Emery Tiu
July 27, 2010 Tuesday
L. Allowable Deductions
Distinguish deduction from exemption and deduction from exclusion. Or are they the same?
o First off, we have to know that all wealth which flows to our hands to know whether it’s an income or a capital. If it’s an income, you list down all your income but you exclude those which are listed as exclusions from gross income or any item which the law exempts from taxation to arrive at gross income because this is income. In order to arrive at a taxable income in which the income tax rate will be computed, we have to know the deductions allowed.
o She said that the difference between a exemption and deductions is that deductions are those items allowed by law to reduce the gross income in order to arrive at a taxable income. Exclusions are these items are already, off-hand, already identified by law as an exempt income whether it be included in the list of exclusions of gross income under Section 32b or in separate special laws. Diba what did we say about exemptions, these are immunities from future taxes to which you could have been liable had there been no law granting its exclusion.
o Now, if you identified all income, you exclude all the exclusions, this is the one which we were asked to memorize, the exclusions from gross income are those exemptions granted so that you will know which are covered by gross income. But not all gross income are subject because there are deductions allowed.
o Is deduction an income that is not taxable? The distinction there really is when you say exemption, it’s an income that is not taxable. There is an inflow towards you, but there is a law saying that that income which flew into your hands is not taxable. But deduction, although it reduces the income, in order to arrive at a taxable income, is not an income. Deduction is an expense. It’s an outflow of your wealth. That’s why you are allowed to deduct expenses.
When you engage in a business, you have income, you have proceeds but you are not entirely taxable on the proceeds, you are allowed to deduct expenses which you have incurred.
In the same way, that deduction is not the same as exclusion. Exclusions are just like exemptions, they are income or inflows to the tax payer. But because of the provision of the tax code, it is not subject to income see. Now, you will see that in order to arrive at a taxable income, you always deduct exclusions and exemptions. It is the act of deduction but it is not an expense, it’s an income.
Now there are principles that you need to know to guide you whether you can deduct a certain item from your gross income. What are these?
o The basic principles that would guide you in determining whether an item is allowed to be deducted is:
1. The taxpayer or you seeking for deduction must be able to pin point some specific provision of the law authorizing you to deduct and
2. Prove that you are entitled to the deduction authorized because you satisfy all the conditions required.
3. All deductions are always strictly construed against the tax payer. That is the 3rd principle.
4. An additional requirement for the deductibility of an expense is not when a tax is required to be withheld by you, as the payer of the expense, you should have withheld the tax, otherwise, you cannot deduct the expense.
Let me put it in simple terms. If you have a business and you rent a place, a boutique perhaps in ayala at Php100k per month, per space. The law requires you
All Income
Less: Exclusions from Gross Income /
Exemption
_________________________________________
Gross Income
Less: Deductions
_________________________________________
Taxable Income
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to withhold 5% oif your rental payments and remit it to the government. So you will only pay or give ayala Php 100k less 5% or less Php 5000. Where does the Php5000 go? To the government. Ayala will only receive 95%. If you failed to deduct even if you have given Ayala the full Php100k, you forgot to deduct the 5%, you will not be allowed to deduct entirely the Php100k rent expense. That’s what will happen if you won’t satisfy the requirement of the deductibility of taxes on expenses.
What are the deductions that may be allowed or what are the different kinds of deductions that may be allowed on the different kinds of tax payers?
o a. Personal and Additional Deductions/Exemptions – Section 35
o b. Itemized Deductions – Section 34A – K and 34M
o c. Optional Standard Deduction of 40% of the Gross income – is the deduction which an
individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, on a corporation, in an amount not exceeding 40% of its gross income, in lieu of taking itemized deductions.
Itemized deductions, these are expenses incurred in line with your business or profession. Optional standard deductions, which is in view of itemized deductions and number 3, that you can deduct in order to arrive at your taxable income is the personal and additional deductions.
I am not saying that for you as a taxpayer, everything will be applicable. But these are (she’s saying about number 4, then does not continue here.)
Any of the deductions claimed by a tax payer will fall under any of these categories. It may be an itemized deduction or expenses or in lieu of that an optional standard deduction at a fixed rate of 40% of your gross income. Or you can claim, if you are an individual tax payer, you can also claim the personal and additional exemptions in lieu of family and living expenses.
o What are the personal and additional exemptions as mentioned before? Php 50,000 for Single, head of the family or married, the personal exemption. Php 25,000 additional exemption for every dependent child that you have, legitimate, illegitimate, acknowledged or legally adopted. So if you compute your income tax due, you may be able to claim anyone of these, but not all of these. Because optional standard deduction is only in lieu of itemized.
o We will discuss this fully in outline number 3 and 4. After we have the deductible expenses, you can now have your taxable income multiplied by your tax rate.
L. Non-deductible Items
Would all your expenses incurred be deductible? If you engage in business and you had incurred expenses of Php1M but your sales proceeds is only Php500,000. Are you guaranteed that you can claim your Php1M expenses? There are non-deductible items identified by the Tax Code.
All Income
Less: Exclusions from Gross Income / Exemption / Personal and Additional Exemptio
_________________________________________
Gross Income
1. expense in lieu 2. 4.
Less: Deductions (itemized deductions / Optional Standard Deduction / Premiums on
HIH Insurance
_________________________________________
Taxable Income
2. 50 ,0 00 S M 2 5, 00 0 /c hi ldSale
Php 500,000.00
Expenses
(Php
1,000,000.00)
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What are the non-deductible items? Not all expenses that you paid for or have incurred may be allowed as deduction in the computation of your taxable income. Let us identify what are the items that you have spent for but are totally non-deductible items.
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;
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
5. Losses from sales or exchanges of property directly or indirectly –
a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants)
b) 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
c) Except in case of distributions in liquidation, between 2 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
d) Between the grantor and a fiduciary of any trust
e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust
f) Between a fiduciary of trust and a beneficiary of such trust (1) Personal living or family expenses
o Why non-deductible?
1. Its not related to the business. It is personal and for the family.
2. The personal exemption of Php 50,000 for single and married individual and additional exemption for every child already child already approximates your personal and family living expenses for the entire year. That is why personal and family living expenses are non-deductible items.
(2) Amount paid for new buildings or permanent improvements, or betterment to increase the value of any property or estate;
o This simply means to say that when you spend for something as a property or estate for the business, it is not deductible in the year that you have spent for it or paid for it.
o Give me an example. Amount paid for new building or permanent improvements are non-deductible items period.
Example, if you open up a business and you purchased a new building used to house your operations, is that expense not deductible from your income? It is not deductible in the year you spent for it.
o If you spent Php100M in purchasing a building, you are not allowed to deduct the full Php100M in the year of purchase, or in the year of construction but it will deductible as an allowance over the years of its estimated time. So if a building is constructed costing PHp100M and it is expected to have a life, useful for another 100 years from the time that it is finished from construction, then it is just but proper and reasonable to spread out the value of Php100M over the useful years of 100. So it is deductible based on depreciating effect or the value of depreciation for years. So it will diminish its value, Php1M every year. Because after every year, its estimated life reduces by 1 year so the effect is to deduct it not 1 time but over the estimated life of that property or asset or even if its not a new building, so long as it’s a major improvement, a betterment, which increases the life of an existing asset, it will not be deductible outright but only deductible over its life.
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o It is reasonable because if you deduct in the first year that you bought it, you deduct Php100M. And your sales is only PHp2M, you lose Php98M. Whereas, if you spread out the expense over 100 years, you will benefit each and every Php1M every year as an expense.
o If we will come across an exemption wherein non-stock, non-profit education institutions like San Carlos can actually deduct in the 1st year of purchasing building the entire Php1M. Why does the BIR allow this? Because schools are not taxable. Even if we deduct the entire Php100M of purchasing it, nothing will ever change. Even if we deduct it the next year. Schools are not, non-stock, non-profit educational institutions, are not taxable. So the effect is different. IN normal businesses and abnormal businesses.
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made
o No. 3 is it the same as No. 2? If you have a motor vehicle or delivery van in your business to deliver your items and you change the headlight or you change the mirror, can you deduct the expense outright or should you spread out the value of the repair? You can deduct outright.
o No. 3 are major repairs which extends the life of an existing asset which requires an apportionment of the expenses over the number of years that the asset’s life has been extended or the property’s life has been extended.
(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
o The company took out a life insurance policy over your life as its most important employee. Every year the company pays premiums amounting to PHp100,000 over the life insurance policy. Is the Php100,000 premium a deductible business expense? You are the president of the company.
Let’s have an illustration: Company A gets a life insurance policy over your life, Php100,000 premiums over a year. The Php100,000 premium is used to satisfy the requirement of the life insurance taken by the company over your life and it is paid to an insurance company, Company B. This is an expense of the company. The assets of the company is decreased by Php100,000 every year just to pay the premiums of your life insurance policy. Can we claim this as an expense deductible from income of Company A who spent for it?
Premium Beneficiary Deductible?
Php 100,000 Company A X
Php 100,000 Estate of U as employee
If a company takes out an insurance policy over the life of its employees, take note of who the beneficiary is. It’s only here that the one spending for the premium is the company itself, so it’s losing money because it’s paying for something.
Can this be a deductible expense? So it can be a tax benefit in the payment of taxes, so the tax liability of Company A will be reduced, you have to know who the beneficiary is. Now if the company made itself as the beneficiary, it is not deductible because the law says it is not deductible if the taxpayer is directly or indirectly the beneficiary under the policy.
o Who is the taxpayer referred to in this section? Company A. The tax payer who took the life insurance policy is the beneficiary itself, not deductible. The principle behind that because it is merely transferring money from Company A
to the insurance company and go back to Company A when the employee dies. It is merely transfer of money but will revert back to the company upon the happening of the event insured.
But if the beneficiary is another person other than the tax payer himself, it is deductible, because the proceeds will not revert to the coffers of the company. But take note, the designation of the company may be direct designation or indirect. If its
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5. Losses from sales or exchanges of property directly or indirectly –
First, we have to know whether losses are deductible expenses? Yes.
Example, if you engage in the buy and sell of motor vehicles. If you have sold 10 motor vehicles in a year, 7 were sold at a profit, 3 were sold at a loss, the losses incurred by the 3 transactions can be offsetted against the gains out from the 7 transactions. So generally losses are deductible items.
If the 7 motor vehicles were sold for Php7M, your capital was only Php4M, Php3M is taxable income. If the 3 other vehicles were sold for were sold for Php1M, and puhunan is Php3M, you lost Php2M, since you own this 1 business, you will only be liable for tax for Php 1M, losses are deductible expenses so long as it is incurred in relation to your business.
Example, if you are in the manufacture of milk or production of milk, along the way some will evaporate, losses are incurred. From the cow’s milk, if it directly spills. But losses are deductible except for losses found in Section 36, and it says losses from sales or exchanges of property between members of a family.
o a) Between members of a family (brother, sister of half or full blood, spouse, ascendant, lineal descendants),
Example: This motor vehicle, you sold it to your sister. Puhunan is Php3M, but the 7 you sold it to your classmates, if you sold this to your sister, is the Php2M, deductible as an expense? No.
Why are losses or exchanges of sales between you and your sister not deductible losses? Because transactions between family members are for the most part not entered into an
honest transaction unlike entering into a transaction with a 3rd person or 3rd party, you may sell this one for Php10 to someone else but you can actually dispose it to your sister for Php1M.
So losses are not real in cases between family members. And even if it is real losses but because you entered it with a family member, it is not deductible.
o b) 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
Company A sold a parcel of land to you, selling price is Php1M, cost to the company is Php 3M, the company lost Php2M from the transaction entered with you. Is the transaction PHp2M deductible from the income of Company A? Yes. Because in this case there is no mention if you are a stockholder of the company and for what share.
U
Loss: Php 2M DeductibleCompany A
60% U 10% V 10% W 10% X 10% YU
Loss: Php 2M Not DeductibleCompany A
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Company A is owned by a 5 stockholders (Corporation must be atleast 5 stockholders). You are the owner of 60% of Company A. V, W, X, Y are owners of 10% of the shares. If you are an owner of Company A by 60%, can the company deduct the Php2M from its income? No. Why? Because if a company wishes to avoid paying taxes, it can actually enter into
simulated losses or transactions by selling properties to any of its controlling stockholders. But in order for it to be a non-deductible sale class, the individual with whom the company entered into with a transaction must be a controlling stock holder, meaning he owns more than half or more than 50% of the business itself.
If Company A sold the land for Php1M costing PHp3M to any of V, W, X and Y, it is still deductible loss. Why? Because these stockholders are not controlling stockholders.
When the transaction that we are looking into is between a company and an individual, the requirement is that the individual must be a direct stockholder.
o c) Except in case of distributions in liquidation, between 2 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
How about corporation to corporation? Give me an illustration for number 3.
What does no. 3 prohibit? Transactions between corporations.
Corporation A sold a land for Php1M costing Php3M, suffering a loss of Php2M. To whom was it sold? Corporation B. Is the loss of Php2M deductible? As a rule, if you have no other fact, these are the only facts given the general rule is losses incurred are deductible losses.
But if we dig into the ownership, say for example:
U, V, W, X and Y, and Company B is also owned by U, V, W, X and Y, and the shares are given as shown, still deductible? No. Because the ownership is more than 50%. The law provides that if for example that this transaction is entered into between 2 corporations whereby ownership is held directly or indirectly by more than 50% for the same individual is not deductible loss.
So Company A is owned by more than 50% by U, Company B is owned more than 60% by the same individual, so the controlling interest in both corporations is U, the same individual, therefore, it is covered by non-deductible lsoses.
Company B
Loss: Php 2M DeductibleCompany A
60% U 10%V 10% W 10% X 10% Y Land GSP Php 1,000,000 Cost 3,000,000 Loss Php 2,000,000 ***NOT DEDUCTIBLECompany A
60% U 10%V 10% W 10% X 10% YCompany B
Emery Tiu Let me change the facts:
Deductible or not? U owns 60%, Y owns 60% on the other company. Is the loss deductible? Yes. In this case, it is not the same individual who is owning both corporations or controlling both corporations, the loss is deductible.
Let me change again the facts:
In this case, if I put in there are 5 owners, individual owners and the 6th owner is Z Corporation, but Z Corporation is owned 100% by U, deductible or not? Okay, let’s go to your first corporation, we retained ownership 60% controlled by U, Company B, the buyer of the land is owned by 10% by U, V, W, X, Y. The remaining 50% is owned by a corporation, Corporation Z. If a corporation owns a corporation, there is ultimately an individual owning it. You have to key in the ownership of all levels of the corporation. It so happened that Z corporation is 99.99% owned by U.
Is the loss deductible or not? Is this covered by transactions which are not arms length? Arms length because the law says owned by individual directly or indirectly. This is a case of 2 corporations entering into a sale transaction of a real property but both corporations are owned by the same individual although indirectly. The other one indirectly.
More than 50% is held by the same individual directly or indirectly. You say U owns this majority; it’s more than 50%. Is U owning or controlling this corporation? Yes, indirectly. How indirectly? U owns 10%. U owns the entire 50% through another corporation, therefore, U’s ownership is: 10% + 50% = 60%. More than 50% of both corporations is owned by the same individual. Therefore, we can say that the transaction is not entered into an arms length.
Let me change the facts again: 60% U 10%V 10% W 10% X 10% Y Land GSP Php 1,000,000 Cost 3,000,000 Loss Php 2,000,000 ***DEDUCTIBLE
Company A
10% U 10%V 10% W 10% X 60% YCompany B
60% U 10% V 10% W 10% X 10% Y Land GSP Php 1,000,000 Cost 3,000,000 Loss Php 2,000,000 ***NON-DEDUCTIBLECompany A
10% U 10% V 10% W 10% X 10% YCompany B
50% Company Z 99.99% owned by U 60% U 10% V 10% W 10% X 10% Y Land GSP Php 1,000,000 Cost 3,000,000 Loss Php 2,000,000 ***DEDUCTIBLECompany A
10% U 10% V 10% W 10% X 10% YCompany B
50% Company Z 60% owned by U 40% owned by ATherefore, U’s share is: 60% of the 50% share= 30%
Plus: share in Co. B = 10%
40%
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Z Corporation owns 50% of Company is owned by U and A. 60% for U, 40% for A. IS the loss deductible? Does U control corporation B? No. But then U has more than 60% of Company Z? Diba this is a corporation owned by a corporation. But you know that this corporation is owned by other stockholders. So how much of the share does U own? 60% of 50% is 30% plus 10%, U owns only 40%.
The ownership of U here is more than 50% direct control over Z Corporation. But in Company B, U only directly control Company B by 10%. U owns 10% directly and indirectly by 30% of Company B through owning B by 60%. 60% of 50% if 30%. So the 30% of Company B is owned by U through this corporation and another 10% that is a total of 40%
Does it satisfy the requirement for non-deductibility? NO, therefore the loss is deductible.
This is what you call a grandfather rule in determining ownership of the corporation. It is grandfather in a sense because you with start with Company A here and its owned by another Company C, owned by another Company C, to the extent that you determine the ownership, the vast ownership of the individual, that is the grandfather rule in Corporation Code.
If it’s family-owned, there are still distribution of interest and control. You still use the number of ownership that he has in his corporation. That is based on SEC because there is an annual report that needs to be submitted to the SEC, stating who the owners are and what percentages of the stocks they are holding.
o d) Between the grantor and a fiduciary of any trust
o e) Between fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust
o f) Between a fiduciary of trust and a beneficiary of such trust
The other non-deductible losses from sales or exchanges of property, the reason why it is non-deductible because it refers to one and the same, it simply a temporary transfer. The grantor of the trust and the fiduciary of the trust, these are second transfers so it refers to one and the same.
N. General Principles of Income Taxation in the Philippines – Section 23.
This is a very important provision for income tax. What are the general principles of income taxation?
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. Sec. 22(E) enumerates who are non-resident citizens
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.
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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
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.
Individuals are classified into resident citizens, taxable for income within and without. Second classification, is non-resident citizen taxable only for income within. Third classification, they are taxable only for income derived within. For non-resident aliens engaged in trade or business, are taxable only for income within the Philippines.
How about overseas contract workers? Taxable for income derived within the Philippines. o Why are they not taxable within and without?
When they are non-residents for the year, they are only taxable within.
All of those taxpayers are taxable only from income within EXCEPT for 2 types which are taxable on their worldwide income. What are the 2 taxpayers which are taxable from income within and income without?
Only resident citizens and domestic corporations are taxable on income within and income without, while all the rest are taxable only if they earn income having situs within the Philippines.
So bottom line is determining the situs of the income important for all types of taxpayers? What is the purpose why do we have to determine the situs of the income?
o Purpose: so that we will know if we have taxing jurisdiction over that income. Determining the situs of income is important because we would want to know if the income of those taxpayers that we have just mentioned are income within, and definitely, taxable in the Philippines.
o But not all taxpayers would the situs of income really matter. What type of taxpayer is situs irrelevant? Resident citizen and domestic corporation because they are taxable on income within and without. So, situs of income is not important in so far as domestic corporations and resident citizens are concerned, they are taxable wherever their income has situs. Therefore, if you have a question before you that says, “the individual taxpayer is a resident citizen or a domestic corporation it is actually taxable on income within and without. So, situs is irrelevant unless we make it more complicated in applying exemptions in tax treaties.
o But as a rule, situs is only important in so far as determining whether the income of non-resident citizens, aliens and foreign corporations are concerned because these types of taxpayers are taxable on income within the Philippines.
Is an immigrant a resident citizen? What is his classification as a taxpayer, resident citizen or non-resident citizen? (not answered by Atty. Tiu)
What are the general principles of income taxation in the Philippines?
A resident citizen is taxable on all income derived from sources within and without the Philippines
A non-resident citizen is taxable only on income derived from sources within the Philippines. 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.
An alien individual whether a resident or not of the Philippines is taxable only on income derived from sources within the Philippines
A domestic corporation is taxable on all income derived from sources within and without the Philippines
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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.
Individual Income Taxation Taxable Individuals
A. Resident Citizen
Who is a resident citizen? What is the taxability of a resident citizen? Resident citizens are citizens of the Philippines residing therein.
They are subject to the schedular rates of 5%-32% tax on income derived from sources within and without the Philippines.
Prime example: all of us are citizens here unless you claim otherwise. B. Non-resident Citizen
Who is a non-resident citizen? Assuming you are working and your company sent you off abroad under an assignment contract for 2 years. He left today, will he be considered a non-resident citizen for tax purposes? He is still a citizen, yes. His employer is a domestic corporation. He was sent to Korea for 2 years, he left this morning. Is he a resident citizen or non-resident citizen? When is a citizen considered a non-resident citizen? (Ms. Tiu said she wants the enumeration found in Sec. 22 of the Tax Code, she said that we have to memorize this Sec. re who are non-resident citizen)
Sec. 22(E), the term “nonresident citizen” means:
o (1) A citizen of the Phils. who establishes to the satisfaction of the Commissioner the fact of is physical presence abroad with a definite intention to reside therein
o (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
o (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
o (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
o (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.
o Illustration (1st scenario):
He does not qualify under No. 1 and No. 2.
Let us go to No. 3. A citizen of the Phils. who works and derives income from abroad and whose employment requires him to be physically present abroad most of the time during the taxable year.
January 1, 2010 July 27, 2010 December 31, 2010 December 31, 2011 July 26, 2012 December 2012
5 months and 4 days Less than 183 days
WITHOUT SITUS
WITHIN SITUS WITHOUT SITUSABROAD WITHOUT SITUS WITHIN SITUS
2010 RESIDENT CITIZEN TAXABLE FOR BOTH NON-RESIDENT EXEMPT HOMECOMING CONSIDERED NON-RESIDENT
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“Most of the time” is interpreted to mean 183 days abroad or more physically present.
Did he go abroad for employment? Yes but not on a permanent basis because his contract is fixed for 2 years, January 1, 2010. He left this morning, July 27, 2010. By December 31, 2010, he spent 5 months and 4 days, which is definitely less than 183 days. He is not abroad most of the time, so for 2010, he is considered a resident citizen. For December 31, 2011, he is abroad. He is a non-resident citizen. Now, this is established that he is a resident citizen for the entire 2010. Why? He was not abroad most of the time during year. So, his salary from January to July has situs within. His salary from July to December has situs without because he is abroad. Is this taxable for 2010? Yes, both income is taxable. As a resident citizen, regardless where your income is earned whether it has situs within or without, definitely, it is taxable in the Philippines.
Now for 2011, he is a non-resident citizen because his employment requires him to be physically present most of the time during the year. Is this an income within or without? It is income without, hence, not taxable in the Philippines. A non-resident citizen is only taxable for income within, so, in this case, this is not taxable.
How about 2012? He came back and continued employment with his local company, December 31, 2012. Is this income within or without? Is this taxable? He is considered non-resident, under category no. 4. o 2nd scenario:
He is still considered non-resident citizen (from Dec. 31, 2011 to June 26, 2012). As a returning non-resident citizen, from the start of the year to the date of arrival, any income earned without or outside the Philippines is not taxable. Because for this period, he is considered as a non-resident citizen. This is where he is a considered as a hybrid non-resident citizen, half and half. You cannot consider him as entirely as non-resident nor as resident citizen for the entire year but the requirement there to apply the rules of hybrid personality, he must have returned as a non-resident the year before. If he is a resident citizen the year before. So, lets cut this short, wala ni nga year, what is the year immediately before this one, the rule will not apply because he must be a returning non-resident citizen.
Diba the first type of non-resident is easy—must be able to establish the fact of his physical presence abroad to the Commissioner of Internal Revenue and he has a definite intention to reside therein.
No. 2 is also easy—he must be an immigrant or permanently employed abroad. No. 3 is much more complicated because his employment abroad requires him to
be physically present most of the time during the year which requires 183 days or more.
The 4th only applies to a citizen who was previously, the year before, is considered as non-resident whether 1st, 2nd, or 3rd category. Any of those 1st 3 categories non-resident citizen comes back to the Philippines to reside permanently here, then, he
January 1, 2010 July 27, 2010 December 31, 2010 December 31, 2011 June 26, 2012 December 2012
5 months and 4 days Less than 183 days
WITHOUT SITUS
WITHIN SITUS WITHOUT SITUSABROAD WITHOUT SITUS WITHIN SITUS
2010 RESIDENT CITIZEN TAXABLE FOR BOTH NON-RESIDENT EXEMPT HOMECOMING LESS THAN 183 days here CONSIDERED NON-RESIDENT STILL
Emery Tiu
will have a portion of the year as non-resident citizen and, after the date of arrival, resident citizen. Any income during that time from without is already taxable. Remember the rules, this is important that he be considered non-resident here
because all his income from abroad during this time will always be considered as non-taxable in the Philippines because his classification is a returning non-resident. But, from the day of arrival until Dec. 31, he is already classified as resident citizen, and if he has income in any day or any month during this period, he goes abroad to perform, to sing, or whatever, even if it is income without but he is already classified as resident citizen, it means to say that everything here is taxable. But on the other hand, only those income within is taxable.
As a returning non-resident the year before, even if he returns January 3 here, not most of the time during the year, his income from January 1 to January 3 abroad is non-resident citizen, income without, therefore exempt.
(Atty Tiu was asked what “returning” is?) His coming back, definitely, to reside in the Philippines. But for him to avail for the 4th category of non-resident citizen tax-free, he must have been a non-resident the previous year or years.
Say, if you have a relative who stayed abroad for many years, comes back to the Philippines as balikbayan and stayed here for 6 months, went back to the US for 1 month then came back again for the rest year. If you take the entire year he stayed here for more than 183 days, is he resident citizen because he stayed here most of the time? NO because he is not returning back to reside here, only on a vacation. So, it does not take his status as a non-resident for staying here most of the time. An immigrant is an immigrant, unless he decides to come back, he will not be considered as a resident citizen.
(Q: asked what if the employee is asked to go abroad near the end of the taxable year) If you are required to go abroad on a 2 year contract, make sure that you leave the Philippines before June 30, so that you will be considered as non-resident citizen so that you income abroad will not be taxable.
(Q: what is our measure of most of the time?) 183 days or more in a given year whether continuous, in succession, or in the aggregate. You add out the days. Basta, you have a definite purpose of going there but not for permanent stay. (Q: in the 1st category, when is the reckoning point?) for category 1 and 2, the day
that you left.
How about a seaman who is working in a vessel? Would all of them be considered as non-resident citizen?
A seaman is not categorized as non-resident (1) although he is physically present abroad, he does not intend to reside in the vessel for his entire life; (2) he is not an immigrant and his employment is not permanent, its per contract basis. So, he is under category no. 3.
In order that they be classified non-resident citizen under category no. 3, 2 requirements must be complied with, (1) they must stay abroad most of the time abroad during the year, meaning 183 days or more; and (2) the vessel within which they are working must be engaged exclusively in international trade. Otherwise, they do not qualify as non-resident citizen and their income, even if they earn it working in the vessel, it will be considered as taxable within and without as resident citizens. Why again? They don’t qualify as immigrants or permanent employees abroad. All overseas contract workers including seaman, its contractual. Its not a permanent employment.
C. Resident Alien
Who is a resident alien?
A resident alien is an individual whose residence is here in the Philippines but is not a citizen of the Philippines.
When can you be considered a resident? If you marry a Filipina?
You will be considered a resident if you are not considered as a mere transient or if he lives in the Philippines and has no definite intention of his stay here.
Emery Tiu
There is no number of days as a benchmark, or number of months, number of years to say whether an alien here in the Philippines is definitely considered as resident or not. Unlike in non-resident citizen, there’s a number of days. Resident(?mao ni iyang giingon pero murag non-resident alien iyang pasabot. Check lang ) alien engaged in trade or not engaged in trade, you have 183 day rule but for an alien to be considered as resident, there is no exact measure or length of stay that he has to establish in the Philippines.
So long as he is not a mere visitor, transient, or sojourner in the Philippines and so long as he has definite intention to reside here or his visit requires an extended stay in order to establish or satisfy a purpose for which he is coming to the Philippines, making the Philippines as a temporary home country, he will be considered as a resident alien. In some part of the discussions in the book, you will see there one year but that one year has not been established by any law. It is just a discussion of an opinion or ruling by a SC decision but in more cases than not, the SC does not really give a number of years for length of stay. It just says, so long as he has a definite purpose of staying in the Philippines, and making the Philippines as his home country, then, he can be considered a resident alien. In one case, it says that the length of stay is indicative of the intention of an alien. If he had stayed here in the Phils. for more than a year, he may already be considered as a resident alien.
D. Non-resident alien
What about a non-resident alien? Definitely not a citizen, not even a resident alien. But for some purpose he happens to be in the Philippines earning some form of money or income. Who is a non-resident alien?
There are two classifications of non-resident alien: o (1) one that is engaged in trade or business o (2) one that is not engaged in trade of business
If there is an alien or foreigner, say, you went to Boracay alone and you’ve met a foreigner. During your conversation, you learn that he has been in Boracay for half of the year. He came to Boracay, January 1 and you met him yesterday (July 26; stayed around 204 days already in the Philippines, almost 7 months), can you consider him a non-resident alien not engaged in trade or business. So, his stay is more than half of the year. He did nothing in Boracay except surf and dive. Is he of the 1st type or the 2nd type? During almost those 7 months, he earned a minimum amount in teaching how to scuba dive.
Those non-resident aliens who stayed in the Philippines continuously or in the aggregate for more than 180 days regardless of what they are doing in the Philippines, they are considered as non-resident aliens engaged in trade or business. The number of days is used to classify whether the non-resident alien is engaged in trade or business or not. The reason why we have to qualify or distinguish them, although both of them have really no definite purpose in staying in the Philippines if you have a definite purpose of staying, you may already be categorized as resident alien, for those having no definite intention or purpose of staying here, you use the 180 day rule.
And using the 180 day rule is for purposes of what? Why do we have to distinguish not engage or engage when both of them have are non-resident aliens with no intention for staying here? Why is there a need?
o Both of them are taxable only on income within. Insofar as their income are earning, there is no difference. If Mr. A who stayed here 180 days and Mr. B who stayed here 179 days, they both earn the same income, they are both taxable on income earned within the Philippines. Why do we have distinguish them?
They are subject to different tax rates.
A resident citizen and a resident citizen, a resident alien and a non-resident alien engaged in trade or business, otherwise those staying more than 180 days in a given year, aggregate or continuous, would be taxed at the same rate of 5%-32%. Only non-resident aliens who have stayed 180 days or less will be taxed at a different rate of 25% and without the benefit of deductions because they are taxed on all incomes.
So in our example before whenever a performing artist does a concert here in the Philippines for 1 night, the entire income that they earn is taxed at a fixed rate of 25% without the benefit of any deductions not even his plane ticket cost, but it is shouldered by the producer.
Emery Tiu E. Special Employees
Who are special employees?
Special employees are those employees employed in special corporations and special corporations are the following:
o (1) Regional Area Headquarters (RAHQ) of multinational corporations, defined in Sec. 22
o (2) Regional Operating Headquarters (ROHQ) of Multinational Corporations, defined in Sec. 22
o (3) Offshore banking units o (4) Petroleum service contractors
What is the difference between the two, (1) and (2)?
o RAHQ is established for the purpose of overseeing. They do not earn income. They do not operate to earn income while ROHQ may be performing services and activities in favor of the other corporations related to the multinational companies located within the Asia-Pacific region.
o For example, Chevron is related to Caltex. Chevron established a ROHQ wherein employees of that headquarters will perform services (accounting, auditing, financing, administration services) for and in behalf of all other Caltex located within the Asia-Pacific region. Its operational and it is earning income but would all employees of Chevron be considered as special employees? What makes them special? Why are they called special employees?
No, not all would be considered special employees. They are special because they are subject to a preferential tax rate of 15% on their salaries, honorarium, wages, emolument, remunerations and other similar income.
o Can a Filipino be a special employee?
The general rule is only alien employees occupying managerial, supervisory, technical positions can be special employees. Only in cases where no alien individual can fill up that requirement would a Filipino individual be allowed to become a special employee subject to the preferential, special tax rate of only 15%.
That is so special because, normally, Filipino individuals or alien individuals employed in corporations not among those special corporations will be taxed at a rate of 5%-32%, and you know that managerial positions already demand a higher salary where you would be covered a bracket of 32%. Indeed, 15% is special.
We have RAHQ, ROHQ of multinational corporations, offshore banking units in the Philippines and petroleum service contractors. These are the only corporations who can employ special employees.
If you are a special employee, you are a Filipino, and you have and income on the side, will all your income from employment and other income, say for example, from business be subject to the preferential rate of 15%?
No. If you are a Filipino individual, the rule is special employees would only be allowed preferential treatment of salaries, honorarium, wages, emolument, remunerations, those entirely related to the employment of the special corporation. If he has earned income as an employee of a special corporation occupying managerial and technical position, then, any income which he earned from selling sandwiches, coffee etc. during break time will not be covered by the 15%, it will be taxed 5%-32%.
But what is the special rule for Filipinos occupying technical/ managerial positions in these special corporations? Do they have the option to be taxed at 5%-32% instead of 15%?
o A circular (Revenue Memorandum 41-2009) has been issued by the BIR, if in case we talk about of Filipinos employed in these special corporations availing of the special rate of 15%, their positions must be managerial and highly technical position, not OR, in order for them to be entitle to 15% or at a regular rates of 5%-32%.
Emery Tiu
o While normally we employ expatriate employees, these are alien individuals employed in managerial confidential or highly technical positions.
F. Estates and Trusts
Is an estate an individual? Why is it included in taxable individuals? When a natural person dies, how many taxable persons do we have? Diba, persons, it can be juridical or natural? At the point of death, if you are the BIR, how many taxable persons do you see?
There are two—the dead person or his income during his lifetime, during the calendar year. If a person dies today, he is supposed to have income January 1 until yesterday. From today, he will have estate as a taxable individual. You have two separate taxable persons at the time of death.
August 3, 2010
1. Alien individuals employed in multinational corporations are subject to the preferential rate of 15% on compensation income so long as they are occupying managerial and technical positions. True or False?
False. Multinational Corporation is generic. Multinational Corporation is simply a foreign corporation or entity engaged in international trade. When you say regional operating headquarters, regional area headquarters of a multinational corporation, that’s what makes an employee a special employee given a preferential rate of 15%.
We said that there are only four corporations who can hire special employees subject to the special rate of 15% and they are regional operating headquarters of multinational corporations, regional area headquarters of multinational corporations, petroleum service contractors and subcontractors and lastly, the offshore banking units. If we simply say alien individuals employed in a multinational corporation, it’s as if they are simply employed in a resident foreign corporation engaged in international trade or as simple as that. To become a regional area headquarter or regional operating headquarter, it requires a special registration.
2. How about estates, trusts, are they considered as individual tax payers for tax purposes? Yes.
3. If you’re saying that they shall be treated the same as individuals, so what are the tax rates applicable to these estates and trusts? How about the estate itself? Is it subject to income tax?
This is not the cemetery class. Mr. X died, he left an estate, a set of property. While the property is under judicial settlement, it will bear income or fruits. To which amount, is it the estate or the fruits that the estate is subject to income tax? It is the fruits that are subject to income tax. Okay, only the outer layer is subject to estate income tax.
What about the estate itself left by the decedent, is it subject to income tax? No. Why? Because it’s not an income, it is a capital and subject to estate tax. There is a difference between the estate tax of 5-20% and estate income tax of 5-32%. Income tax as we have learned is always subject to an income. Only one instance is income tax subject to capital and what is that again? On the capital gains or rather the presumed gains on a sale of a capital asset which is a real property located in the Philippines. So do not tax the estate left by the decedent, simply tax the income generated by the estate during settlement. Whenever a person dies, there are two persons subjected to tax: (1) the decedent himself his income from January up to his income is subject to income tax. Upon death and until the settlement is finished, it will be the income generated unless distributed is subject to estate income tax.
4. Is the estate allowed personal exemption? Say for example this is 2010, Mr. X died August 3, today, can the income tax return of Mr. X claim the personal exemption? How about the estate? Can the estate claim during the same year personal exemption?
The individual person can claim the personal exemption on his income from January until the point of death. The estate under settlement from the point of death until the end of the same year is another personality, distinct from the person himself who died. Therefore, personal exemption is as well allowed to the estate. But of course, the following year, if the estate is not yet settled, still under judicial settlement, the following year, you don’t speak of Mr. X anymore. His personality has ceased at the time of death. He could no longer earn income, only the estate will be considered as a tax payer, the year after death and years after that.
Illustration: MR. X DIED ON: August 3, 2010 Estate of Mr. X. X X X X X X X X X X X
X ESTATE PER SE:
Subject to Estate Tax FRUITS: Subject to Income Tax JANUARY – DEATH
Subject to Income Tax as an individual
CAN CLAIM PERSONAL EXEMPTIONS? Yes, for both.
PHP 50,000 during time alive Php 20,000 as an estate
Emery Tiu
5. Personal exemption is how much? P50,000
6. Can the estate claim additional exemption for a dependent amounting to P25,000 – the additional exemption?
The P25,000 is only in reference to a dependent child or children. Exemption is P50,000 basic class, I think I placed there last page of this outline, estates and trusts number 3, exemption allowed to estate and trust fifty (P50,000) right? But the problem is that when I looked into the tax code, that section 62 using RA 8424, it’s only P20,000 because in 1998 when 8424 took effect, personal exemption was only P20,000. When was it raised again to P50,000? Only in 2008, RA 9504, remember the illustration I gave you in retroactive application? It’s just that, that same law, RA 9504 did not amend section 62 which is the personal exemption allowed to estates and trusts. So, I think since this is an exemption and strictly construed against the estate tax payer, we still retain the P20,000 exemption although it is not reconcilable. Still, we maintain the P20,000 not the P50,000 which replaces this. Again, for the reason that Section 62 of the tax code has not been specifically amended by RA 9504 which increase the personal exemption from P20,000 to P50,000.
Let’s go to different types or categories of income that individual taxpayer may earn. 7. What is compensation income?
(Can’t hear Ms. Tan’s voice) Based on Dimaampao’s book, it is defined as all remuneration for services rendered by an employee for his employer unless specifically excluded under the Tax Code. 8. When is there employee-employer relationship?
Apply the four-fold test
9. For tax purposes, can a compensation in kind be subject to income tax? Or is it always compensation in cash? Or does the labor code allow compensation to be given in kind?
Under the labor code it’s not allowed but for tax purposes class, compensation may be given in cash or in kind. Lifeblood doctrine, the government does not only look at cash compensation to be taxed but in any form that the person employee is benefited from his employment or services that he has rendered. Everything will be taxable as a rule.
10. Give me an example of a compensation in kind. Promissory notes.
How can an employee have a promissory note as an income?
Even if it’s not in cash yet, it can be considered as realized on the part of the employee as he has already rendered services, then it will be subject to tax.
What else? Stocks.
What about stocks? What is a Stock option?
Instead of giving salary, they are given with stocks, shares of stocks.
What do you think why the company would give an employee a share of stock? What would that make the employee if he gets hold of stocks of the company?
In some cases, companies in order to build loyalty and in order to retain the employees in its employ would be offering stock options to its employees. Now, if the offer of the stock option is not more favorable than that offered to third persons not employees to the company, so if it’s offered at 100 and
Emery Tiu
sold to outsiders at 100 as well, there’s no income to speak of. The only time that the employee will be subjected to income tax is when the stock option is more favorable than 3rd person. Say for example, the fair market value per share of the company is 1000 and it is sold to the employee at 100. The 900 difference is simply an income which can be connected to the services that has been rendered by the employee to the employer.
What other compensation in kind do we have?
Cancellation of indebtedness – we’ve discussed that already before. What else?
Tax liability of the employee paid by the employer. Can you illustrate?
Let’s say for example, you were hired P10,000 a month. Do you expect to get P10,000 a month? No. because this P10,000 is entirely subject to income tax because it’s her income.
In the example that she has given, tax liability of the employee being shouldered or payed by the employer is when the example is when the employer promised to give her clean P10,000 without any tax deduction. It may so happens that she may get P10,000 without any deduction, the employer is actually shouldering the tax of the entire income. So, the tax of the entire income is somewhere, let’ say, P2,500 to the BIR, P10,000 to the pocket of the employee. The employee does not concern himself with how much the employer will be paying so long as he gets free of tax. You will learn later how to gross this tax, how to compute the tax. Anyway, so long as the employer promises the employee of a salary that is already free of tax, the employer is actually shouldering the tax, it’s as if the portion shouldered by the employer is still net income of the employee. In fact, in this case, how much is really the compensation of the employee? Is it P10,000 or P12,500? It’s P12,500. It’s just that P2,500 went directly to the tax authority. And I think we have also in our outline, premiums paid by the employer to life insurance policy of the employee – we’ve discussed this, right? (Class: yes)
Illustration:
11. If a property is given to the employee, what is the taxable base?
If you are given a parcel of land by your employer class, the basis for taxation is the fair market value of the property given.
12. Now, what is the doctrine of cash equivalent? How is this related to what we have discussed a while ago? For tax purposes class, we’re looking at the fixed amount on which the tax will be imposed. If the income goes to the tax payer or employee in the form of property or any other kind other than the standard of measure of value which is cash, then there must be equivalent to every property that is given. For every value received by the tax payer or employee as a benefit for being hired or as compensation for service rendered, there will be an equivalent tax on that income, even if it is received in kind. So, the equivalent value of the property of the property or benefit received will be taxable as a rule. That’s as a rule because we will encounter some exceptions to the rule.
13. Now if you’re an employee Ms. Gingoyon and you are allowed to stay in the condominium units, for which you actually don’t get housing allowance in cash. You only have free stay in that condominium unit. Is that an income?
Yes. If you will be allowed to stay free of charge in a particular, like residential place, apartment, etc. Regardless whether you received something in cash or not for that stay, it will be taxable because you are benefited. In your own person, you don’t need to shell out money in order to stay in that place. Therefore, how will it be taxed if your stay in the condominium unit which is a value of P50,000 the leasing rate which is per month, then the P50,000 value will be subject to tax, regardless of your status in the company – whether you are the janitor or president of the company, it will be subject to tax. But, who pays is something else.
SALARY:
PHP 10,000.00
TAX
PHP 2,500.00
ACTUAL COMPENSATION: Php
12,500.00
Emery Tiu You mentioned of fringe benefit, what is it?
Fringe benefit is any good or services or benefits given by the employer to the employee, except for rank and file employees.
So, bottom line, who gets fringe benefits? Say for example, this is ABC Corporation, everyone of us here are employees of ABC Corporation, rank-and-file and not rank-and-file. Everyone is given a chance to stay in the condominium unit, 1 unit each. Is everybody earning income here?
Yes. It is settled class that everyone is actually earning income in some form. Although it is not in cash, it is the free stay valued at P50,000/month had they stayed in another area.
My question is since it is settled that everyone is earning income in some form, would we, all of us, be subject to tax on the income that we have earned in kind?
Yes
Non rank-and file that side and rank-and file, P50,000/month in kind - free stay, P15,000/month in kind. If you want to ask how much is the cash compensation, P10,000 lang in cash because you’re rank and file. P100,000 in cash because you’re not rank-and-file. Now this is taxable, taxable. Is this taxable?
This will be given, the cash from the cash compensation will be given through you ATM account or in cash, net of your taxes. But how will this be regulated? So, you’re saying this is taxable for the rank-and-files here, if the tax of this amount is P10,000, you will receive nothing na, because the P10,000 will be collected from you, agree?
This level, the cash that is received both rank-and-file and not rank-file is considered as salary. This level naman beyond your salary, we call that benefit in kind. Some benefits are in cash if you’re given Christmas bonuses. But benefits in kind are treated differently if received by a rank-and-file and benefit by a not rank-and-file, this is specifically called fringe benefit.
These are ordinary benefits. Both are income, differently termed, these are benefits received by the rank-and-file employee. These are specifically called fringed benefits received by non rank-and-file employees. Now, usually you couldn’t imagine rank-and-file, getting of these, di ba? But for illustration purpose, let’s say they are also given that kind of benefit. Now, will this be subject to tax?
Doctrine of cash equivalent, will it be subject to tax? Yes. This salary will be subject to tax of which we call as withholding tax on wages, salary or compensation. It’s the ordinary tax on the salary. This one will be subject to the ordinary tax on salary as well but how about this? Is this subject to ordinary tax on the salary? No. Subject to what? Fringe benfits tax. And fringe benefits tax is what? Final tax. What is the effect if it’s a final tax? Ms. Cuevas answers.
Fringe benefits tax works this way. I’ll show how this is really unfair to this line. Fringe benefits are perks given to those given occupying managerial and supervisory positions. And for that whatever benefit is given to them which is usually not available to rank-and-file, it is subject to final tax which we call as the tax on fringe benefit. Being subject to final tax, the word final means that the benefit itself is already taxed with finality. And if it is taxed with finality, it is no longer considered in the income of the non rank-and-file to be subjected to the ordinary withholding tax on salaries. So, this is separately taxed. But because it’s a perk or benefit to those occupying higher positions, it is the employer who shoulders the tax. Whatever benefit is given to the employee, a corresponding is paid by the employer to the government.
How about those given to rank-and-file? Sige it’s an apartment lang at P5,000 not a condominium unit, is this a fringe benefit?
No. there will never be a fringe benefit if the recipient is a rank-and-file employee. They don’t receive perks. Not being a fringe benefit, it is not subject to the final tax which we call as fringe benefits tax. Not being subject to tax with finality, it simply means that the compensation in kind given to rank-and-file will be considered in his salary – it will be considered as a part of the salary of the rank-of-rank-and-file subject to the ordinary withholding tax on wage. So, in this case class, P15,000 will be subject to withholding tax instead of the P10,000 because the employees as well receiving P5,000 in kind.
In this case naman, the basic only is subject to tax by the… will be shouldered by the employee while the P50,000 perk will be covered by the employer. The tax at P15,000 is higher than the taxed at P10,000. The non rank-and-file is actually enjoying this kind of benefit free from tax. It is really best to be a non rank-and-file employee. You can receive different kinds of fringe benefit.
Illustration:
RANK AND FILE EMPLOYEE
NON-RANK AND FILE EMPLOYEE
TAXABLE?
Amount
Amount
TAXABLE?
SALARY
Subject to WTW/C/S
Cash Php
Emery Tiu
BENEFIT
Subject to WTW/C/S
Kind Php
50,000
Kind Php
50,000
Subject to FBT
14. What are the different kinds of fringe benefits?
Housing, expense account, vehicle of any kind, household personnel, interest on loan at less than market rate, membership fees, dues and other expenses borne by the employer in social and athletic clubs or other similar organizations, expenses for foreign travel, holiday and vacation expenses, educational assistance to the employee or his dependents, and life or health insurance and other non-life insurance premiums or similar accounts in excess of the law allows.
15. If you are an employee, non rank-and-file and you are allowed to stay at a staff house within the company premises. Example in Ormoc, is it Ormoc wherein there’s Californian Energy Plant – the powerplant. There’s an administration building, dispensed in territory there are staff house. If you are allowed to stay in of the staff houses, is it considered as fringe benefits subject to fringe benefits tax?
Housing benefits as a rule is subject to fringe benefits tax if the recipient is a non rank-and-file employee but there are exceptions:
1. If the housing allowance or benefit is for the convenience of the employer. Example, if you’re a doctor and your work is 24hrs. call of duty. You hired a driver which you housed, you don’t want him to stay inside your house. You simply rented out the place beside your house. Is that for the convenience of the employer? Yes. But the driver is not a rank-and-file but it is just for illustration.
2. When your place rented out is within 50meters from company premises. Now, if your place of stay is within 50meters from company premises, then it is exempt from fringe benefits tax. So, if ever you get to be an employer years from now and you want to give housing allowances or housing benefits of your staff or manager, make sure that you get something that is near.
If it’s 50meters whether it is for convenience or not. For the convenience, no meters required or no standards. But the 50meter whether or not for the convenience but bottom line it’s usually for the convenience why he is required to stay near the premises.
But there is an exemption to that by virtue of the BIR Ruling the taxpayer requested an exemption from fringe benefits tax despite the distance longer than 50meters is when the place is hazardous to health of the employees, so it can be 100meters.
3. You’re on travel and you are allowed or given housing benefit for 3 months or less in the area wherein you are assigned.
16. Now, the listings here Ms. Cuevas, is it exclusive or are there other benefits that can be subject to fringe benefits tax not listed in this enumeration?
Yes. Primarily because it says “but not limited to the following.” Although there are two views class, there are some discussions which says these are their only benefits subject to fringe benefits tax but there has already been a BIR Ruling saying that the stock options given by Globe Telecom to its officers are subject to fringe benefits tax to the extent of the difference between the fair market value of the stocks and the offer price to its officers.
17. Give me an example wherein you will be subject to fringe benefits tax on a vehicle assistance or motor vehicle – in relation to motor vehicle benefits.
For example if the manager lives away from the workplace, for example Lapu-Lapu and then the place of work is in Minglanilla. So, the employer has given the employee or issued the employee a vehicle for the benefit of the employee so that it would be easy for the employee to travel.
18. In that case, is that subject to fringe benefits tax?
Yes. In that case, it will be subject to fringe benefit tax.
19. Is it necessary that the ownership of the vehicle be given to the employee so that there will be fringe benefits tax due on the assistance given.
I think it is not necessary that the ownership is given to his employee as long as the employee is having or is enjoying the benefit of that vehicle which can be subject o fringe benefits tax. Okay. There are many types of benefits in so far as vehicle is concerned. The company may give the employee directly a motor vehicle – is entirely fringe benefits. Sometimes, the company may subsidize 50% of the purchase price of the vehicle and 50% is the fringe benefit. In some case, the company allows only not transfer of ownership, only allows the employee to use the vehicle exclusively – still it is subject to fringe benefits tax. How will it be computed? Of course the monthly amortization or the monthly depreciation value of the vehicles or in case where there may be fringe benefits in the vehicle assistance where the employer leases
