Tax1 Dimaampao Lecture Notes (1)

Introduction

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 Excluded: NIRC Sec. 116-201

 Percentage Taxes (Title V, NIRC; Sec. 116-128) o Except:

 Exempt Transactions (S.109 a, b, c, d, e)  Excise Tax (Sec. 129-172)

 Documentary Stamp Tax (Sec. 173-201) 

 Tax Pyramiding (Ppl v. Sandiganbayan)



 Sources of Bar Exam Questions in Tax 1. Income Tax (8.4%  8 Qs)

2. Tax Remedies (6%  7 Qs) 3. General Principles (3%  4 Qs) 4. Estate Tax (1.1%)

5. Donor’s Tax (1.1%)

6. Local Government Taxation (1.2%)

7. Real Property Taxation (0.8%)

8. TCCP / Customs Duties (1.5%)

9. Value Added Tax (0.5%)

 

Title I

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1. 1997 Tax Reform Act (NIRC): Secs 22-83  favorite: Secs 22-42

 50 new rules 

 10 Salient Features of The Present Income Tax System:

1. Schedular 2. Global

3. Gross Income Taxation 4. Net Income Taxation 5. Income tax Situs 6. Test of Income taxation 7. Basis

8. Income Tax Rates 9. Pay as you file system 10.

Substituted Filing 

 Basic/Salient Features of the Present Income Tax System in the light of

amendments introduced by RA 8424 (p.70 Mamalateo)  Also the same as:

o Systems of income taxation / methods / tax treatment

o Features of a Schedular Tax System: 12 Systems of Income Taxation o Method of taxation to which the NIRC belongs

o How does the tax code tax income?  Answer:

o Schedular Tax System / Treatment – system in law, where the

income tax rules / treatment varies and made to depend on the kind /

category of taxable income of the tax payer (Tan v. del Rosario). It operates under the following characteristics: (p.1 Dimaampao IT)

1. Categorizes/classifies income: Sec. 32a (memorize!) cf: Secs 24, 25 & 26 (imposes different tax rates) – categorizes income of

individual taxpayers (11 types) 2. Provides for different tax treatment 3. Imposes different tax rates

o Global Tax System / Treatment – a system or tax treatment which

views, indifferently the tax base, and generally treats in common all

categories of taxable income of the taxpayer (Tan v. del Rosario) (p.2 Dimaampao IT)

 Provides for uniform tax rules / tax rates

 Income Tax of Corporations (Secs 27 & 28) - generally does not

categorize/classify income

 Imposes uniform corporate tax rates  Covers:

i.

Domestic Corporations (Sec 27)

ii. Resident Foreign Corporations (Sec. 28A) iii. Non-resident Foreign Corporations (Sec. 28B)  As amended by RA 9337: corporate rate = 30% effective

Jan 1, 2009 

 Distinguish: Schedular Tax System v. Global Tax System (p.15 UP Bar Ops

 As to…  Schedular  Global

 Tax Treatment  Different tax treatment / rules  Uniform tax treatment / rules  Classification of Income  Categorizes / classifies income

 Does not generally classify / categorize income  Tax Rates  Imposes different

tax rates

 Imposes uniform tax rates

 Applicability  Applies to individual income taxation

 Applies to corporate income taxation

 

 Net / Gross Income Taxation

 What is the method of income taxation that allows deductions and grants personal exemptions? (Allows Taxpayers to claim allowable deductions (Sec 34) & Grants personal exemptions (Sec 35)) (2000 Q.10)

 A: Net income taxation - characteristics

o Allows taxpayers to claim deductions and personal exemptions o The tax base / the basis of the tax rates is net / taxable income 

 What is taxable /net income? (Sec. 31) [1977]

 A: gross income less allowable deductions and personal exemptions 

 T/F: Our tax system does not use the gross income taxation

 Under exceptional cases, we have adopted gross income taxation w/c applies to: o Non-resident aliens not ETB (Sec. 25: B, C, E)

o Non-resident foreign corporations or NRFCs (Sec 28, B 1, 2, 3 & 4) 

 What is meant / discuss gross income taxation / what is gross income for purposes of income tax? (Sec. 32A: enumerate 11 different kinds of income; p. 11

Dimaampao IT)

 Gross income does not allow deductions and grants no exemptions.  The tax base is gross income



 Distinction between gross income taxation and net income taxation: (p. 13

 As to…  Gross Income Taxation  Net Income Taxation  Taxpayer’s claim for deduction / exemption  Allows no deductions, grants no exemptions  Allows deductions, grants exemptions

 Tax base  Gross income  Net / taxable

income  Applicability 1. NRA not ETB

2. NRFCs

 Applies to the following individual & corporate taxpayers:   Individual taxpayers 1. RC: Resident Citizen 2. NRC: Non-resident Citizen

3. RA: Resident Alien individual 4. NRA ETB Corporate taxpayers 1. DC: Domestic Corporations 2. RFCs: Resident Foreign Corporations

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

 What is your opinion on the advantages / disadvantages of GI / NI Taxation? (p.13 Dimaampao IT)

 GIT

o minimize of source of graft & corruption (margin of discretion exercised by Revenue District Officers)

o simplifies income tax system

 NIT

o Just, fair & reasonable (RA 8424 Sec 2) = equitable relief to taxpayers, improve levels of disposable income & increase economic activities

 Equitable relief = deductions and exemptions

 Taxpayers encouraged to engage in income-generating activities  More revenues to the government

o Minimizes fraud in claiming deductions  Counter-checking by the BIR 

 Income Situs (Tan v. del Rosario) = Comprehensive income tax situs (RPN)

1. Residence (Sec. 23) a. Resident citizen

b. Resident alien individual c. Resident corporation 2. Place / source of income

a. Could only be taxed from sources within: i.

Non-resident citizen (Sec. 23 b & c) ii. NRA

iii. RA (amendment)

b. Could be taxed from income sources without: i.

RC

ii. DC

 Basis: nationality / citizenship

o State-Partnership Theory (Comm v. Liglig) – state shall provide PRIC:

protection, resources, incentives, climate for production of income  Emanates between the partnership between the State & its

o Protection Theory - Sources of income: PAS - Property, Activity,

Service (British Overseas Airways Corp v. Commissioner)

 BOAC was an Offline international airline but due to transfers, enjoyed protection of Philippine law (place of sale)  not applicable due to modified meaning of GROSS PHILIPPINE BILLINGS (p.34 UP Bar Ops reviewer)

 Origin of passengers (basis of tax) as per Sec 28A3, as implemented by RR 25-2002

3. Nationality / citizenship of taxpayer

Test of Taxable Income

It’s not the actual receipt, it is the right to receive, that determines when to include an amount in the gross income. (Filipinas Synthetic Fiber Corp v. CA)

 Doctrine of Constructive Receipt (RR 2, Sec 52) – p.8-9 Dimaampao I.T.

o The right to receive must be unconditional, valid and enforceable. o Such amount must be credited to the account of the taxpayer.

 If subject to legal restriction – not considered as constructively realized:

 E.g. Interest income of bank deposits (Sec. 53, RR 2) o Examples of income constructively realized:

 Cash / Property Dividends received by RC, NRC, RA (Sec. 24B item 2)

 Cash / Property Dividends received by NRA ETB (Sec. 25 A 2)  Share of a partner from the NI of a GPP (Sec 26 last par)

 Share of a partner from a taxable / business partnership (Sec. 73 D)

 Rent income deposited in court by the lessee of the property in view of the unjustified refusal of the lessor (Limpian Investment Corp v. Commissioner) cf: Art. 1261 NCC



 Basis of the computation of Taxable Income (Sec. 43)

 Taxable income shall be computed on the basis of taxpayers’ annual accounting period.

 2 Accounting Periods:

a. Calendar Year – an accounting period of 12 months that starts on Jan 1 and ends on Dec 31

o May be adopted by individual and corporate taxpayers

b. Fiscal Year – an accounting period of 12 months, ending on the last day of any month other than December (Sec. 22q)

o Can only be adopted by corporate taxpayers

 Relevance of accounting periods: Tax Remedies (Sec. 229, Sec. 43 & 77b): Prescriptive period for filing of tax refund is 2 yrs from the date of payment.

o As far as corporate taxpayers are concerned, the 2yr period commences to run from the filing of the final adjustment corporate tax return. – April

15 if calendar year (TMX Inc)

 If a corporate taxpayer filing tax refund has adopted the fiscal

year period, the deadline for the filing of the final adjustment corporate tax return is on / before the 15th _{day of the 4}th _month

following the close of the fiscal year period. (Sec. 77b)  E.g. accounting period ended on June 30, 2005. The

deadline of the filing of the final adjustment tax return is on October 15, 2005. The 2yr period / deadline for filing of claim of refund is on October 15, 2007.

 

 Income Tax Rates

 Individual

 Progressive Rates (Sec. 28) – tax rate increases as the tax base increases

o Equitable tax (Art. VI Sec 28 par 1, 2nd _{sentence 1987 Consti)}

o Re: VAT & the constitutional provision that Congress shall provide for a progressive tax system: direct taxes should be preferred, and indirect taxes should be minimized as much as possible. The mandate of Congress is not to prescribe, but merely a directive. Thus the VAT law

has been sustained. (Abakada Guro)

o Tax Pyramiding (People v. Sandiganbayan) – a tax on tax; it does not have basis in law and has been rejected by Congress.

 Corporate

 Uniform Corporate Rate of 30% as applied to DC, RFCs (Sec. 27 & 28)

 2 Systems

1. Final withholding tax system (Sec 57) 2. Creditable withholding tax system (Sec. 78)

As to… Final withholding tax system

Creditable withholding tax system

Items of income 28 items of income subject to FWT (focus on 6:

RPWIDS) 1. Royalties

2. Prizes - amount more than P10K (if less: regular income,

subject to regular income tax, not

subject to final tax) 3. Winnings – except

PCSO & lotto

4. Interests Income on Bank deposits 5. Dividends received from domestic corporations - If received by a DC or RFC  tax exempt  Received by individual taxpayers  Received by NRFC 6. Share of a partner from the NIAT of a business partnership

 If received from a GPP: part of GI

Compensation for services rendered – e.g.

compensation income (salaries, wages,

commissions)

Tax Withheld Cannot be claimed as a tax credit

Can be claimed as tax credit to income tax due /

- final, complete payment of TP’s tax liability

payable

- withholding agent: employer

Effect on the Subject Income

Extinguishes taxpayers’ tax liability

- need not be reported as part of the gross income of

the taxpayer

Does not extinguish the taxpayer’s liability

- has to be reported as part of the gross income of the taxpayer (thru the ITR)

Filing of IT Return TP is no longer required to file IT Return if the only sources of income are

those subjected to FWT under Sec. 57 (Sec.

51A2c)

e.g.

1. NRA not ETB (Sec. 25

B, C, D, E cf: Sec. 51A2c)

2. NRFCs (Sec. 28B

items 1, 2, 3, 4) – explains the following concept:

 Sec. 52F – Every corporation except NRFCs are required to file quarterly corporate income tax return

Taxpayers are required to file IT returns

Deductible Tax v. Creditable Tax

Deductible Tax Creditable Tax

may be deducted from gross income (one of the allowable deductions)

deducted, credited against taxpayers’ income tax due / payable



 Pay as You File System (Sec. 56A1) – payment is done when you file your income

tax

1. Individuals and Estates (Sec. 62) – annual payment on or before Apr 15 (Sec 51c1) 2. Corporate – Domestic corporations file their IT quarterly (Secs 75 & 76)  qualify by:

 For the 1st_{, 2}nd_{, and 3}rd _{quarters, it must file the summary of its gross income}

and expenses, which shall be reported on a cumulative basis. Thereafter, it shall file its final adjustment return, showing the entire income for the whole taxable year.

 Rationale for quarterly payment & filing:

o Ensures timeliness of collection of the corporate income tax o Payment in installment eases burden on domestic corporations

o Improve the liquidity / cash flow of the government (cf: consistent with

Administrative Feasibility)

 

 Fundamental Principles of a Sound Tax System (FAT)

1. Fiscal Adequacy – sources of revenue must be adequate to meet government expenditures

2. Administrative Feasibility 3. Theoretical Justice

 Any violation of the first 2 principles will not render the law invalid, because they have no constitutional basis (unlike the principle of theoretical justice)

 Determination of the wisdom, expediency, necessity of the tax-measure belongs to the law-making body of the State

Substituted Filing of Income Tax Return (RR 3-2002) – if an individual taxpayer has

complied with the following conditions, he is no longer required to file income tax return: 1. Only source of income is compensation income (purely compensation income earner) 2. One employer in the Philippines

3. The tax withheld by the employer should be equal or the same as the income tax due  If income tax due is more than tax withheld: required to file ITR

3-o The tax law, however, imposes no limitation (cf: Sec 51A2b)

o BIR Regulations are valid if they are consistent / in harmony with the tax code

4. Employer must file BIR form 1604 showing tax withheld on employee’s compensation income

 Such tax withheld is tantamount to a subsequent filing of an income tax return.

Title II

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 Sources: Only provides rules on sources within & without (Sec 23)

 Tax base (WON you could claim deductions) – (Secs 24 & 25: Individual, 27, 28: Corporate)

o answers if a taxpayer could claim allowable deductions  Accounting periods that may be adopted

o TP’s annual accounting period: Calendar year / fiscal year (Sec 43)  Tax rates (Sec 24, 25, 27, 28)

 Income Tax Due / Payable

 Filing of ITR (Sec 51, 51, 75, 76) 

 Classificat ion of Taxpayers  Sou rces of income  Ta x base  Ann ual Accounting Period  T ax Rates  Fili ng of IT Return  Individual : Sec 23 a, b, c, d cf: Sec 22  Sec 23  Se cs 24, 25  Sec 43  S ecs 24, 25, 27, 28  Sec s 51, 52, 75 & 76  RC  W/n

& w/o (Sec 23A)  GI  Less : AD1 _(Sec 24A1a)  Tax able Inc Less:

PE  IT Payable  Cale ndar Year  5-32% Progressive Rates (Sec 24A1c)  Req uired (Sec 51A1a)  NRC  W/n2 (Sec 23B & C)  GI  Less : AD (Sec 24A1b)  Tax able Inc Less:

PE  IT Payable  Cale ndar Year  5-32% Progressive Rates (Sec 24A1c)  Req uired (Sec 51A1b)  RA  W/n3 _{ GI}  Less : AD (Sec 24A1c)  Tax

Calendar

Year

_{Secs 34 & 35}

_{Effective Jan 1, 1998}

_{Effective Jan 1, 1998}

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able Inc Less:

PE

 IT

 NRA ETB4 5 _{ W/n} (Sec 23D)  GI  Less : AD (Sec 25A1)  Tax able Inc Less:

PE 6  IT Payable

Calendar

Year

Calendar

Year

NRA Not ETB

1. Offshore Banking Units 2. Regional HQ of MNCs 3. Employees of petroleum contractors/subco n  1 5% (b)  Corporate   Se   

4

_{e.g. Mr..., having stayed in the Phils for more than 180 days could only be}

taxed on income from sources within…may claim AD & PE, subject to recip,

may be taxed for his income earned during the CY, applying progressive

rates, required to file ITR.

5

_{aggregate stay in the Philippines for more than 180 days (Sec 25A1) – e.g.}

June 15-Dec 15 = 183 days

6 _{but may only claim PE subject to the rule on reciprocity (Sec 34)}

:

 Sec 23 e, f  cf: Sec 22

cs 27, 28

DC  W/n

& w/o (Sec 23)

 GI

 Less : AD  Tax able Inc (Sec

27a)  CY/F Y (Sec 23)  U niform Corpora te IT Rate 30%7   Req uired (Sec 52A cf: 72 & 76) RFC8 _{ W/n} (Sec 23F)  GI  Less : AD  Tax able Inc (Sec

28A1)  CY/F Y  U niform Corpora te IT Rate 30%9   Req uired (Sec 52A) NRFC  W/n (Sec 23F)  GI  CY/F Y  F IT: 30% (Sec 28B1)  Req uired Special NRFCs (Sec 28B2) 1. NR Dist of Cinematographic Films 2. NR Lessor of Vessels Chartered to Phil Citizens 3. NR Lessor of  GI FIT: 25% FIT: 4.5%  Not Required

7

_{Effective Jan 1, 2009 (RA 9337)}

8

_{Tax Code is silent. But there are tests to determine WON a foreign corp is}

Aircraft, Mach & Equipment

FIT: 7.5%

NRA ETB v. NRA not ETB

NRA ETB NRA not ETB

Sources No distinction: only taxable on income from sources within

Tax Base Can claim deductions, PE subject to the rule on recip

Cannot claim deductions

Tax Rates Progressive Rates: 5-32% FIT (25%, 15%)

Filing of ITR Required Not required

Tests to determine WON a foreign corp is doing business in the

Phils:

1.Transactions must be in line with its Ordinary business

2. Continuity of Commercial Transactions (Mentholatum case)

3.Intention to carry out the body / substance of the foreign corporation

4. Actual specific, commercial transaction consummated in the Phils.

Therefore, mere exporting of goods does not result in ETB, pursuant to

RA 7042 Sec 3B. (Val. Brothers v. GBTL Mfg Corp)

RA 7742?: Opening of offices, branches, performance of, continuity of

commercial transactions, perfection of contract, entering into a

dealership agreement, management, supervision of business

Requisites for Validity of BIR Regulations

1. Consistent – in harmony with the Tax Code 2. Reasonable

3. Useful & necessary

4. Published in the OG / NGC

- mere interpretive rules should not change / modify the tax code.

Memorize: Sec 32A

Codal

1. Compensation for services rendered 2. Business / Trade, Professional Income 3. Property Income 4. Interests 5. Rents 6. Royalties 7. Dividend Income* 8. Annuities 9. Prizes, winnings 10. Pensions 11.

Partner’s Share from NI of GPP

PBC-PRP-WPD-PARI

1. Professional income 2. Business / Trade Income 3. Compensation Income 4. Property Income 5. Rent Income 6. Prizes 7. Winnings 8. Pensions 9. Dividend Income*

10. Partner’s Distributive Share from NI of GPP

11. Annuities 12. Royalties 13. Interests*

Income

1. Gross Compensation Income – compensation for services in whatever form paid,

may include salaries, commissions & similar items (NIRC)

o Gross Compensation income refers to all renumeration for services rendered or performed by an employee for his employer, arising

under an employer-employee relationship, unless specifically excluded by the Tax Code (RR 2-98 Sec. 2.78.1)

o Determinative Test: Presence of the employer-employee relationship (SPDC)

 Selection

 Payment - compensation  Dismissal

 Control

o Payment made by a contractor to a contractee, in the absence of an ER-EE relationship is business / trade income

o Payment made to a professional for services rendered, in the absence of an ER-EE relationship should be taxed as professional income

- Importance (Sec. 34 cf: Sec. 35): Allowable Deductions o Personal exemptions

o Premiums on life / hospital insurance (Sec 34 m)

 P2400/yr

 Gross Annual income P250,000

 Claimed by spouse who will claim additional AD

- Taxable compensation income is not only limited to payment made in cash; payment may be made in kind. (Sec 32A1: in whatever form paid)

o Life Insurance premiums on the life of the insurance policy of the EE

o Cancellation / forgiveness of indebtedness

-2 Tax Implications of Payment made for services rendered (tax implication = tax effect =

tax consequence = tax incidents):  EE: Income Tax (Sec 32A1)

 ER: Ordinary, unnecessary Expense (Sec 34A1) – reasonable allowance for salaries and wages, and other compensation for personal services actual rendered

o How much can be treated as compensation?  Reasonable, and FV of services rendered (Sec 34A1a.i.)

 P30K (ER)

 P30K compensation income and P20K income derived from whatever source (EE)

o Claim of Right Doctrine – illegal / unlawful income, profit / gain is subject to

tax

 Death Benefit for the EE from the ER (Sec 32B qualifies Sec 32A) – enumerates exclusions from gross income

o No income there 



 Rules on Life Insurance Premiums

o ER:

 ER who pays insurance premiums on the LIP of his manager / supervisor  Taxable Fringe Benefit subject to FT (Sec 33B 10)

 When insured is a rank & file EE  compensation income: in whatever form paid (Sec 32E.A1)

 LIP paid by the taxpayer - May not be claimed as a deductible expense by the ER if it is designated as the beneficiary (Sec 36A4 Non-deductible items )  Tax treatment of LIP paid by the ER

Beneficiary Designated ER (expense) EE (Income)

Executor, Administrator, Estate

Deductible ordinary & necessary expense (Sec 34

A 1: other forms of

compensation for personal services actual rendered)

1. Mgr/Sup: subject to FBT, which is a FT (Sec 33 B 10)

2. R&F: taxable comp inc (Sec 32 A 1) ER Non-deductible expense – whether the ER is directly/indirectly designated as the beneficiary (Sec 36 A 4) Rationale: mere return on capital

No taxable income 

No benefits received since basis for IT is

 Cancellation / forgiveness of indebtedness (RR 2, 1940 Sec 50)

1. May result in taxable compensation income for services rendered 2. May constitute a taxable donation

3. May also be considered as a taxable capital transaction

o Tax Treatment of Cancellation / Forgiveness of Indebtedness

Situation CR DR ER-Cr EE-Dr Consideration: services rendered Allowable deduction (Sec 34A1a.i.: Other forms

of compensation for

personal services rendered)

Taxable compensation income

(Sec 32A1: Compensation for services in whatever form paid)

 ER-Cr

 EE-Dr

Consideration: Liberality

(Donation)

Subject to donor’s tax on a direct / indirect donation; May be claimed as a bad

debts expense (Sec 34 e)

Not subject to income tax (Sec 32B item 3:

donation / gifts are excluded from GI)

No more donor’s tax10

 Unpaid obligation of P100K; Dr declared

insolvent, Cr agreed to accept payment through

dacion en pago

The transaction is a taxable capital transaction

 Cr-corporation

condoned the debt of the Dr-SH

- must be condoned / renounced w/o prejudice to the Trust Fund doctrine

Interest on capital /

preferred shares of stock is a non-deductible interest. No exceptions. (RMC

17-71, Jul 12, 1971)

Taxable as dividend income (taxable as dividend)



 Compensation Income (Sec 32A) v. Fringe Benefits (Sec 33)

 _{ Compensation}

Income

 Fringe Benefits*  Rates  Progressive Rates of

5-32%

 Final Tax  Reporting  Must be reported by

the compensation earner

 Need not be

reported by the manager / supervisor

Except:

 Sec 33C item 3: FB given to R&F EEs – not taxable subject to final tax (but should be reported as part of gross compensation

income)

  Bar Qs  2001 # 1  2003 # 3  2004 # 5  2007 #

Definition of FB: *Memorize Sec 33B

 Form: cash, goods, services, other benefits

 Recipient: mgrl, supervisory EEs (RR 3-98 adopted Labor Code def’ns), except R&F EEs

 Source: ER

 10 Taxable FBs: (HEV-HIM-EHEL) i.

Housing*

ii. Expense Account iii. Vehicle

iv. Household personnel v.

Interest on Loan** vi.

Membership benefit in social / other athletic clubs vii.

Expenses for foreign travel*** viii.

Holiday & vacation expenses ix.

Educational benefit****

x. Life / health / non-life / accident Insurance Premiums***** 

*Housing Benefit: Employer’s Convenience Rule (RR 3-98) – tax-exempt (MTB): 1. Housing unit situated w/n ER’s Business premises

 Housing unit outside the business premises – as long as adjacent (w/n a 50m perimeter) from the business premises of the ER (RR 3-98)

3. Military Housing unit - Traditionally exempt housing benefit11

**Actual rate of interest must be less than the market rate  Market Rate: 12% (RR 3-98)

 Examples: ER granted loan. Will this result in taxable interest benefit if interest rate is…:

o 14% - no o 12% - no

o 0-11.99% - yes

***Expenses for foreign travel – Requisites / Conditions / Situations under w/c expenses for foreign travel may not be subject to FBT (RR 3-98):

a. Must be paid / incurred in connection with the business of the ER (business expense) – e.g. conventions, seminars, business meetings

b. Must be supported by receipts / documents (Substantiation) c. Exempt only up to $300

d. Cost of airplane ticket: i.

Economic class: exempt

ii. First class: exempt up to 70% 

 ****Educational Benefit – 2 categories:

1. Granted to the Mgrl / Supervisory EE – in the nature of a scholarship grant; requisites:  Agreement between mgr / supervisor that the EE will stay in the employ of the

ER within a certain period of time, as an expression of gratitude

2. Dependent of the EE – ER may adopt competitive exams to be administered by the ER ******Life / health / non-life / accident Insurance Premiums:

1. SSS 2. GSIS

3.

De Minimis Benefits – Implication; Definition & 2 Characteristics:

11

_{asked in 1995}

1. Minimum amount – relatively of small amount 2. Purpose/s for grant: Promote CHEG

 Contentment  Health

 Efficiency  Goodwill 

 Amount  Type of FB

 P125  Medical Cash Benefits Given to the dependent of the EE

 300  Laundry Allowance

 1,500 (NEW!)  Rice Subsidy / Allowance (increased from P1000 by RR 5-2008, RR 10-2008)

 4,000 (NEW!)  Clothing / uniform benefit (increased from P3000 by RR 5-2008, 10-2008)

 5,000  Christmas / Anniversary gift (cf: Sec 32 B 7 e – lump sum limitation of P30K to Christmas bonus / productivity allowance)

 10,000  Employees’ achievement award

 Medical benefit granted to EEs (cf: P125 limit if granted to dependents)

 No minimum amount (RR 3-98 as amended by RR

5-2008, RR 10-2008)

 Commuted value / monetized of unused VL / SL 1.

Govt – exempt from receipt of commuted value of unused VL / SL (no more 10-day rule)

2.

Private – Apply the 10-day rule 

VL – unused up to the 10 day VL credits; in excess: taxable 

SL – taxable (applying strictissimi juris) 

Retiree – exempt from receipt of all monetized VL / SL benefits (Zialcita case)



 Zialcita (190 SCRA 851) – monetized value of unused

VL credits may form part of terminal leave pay, which is exempt  received by the EE on account / cause beyond his

control

 (compulsory retirement)

 Fruits, books & cars, gifts on account of occasions of the EE

 Reasonable

 Overtime pay - not more than 25% of the basic minimum wage

Also considered as taxable FBs (Goods, services or other benefits) 1. Laptop

2. Motor vehicle 3. Courtesy discount

Sec 32 (Prof income, Business / Trade Income) cf: Sec 74 – define self-employment income; what are considered as self-employment income?

1. Business / Trade Income

 Is business / trade income the same as gross income from gross sales / receipts? NO.

Formula:

Gross sales12 _{/ receipts}13 _:

Less: SD, SRA Net Sales

Less: CGS & mfg’d/ Cost of Sales

Gross Income from conduct of trade / business

 1) Gross income from conduct of trade or business (32.A.2) - to come up with this start with GROSS SALES or RECEIPTS

 (2) Gross sales or receipts -. apply to sale of services. Deduct the COST OF INVESTMENT. If manufacturing, cost of goods sold and manufactured. If merchandising, cost of sales. And also deduct sales discounts, sales returns and allowances.

2. Professional Income

3. Share of a partner from the income of partnership

Gains Derived from Dealings in Property (Sec 32A) / Property Income cf: Secs 39 & 40  Ordinary v. Capital Asset (Memorize Sec 39A1) –

o Ordinary asset – Ordinary assets are limited to the following…

12

_{from sale of goods}

13

_{for sale of services}

 4 Kinds of Ordinary Assets (Expressio unios est exlusio alterius) – SOUR:  Stock in trade – inventoriable assets (e.g. Mfg)

o Raw materials o Finished Goods

o Work-in-process Goods

 Ordinary course of trade / business – property primarily held for

sale to customers in the ordinary course of trade / business (e.g. Real Estate dealers)

 Used in trade / business – depreciable assets used in trade / business (e.g. machinery, furniture / fixture in Mfg / Service)  Real Property used in trade / business – if not, it will be a capital

asset

o Capital assets – property held by the TP WON connected to his trade /

business but does not include SOUR (defined by way of exclusion)  Exercises:

o All properties held by the TP in connection with his trade / business are ordinary assets  FALSE. The definition of a capital asset includes properties held by a

TP in connection to his trade / business, but not covered by SOUR  E.g. Think other assets in B/S: Accounts receivable, collectibles,

marketable securities, investment in stocks, goodwill in business, other intangible assets from which extra-ordinary gain will be derived if sold, etc)

o Capital assets are always capital assets  FALSE.

 Capital assets may also become ordinary assets in certain situations.  E.g. Real estate assets of a real estate dealer inherited by heirs,

property w/c was formerly not used in business but improved to be used in business

 Property primarily held for sale to customers in the ordinary course of trade / business – TEST: Substantial Improvement: When a property has been substantially improved / actively sold, it may be a property primarily held for sale in the ordinary course of business. The improvement is substantial if the amount of the

improvement is double the original cost of the property. (Calazans v. Commissioner, 144 SCRA 664)

 Valuable improvement: The improvement is considered valuable if there is an unmistakable intention of the TP, not only to liquidate the estate of the decedent, but also to make the property saleable

to the general public. (Tuazon Jr v. Lingad, 58 SCRA 170) o Valuable improvements include: (BASIC)

 Broker relationship established between the seller & the broker – did he really engage in the business of

buy & sell?

 Area improved – e.g. 7ha of land in the Tuazon case  Subdivision – were the lots subdivided? And the

subdivided lots SOLD to the general public?  Improvement – there must be an unmistakable

intention of making the lots attractive to the general public

 Continuity of the business

o Conversely, ordinary assets may also be converted into capital assets. o Factors to consider when an ordinary asset may still be considered as an

ordinary asset (RR 7-2003) FENCIA – inconsistent with Sec 39 A1  Failed business of a real estate business (real estate developer)*  Engaged in R/E business (developer, lessor)

 No longer engaged in the business of real estate  Change in business

 Involuntary Transfer of Property – may include expropriation or foreclosure of property

 Abandoned, Idle Property 

 Special Rules (that apply to capital transactions):

1. Holding Period – 12months (Sec 39B) – a form of tax avoidance

 Reduces taxpayer’s taxable capital gain by 50% if capital asset is sold after the 12month holding period (Statute of Partial Exemption)

o If sold within the 12month holding period, it will be completely taxable  Only applies to capital assets and individual taxpayers.

o If the asset were an ordinary asset, the 12month holding period would not be applicable

o If the taxpayer were a corporate taxpayer, it would not be applicable. 2. Capital Loss Limitation (Sec 39C) –

 Principles:

o Capital loss is deductible only from capital gain. o Capital loss cannot be deducted from ordinary gain.

o Ordinary Loss may be deductible from capital Gain – no prohibition in the tax code

 Rationale: Matching (of costs against revenues) principle - Capital loss is a non-business connected expense, which is not an allowable deduction in Sec 34. Only business expenses are deductible from ordinary income.

 Application: o Individual o Corporate

 Except trust bank & trust companies 3. Net Capital Loss Carry-over (NELCO) (Sec 39D) –

NELCO Sec 39D NOLCO Sec 34D

Net Capital Loss Carry Over Net Operating Loss Carry Over

Scope Capital assets / transactions

Ordinary asset / transaction

Applies to…TP Individual Individual / Corporate Period (when Loss

deductible)

1 yr (only in the succeeding year)

3 yr period (X: mining companies – 5 yrs)

Net Capital Loss (definition in Sec 39A3) - the excess of the capital loss over capital

gain. (if the capital loss is more than the capital gain)

Statute of Partial Exemption - Long-term capital asset which may result in the

reduction of capital gain (held for more than 12 months)

 How do you construe provisions of the Tax Code re: capital transactions? o A: Strictly construed against taxpayer holding the capital asset

(partakes the nature of exemptions. Therefore strictissimi juris) 

Not all capital transactions are covered / subject to Special Rules, but are subject to other certain special rules (Sec 24, 25, 26, 27):

1. Sale of shares of stock – considered as a capital transaction (applies to individual & corporate taxpayers alike)

 Listed – considered as capital asset (Title V, Sec 127a): ½ of 1% of the gross

selling price (GSP)

 Not listed – considered as income tax (FIT) o P100K & below - 5% (before: 10%)

o Any amount in excess of P100K – 10% (before: 20%) 2. (Sec 24D vs Sec 27D sec 5)

Sale / disposition of real property not used in trade / business

Sec 24D Sec 27D5

Applicability Individual Taxpayers Domestic Corporations Coverage Real Property (except

machinery – cf: Sec 199, RA 716014 ₎

Land and building

Tax Base Higher amount between: GSP & zonal value Tax Rate 6% (before 5%)

Option of applying tax rate Option granted to the individual seller

If the buyer is the gov’t – buyer may apply

progressive rates of 5-32%

No option granted to domestic corporations

Tax Avoidance Scheme Tax avoidance Scheme in Sec 24D2: Principal

Residence is the subject of sale

14 _{Sec 199 of RA 7160 (LGC) – amplified definition of machinery in the NCC: Machinery –}

tend to meet the needs of the business of the owner 1. Whether permanently attached / temporarily attached

2. Must be actually, directly and exclusively used to meet the needs of a particular business / authority e.g. the business of mining, agricultural, other business

5 Conditions for Exemption under Sec 24D2 (1-4) and RR17-03 (5):

1. Proceeds of the sale must be used to construct / purchase a new principal residence  Dwelling characterized by the element of permanency: animus revertendi (RR

13-99)

2. 30-day notice to the BIR

3. Comply with the 18th _{month period – within which to construct / purchase a new}

principal residence

4. 10 yr limitation – can only be availed of once every 10yrs

5. RDO & authorized agent bank should execute an ESCROW AGREEMENT with the seller  the 6% CGT should be deposited under the ESCROW ACCOUNT

 within 30 days from the lapse of the 18th _{month period, the seller could}

withdraw the amount.

Presumptive Gain Principle (presumed gain) a.k.a. Gain by Legal Fiction (Sec 24D1) –

even if the seller incurred a loss, he can still be made to pay the 6% CGT

 remember: the tax base is the higher of the GSP / zonal value; cost not deductible

 applies only to sale of real property considered as capital asset; does not take into account the costs / loss sustained by the seller because as far as the law is

concerned, there is a presumption that the seller acquired gain

 exception to the rule that cost is allowed as deduction to the amount realized (GR: Formula in Sec 40A)

Formula in Determining Taxable Gain from Deductible Loss from Sale of an Asset / Property (Sec. 40A)

Selling Price / Amount Received or Realized

Less: Cost / Adjusted Basis - (determined by mode of acquisition) Taxable Gain / Deductible Loss

How did you acquire the property that you disposed of? (to determine Cost / Adjusted Basis): PIDI

 Purchase (it’s really the cost)

 Inheritance – FMV of property at time of death of decedent

 Donation – FMV of property at time of donation (same basis for the donor)

 Insufficient / inadequate Consideration – same basis in the hands of the 1st

transferor of the property

o If property was acquired way below its FMV 

 Alternative Tax Treatment: No Gain / Loss Recognized (Sec 40C2, an exeption to Sec 40A) – gain from initial sale is tax-exempt, but the subsequent sale is taxable

 Exempt exchanges of property, shares of stock and securities  Situations covered: 

o In accordance with a plan of merger / consolidation =another form of tax-avoidance!

o Corporate control (Sec 40C6c) – 51% (same definition as corporate control under the Corpo Code) acquired by 5 people (max: a person, alone or together with others, not exceeding 4 persons in Sec 40C2 last paragraph)

 Transactions solely in kind: no cash given  Property for stock

 Stock for Stock  Security for Stock

 Effect:  Gain = tax-exempt; loss = non-deductible  Transaction not solely in kind - If additional cash is given

 Effect: Gain = recognized; loss = not recognized

 Merger / consolidation includes the ordinary meaning of merger / consolidation and expanded to cover the acquisition / transfer of all assets in exchange solely for shares of stock (Sec 40C6b)  even if no PLAN of merger/consolidation

 

 Recap: Examples of Tax-Avoidance:

1. Holding Period Rule

2. Sale of Real Property considered as capital asset in Sec 24D

3. Exchange of property/ shares of stock / securities in line with a plan of merger / consolidation

4. Exchange of property/ shares of stock / securities by maximum of 5 people to gain control

Gain Recognized, Loss Not Recognized – applicable tax treatment to:

1. Transactions not solely in kind

2. Illegal transaction (e.g. income from bribery)

 Illegal / unlawful (Sec 32A) – Income derived from whatever source in accordance with the CLAIM OF RIGHT DOCTRINE (US v. Ratkin)

 Illegal loss is non-deductible

3. Related taxpayers (Sec 36B) – non-arms length transactions  4 Groups:

o Members of the same family

o Stockholder & corporation – factor: corporate control

o Sister corporations: 2 corporations who are owned & controlled by same stockholders

o Parties to a trust (Trustor, Trustee, Fiduciary, Beneficiary)  Cf: concept / definition of Stranger (in Donor’s Tax) – (Sec 99B) 4. Wash sale transaction (Sec 38)

 Subject:

o Shares of stock o Securities o Stock options

 Seller: must NOT be a dealer in securities  Period:

o 30 days before the sale till 30 days after the sale a.k.a. 61-day sale– seller acquires substantially identical securities

 Tax treatment: Gain from wash sale = taxable; Loss = non-deductible o Rationale: Loss from wash sale is artificial loss. It is not actually

sustained or incurred.

 Sec 34D prescribes requisites for a deduction of a loss  Actually sustained or incurred

Wash Sale (Sec 38) v. Short Sale (Sec 39F1)

Wash Sale Short Sale

Gain Taxable Treated as capital gain Loss Not deductible Treated as capital loss,

which is deductible from capital gain

Concept of a Short Sale Transaction – represents an obligation payable in kind / goods Seller merely speculates that on this day the price of the security or share will increase. If the price decreases, he earns an income. If the price increases, he incurs loss. Hence there is a short sale, He just borrowed the security or share of another person and he may

promise to buy them in goods / securities.

Failure to Exercise Option to Buy / Sell -

Additional Capital Transactions (in addition to Sec 39 of NIRC)

1. Adjustment of partner’s interest in a partnership (Secs 142 & 142 of RR-3) 2. Liquidation of a corporation (Secs 143 of RR-3)

Item 4: Interest Income GR: Taxable

X: (Sec 32B7a)

1. Foreign government

2. Financial institution financed / controlled by foreign government

3. International / regional foreign institution established by foreign government o Interest income on deposits made in the Philippines

o Interest income from loans extended o Interest income on long-term debentures

4. Income derived from long-term deposits / investment / management account (Sec 22w)

 Term: 5yrs

 Denomination: P10K

 Subject to BSP Regulations  Provisions on exemption

o If depositor is a RC, NRC, RA - exempt (Sec 24B1) o If depositor is a NRA (Sec 25A2)

 ETB – exempt

 NETB – not exempt (Sec 25B)

 If depositor is a non-resident - exempt

 If depositors is a resident – non-exempt (7.5%) 

 *Interest income from government securities is taxable. (Sec 32B) 

 Items 5 & 6: Rent Income v. Royalties

 _ Rent Income  Royalties

 Tax Treatment  Subject to regular tax

 Subject to FIT  Reporting  Must be reported  Need not be

reported

 

 Additional Taxable Rent Income (in addition to Lease Income)

1. Obligations of the lessor assumed paid by the lessee  E.g. Real Property Tax on lease premises  Lessee pays interest of Lessor’s debt

 Insurance Premiums of Lessor’s property paid by the lessee 2. Value of permanent improvement

 long-term contract of lease – may contain stipulation that ownership of lease shall pass to the lessee at the end of the lease contract

 2 methods of reporting of value of permanent improvements

o Outright method – upon the completion of such permanent improvement, such FMV of the same shall be reported as additional rent income of the

lessor in addition to the regular rentals

o Spread-out method – the depreciated value of the permanent

improvement upon the expiration of the contract of lease; aliquot portion reported as rent income throughout the remaining period of lease

Type of Dividend Source Recipient Tax Treatment Cash, Property Dividend Domestic Corporation RC, NRC, RA FIT: 10% (Sec 24B2)

NRA ETB FIT: 20% (Sec 25B2)

NRA NETB FIT: 25% (Sec 25B3) Domestic Corporation Tax-exempt (Sec 27D) RFC Tax-exempt (Sec 28Ad) NRFC FIT: 15% (Sec. 28B5b) FC: Income derived from sources w/n = at least 50% of the NI must be derived from Phil sources for the last 3 preceding taxable yrs (Sec 42A2b)

Any

Stock tax exempt

rationale: no flow of wealth so no realized gain: Transfer from surplus account to capital (Sec 73Bb)

lrbs_ssbc-r_2009

Exeption re: Redemption of Shares of stock – may or may not result in taxable stock dividend

Source: original capital investment / initial capital subscription – redemption does not result in a taxable gain, as it is merely a return on capital

Source: stock dividend declarations – taxable since it may result in a flow of wealth, in such time and manner essentially equivalent to the declaration of taxable dividend

There has to be flow of wealth so stock redemption may result into taxable income. (Commissioner v. Andres Soriano Corp 301 SCRA 152)

Is stock dividend received by usufructuary taxable? 2 Views: Massachusetts view: Tax-exempt

Pennsylvania view: Taxable  in accord with Art 566 of the NCC: Usufructruary shall be entitled to all natural, industrial & civil fruits of the usufruct. Stock dividends are fruits of

the thing in usufruct.

(Basrach v. SEIFERT 87 Phil Rep)

Disguised dividends in Income taxation  Taxable

Board declared stock dividends declared not in accordance with the Corporation Law, requiring presence of unrestricted R/E. But they made it appear that dividends declared

were stock dividends so they could evade the payment of tax on dividends. 

 Dividends deemed stock: Stocks distributed as dividends were sourced from another corporation  Taxable

 Change in SH’s interest in a corporation

 Common Preferred Shares of Stock issued by a corporation (Commissioner v. Marin cf: Q1, 1994)

Income Subject to FIT:

 Interest Income from Bank Deposit (Arroyo case)  Div received from DC by NRFC, NRA

 RPWADS RPWADS

 More than P10K Winnings  Exempt: o PCSO o Lotto Annuities Dividends Received

Share of a partner from the NIAT of a Taxable Partnership (Sec 24B2 & 25A2)

Income subject to FIT – income governed by the Final W/holding Tax system. Under this

system, the w/holding agent shall deduct and w/hold such tax on income. The recipient of such an income is not required to report the same as part of his income because such final tax w/held shall serve as full payment / settlement of the tax liability on income.

Income subject to CWT – income governed by the Creditable W/holding Tax System.

Under this system, the w/holding agent shall deduct and w/hold such tax on income. The recipient of such an income is required to report the same as part of his gross income.

Such tax w/held will not extinguish TP’s tax liab on such income. The tax w/held can be claimed by the TP as creditable tax.

Cash dividend received by an RC/RA from a DC is subject to FIT & not progressive

rates of 5-32% (Sec 24B2) Rationale:

1. Ensure collection of tax on dividend, which will immediately go to the coffers of gov’t. (NIT: no assurance that individual TP’s will report dividend income.

2. Easier compliance: By shifting responsibility to the corporations, the BIR could easily monitor the compliance. (NIT: It would be extremely difficult for the BIR to check compliance with individual TP)

3. Sure revenue to the government

4. Reportable income which could be offset against a loss 5. Lessen the burden on the taxpayer

 Same reasons why Interest Income from bank deposits is subject to FIT (just qualify individual TPs w/ the term depositors, and substitute banks for

corporations)

Exclusions from GI

22/06/2015 18:18:00

interest income from bank deposits now subject to income tax)  Life Insurance Policy proceeds*

o Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be included / excluded from the Gross Estate)

 Included:

 Beneficiary is estate, executor, administrator (irrevocable / revocable designation)

 Third person (may include ER) is revocably designated beneficiary (determine WON revocable)

 Irrevocable designation will exclude LIP proceeds from the GE

 Excluded: Received by any beneficiary  Proceeds of group insurance policy  LIP taken on own life

 Irrevocable designation will exclude LIP proceeds from the GE

 Awards & Prizes  Gifts, Donations

 Compensation for injuries / sickness**

 I

 Retirement Benefits, Exemptions, Etc**  Miscellaneous Items****

 

 Donation: Donor-Donee

 Tax Implication of Donation Inter Vivos

1. Donor – subject to donor’s tax

2. Donee – not subject to donee’s tax (abolished by PD 69)



 Tax Implication of Donation Mortis Causa

1. Testator – subject to estate tax

2. Heirs – not subject to inheritance tax (abolished by PD 69; Jan 1972)

 

 *Life Insurance Policy proceeds

 Cf: Estate Tax (Sec 85e: WON proceeds of life insurance policy will be included / excluded from the Gross Estate)

o Included:

 Beneficiary is estate, executor, administrator (irrevocable / revocable designation)

 Third person (may include ER) is revocably designated beneficiary (determine WON revocable)

 Irrevocable designation will exclude LIP proceeds from the GE

o Excluded: Received by any beneficiary  Proceeds of group insurance policy  LIP taken on own life

 Irrevocable designation will exclude LIP proceeds from the GE 



 **Compensation for Injuries / Sickness – not taxable, no income realized  Q: WON the foregoing damages are taxable:

 Hospitalization expenses – NOT TAXABLE.  Moral damages – 2 views:

o Taxable - Sec 32A “income derived from whatever source”; no exemptions granted; strictissimi juris

o NOT TAXABLE– In effect, imposing tax on grounds for MD:

 Sec 2217 (NCC): 9 grounds for Moral Damages (MBA-SWS-PAF)  Moral shock, Besmirched reputation, mental Anguish,

Social humiliation, Wounded feelings, Similar injury, Physical suffering, serious Anxiety, Fright

 Cf: Art 2219 par 7 was applied in the Filipinas Broadcasting case, awarding moral damages to a corporation for defamation

 Exemplary damages – NOT TAXABLE: Based on sound public policy  Cost of repair of damaged car – NOT TAXABLE. Indemnification

 Lost profit – TAXABLE. He could have earned this if he were not hospitalized 



 ***Retirement Benefits, Pensions, etc  A. Retirement Benefits

o Received from private ER - 4 requisites for exemption:  Source: BIR-approved retirement plan

 Age of retiree EE: 50yrs of age  Length of service: at least 10yrs  Limitation: can only be availed of once

o All retirement benefits received from the GSIS (given to public / gov’t EEs) are EXEMPT.

 B. Separation pay

o Must be received on account of causes BEYOND the control of the EE / official

 Includes termination due to labor-saving devices, losses incurred by the ER

o Kinds

 Death benefit (Sec 32B6)  Physical disability benefit  Sickness benefit

o Compulsory retirement is considered a cause beyond the control of the EE, hence all benefits received, including the so-called terminal leave pay

is exempt. The terminal leave pay covers monetized value of unused VL/SL credits. (Zialcita case)

^_^Check out 1999 Bar Qs^_^ 

 Q (1999): A Co., a Philippine corporation, has two divisions — manufacturing and construction. Due to the economic situation, it had to close its construction division and layoff the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer

at the time of retirement.

 There are 2 groups of employees to be laid off: 1) Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. 2)

Employees who do no meet either the age or length of service A Co. plans to give the following:

 For category (A) employees - the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service.

 For category (B) employees - one month for every year of service.

 For both categories, the cash equivalent of unused vacation and sick leave credits. A Co. seeks your advice as to whether or not it will subject any of these payments to

withholding tax. Explain your advice.

 A:

 All of the payments are not subject to income tax and should not also be subject to withholding tax. The employees were laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of such involuntary separation are excluded from gross income, irrespective of whether the employee at the time of separation

has rendered less than ten years of service and/or is below fifty years of age.

(Section 32(B), NIRC)



Does it necessary follow that retirement benefits are exempt from estate tax? (Sec 86A7) – YES. An allowable deduction from Gross Estate, by virtue of RA 7641 in relation to

the LC.

RA 7641 cf: RA 4917, 86A7 – salient points:

 Retirement benefits that may be given to EEs under the CBA or any other agreement are exempt.

 If there is no established retirement plan given by the ER, likewise exempt provided:

o Tenure: Rendered at least 5yrs of service o Age: 60-65yrs old

Q: What are tax implications of receipt of GSIS benefits and their subsequent deposit in the bank?

A: GSIS benefits are EXEMPT; If deposited in the bank, interest income therefore will be subject to tax. (Same as SSS benefits)

****Miscellaneous Items

 A. Interest income that derived / may be received by a foreign government, , ,  B. financing institution

 C. finance controlled by a foreign gov’t

 D. regional financial institution established by a foreign government 

 Sources of investment: loans, deposits, stocks, LT cert of indebtedness, dividends, interest income



 Case (Commissioner v. Mitsubishi Metal, 1990): EXIM Bank, an international financing institution extended loan to Mitsubishi Metal and used it to extend loan to a Philippine corporation, Atlas Mining Corp. Mitsubishi Metal claimed that the interest income was exempt since the amount likewise came from an exempt institution. Loan – P20M Sale – Atlas will purchase mining equipment to be sold to Mitsubishi for P50M. BIR: Mitsubishi is

taxable. CTA: Mitsubishi is an agent of the EXIM Bank. 

 SC: Interest on the loan is taxable. The source is tax-exempt, therefore the interest should not be taxed. However, there was no clear & convincing evidence that Mitsubishi was

indeed an agent of Japan. When the contract between Mitsubishi & EXIM was

consummated, the money ceased to belong to EXIM15 _{; it was already owned by Mitsubishi.}

The other contract of loan was executed between Mitsubishi & Atlas. Exemptions should be construed strictly against the TP, hence it could claim no exemption.

 Of course, different answer if Mitsubishi were indeed an agent 



 Income derived by Government / Political Subdivisions

 From

 Public utility

 Exercise of essential governmental function  Accruing to:

 Government of the Philippines – National / Local (does not qualify “government” as national)

o Mactan Cebu Int’l Airport Case – Gov’t of the Philippines is synonymous as Republic of the Phils. Republic of the Philippines may include

instrumentalities, where GOCCs belong.

o Cf: Sec 27C – Exempt GOCCs from Corporate Income Tax:  GSIS

 SSS

 Phil Health Ins Corp  PCSO

o Exemption of PAGCOR was withdrawn by RA 9337 (July 1, 2005) 



 Prizes & Awards (Sec 32B7c & d)

 _ (C)  (D)  Requisites for Exemption 3   Conditions must concur:  SCRA-LEC:  Scientific, charitable, religious, artistic, literary, educational, civic achievement  Received by an athlete who participated in

a competition – whether here or abroad

 _ No action on his

part to enter the contest

 Sanctioned by the National Sports Association

– The Philippine Olympic Committee must approve

(Law creating the Philippine Sports Commission)

 _ Unconditional

receipt: should not be required to render future

services



 cf: RA 7549:

 The recipient of such an award, exempt from Income Tax.

 The donor of such an amount, exempt from Donor’s Tax. (not yet in the Tax Code; not in Sec 101A3)

 Such amount can be claimed as a deductible contribution. (not yet in the Tax Code; not in Sec 34H)

 

 Gains from the Sale of Bonds, Debentures or Other Certificates of Indebtedness –

 Sale/Exhange/Retirement of Bonds, Debentures / Other CIs – more than 5yrs: exempted; 5yrs or less: taxable



 Informer’s Reward

 No longer an exclusion from GI (Sec 32B)  Taxable with 10% FIT (Sec 282)



 FCDA

 Recipient

o resident individual / corporate: 7.5% o non-resident: exempt

Corporate Income Taxation

22/06/2015 18:18:00

 Sec 22B – Exempts 3 o GPPs

o Joint venture for purpose of undertaking construction projects

o Joint construction for purpose of engaging in petroleum, coal, geothermal & other energy operations in accordance with the consortium agreement

with the government  Sec 27C – Exempts 4 GOCCs

o GSIS o SSS

o Phil Health o PCSO

 Sec 30 – Exempts 11: remember common characteristics o Non-stock, non-profit corporations

o No part of the income must inure to the benefit of a particular member/individual

o Social welfare, Religious, Charitable and other non-profit purposes o Par E: 6 exempt corporations: CARS

 Charitable  Cultural  Athletic  Religious  Rehabilitation of veterans  Scientific Organizations

 Non-stock, non-profit educational institution (H)  Government educational institution (I)

o Memorize Sec 30 last par: …income of whatever kind / character from any of their properties, real / personal or any activities conducted for profit, regardless of the disposition made of such an income shall be

o YMCA v. Commissioner 298 SCRA 83: YMCA is a religious & charitable

institution, but did not qualify as a non-stock, non-profit educational institution. YMCA advanced that it was exempt under Art VI, Sec 28 par

3 of the Constitution & Art XIV, Sec 4, par 3 of the Constitution,

contending that it was a non-stock non-profit institution and should not be taxed for the receipt of rent income. Such an income should be used

to carry out its religious, charitable and educational purposes.

SC: Rent income from lease of property subject to tax, regardless of

purpose for the income.

 Art VI, Sec 28 par 3 of the Constitution only applies to real property.

 Art XIV, Sec 4, par 3 only applied to non-stock non-profit educational institution, to which YMCA does not belong. 



 Non-stock non-profit educational institution

 Exemption of non-stock non-profit education institution is merely a reiteration of Art IV of the Constitution: Actually, Directly & Exclusively used for such purposes  The use of the amount is the test of exemption.

 Interest income from bank Deposits – to avail of exemption from 20% FIT, the non-stock, non-profit educational institution Cf: DOF 149-95

 Cf: DOF 149-95: requires concurrence of the following conditions for exemption: o Proof in the form of certification, issued by the bank of deposit in that

particular bank

o Certification re: actual utilization of such amount for educational purposes

o Resolution of the BOT that such amount will be used for expansion of educational project



 Interest on Deposit of bank deposits:

 Subject to 20% FIT if depositor: (Sec 30 is categorical: regardless of use / disposition)

 Government educational institution  private educational institution  charitable institution

 religious organization

 Exempt

 if depositor is Non-stock, non-profit educational institutions: subject to conditions in the DOF 149-95 (CCP)



 Rules on Exemption on:

 Income Tax (Sec 30 NIRC)

 Property Tax (Art VI Sec 28 par 3 Consti; Lung Center of the Phils v. Roces)  Donor’s Tax (Sec 101 A3)

 Is… exempted from…  Income Tax (Sec 30 NIRC)  Propert y Tax  Donor’ s Tax  Estate Tax

 Religious  YES  ADE: Actually, directly, exclusively* used for religious purposes  YES. Provided complies with conditions  NO  Educational Institution  Private  NO.  Subject to 10% preferential corporate rate if income from its unrelated activities is not more than 50% of its income.  ADE: Actually, directly, exclusively* used for educational purposes  NO  NO  Govern ment  YES (Sec 30i)  May be exempt from donor’s tax  NO  Non-stock, non-profit  Yes (Sec 30h, Art XIV Sec 4 par 3 Consti)  YES. Provided complies with conditions  NO  Charitabl e  YES (Sec 30e, subject to last par)  ADE: Actually, directly, exclusively* used for  YES. Provided complies with conditions  YES, provided the 30% requirement is complied with

lrbs_ssbc-r_2009

charitable purposes



 *Exclusively is no longer construed as primarily. Now, the court construes the

meaning of exclusively as solely. Doctrine of incidental purpose no longer exists. (Lung

Center Phils v. Roces)

 - partial exemption is allowed (Lung Center of the Philippines v. Quezon City) 



9 Donations Exempt from Donor’s Tax (QARTIER-CPS) – with conditions for exemption

 Qualified Donees

 Accredited Non-government organizations (RA 8424)  Religious organization

 Trust foundations

 Educational institutions – non-stock non-profit  Research institution

 Cultural organization  Philanthropic organization  Social welfare organization 

 Conditions for exemption:

o Non-stock non-profit

o Not more than 30% of the donation shall be used for admin purposes o Trustees receive no compensation

o Donations for the achievement of purposes as stated in Articles of Incorporation



 Donations Mortis Causa (Sec 87D CSC) – subject to condition: Not more than 30% of the donation shall be used for admin purposes

 Charitable Institution  Social welfare institution  Cultural

 

 Corporations include partnership no matter how created or organized – registration with the SEC is not required

 JV / Association need not comply with the formal requirements of the law regarding the creation of a partnership. (Collector v. Gatchalian)

 A taxable partnership is formed for as long as parties have the intention to divide profits among themselves & there is a contribution to a common fund.  Co-ownership not taxable; merely for the enjoyment of the co-owners (not for

profits) – seemingly conflicting doctrines:

o An unregistered taxable partnership was formed between the heirs. (Unya v. Commissioner 45 SCRA 74, 1972) – apartments were purchased

by heirs and they received rent income therefore.

o There was no unregistered taxable partnership formed / organized. (Obillos, 139 SCRA 136, 1985) – sold property to divide proceeds only, not for profit

o There was no unregistered taxable partnership formed / organized. (Pascual & Dragon, 166 SCRA, 1988) – 5 parcels of land were purchased

& later on sold by heirs. SC applied test in Art 1769; heirs shared in gross receipts of sale. Mere sharing in the gross receipts does not in itself establish partnership.



 Significant Rules:

 MCIT

 IAET

 Branch Profits Remittance Tax

 Tax sparing credit rule (Sec 28B5b)

 

 MCIT of 2% of GI – applicable to DC (Sec 27E), RFC (Sec 28A2)

 Rationale / underlying basis: Forestall the prevailing practice of corporations

of over-claiming deductions in order to reduce their income tax payments (not stated in RR 9-98)

 Equitable Provisions of the MCIT:

o Applies only to a corporation on the commencement of its 4th _{yr of}

corporate operations.

 Sec 27E par 1 – not automatically imposed on a newly-formed corporation; proven fact that corporations often operate at a loss

for the 1st _3yrs

o Excess of MCIT can be claimed as a tax credit for 3 consecutive taxable years (Carry-Forward Rule)