Lectures of Atty. Japaar B. Dimaampao
Supplement Bar Material
STATE POLICY Declared Policy of the State: (Code:RDB-N)
1) to promote sustainable economic growth through the rationalization of the Philippine internal revenue tax system, including tax administration;
2) to provide, as much as possible, an equitable relief to a greater number of taxpayers in order to improve levels of disposable income and increase economic activity;
3) to create a robust environment for business to enable firms to compete better in the regional as well as the global market; 4) the State ensures that the Government is able to provide for the needs of those under its jurisdiction and care.
THE B.I.R. 1) Powers and duties of the BIR.
The BIR shall be under the supervision and control of the DOF and its powers and duties shall comprehend: (CODE: ACE-JP) 1) the assessment;
2) collection of all national internal revenue taxes, fees, and charges; 3) the enforcement of all forfeitures, penalties, and fines;
4) execution of judgments in all cases decided in favor by the CTA and ordinary courts
5) give effect and to administer the supervisory and police powers conferred to it by the Code and other laws. 2) POWERS of the Commissioner of the Internal Revenue.
1) to interpret tax laws and to decide tax cases (Sec. 4);
2) to obtain information and to summon, examine, and take testimony of persons (Sec. 5);
3) to make assessments and prescribe additional requirements for tax administration and enforcement (Sec. 6); 4) to delegate powers (Sec. 7);
5) to administer oaths and take testimony (Sec. 14); 6) to make arrests and seizures (Sec. 15);
7) to assign or re-assign internal revenue officers (Sec. 16 & 17).
REQUISITES OF A VALID TAX REGULATION (LIMITATION OF THE POWER TO INTERPRET TAX LAWS) 1) It must be consistent with the provision of the Tax Code
2) Reasonable
3) Useful and necessary
4) It must be published in the official gazette or in the newspapers of general circulation. SOURCES OF REVENUES
The following taxes, fees and charges are deemed to be national internal revenue taxes: (Code:IEVPEDO or EVE-PIDO) 1) Income tax;
2) Estate and donor’s taxes; 3) Value-added tax; 4) Other percentage taxes; 5) Excise taxes;
6) Documentary stamp taxes; and
7) Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue
INCOME TAX
FEATURES OF OUR PRESENT INCOME TAXATION
Q. What are the features of our present income taxation in the light of R.A 8424?
A. We adopted the so-called “COMPREHENSIVE TAX SITUS” – Comprehensive in the sense that we practically apply all possible rules of tax situs.
Criteria used: (Code: R. P. N.) a) Residency of taxpayer ;
Situations where we utilized residency as basis:
1) We tax the income of a resident alien derived from sources within the Philippines.
2) We also tax the income from sources within of resident foreign corporation in the Philippines. b) Place/Source
Used as a basis in taxing the income of a non-resident alien individual. We can only tax his income derived from sources within and in taxing the same, we consider the place where the income is derived.
c) Nationality or Citizenship in the case of individual taxpayer
We used that as a basis in imposing tax on the income of a resident citizen. Resident citizen may be taxed from his sources within and without. The source of income here is immaterial what we consider is the nationality or citizenship of the taxpayer.
Domestic corporation – we can tax its income derived from sources within and without.
On Non-resident citizen, they can only be taxed on their income derived from the sources within – tax situs is the place /source of income.
Taxpayer
Sources
1. RC
I/O (Sec. 23 [A])
2. NRC
I (Sec. 23 [B])
3. OCW
I (Sec. 23 [C])
4. ALIEN
4.1 NRA-ETB
4.2 NRA-NETB
4.3 ALIEN ERA-MNC
4.4 ALIEN OBUs
4.5 ALIEN PSCS
I (Sec. 23 [D])
5. Domestic Corp.
I (Sec. 23 [E])
6. Foreign Corp-RFC/NRFC
I (Sec. 23 [F])
1) A resident citizen is taxable on all income derived from sources within and without the Philippines. 2) A non-resident citizen is taxable only on income derived from sources within the Philippines.
3) An overseas contract worker is taxable only on income from sources within the Philippines; a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in the international trade shall be treated as an overseas contract worker.
4) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
6] A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.
Income Taxation may be grouped into: 1) individual income taxation 2) corporate income taxation
Q. What are the basic features of individual taxation? (S.P. F. E. M.) A.
1) Individual income taxation adopted the Schedular system of taxation
Schedular System of Taxation – is a system employed where the income tax treatment varies and made to depend on the kind or category of the taxpayer’s taxable income (Tan vs. Del Rosario).
Characteristics of schedular system of taxation:
a) It gives or accords different tax treatment on the income of individual taxpayer. b) It classifies income.
Manifestations: (that under the individual taxation we adopted the schedular system of taxation) [C, B, P, Dp, I, R, R, D, A, Pw, P, P]
Under Sec. 32(a), income may be categorized as follows: 1) compensation income,
2) business income, 3) professional income,
4) income derived from dealings in property, 5) interest income, 6) rent income, 7) royalties, 8) dividends, 9) annuities, 10) prizes,
11) winnings, 12) pensions, and
13) partner’s distributive share from the net income of the general professional partnership.
This is the manifestation that as far as individual income taxation, the income is categorized.
2] The tax rates are progressive in character. This is clear under Sec. 24 (a). You will notice there that the tax base increases as the tax rate increases.
3] Modified gross income as regards compensation earner. Modified because in determining the taxable compensation income, the only allowable deductions are personal and additional exemption. You cannot deduct the allowable deductions under Sec. 34 from gross compensation income.
But as regards those individual taxpayers that derived business, trade or professional income, we adopted the net income system. This is so because under Sec. 34, allowable deductions may be claimed by individual taxpayers who derived business trade and professional income.
4] We employ this “Pay as you File” system.
5] Under certain cases, we employ the “pay as you earn” system. This applies to “income subject to withholding tax”. Q. What are the basic features of corporate income taxation?
A.
1] Global Concept has been adopted. >>> Global system where the tax treatment views indifferently the tax base and treats in common all categories of taxable income of taxpayer (Tan vs. Del Rosario).
Characteristics of Global system of Taxation:
a) Uniform tax treatment – this is subject to diminishing corporate tax rates of 34% (Jan. 1, 1998), 33% (Jan. 1, 1999), 32% (Jan. 1, 2000). See Chapter IV, Sec. 27).
b) Does not categorize income.
2] Corporate taxpayer, particularly domestic corporations are entitled to deductions. So, insofar as domestic corporation and resident foreign corporation is concerned, we adopted here the net income tax system.
New provisions under R.A. 8424: 10% tax on improperly accumulated earnings of a corporate taxpayer. 3] Pay as you file system has also been employed.
Corporate taxpayer is allowed to adopt calendar or fiscal year period. Corporate taxpayer files corporate income tax return quarterly. And it also files the so-called FINAL ADJUSTED RETURN.
In the case of individual taxpayer, the payment should not be later than April 15 of every taxable year. Individual taxpayers are not allowed to adopt the so-called FISCAL YEAR PERIOD.
* Individual taxpayers are allowed to adopt only the calendar year period while corporate taxpayers have the option either the calendar year period of the fiscal year period.
Calendar year period – this covers the period of 12-month commencing from Jan. 1 and ending Dec. 31.
Fiscal year period – this is also a 12-month period commencing on any month or ending on any month other than Dec. 31. DEFINITION OF CERTAIN TERMS
GROSS INCOME TAXATION – is a system of taxation, where the income is taxed at gross. The taxpayers under this system are not entitled to any deductions.
In general, we adopted the net income taxation because under Sec. 34, taxpayers are allowed to claim the so-called ALLOWABLE DEDUCTIONS. GROSS INCOME – means all income derived whatever source, including but not limited to the following: [STP-IRR-DAP-PS]
1. Compensation for services;
2. Gross income from trade or business or the exercise of a profession; 3. Gains derived from dealings in property;
4. Interests; 5. Rents; 6. Royalties; 7. Dividends; 8. Annuities;
9. Prizes and winnings; 10. Pensions; and
11. Partner’s distributive share from the net income of the general professional partnership.
INCOME – all wealth which flows in the taxpayer other than a mere return of capital. It includes all income specifically described as gain or profit including gain derived from the sale or disposition of capital asset.
JUDICIAL DEFINITION: It also means gains derived from (1) capital, (2) labor, or (3) both labor and capital including gains derived from the sale or exchange of capital asset.
FOUR (4) Sources of INCOME; [ClaBS] a. Capital
b. Labor
c. Both labor and capital d. Sale of property
Example of income derived from capital >>> Interest Income Example of income derived from labor >>> Compensation Income
Example of income derived from both capital and labor >>> Income of an independent contractor. The independent contractor provides work force, provides capital and derives income from such capital.
* In determining the profit from the sale of property, you should always be guided by this formula: Amount Received Or Realized LESS Cost of Property = PROFIT
TAXABLE INCOME – (the old term is Net Income) – means all pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by this Code or other special laws. (Sec. 31 of the TRA of 1997).
Shoter Version: All pertinent items of gross income less allowable deductions.
Q. What are the advantages/disadvantages of gross income taxation and net income taxation? Advantages of gross income taxation:
1. It simplifies our income taxation. This is so because since no deductions are allowed, it is very easy to tax the income. You don’t have to find out whether deductions or expenses are legitimate or not because they are not deductible.
2. This will generate more revenue to the government. 3. It minimizes cost.
Disadvantages of gross income taxation:
1. As far as the taxpayer is concerned, this is inequitable because they cannot claim the expenses, which are incurred in connection with his trade or business or exercise of his profession.
2. And if this is the system, in all likelihood the taxpayers will lose interest to earn more. It will in effect reduce the purchasing capacity of the taxpayer.
3. Since taxpayers cannot claim those legitimate expenses as deductions, they may resort to fraudulent scheme that will minimize their tax ability and this may be done through the understatement of income. So, in effect, this will encourage tax evasion.
Advantages of net income taxation:
1. As far as the taxpayer is concerned, they will consider this as equitable and just system.
2. This will minimize tax evasion because examiners will be employed to check whether expenses are correct or not. 3. The consequence of no. 2 is that this will generate more revenues.
Disadvantages of net income taxation: 1. vulnerable to graft and corruption 2. vulnerable to tax evasion 3. will give rise to loss of revenues.
SOURCES/SITUS OF INCOME
An income may be an income from within or without the Philippines. The other term for income within is Local Income while income without is sometimes called Global Income or Universal Income.
In determining whether an income is an income within or without, you have to consider the classification or kind of income. CLASSIFICATION OF INCOME: [C, B, P, I, R, R, D, A, P, P, P]
1. Compensation income from services
2. Income derived from business, trade or profession – in this regard, the common forms of business are merchandising business, farming business, mining business and manufacturing business.
4. Interest Income 5. Rent Income 6. Royalties
7. Dividends, which may be received from domestic or foreign corporation 8. Annuities
9. Prizes and winnings 10. Pensions
11. Partner’s distributive share in the net income of general professional partnership (Professional income of a partner) * COMPENSATION INCOME
Tax Situs: Place where services are rendered. So, if services are rendered within the Phils., that is a Local Income. If it is a payment for services rendered outside the Phils., that is an income without.
RC – income from within and without are taxable.
NRC – only compensation income from sources within is taxable. RA – same as NRC.
* BUSINESS INCOME [M3 F] a) Merchandising Business
b) Farming Business Tax Situs: Place where these
c) Mining Business business are undertaken. d) Manufacturing Business
Tax Situs:
(1) if the goods are manufactured in the Phils. And sold within the phils. This is considered as income derived purely within. (2) Goods manufactured outside the Phils. and sold outside – income derived purely without.
(3) Goods manufactured within the Phils. and sold outside the Phils. – income partly within and partly without. (4) Goods manufactured outside the Phils. and sold within the Phils. – income partly within and partly without. * INCOME FROM SALE OR EXCHANGE OF PROPERTY
If it involves personal property, in determining the tax situs, we have to consider the place of sale.
In the case of sale of transport documents, tax situs is the place where the transport document is sold (BOAC Case).
If it involves real property, the tax situs is the place or location of the real property. So, if the property sold is situated within the Phils., the income derived from such sale is considered as income within.
* INTEREST INCOME
Tax Situs: RESIDENCE of the DEBTOR
Case: There was this contract regarding the construction of ocean-going vessels. There was this issuance of letter of credit and the payment of downpayment. All the elements of the transactions took place in Japan. The payment was made in Japan. The letter of credit was executed in Japan. The delivery was made in Japan. The debtor is a domestic corp.
Is the interest income on this loan evidenced by the letter of credit taxable to the Japanese corp.?
HELD: NO, because the tax situs of interest income is not the activity but the residence of the debtor. The place where the contract of loan is executed is immaterial.
* RENT INCOME
Tax Situs: the PLACE of property subject of the contract of lease.
* ROYALTIES
Tax Situs: the PLACE where the intangible property is USED
* DIVIDEND
a. Received from domestic corp. – this is an income purely within.
b. Received from foreign corp. – consider the income of the foreign corp. in the Phils. during the last preceding three (3) taxable years; rules:
(2) It is purely without if the proportion of its Phil. income to the total income is less than 60% (3) There should be an allocation if it is more than 50% but not exceeding 85%
* ANNUITIES
Tax Situs: the PLACE where the contract was made * PRIZES AND WINNINGS
Prizes may be given on account of services rendered – in which case, the tax situs is the place where the services were rendered.
If these prizes are not given on account of services, the tax situs is the place where the same was given.
Tax situs of winnings is the place where the same was given. *PENSION
Tax Situs: PLACE where this may be given on account of services rendered *PROFESSIONAL INCOME OF PROFESISONAL PARTNERS Tax Situs: PLACE where the exercise of profession is undertaken
GROSS INCOME
GROSS INCOME – means all income derived from whatever source, including but not limited to the following: INCLUSION: [code: STP-IRR-DAP-PS]
1. compensation for services
2. gross income from trade or business or the exercise of a profession 3. gains derived from dealings in property
4. Interests 5. Rents 6. Royalties 7. Dividends 8. Annuities
9. Prizes and winnings 10. Pensions and
11. Partner’s distributive share from the net income of the general professional partnership (Sec. 32 of TRA of 1997) EXCLUSIONS [code: LAGCIRM]
1. proceeds of life insurance policy
2. amount received by the insured as return of premium 3. gifts, bequests, devises or descent
4. compensation for injuries or sickness 5. income exempt under treaty
6. retirement benefits, pensions, gratuities and others: (F, V, R, S, S, G)
a. retirement benefits received from foreign institution whether public or private b. veteran’s benefits
c. retirement benefits received from private firms whether individual or corporate d. separation pay
e. SSS f. GSIS 7. miscellaneous items:
a. prizes and awards given in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievements CONDITIONS:
1. the recipient was selected without any action on his part to enter the contest or proceeding
2. the recipient is not required to render substantial future services as a condition to receiving the prize or award
b. income derived by the government or its political subdivisions from the exercise of any essential governmental function or from any public utility
c. income derived from investment in the Philippines by foreign government or financing institutions d. prizes and awards in sports competitions
e. gain derived from the redemption of shares of stock issued by the mutual fund company f. contributions to GSIS, SSS, PAG-IBIG, and union dues
g. benefits in the from of 13th month pay and other benefits
h. gain derived from the sale, exchange, retirement of bonds debentures or other certificate of indebtedness with a maturity of more than five (5) years. (Sec. 32 (b), TRA of 1997)
*ALLOWABLE DEDUCTIONS
1. Optional Standard Deduction – of ten percent (10%) of the Gross Income available only to individual other than a non-resident alien provided he signifies in his return his intention to elect OSD, otherwise, itemized deductions apply. Election made shall be irrevocable for the taxable year (Sec. 34 L)
2. Itemized Deductions – under Sec. 34 A-K, and M
3. Personal and Additional Deductions/Exemptions under Sec. 35 * ITEMIZED DEDUCTIONS [code: ELIT-BDD-CRC] 1. expenses 2. loses 3. interest 4. taxes 5. bad debts 6. depreciation
7. depletion of oil, gas wells and mines 8. charitable and other contributions 9. research and development 10. contribution to pension trust * NON-DEDUCTIBLE ITEMS (Sec. 36 A)
1. Personal living or family expenses;
2. Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate;
3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or
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 B) Losses from sales or exchanges of property directly or indirectly –
1. Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants);
2. Except in case of distributions in liquidation, between an individual and a corporation – more than 50% in value of the outstanding stock of which is owned directly, by or for such an individual; or
3. Except in case of distributions in liquidation, between two corporations – more than 50% in value of the outstanding stock of each of which is owned, directly or indirectly, by or for same individual, if either one of such corporation is a personal holding company or a foreign personal holding company; or
4. Between the grantor and a fiduciary of any trust; or
5. Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or 6. Between a fiduciary of a trust and a beneficiary of such trust.
TAXABLE INDIVIDUALS
RESIDENT CITIZENS (RC) Income from within and without – taxable NON-RESIDENT CITIZENS (NRC)
Income from within
When an NRC returns to the Phils., his income may also be taxed as Resident Citizen or Non-Resident Citizen.
Illustration: A, an OCW, arrived in the Phils. sometime in June 1998. He will be taxed as a Non-Resident Citizen (NRC) as regards the income that he earned which covers the period of January to June. Now as regards the income that he will derive upon his arrival from June to December, he will be taxed as Resident Citizen (RC).
But if he is not in the Phils. from the period of January to December 1998, he will be taxed as NRC for the said period. If he will return to the Phils. and stay there from January t December 1999, he will be taxed as RC for the same period.
* NRC must prove to the satisfaction of the BIR Commissioner the fact of physical presence abroad with the intention to reside therein. * When an NRC decides to return to the Phils., he must prove his intention to reside here permanently.
* Now NRC includes OVERSEAS CONTACT WORKERS (OCW), IMMIGRANTS, and those who STAY OUTSIDE the Phils. by virtue of an employment.
RESIDENT ALIEN (RA)
* Includes those who consider the Phils. as a second home.
*** Transient tourist who just sojourn, their stay is merely temporary, thus may not be considered as RA. * If an alien stays in the Phils. for a period of more than one (1) year, he is considered as RA.
SPECIAL NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-NETB)
* He must be an alien individual who is not residing in the Phils. and not engaged in trade or business in the Phils. * He is one whose stay in the Phis.is not more than 180 days
SPECIAL NON-RESIDENT NOT ENGAGED IN TRADE OR BUSINESS (SNRA-NETB) * Those employed by: (ROP)
1. Regional or Area Headquarters of Multinational corporations; 2. Offshore Banking Units;
3. Petroleum Service Contractors
NON-RESIDENT ALIEN ENGAGED IN TRADE OR BUSINESS (NRA-ETB) > considered as engaged in trade or business if his stay is more than 180 days
> We can no longer tax his income from sources without. We can only tax his income from sources within.
ENTITLEMENT OF DEDUCTIONS
RC – entitled to deductions because the tax base is taxable income. Gross Income
Less: Allowable deductions ======================= Taxable Income
NRC – entitled to deductions because the tax base is taxable income. RA – entitled to deductions because the tax base is taxable income.
NRA-TB – entitled to deductions because the tax base is gross income. Their income is subject to 25% tax rate. SNRA-NETB – subject to 15% tax rate on their income in the from of:
S - Salaries H - Honoraria O - Other W - Wages E - Emoluments R - Remuneration
EXCLUSION FROM GROSS INCOME
“PROCEEDS OF LIFE INSURANCE”Subject to tax if :
1. the insurer and insured agreed that the amount of the proceeds shall be withheld by the insurer with the obligation to pay interest in the same, the interest is the one subject to tax;
2. there is transfer of the insurance policy; Example:
A transferred to B his life insurance policy. The value of the policy is P1 M. B paid a consideration amounting to P300,000. B continued paying the premiums after the transfer such that the premiums amounted to P200,000. Upon the death of the insured, the P1 M may be received by the heirs.
Q. Is the full amount of P1 M exempt?
A. NO, only the consideration given and the total premiums paid may be excluded. That is, P1 M less P500,000. Problem:
A obtained a life insurance policy for B. B is the president of A’s corporation. Corp. has an insurable interest in the life of its officers, so premiums may be paid by the employer A. Upon the death of B, his designated beneficiaries will receive the proceeds.
a. Is the amount representing the proceeds of the life insurance policy taxable?
b. What about the premium paid by the employer A? Does this amount form part of the gross compensation income? c. Does the amount representing the proceeds of life insurance policy from part of the estate of the decedent?
Answers:
a. Let us first make two (2) assumptions. Let us assume that: 1. the beneficiary designated is the employer;
2. the beneficiary designated is the heir of the family of the insured.
The Tax Code however, makes no distinction. Regardless of the designated beneficiary is the employer or the heirs, or the family of the insured proceeds of life insurance policy should always be excluded.
b. Premiums of life insurance policy paid by the employer may form part of compensation income; hence, taxable if the beneficiary designated are the heirs or the family or the employees.
It is not taxable compensation income if the designated beneficiary is the employer because that is just a mere return of capital. c. Proceeds of life insurance policy may be excluded from the gross estate of the decedent under the following cases:
1. if the beneficiary designated is a 3rd person and the designation is irrevocable;
2. it is a proceed of a group insurance policy. However, it is included in the gross estate of the decedent:
1. if the beneficiary designated in the estate, executor or administrator of the estate or the family of heirs of the decedent; 2. if the beneficiary designated is a 3rd person and the designation is revocable [see Section 85 (e)]
As far as Sec. 85 (e) is concerned, an employer may be considered a 3rd person.
“AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM” Reason for Exclusion: It represents a mere return of capital.
The sources of this return of premium: (L.E.A.) 1. Life Insurance Policy
2. Endowment contracts 3. Annuity contracts
---Whether the premiums are returned during or at the maturity of the term mentioned in the contract or upon surrender of thee contract Problem:
A took out an endowment policy amounting to P1 M. He paid premiums amounting to P800,000. Upon the maturity of the policy, A received that P1M.
How much is the taxable amount? Answer:
That is P1,000,000. – value of endowment policy LESS: P 800,000. – representing amount of premium =============================================== P 200,000. – taxable amount
*“GIFTS, BEQUESTS and DEVISES”
Rationale: What is contemplated here are donations which are purely gratuitous in character in order that it may be excluded. Gifts are excluded because these are subject to donor’s tax.
Bequests and devises are excluded because these may be subject to estate tax.
What about remuneratory donations? Remuneratory donations are subject to income tax.
EXCEPTIONS to the Rule:>>> the income or fruit of such money given by donation, bequests or devise, including the income of this gift, bequest or devise in cases of transfer of divided interest.
*“COMPENSATION FOR INJURIES OR SICKNESS”
Reason for Exclusion: This is just an indemnification for the injuries or damages suffered. This is compensatory in nature. The sources are:
1. The compensation may be paid by virtue of a suit;
2. It may be paid by virtue of health insurance, accident insurance or Workmen’s Compensation Act But as regards damages representing loss of anticipated income, this is the one that is taxable.
If damages are in the nature of moral, exemplary, nominal, temperate, actual and liquidated damages, as a rule, these may not be subject to tax. Example:
If a person suffered injury as a result of a vehicular accident, and an action is filed in court, the Court awards the following:
Moral - P100,000. Exemplary - P100,000.
Actual - P 60,000. (hospitalization expenses) P 20,000. (repair of car)
P 60,000. (loss of income)
*** All damages awarded are tax-exempt except damages of representing loss of income. Question: Are damages awarded by the Court on account of breach of contract taxable?
Answer: Qualify your answer. With regards to damages awarded on account of loss of earnings of the contracting party, it is taxable. “INCOME EXEMPT UNDER TREATY”
Reason for the Exclusion: Treaty has obligatory force of contract. Exception: As may be provided for in the treaty.
*“RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHERS” - VETERAN’S BENEFIT
* This may be given by the US Administration. * The recipient must be a resident veteran.
- BENEFITS GIVEN BY FOREIGN AGENCIES OR INSTITUTIONS WHETHER PUBLIC OR PRIVATE Giver: Foreign government agencies or institutions whether public or private.
Recipient: Resident citizen, non-resident citizen or resident alien. Observation:
Non-resident citizen should not be included in the enumeration since it is already understood that we cannot tax his income from without. We can only tax the income of non=-resident citizen derived from sources within.
The same is true with resident alien because we can only tax his income from sources within. The inclusion of NRC and RA in the enumeration are mere surplusage.
-RETIREMENT BENEFITS RECEIVED FROM PRIVATE FIRM WHETHER INDIVIDUAL OR CORPORATE Recipient: Private employees or official of such private firm.
REQUISITES:
1. The private employee or official must be at least 50 years of age at the time of his requirement; 2. He must have rendered at least 10 years of service to the employer at the time of the retirement; 3. There must be reasonable private benefit plan – established by the employer;
4. The reasonable private benefit plan must be approved by the BIR.
5. Reasonable private benefit plan may be in the nature of pension plan, profit sharing plan, stock bonus plan, or gratuity;
6. The employer must give contribution and no amount shall inure to the benefit of a particular employee or official. This must be established for the common benefit of the employees or officials;
7. This can be availed of ONCE.
* The subsequent retirement benefits received from another private employer is no longer exempt but subject to tax.
* If the second employer is a government entity or institution, in which case, that is exempt because the giver here is not a private firm. The limitation applies only when the giver of the subsequent retirement benefits is another private employer.
-PHYSICAL DISABILITY BENEFITS
* These include death benefit, sickness benefit and other disability benefit. Sometimes, the term used is “separation pay”. Giver: may either be public or private employer
*Sources of Separation Pay: 1. Death of an employee;
3. Any other cause beyond the control of the employee or official. Example of no.3
a. Retrenchment of employees; b. Installation of labor saving devises; c. Dissolution of law firm.
>Resignation of an employee is a cause within his control.
>But, involuntary resignation is beyond the control of the employee.
>The most important thing here is that the separation pay was given on account of the above-mentioned sources.
>There is no requirement as to age of the employee or official; there is also no requirement as to the length of service of the employee or official. >No requirement also as to the number of availment of benefits.
-AMOUNT OF THE ACCUMULATED SICK LEAVE AND VACATION LEAVE CREDITS
The monetized value of these benefits may be subject to tax if these will not form part of the terminal leave pay. The monetized value of sick leave credit is always tax exempt, if it forms part of the terminal leave pay.
As regards UNUSED VACATION LEAVE CREDIT, this is exempt only if the number of days is 10 days or less in excess of 10 days, it is already subject to tax.
If the unused sick leave benefit is monetized, if the employer allow such practice, and the same is given at the end of this year, it is subject to withholding tax because in this case, it does not form part of the terminal leave pay.
Reason for exemption of terminal leave pay:
The accumulated value of unused sick leave and vacation leave credits included in the terminal leave pay is exempt from income tax because it is one received on account of a cause beyond the control of the employee. This terminal leave pay is usually given under a compulsory retirement. Compulsory retirement is a cause beyond the control ofte employee.
*“MISCELLANEOUS ITEMS”
a. Prizes and Awards in Awards Competitions REQUISITES:
1. Competition and tournament must be sanctioned or approved by the National Sports Association;
2. The competition and tournament must also be approved by the Philippine Olympic Committee, whether local or international; whether held in the Phils or outside.(if not accredited- 20% tax)
b. Prizes and Awards made primarily in recognition of: (RCS-SALE)
Religious, Charitable, Civic Achievement, Scientific, Athletic, Literary, Educational
Example: P1 M reward given to Mr. Advincula for his exemplary honesty. This may be excluded from his gross income because it is given in recognition of civic achievement. He was (1) selected without any action on his part to enter a contest or proceeding; and (2) he is not required to render substantial future services as a condition to receiving the award.
c. Income derived from public utility or from the exercise of essential government function by the Government or political subdivisions of the Phils.
Recipient: Government or its Political Subdivision
* Government of the Republic of the Phils or Government of the Phils vs. National Government Government of the Republic of the Phils. is synonymous with Government of the Phils.
Government of the Phils. or government of the Phils. – refers to the government corporate entity through which the functions of the government are exercised throughout the Phils., including save as the contrary appears from the context, the various arms through which political authority is made effective in the Phils., whether pertaining to the autonomous regions, cities, provinces, municipalities, barangays or other forms of local government. These autonomous regions, provincial, city, municipal or barangay subdivisions are the political subdivisions.
National government - refers to the entire machinery of the central government. This includes the three (3) major departments of the government: the Executive, the Legislative and the Judiciary (Mactan Cebu International Airport Authority vs. Marcos, Sept. 11, 1996).
It is clear that government-owned and controlled corporations is within the contemplation of the term “national government”. We need this distinctions because the particular item of exclusion emphasizes the fact that political subdivisions of the State form
part of the Government of the Phils.
You must have noticed that there is no provision regarding government-owned and controlled corporations. Also, there are no provisions on agencies or instrumentalities of the government. The item or income here is exempt if the recipient is either the Government of the Republic of the Phils. or the provincial subdivisions of the State such as provinces, cities, etc.
* Income derived by a government-owned and controlled corporation, agency or instrumentality of the government may be subject to tax. *Government-owned and controlled corporations are now subject to corporate income tax, except:
b. GSIS
c. Phil. Health Insurance Corp. d. PCSO
e. PAGCOR
Situation: A municipality derived income from holding a fiesta.
Rule: The rule is settled that holding a town fiesta is considered a proprietary function. Therefore, said income is subject to tax. Situation: A municipality derived income from the operation of public market, electric power plant and other public utilities. Rule: That income is tax exempt.
d. Income derived from investment in the Phils. (1) by foreign government or (2) financing institutions, owned, controlled or financed by foreign government, regional or (3) international financing institutions established by foreign government
REQUISITES:
1. Recipient must be: a. foreign government;
b. financing institution owned, financed or controlled by foreign government;
c. regional financing institution, international financing institution established by foreign government; 2. It must be an income derived from investment in the Phils.
Sources of such income:
--- It may be in the nature of bonds. So, foreign government here may be considered the creditor – possible income here is the interest of bonds. Now, loans may be extended – possible income here is interest on loans.
--- If a foreign government or financing institution made a deposit in a bank, Phil. currency deposit – the income here is the nature of interest income.
--- If a foreign government made an investment in a domestic corporation. It may be considered a stockholder. And a stockhlder is entitled to dividend. Hence, the dividend income received from domestic corporation is tax exempt.
** If the recipient of such dividend is a resident foreign corporation that is also tax exempt. It is only subject to tax if the recipient of such dividend is a non-resident foreign corporation.
Case: EXIMBANK, which is a consortium of Japanese banks, extended a loan in the amount of S20M to Mitsubishi Metal Corp., a Japanese corporation. The same amount was extended by Mitsubishi as a loan to Atlas Corp., a domestic corporation.
The contract entered into between Mitsubishi Metal Corp. is denominated as “contract of loan and sale”. It is a contract of loan because Mitsubishi would lend Atlas S20M. It is a contract of sale because under the contract Atlas bound itself to sell the concentrates (this is a mining corp.) that may be produced by the concentrator machine/equipment purchased through the use of the S20M for a period of 15 years.
This being a contract of loan, Mitsubishi is entitled to interest on loan. ISSUE: Whether or not such interest on loan is subject to Phil. income tax ARGUMENTS: Mitsubishi contended that this is not taxable because:
1. The source of S20M is a tax exempt entity (EXIMBANK is a financing institution controlled and financed by a foreign government); and 2. Mitsubishi is an agent of EXIMBANK, a tax exempt entity.
HELD: There was no evidence to the effect that Mitsubishi is an agent of EXIMBANK. It is a mere allegation that has not been proven.
In a contract of loan, once the loan is consummated, the amount becomes exclusive property of the borrower. It is no longer considered the money of EXIMBANK. Hence, the interest of such loan should be subject to tax.
The lender is not a tax exempt entity. The creditor here is Mitsubishi and it is not a tax exempt entity. Such being the case, tax exemption must be strictly construed against the taxpayer and liberally in favor of the government. When you claim exemption, you should prove it clear and categorical terms.
* The problem may be modified by the examiner. The examiner may clearly state the Mitsubishi is an agent of EXIMBANK. The answer is, the interest on loan is tax exempt. Mitsubishi then is considered as an extension of EXIMBANK. It is as if the lender is EXIMBANK.
e. 13th month Pay and Benefits
* This applies both to private and public employees.
* Total exclusion should not exceed P30,000 subject to increase by the Secretary of Finance upon the recommendation of the BIR Commissioner. f. Contributions to GSIS, SSS, MEDICARE, PAG-IBIG, and union dues
* This is a surplusage. Even if this is not mentioned, we cannot tax that.
g. Sale, exchange, retirement of bonds, debentures and other certificates of indebtedness with a maturity of more than FIVE (5) YEARS - If maturity is less than 5 years, taxable.
Rule: Interest on bonds 1. issued by C.B - exempt 2. if issued by corp.- not exempt
Rule: Redemptions of share in mutual funds:
- only those gains derived from redemption of shares issued by a mutual fund company are exempt - it must emanate from a mutual fund
- If the term is not more than 5 years (5 years or less), the gain derived from the sale, exchange and retirement of the same, may be subject to tax. Illustration:
If you are a creditor, you may sell these bonds, debentures or certificates of indebtedness to another. Hindi mo na mahintay ang maturity kasi long term. If there is a gain on the sale of the same, it would be a tax exempt provided that the bonds, etc., have a maturity or term of more than 5 years.
Retirement of bonds, debenture, etc. --- Nagbayad na ‘yung debtor. There may be gain derived from the same, such as interest. This time, since the gain is in the nature of interest, it is subject to tax. But, the gain derived from the sale, exchange or retirement with a term of more than 5 years, is tax exempt. This is because exemptions are strictly construed against the taxpayer and liberally in favor of the government. Interests on bonds, debentures, etc. are taxable, the provision is clear. It only covers sale/exchange/retirement of bonds, debentures and other certificate of indebtedness with a maturity of five years. Strict interpretation of tax exemption.
TYPES/ CLASSIFICATION OF INCOME
1. COMPENSATION INCOME
– an income derived under anemployer relationship. This may include the following: (WEBB-DROP)
Wages, Emoluments, Bonuses, Benefits, Director’s fee, Taxable Retirement Benefits, Other items of income of similar nature, Taxable Pensions * Retirement benefits may be subject to tax, if it does not comply with the provision of Sec. 32 (b) par. 6 sub.par a.
* Pensions may be subject to tax, if it is given not in accordance with the conditions laid down under that exclusion provision. * Other items of income of similar nature may include: (CHAMP)
Clothing allowance, Hospitalization allowance, Allowances for Food, Medical allowance, Share from the Profit sharing plan of the employee * TESTS TO DETERMINE WHETHER AN INCOME IS COMPENSATION or NOT:
Find out whether it is received under an employer-employee relationship.
Any payment received under an employer-employee relationship is compensation income. *TESTS TO DETERMINE THERE EXISTS AN EMPLOYER-EMPLOYEE RELATIONSHIP: (AC-DC) 1. Appointment (selection and hiring)
2. Compensation 3. Dismissal power 4. Control test
N.B. : The name or designation of income is immaterial. The basis of the income is immaterial and the manner by which it is paid, is also not important. As long as it is given under an employer-employee relationship, then that is compensation income.
CANCELLATION OF INDEBTEDNESS – Considered as compensation income is the indebtedness had been cancelled in consideration of the services rendered.
*** Share of the employee from the PROFIT SHARING PLAN of the employer- Compensation income received in consideration of services rendered. TAX LIABILITY OF THE EMPLOYEE PAID BY THE EMPLOYER – Compensation income if paid under an employer-employee relationship in consideration of services rendered.
PREMIUMS PAID BY THE EMPLOYER ON THE INSURANCE POLICY OF THE EMPLOYEE – Compensation income if the beneficiary designated is the family of heirs of the employee.
*** The basis of the income is immaterial. Even if it is paid in piece work, fixed rate or percentage basis as long as it is paid under an employer-employee relationship.
REQUISITES FOR TAXABILITY OF COMPENSATION INCOME ARE: (SPR) 1. There must be services, rendered under an employer-employee relationship. 2. If payment must be for that services rendered.
3. It must be reasonable. The compensation for services rendered must be reasonable. Purpose why only a reasonable amount may be taxed as compensation income:
Take note on the part of the employer, he can claim such compensation for services as deduction. Now, only the amount that is reasonable under the circumstances can be claimed as deduction. So, if the amount or the value of the services rendered is P10,000 but the employee received P15,000. As far as the employer is concerned, he can only claim the reasonable amount of P10,000. In the case of an employee, he can consider P10,000 as compensation income. The excess of P5,000 may be treated as other income.
*** Not all payments for services rendered are considered compensation income. Only those paid under the employer-employee relationship. THE FOLLOWING ARE NOT COMPENSATION INCOME: (P I)
1. Compensation for services rendered by independent service contractor. This may be treated as trade or business income.
2. Income derived by professionals from the practice of profession under professional partnership. This is treated as professional income.
*** Fringe benefit is considered as compensation income. This is governed by Sec. 33, TRA 1997. This is compensation income in the sense that this is received under an employer-employee relatioship.
DOCTRINE OF CASH EQUIVALENT - you may be paid in cash or in property/kind - equivalent value of property is taxable
* DIFFERENT FORMS OF COMPENSATION INCOME:
1. Property/Kind – Fair Market Value (FMV) of the property. If there is a price stipulated, it is the price stipulated that will be followed in the absence of contrary evidence.
2. Promissory Note or other evidence of Indebtedness -
a. If it is not discounted, it is the face value of the promissory note. b. If it is discounted, it is the fair discounted value of the promissory note. 3. Stock – FMV of that shares of stock
4. Cancellation of Indebtedness – Cancellation of indebtedness has the following tax consequences:
a.
It may amount to taxable compensation income if the indebtedness has been cancelled in consideration of the services
rendered.
b.
It may amount to taxable gift or donation if the indebtedness has been cancelled without any consideration at all. This is
not subject to income tax but may amount to taxable gift or donation.
c.
It may amount to capital transaction if the creditor is a corporation and the debtor is a stockholder. If creditor
corporation condoned the indebtedness of the debtor stockholder, that may amount to taxable capital transaction. This is
the form of direct dividend. Now, property dividend is subject to tax rates of 6%, 8% and 10%. Dividend received from
domestic corporation is now subject to tax.
5. Tax liability of the Employee paid by the employer in consideration of services rendered – amount of tax liability
6. Premiums paid by the employer on the life insurance policy of the employee.
a.
It is a taxable compensation income if the beneficiary designated are the heirs of the employee or his family.
b. It is not a taxable compensation income if the beneficiary designated is the employer because it is just a mere return of
capital.
If the designation of the employer as beneficiary is indirect (e.g.: It is the creditor of the employer that is designated as
beneficiary), that is still not taxable compensation income.
Example of Indirect designation of the employer as a beneficiary:
a.
Beneficiary is the wife of the President of a close corporation.
Premiums will be taxed under Sec. 33 par.b no.10. it is stated there: “Life or health insurance and other non-life insurance premiums
or similar amounts in excess of what the law allows.
* If the payment was received by the employee when he was no longer connected with his employer, it is still considered compensation
income. What is important here is that it must be received during the existence of the employer-employee relationship. Employees
may be dismissed by the employer, and they may file complaint for illegal dismissal against the employer. Judgment was rendered by
the arbiter in favor of the employee. All the wages supposed to be paid (e.g. backwages) can be taxed as compensation income. What
about attorney’s fees? That is exempt.
FRINGE BENEFITS: code (HEV-HIM-EHEL)
FRINGE BENEFIT – Any good, service, or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employee) such as but not limited to the following:
1. Housing; 2. Expense account; 3 Vehicle of any kind;
4. Household personnel such as maid, driver, others;
5. Interest on loan at less than market rate to the extent of the difference between the market rate and the actual rate granted;
6. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations;
7. Expenses for foreign travel; 8. Holiday and vacation expenses;
9. Educational assistance to the employee or his dependents; and
10. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows.(if contribution-exempt)
* Housing allowance may be exempt from tax if the living quarters are: a. Provided with the premises of the employer.
b. It must be made as a condition of employment.
If said requisites are not present, housing allowance may be taxed as fringe benefits. * Meal allowance may be exempt from tax if it is provided within the premises of the employer.
* Privilege or purchase discount are tax exempt if it does not exceed ½ of the basic monthly salary of the employee. If it is more than ½, the excess may be as fringe bene
* Medical or hospital allowance, clothing allowance, rice allowance may be exempt from tax if the following requisites are present: 1. It must be of relatively small value (reasonable amount). (RSV)
2. It must be given for the following purposes: (CHEG) a. To promote Contentment
b. To promote Health c. To promote Efficiency d. To promote Goodwill
* Tax Exempt fringe benefits: (RF, DM, C, Ex, ECR)
1. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not. 2. “De minimis benefits” – means of small amount. These are benefits relatively of small amount.
3. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefits plans.
4. Fringe benefits which are authorized or exempted from tax under special laws.
5. Those given for the convenience of the employer, including those which are required by the nature of the trade, business or profession of the employer (Employer’s Convenience Rule)
De minimis benefits (of relatively small value) – limited to facilities or privileges furnished or offered by employer to his employees merely as a means of promoting health, goodwill, contentment, or efficiency of employees, such as:
b. Medical cash allowance to dependents of employees not exceeding P750 per semester of P125 per month; c. Rice subsidy of P350 per month;
d. Uniforms; e. Medical benefits
f. Laundry allowance of P150 per month;
g. Employee achievement awards, for length of service of safety achievement in the form of tangible personal property other than cash gift certificate, with an annual monetary value not exceeding ½ month of the basic salary of employee receiving the award under an established written plan which does not discriminate in favor of highly paid employees;
h. Christmas and major anniversary celebrations for employees and their guests;
i. Company picnics and sports tournaments in the Philippines and are participated in exclusively by employees; and
j. Flowers, fruits, books or similar items given to employees under special circumstances on account of illness, marriage, birth of a baby, etc.
*Principle of Employer’s Convenience Rule:
- fringe benefits may be exempt/not subject to tax if these are given for the benefit or advantage of the employer. The following are the possible fringe benefits, which may be exempt under the Employer’s Convenience Rule: (H V H M T)
a. Housing benefit b. Vehicle
c. Household personnel
d. Membership in a social or athletic club or similar organization e. Traveling expense benefit
* Housing benefit – in determining whether the same is exempt under the employer’s convenience rule, you have to consider the peculiar nature of the special needs of the employer.
Requisites for exemption:
1. It must be made as a condition for employment; 2. It must be provided within the premises of the employer *** This may apply to a supervisor of a plant or a company.
* If the housing or living quarters are provided outside the premises of the employer, even if that is for the convenience of the employer, this is only exempt up to 50% of the amount. So, 50% taxable, 50% exempt.
* Vehicle – Exempt but depends upon the peculiar nature of the special needs of the business of the employer. Example: LBC or DHL business
* Household personnel such as maid, driver and others – Exempt, but depends upon the peculiar nature of the business of the employer. * Membership in a social club, etc. – Peculiar nature requirement.
* Traveling expense benefit – Peculiar nature requirement. Example: Employer sent his employees abroad to attend a particular seminar to improve their technical know-how.
BAR QUESTION: A is a driver of Congressman Magtanggol and he received a monthly salary of P5,000 and living quarter allowance of P2,500. a. Whether the P2,500 living quarter allowance is excluded or subject to tax?
b. Assuming the employer is an obstetrician would your answer be the same? ANSWER:
a. That should be subject to tax.
b. It should be excluded. Reason: Convenience of the employer’s rule.
2. GROSS INCOME FROM BUSINESS, TRADE OR PROFESSION
BUSINESS – Any activity that entails time, attention, effort for purposes of livelihood or profit.
As regards construction business, the taxpayer here must be an independent contractor. He may report his income under the percentage of completion method or under the so-called completed contract method.
PROFESSIONAL INCOME – The recipient of the same must be professionals.
How about those who claim that they are professionals but are not registered in the P. R. C., can they still be tax as such? Yes, irrespective of whether they are licensed or not because of the rule that gross income derived from whatever source.
3. PASSIVE INCOME
PASSIVE INCOME – This is the income that is subject to final tax. Income subject to final tax are the following: (code:RPD-WIDS)
1. Royalties 2. Prizes 3. Winnings
4. Interests on bank deposit, deposit substitutes, trust funds and other similar arrangements.
5. Dividend received from domestic corporation, mutual fund insurance company, regional headquarters of multi-national corporation and other corporation.
6. Share a partner in the net income after tax of a taxable partnership, joint account, joint venture or concessions.
*** Do not include passive income in the income of your business or profession, or in your compensation income . This is so because when you receive this income, the tax had already been imposed and deducted.
RC, NRC, RA NRA-ETB NRA-NETB
ROYALTIES 20% except in the case of literary
works, books and musical compositions which are subject to
10% final tax Same as RC, NRC, RA 25%
PRIZES exceeding P10,000.00 If it is P10,000.00 or less, it is NOT subject to final tax but the same must be included in other income (e.g. compensation,
business, professional) 20% 20% 25%
WINNINGS except PCSO &
Lotto 20% 20% 25%
INTERESTS ON BANK
DEPOSITS, etc. 20% 20% 25%
DIVIDENDS RECEIVED from domestic corp., etc.
10%
20% 25%
SHARE OF A PARTNER in the net income after a tax of a taxable partnership, etc.
10% 20% 25%
Question: How do you treat that share of a professional partner from the net income of a general-professional partnership? Answer: This should be taxed at the rate provided under Sec.24, that is, 5% to 34%.
But as regards the share of a partner in the net income after tax of a taxable or business partnership , that is one which is subject to final tax.
PRIZES – may be exempt if given in sports competition and if given primary in recognition of scientific, artistic, literary, educational, religious, charitable, or civic achievement.
INTEREST Rules
1. If it is an interest on foreign currency deposit system, it is exempt. If the recipient is non-resident individual (NRC, NRA-ETB, NRA-NETB). 2. If the recipient is a resident individual (RC, RA), that is subject to 7.5 %.
3. Interest income is also exempt if it is an interest income on a long- term deposit or long-term investment (this must have a term of not less than 5 years).
If the term is less than 5 years it is subject to the following rates:
1. 4 years to less than 5 years 5%
2. 3 years to less than 4 years 12%
3. Less than 3 years 20%
DIVIDEND RECEIVED FROM DOMESTIC CORPORATION
1. This is exempt from tax if the recipient is a foreign government, financing institution, regional financing institution, international financing institution established by foreign government [see Sec.32 (B) (7) (a)]. 2. It is also exempt if the recipient of such dividend is another domestic corporation or resident foreign
corporation [see Sec. 28(A)(7)(d)]
CAPITAL GAIN DERIVED FROM SALE OF SHARES OF STOCK
Listed and traded through local stock exchange – this is not subject to income tax but subject to percentage tax of ½ of 1% of the gross selling price.
Not listed and traded through local stock exchange – this is the one subject to income tax.
Not over P100,000.00 5%
Amount Over P100,000.00 10%
If the share of stock is not listed and traded through local stock exchange, the basis of the tax is net capital gain. So, you should first deduct the capital loss.
If listed and traded through local exchange, there is no deduction allowed because the basis of the tax rate of ½ of 1% of the gross selling price.
The above-mentioned tax rates apply to all individual taxpayers. * CAPITAL GAIN DERIVED FROM THE SALE OF REAL PROPERTY - The real property involved must be considered CAPITAL ASSET.
- The tax on capital gain derived from the sale of real property is 6% of the gross selling price or zonal value which ever is higher. * CAPITAL ASSET – property held by the taxpayer whether or not connected in his trade or business except: (code: SOUR)
1. Stock in trade or other property of any kind which would be included in the inventory of the taxpayer if on hand at the end of the taxable year.
2. Property primarily held for sale to customers in the Ordinary course of trade or business. 3. Property Used in trade or business subject to depreciation
4. Real property used in trade or business.
► The definition of capital asset says “real property held by the taxpayer whether or not connected with his trade or business except real property used in trade or business.” So, in order to be a capital asset, the real property must be one not used in trade or business.
► That is why, the sale of residential house and lot is subject to 6% of capital gains because it is a real property not used in trade or business.
► But, sale of real property by a real estate dealer is not a capital transaction because the property involved is one primarily held for sale to customer in the ordinary course of trade or business. That is not a capital asset but an ordinary asset.
► This covers not only “sale” of property; it also covers conditional sale of real property including the so-called pacto de retro sale under Art. 1602 of the NCC, or disposition of property located in the Phils.
► If the buyer is the government or any of its political sub-divisions or political agencies, including government owned and controlled corporations, the seller have the option to avail the 6% or under Sec. 24(A), wherein the basis under said section is taxable income so deductions may be allowed. The cost of the property may be deducted but when you avail of the 6%, the basis is gross selling price or zonal value whichever is higher. ► Is this a tax on the buyer or the seller?
It is a tax on the seller. But sometimes, through an agreement, pwede nilang I-transfer sa buyer, and there’s nothing that can prevent the seller from transferring the tax to the buyer in the contract of sale.
OTHER INCOME
* OTHER INCOME includes [code: R.I.D.O.]a. Rent income other than royalties
b. Interest income other than interest income on bank deposit c. Dividend income
d. Income from Other sources and this may include: (BIT-CDC) d.1. Bad debts recovered
d.2. Illegal gains derived from gambling d.3. Tax funds
d.4. Compensation for private property expropriated by the government for public use.
d.5. Damages
d.6. Cancellation of indebtedness
1. RENT - Compensation for the use of one’s property.
- The payment may be in cash or in kind. The property involved is either personal or real property.
- In the case of personal intangible property, subject to final tax if it involves intellectual property, copyright, trademarks etc.
THE FOLLOWING CONSTITUTES TAXABLE RENT INCOME: 1. The regular rent may be monthly, semi-annually or annually 2. Additional rent income which includes:
a. Obligation of the lessor assumed by the lessee The following are obligations which may be assumed by the lessee: [R.I.D.I.O.] a.1. Real property taxed on leased premises
a.2. Obligation to pay insurance premium on the insured leased premises
a.3. If the lessor is a corp., the obligation to distribute Dividends to its stockholders a.4. Obligation to pay interest on the bonds issued by the lessor.
a.5 Other obligations of the lessor which may be assumed by the lessee.
b. Value of permanent improvements on leased premises. This may be reported through:
b.1. Outright method at the time of permanent is completed, he may report that as additional rent income – FMV of the building or permanent improvement.
b.2. Spread out method by allocating the depreciation among throughout the remaining term of the leased.
c. Advance rentals
c.1. If in the nature of the prepaid rentals without restriction on the use of the amount, it is taxable. c.2. If it is in the nature of security deposit, it is taxable rent income if there is a violation of the term
of the lease.
c.3. If it is in the nature of a loan to the lessor, it is not taxable. 2. INTEREST INCOME – compensation for the use of money.
- Whether it is an interest on loan pursuant to the business of a taxpayer or personal transaction, interest income, except if it is tax exempt, is always taxable. This is so because the source of income is immaterial, even if it is from an illegal source.
- Interest income on bank deposits is subject to final tax.
3. DIVIDEND INCOME – amount declared, set aside and distributed by the Board of Directors to stockholders, on demand or a fixed period. Classes of Dividend: [C.L.I.P.S.S.]
Cash dividend
Liquidating dividend- this is given upon liquidation of corporate affairs
Indirect dividend - it is given in other form and this includes cancellation of indebtedness by the corp. of the obligation of stockholder
Property dividend - it may be in the form of stock other than the stock of the corp. Stock dividend - stock issued by the giver corp.
Script dividend - It is given in the form of promissory note or other evidence of indebtedness.
STOCK DIVIDEND – as a rule not taxable. This is so because there is no income here. It merely represents the transfer of surplus account to the capital account.
EXCEPTIONS to the Rule:
Stock dividend may be subject to tax under the following exceptional cases: [C OR D] 1. If there is a Change in the stockholders interest in the net assets of the corp; 2. If it is one issued by Other corp. We call that “dividend stock”
Stock dividend vs. dividend stock – Stock dividend as a rule is not taxable whereas dividend in stock is taxable.
3. Redemption of stock dividend;
4. If the corp. issues Different shares of stock. If the corp. issues two different classes of shares of stock, the dividend that may be declared thereafter is taxable.
Example:
Outstanding stock
Stock dividend
Taxable
1. Preferred
Common
NT
2. Common
Preferred
NT
3. Preferred
Preferred
NT
4. Common
Common
NT
5. Preferred/Common
Preferred
T
6. Preferred/Common
Common
T
Disguised dividend – treasury stock dividend declared out of the outstanding capital stock, the purpose of which is to avoid the effect of taxation (Commissioner vs. Manning).
It is one which is made to appear as stock dividend when the truth of the matter is that it is a dividend which is illegally declared, such a case, since the purpose is to evade taxation, it is taxable.
Remember, treasury shares of stock are not entitled to dividends.
ALLOWABLE DEDUCTIONS (SEC. 34)
As regards individual taxpayers, the following may claim allowable deductions: 1. RC2. NRC, only those expenses incurred in the Phils. because here, we cannot tax his income derived from sources without.
3. RA, only those expenses incurred in the Phils.
4. NRA-ETB, but only those expenses incurred in the Phils. 5. PP (Professional Partners under Sec. 26)
Exceptions:
1. IT earning CI – EE, ER REL 2. NRA-NTB 3. Aliens employed A. RMC B. OBU C. PSC 4. NRFC
As regards corporate taxpayers, the following are entitled to claim allowable deductions:
1. DC, which includes private educational institutions, non-profit hospital, government-owned and controlled corps. 2. RFC
ITEMIZED DEDUCTIONS: [E,I.T,L,B,D,D,C,R,C]
1. Expenses 6. Depreciation
2. Interests 7. Depletion of oil, gas, wells and mines
3. Taxes 8. Charitable contributions
4. Losses 9. Research & Development
5. Bad debts 10. Contribution to Pension Trust
* In the case of individual taxpayers, they may avail of the optional standard deduction of 10% of gross income * Corporate taxpayers are not allowed to claim 10% optional standard deductions.
