losses are not compensated for by the insurance or other forms of indemnity
d. Submit a declaration of loss sustained from casualty of from robbery, theft, or embezzlement during the taxable year not be less than 30 days not more than 90 days from the date of discovery of the casualty, or robbery, theft or embezzlement giving rise to the loss
Capital loss sec. 34 (D) (4) (a)
These are losses incurred involving assets or transactions which are considered capital.
Simply, capital loss can only be deducted from capital gain. This is because gross income includes ordinary course of trade or business of the taxpayer.
Capital losses on the other hand are not related to the said ordinary course of trade or business of the taxpayer, hence cannot be deducted except from capital gain.
Ex. Of capital gains
1. Securities becoming worthless
2. Losses from wash sales of stock or securities
3. Capital losses on sale or exchange of capital assets
4. Unser sec. 39(f), losses from short sales and losses attributable to the failure to exercise the privileges or options to buy or sell property.
Net Operating Loss Carry-Over (NOLCO)
Means the excess of allowable deduction over gross income of the business in a taxable year. As such, net operating loss carry-over allows individuals and corp. subject to net income tax to take up net operating loss as deduction from gross income.
a. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss.
b. any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection
c. That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons.
See illustration page 190-191 Capital Losses
Means the excess of cost over the amount realized as a result of sales or exchanges of capital assets.
Loss from sales or exchanges of capital assets shall be allowed only to the extent provided in sec. 39 of NIRC
Limitation on Capital Losses See sec. 39 (C )
Net Capital Gain sec. 39 (2)
means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.
Net Capital Loss
means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges sec. 39 (3)
Capital Losses on Bank or Trust Co. which is a DC
If a bank or trust company incorporated under the laws of the Phils, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corp. with interest coupons or in registered form, any loss resulting froom such sale shall not be subject to the foregoing limitation and shall no tbe included in determining the applicability of such limition to other losses.
This is because such substantial part of business is regarded as ordinary assets of banks and trust companies. As such, any loss resulting from the sale shall not be subject to the foregoing limitation on deduction of capital losses.
Holding Period
B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:
(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and
(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months.
Short sales
In par f. of sec 39 the gains or losses from short sales are considered either as capital gains or losses.
Securities Becoming Worthless See Sec. 34 (D) (4) (b) of the NIRC
since it is classified as capital asset, any resulting loss is considered as a capital loss.
The provision conveys that the loss sustained by the holder of securities, which are capital assers, is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or capital loss normally requires the concurrence of 2 conditions for it to result:
1. There is a sale or exchange
2. The thing sold or exchanged is a capital asset
When securities become worthless, there is strictly no sale or exchange of capital assers. A similar kind of treatment is given by the NIRC on the retirement of certificates indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of sale or exchange for the application of the capital gain and loss provisions of the Code. (Chinabanking v. CA)
Wash Sale See sec. 38 NIRC
It is defined as any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period of 30 days before the date of such sale or disposition and ending 30 days after such date,the taxpayer has acquired or has entered into a contract or option so to acquire, substantially identical stock or securities.
SIMPLy: wash sale is a sale or other disposition of stocks or securities acquired by the taxpayer within a 61 day period or beginning 30 days before the date of sale and 30 days after said date of sale. Any losses
SIMPLy: wash sale is a sale or other disposition of stocks or securities acquired by the taxpayer within a 61 day period or beginning 30 days before the date of sale and 30 days after said date of sale. Any losses