REASONS FOR NON-DEDUCTIBILITY
1. Personal expenses 2. Capital expenditures
3. Items not normally subject to income tax and therefore are not deductible.
4. Items taken advantage of by the taxpayer to avoid payment of income tax.
SPECIFIC ITEMS (SECTION 36)
1. Personal, living or family expenses;
2. Amount paid out for new buildings or for permanent improvements, or betterment made to increase the value of any property or estate,
Except that intangible drilling and development cost incurred in petroleum operations are deductible;
3. Amount expended in restoring property or in making good the exhaustion thereof for which an allowance has been made;
4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or
business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. [Sec.
36]
5. Losses from sales or exchanges of property between related taxpayers. [S ec. 36]
TRANSACTIONS BETWEEN RELATED PARTIES
1. Between members of the family;
“Family” includes only the brothers, sisters (whether by the whole or half blood), spouse,
ancestors, and lineal
descendants of the taxpayer.
2. Except in the case of distributions in liquidation:
a. between an individual and a corporation more than 50% in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;
b. between two corporations more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was a personal holding company or a foreign personal holding company; or
3. Between the grantor and a fiduciary of any trust;
4. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust;
5. Between a fiduciary of a trust and a beneficiary of such trust.
TAX CONSEQUENCES
The following are not deductible:
1. Interest expense [Sec. 34 (B)(2)]
2. Bad debts [Sec. 34 (E)(1)]
3. Losses from sales or exchanges of property [Sec 36 (B)]
(2) OPTIONAL CORPORATE INCOME TAX
SECTION 27 (A)
APPLIES TO:
1. Domestic corporations (DC)
2. Resident foreign corporations (RFC) RATE OF TAX AND DATE OF EFFECTIVITY
15% of the Gross Income effective January 1, 2000
CONDITIONS OR REQUIREMENTS
1. A tax effort ratio of 20% of Gross National Product
2. A ratio of 40% income tax collection to total tax revenues
3. A VAT tax effort of 4% of GNP 4. A 0.9% ratio of Consolidated Public
Sector Financial Position (CPSFP) to GNP
OTHER FEATURES
1. Available only to firms whose ratio of:
Cost of sales
<=55%
Gross sales or receipts from all sources
2. The election shall be irrevocable for three (3) consecutive years MEANING OF GROSS INCOME
General concept – Gross sales Less:
(1) Sales Return;
(2) Discount and allowances (3) Cost of goods sold - means
all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
(3) MINIMUM CORPORATE INCOME TAX (MCIT)
SECTION 27 (E)
WHO ARE COVERED?
MCIT is imposed on domestic and resident foreign corporations
1. Whenever such corporation has zero or negative taxable income; or 2. Whenever the amount of
MCIT is greater than the normal income tax due from such
corporation determined under Section 27[A].
LIMITATIONS
1. The MCIT shall apply only to domestic and resident foreign corporations subject to the normal corporate income tax (income tax rates under Sec 27[A] of the CTRP).
2. In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular corporate income tax system.
3. In computing for the MCIT due from a resident foreign corporation, only the gross income from sources within the Philippines shall be considered for such purpose.
WHEN DOES A CORPORATION BECOME LIABLE UNDER THE MCIT?
MCIT is imposed beginning on the fourth taxable year immediately following the year in which such corporation commenced its business.
The taxable year in which the business operations commenced shall be the year when the corporation registers with the BIR.
CARRY FORWARD OF THE EXCESS MINIMUM TAX
• Any excess of MCIT over the normal income tax can be carried forward on an annual basis.
• The excess can be credited against the normal income tax due in the next 3 immediately succeeding taxable years.
• Any amount of the excess MCIT which cannot be credited against the normal income tax due in the next 3-year period shall be forfeited.
RELIEF FROM MCIT
The Secretary of Finance is authorized to suspend the imposition of
the MCIT on any corporation which suffers losses because of:
a. prolonged labor dispute;
b. force majeure; or
c. legitimate business reverses.
“Substantial losses from a prolonged labor dispute" means losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations.
“Force majeure" means a cause due to an irresistible force as by "Act of God"
like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war and insurgency.
“Legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft, or embezzlement, or for other economic reason as determined by the Secretary of Finance.
TAX RATE: 2% of gross income or taxable base pertinent to a trading/merchandising concern or a service entity
TAX BASE: Gross Income MEANING OF GROSS INOME
General concept - gross income means:
Gross sales Less:
(1) Sales Return;
(2) Discount and allowances (3) Cost of goods sold - means
all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
KINDS OF BUSINESS
A. Trading or Merchandising Concern Gross Income =
gross sales/
receipts less sales returns, discounts and allowances and cost of goods sold
Cost of Sales = 1.Invoice cost of the
goods sold;
2.import duties ; 3.freight in
transporting the goods to the place
where the goods are actually sold;
4.insurance while the goods are in transit.
B. Manufacturing Gross Income (Same)
Cost of Sales = All cost of production of finished goods, such as
1.raw materials used;
2.direct labor;
3.manufacturing overhead;
4.freight cost;
5.insurance premiums;
6.other costs
incurred to bring the raw materials to the factory or warehouse.
C. Services Gross Income = Gross receipts less sales returns, allowances,
discounts and costs of services
Cost of Services = All direct costs and expenses necessarily incurred to provide the services required by the customers and clients including:
a. Salaries and employee benefits of personnel, consultants and specialists directly rendering the service;
b. Cost of facilities directly utilized in providing the service.
It shall not include interest expense except for banks and other financial institutions.
• Gross income excludes passive income subject to final tax.
• Other income and Extraordinary Income are included since RR 9-98 provides that gross sales include sales contributory to income taxable under the regular corporate tax.
See Annex T for interplay of normal tax, optional corporate income tax and MCIT.
(4) IMPROPERLY ACCUMULATED EARNINGS (IAE) TAX
SECTION 29
(REVENUE REGULATIONS NO. 2 – 2001) DEFINITION: “Improperly accumulated earnings (IAE)” are the profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of another corporation.
TAX RATE: 10% of the Improperly Accumulated Taxable Income (in addition to other taxes).
Rationale behind IAET
If the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation. Thus, a tax is being imposed;
a. in the nature of a penalty to the corporation for the improper accumulation of its earnings, and b. as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation.
“IMPROPERLY ACCUMULATED TAXABLE INCOME”
Taxable income for the year Add:
Income exempt from tax;
Income excluded from gross income;
Income subject to final tax;
Net operating loss carry-over (NOLCO) Total
Less:
Income tax paid/payable for the taxable year
Dividends actually or constructively paid/issued from the applicable year’s taxable income
Amount reserved for the reasonable needs of the business as defined in the Regulations
Tax base of improperly accumulated earnings tax
EXCLUSIONS
• For corporations using the calendar basis the accumulated earnings tax shall not apply on IAE as of Dec. 31, 1997.
• For fiscal year basis, the tax shall not apply to the 12-month period of fiscal year 1997-1998.
IAE as of the end of a calendar or fiscal year period on or after Dec.
31, 1998 shall be subject to the 10%
tax.
WHO ARE COVERED?
General Rule: The IAE tax shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. These are:
1. Domestic corporations as defined under the Tax Code;
2. Corporations which are classified as closely-held corporations.
• those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals.
• Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.
Exception: The said tax shall not apply to:
1. Publicly held corporations (Sec. 29) 2. Banks and other non-banks Financial
intermediaries (Sec. 29) 3. Insurance companies (Sec. 29)
4. Taxable partnerships (deemed to have actually or constructively received the taxable income under Sec. 73D)
5. General professional partnerships (exempt; taxable against the partners)
6. Non- taxable joint ventures and 7. Enterprises duly registered with the
Philippine Economic Zone Authority (PEZA) under R.A. 7916, and enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A.
7227, as well as other enterprises duly registered under special economic zones declared by law which enjoy payment of special tax rate on their registered operations or activities in lieu of other taxes, national or local.
8. Foreign corporations [RR No. 02-2001]
EVIDENCE OF PURPOSE TO AVOID INCOME TAX
1. The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Instances indicative of purpose to avoid income tax upon shareholders:
1. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business;
2. Investment in bonds and other long-term securities;
3. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business as defined in these Regulations.
2. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear preponderance of evidence, shall prove the contrary.
“Reasonable needs of the business” includes the reasonably anticipated needs of the business such as:
a. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of Balance Sheet date, inclusive of accumulations taken from other years;
b. Earnings reserved for definite corporate expansion projects or programs as approved by the Board of Directors or equivalent body;
c. Reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body;
d. Reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement;
e. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution;
f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.
The controlling intention of the taxpayer is that which is manifested at the time of accumulation, not subsequently declared intentions, which are merely the product of afterthought.
A speculative and indefinite purpose will not suffice.
Definiteness of plan/s coupled with action/s taken towards its consummation is essential.
PERIOD FOR PAYMENT OF DIVIDEND/
PAYMENT OF IAET
Dividends must be declared and paid or issued not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter.
(
5) INCOME SUBJECT TO PREFERENTIAL OR SPECIAL
RATES
Pertains to income derived by a particular individual or corporation belonging to a class of income taxpayer that is subject to either a preferential or special rate.
Tax Rates: Please refer to Annex C.
(6) GROSS INCOME TAX (GIT)
GROSS INCOME TAX (GIT) FORMULA Entire Income
Less: Exclusions and Income subject to Final Tax (e.g. Passive Income)
Gross Income
Multiply by: Tax Rates (%) Net Income Tax Due GIT APPLIES TO
1. Non-resident alien not engaged in trade or business (25%); and
2. Non-resident foreign corporation.
(32%)
Tax Rates: Please refer to Annex A and B.