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CHAPTER 1 GENERAL PRINCIPLES TAXATION

-is a process inherent in every state to exercise the power to exact enforced, proportional distributions imposed upon properties or rights to raise revenue in order to defray the necessary and legitimate expenses of the government. A state does not need a constitutional grant for it to possess the power to tax because taxation is inherent or innate in every state.

TAXATION AS AN IMPLEMENT OF EMINENT DOMAIN

Tax measures are but “enforced contributions exacted on pain of penal sanctions” and “clearly imposed for a public purpose.”

TAXATION AS AN IMPLEMENT OF POLICE POWER

Taxation is distinguishable from police power as to the means employed to implement these good public goals.

GR: Taxation is the strongest power of the state. (The power to destroy.) Limitations:

1. Due process clause; 2. Equal Protection clause Rationale of Taxation

Every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.

TAX TOLL FEES

Imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures;

Collected by private toll way operators as reimbursement for the costs and expenses incurred in the construction, maintenance, and operation of the toll ways, as well as to assure them a reasonable margin of income;

Not government exactions; Imposed only by the government

under its sovereign authority;

May be demanded by either the government or private individuals or entities, as an attributable of ownership;

VAT on toll ways partake the nature of an indirect tax.

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CHARACTERISTICS OF TAXATION (EPMLP) 1. an enforced contribution;

2. must be progressive;

3. generally payable in money; 4. levied by the legislative; 5. for public purpose. BASIS OF TAXATION

a.) LIFEBLOOD THEORY

-it is taxation that gives blood to the nation in order to survive. Without it, there can be no revenue to support or sustain its functions. (NO POWER OF TAXATION, NO GOVERNMENT.)

Primary Purpose: to generate funds for the state to finance the needs of the citizenry and to advance the commonwealth. (PBC v CIR)

 Due Process of law under the Constitution does not require judicial proceedings in tax cases, the modes adopted to enforce collection of taxes should be summary and interfered with as little as possible. b.) NECESSITY THEORY

-The theory behind the exercise of power to tax emanates from necessity. Without taxes, the government cannot fulfill its mandate of promoting the general welfare and well being of the people. (NPC v City of Cabanatuan)

POLICE POWER TAXATION

-power of the state to enact legislation that may interfere with personal liberty or property to promote the general welfare;

-power to levy taxes to be used for public purpose;

-is the regulation of a behavior or conduct;

-revenue generation; -test for validity: lawful objects and

lawful means.

-is circumscribed by inherent and constitutional limitations.

PURPOSES OF TAXATION 1. PUBLIC PURPOSE

-must be intended to benefit the public. It is the heart of taxation law and pertains not only to the traditional government functions but also includes those purposes designed to promote social justice.

GR: The power to tax can be resorted to only for a constitutionally valid purpose.

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XPN: Where the aid is incident to the public benefit. 2. PUBLIC USE

NATURE OF POWER OF TAXATION

Taxation is inherently legislative. It is in the legislature that the discretion to determine the nature, object, extent, coverage and situs of taxation lies.

ASPECTS OF TAXATION 1. LEVY

The power of taxation is vested on and exercised by the legislative department. (Sec.28, Art. VI, 1987 Constitution)

2. COLLECTION

-exercised by the executive department. Particularly the BIR as is enshrined in Sec.2 of NIRC, which provides that the assessment and collection of all national internal revenue taxes, fees and charges shall be under the supervision and control of DOF.

Classification of taxes: a.) National Taxes

-it is the National Government that is charged with the collection. (e.g. BIR and BOC)

Sec. 21, NIRC provides the Sources of Revenue for National Taxes:

a. Income tax;

b. Estate and donor‟s taxes; c. Value added tax;

d. Other percentage taxes; e. Excise taxes;

f. Documentary stamp taxes;

g. Such other taxes as are or hereafter may be imposed and collected by the BIR.

b.) Local Taxes

-it is the local government unit that collects this kind of tax.

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- those that are exacted from the very person who, it is intended or desired, should pay them; they are impositions for which a tax payer is directly liable on the transaction or business he is engaged in.

INDIRECT TAXES

- those that are demanded, in the first instance, from or are paid by one person in expectation and intention that he can shift the burden to someone else.

SCOPE OF POWER OF TAXATION 1. Comprehensive;

2. Unlimited; 3. Plenary; 4. Supreme.

 The rule of taxation shall be uniform and equitable and Congress shall evolve a progressive system of taxation.

BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAE) 1. Fiscal Adequacy

- collection must be adequate to sustain its legitimate expenses. 2. Administrative Feasibility

- tax laws must be capable of just and effective administration that even an ordinary taxpayer may comprehend.

3. Theoretical Justice or Equality

- taxes should be based on the taxpayer‟s ability to pay. LIMITS OF TAXATION

A. INHERENT LIMITATION

1. Taxes must be for public purpose;

2. No improper delegation of the taxing power or authority; 3. Exercise of power is territorial in jurisdiction;

4. Tax exemption of government entities; 5. Recognition of international comity; 6. Prohibition on double taxation. B. CONSTITUTIONAL LIMITATION

1. Due Process clause; 2. Equal Protection clause;

3. Freedom of Speech and Press; 4. Religious Freedom;

5. Non-impairment clause;

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 Double taxation

- taxing the same subject twice for the same taxable year, for the same tax under the same taxing authority and within the same taxable territory.

- There is no constitutional prohibition against double taxation but it is not allowed in this jurisdiction.

 INTERNATIONAL DOUBLE TAXATION

- the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods.

REMEDIES AGAINST DOUBLE TAXATION 1. Reciprocity Clause;

2. Tax Sparing Rule; 3. Tax Credit Method; 4. Exemption Method; 5. Tax Treaties

 Holmes Dictum

- where the assailed tax measure is beyond the jurisdiction of the State, or is not for a public purpose or in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.

GR: Due Process before deprivation of property.

XPN: Lawful exercise of taxing power (Lawful Taking/Eminent Domain) ACTUALLY, DIRECTLY AND EXCLUSIVE CLAUSE

1. Real Property Tax exemption (Art. VI, Sec.28)

- religious, charitable or educational purposes shall be exempt from taxation.

Requisites:

a. it is a religious/charitable institution;

b. its real properties are actually, directly and exclusively used for charitable purposes.

2. Income tax exemption (Art. XIV, Sec.4)

- non-stock, non-profit educational institutions exempt from tax and duties.

Requisites:

a. educational institution must be non-stock and non-profit; b. income it seeks to be exempted from taxation is used

actually, directly and exclusively for educational purposes; c. there is substantial evidence to support the foregoing.

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3. Donations (Art. XIV, Sec.4)

-grants, endowments, donations or contributions for educational purposes exempt from tax.

4. Real Property Tax Exemption (Sec. 234, LGC)

-exemptions from real property tax (local water districts, GOCCs, generation and transmission of electric power) BENEFICIAL USE DOCTRINE

 Exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes.

BENEFICIAL USE DOCTRINE

-Properties owned by the Republic of the Philippines are exempt from real property tax except when the beneficial use thereof has been granted, for consideration or otherwise to a taxable person.

IN LIEU OF ALL TAXES CLAUSE

-Sec. 193, LGC provides that: Tax exemptions and incentives granted to or presently enjoyed by all persons, whether natural or juridical, including GOCCs except local water districts, cooperatives registered under RA 6938, non-stock and non-profit hospitals and educational, are hereby withdrawn upon the effectivity of this Code.

 TAX AVOIDANCE

-a tax saving device within the means sanctioned by law. Used by the tax payer in good faith and at arms length.

 TAX EVASION

-a scheme used outside of those lawful means and when availed of usually subjects the tax payer to further criminal or civil liabilities.

Elements of Tax Evasion: a. the end to be achieved;

b. an accompanying state of mind which is evil, in bad faith, willful or deliberate not incidental;

c. a course of action or failure of action which is unlawful.

PRINCIPLES ON TAX EXEMPTIONS 1. not presumed;

2. construed strictissimi juris; 3. full or partial;

4. exemption of the government from taxation; 5. tax refund akin to tax exemptions, etc.

EXEMPTION OF THE GOVERNMENT FROM TAXATION

GR: All corporations, agencies, or instrumentalities owned or controlled by the Government are mandated to pay such rate of tax upon their taxable income

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upon corporations or associations engaged in similar business, industry or activity. (Sec. 27 (c), NIRC)

XPNS: 1. GSIS 2. SSS 3. PHIC 4. PCSO

** IF THE INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL SUBDIVISION IS ONE THAT IS (a) in the conduct of trade or business, (b) that is for profit or in any of its proprietary functions, such income is subject to tax.

GR: (Sec. 133, LGC) The taxing power of LGUs shall not extend to taxes, fees, charges of any kind on the National Government its agencies and instrumentalities.

XPN: LGUs may fix the rates for the operation of public utilities owned, operated, and maintained by LGUs within their jurisdiction.

Interpretation of Taxes

Imposition of tax can never be presumed. It must be clear, express and unambiguous.

Tax Exemptions:

Tax exemptions must be construed strictly against the tax payer. In case of doubt:

Where there is doubt, tax laws must be construed strictly against the government and in favor of the tax payer.

Provisions of tax laws cannot be extended by implication. It must be clear, express and unambiguous.

 Set-off

- compensation or amanos;

- not allowed in this jurisdiction because the tax payer and the government are not creditors and debtors of each other.

GR: Taxes cannot be subject to set off. XPN:

a. both the obligations from the government and the tax payer are due and demandable;

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TAX PAYER’S SUIT

-a tax payer, though not a party-in-interest, is allowed to sue, assail or question contracts or acts entered into by the government which may be found to have no basis in law at the expense of a tax payer‟s money.

- A tax payer need not be a party to the contract to challenge its validity, they must only specifically prove sufficient interest in preventing the illegal expenditure of money raised by taxation.

Requisites:

1. Use of public funds;

2. Disbursement is illegal or unconstitutional. Locus Standi

- suits may be brought by the parties who have been personally or directly injured by certain acts or omissions.

- Merely a matter of procedure.

- The transcendental importance of these cases demands that they be settled promptly and definitely, brushing aside if we must the technicalities of procedure.

 Requisites of Transcendental importance:

a. the character of the funds or other assets involved in the case; b. the presence of a clear case of disregard of a constitutional or

statutory prohibition by the public respondent agency or instrumentality of the government;

c. the lack of any other party with a more direct and specific interest in raising the questions being raised.

 INJUNCTION SUIT Requisites of an Injunction:

1. The taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment of taxes;

2. The collection by the aforementioned government agencies may jeopardize the interest of the government and/or taxpayer;

3. Require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the court.

GR: No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by the Code. (Sec. 128, NIRC)

XPN: where the taxpayer has shown a clear and unmistakable right to refuse or hold in abeyance the payment of taxes.

 TAX AMNESTY

- is a general pardon or intentional overlooking of the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law.

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 TAX PYRAMIDING -tax on another tax.

BIR REGULATIONS AND BIR ISSUANCES

These rules and regulations have the force and effect or partake the nature of statutes. The regulation must:

a. be germane to the object and purpose of the law;

b. not contradict, but conform to the standards the law prescribes; c. be issued for the sole purpose of carrying into effect the general

provisions of our tax laws. Conflicts

The Internal revenue Code being a special law prevails over the Civil Code a general law.

GR: TAX LAWS ARE CIVIL IN NATURE.

XPN: The criminal liabilities of any person convicted of a crime penalized under NIRC.

 DOCTRINE OF RQUITABLE RECOUPMENT

-allows a taxpayer who is allowed to claim a refund against a government despite the lapse of the reglementary period within which to file a claim.

- not allowed in this jurisdiction.

CHAPTER 2  TAX

-a burden imposed upon persons, properties or rights to raise revenue to defray the necessary expenses of the government.

 INCOME

- all wealth which flows into the taxpayer other than a mere return of capital.

 INCOME TAX - tax on income;

- tax on yearly profits arising from property, professions, trades or offices or as a tax on a person‟s income, emoluments, profits and the like. REQUISITES OF INCOME TAX:

1.there must be gain;

2. the gain must be realized or received;

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INCOME CAPITAL - all wealth which flows into the

tax payer other than as mere return of capital;

-fund of property which can be used in producing goods or services;

- flow/service of wealth -fund/property

Profits or gain -wealth

 ORDINARY INCOME

-any gain from the sale or exchange of property which is not a capital asset or property.

Imposition

An income tax is imposed on the taxable income of: a) Resident Citizen

b) Non-resident citizen c) Resident Alien

d) Non-resident Alien engaged in trade or business e) Domestic Corporation

f) Resident Foreign corporation

An income tax is imposed on the gross income of:

a) Non resident alien not engaged in trade or business b) Non resident foreign corporation

 NET INCOME TAX

- certain deductions and/or exemptions are deducted from the gross income and the tax is computed based on the resulting net income or taxable income.

 GROSS INCOME TAX

-no deductions and/or exemptions are allowed to be deducted, hence, the tax is computed based on the gross or aggregate amount earned.  FINAL INCOME TAX

-no deductions and/or exemptions are allowed to be deducted, hence, the tax is computed based on the gross or passive income but as a distinction, it is subject to the withholding of final tax.

Characteristics of income tax 1. Direct

2. National 3. Excise 4. General 5. Progressive

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INCOME ACCORDING TO SOURCE

1. INCOME FROM SOURCES WITHIN THE PHILIPPINES a) Interest

b) Dividends c) Services

d) Rentals and Royalties e) Sale of Real Property f) Sale of Personal Property

2. INCOME FROM SOURCES WITHOUT THE PHILIPPINES a) Interest other than those derived from sources within the

Philippines

b) Dividends other than those derived from sources within the Philippines

c) Compensation for labor or personal services performed without the Philippines

d) Rentals and Royalties from property located without the Philippines

e) Gains, profits and income from sale of real property located without the Philippines

3. INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT THE PHILIPPINES

(see table page 85-86)

 Schedular approach in the income taxation of individual taxpayers

Income tax treatment varies and made to depend on the kind or category of taxable income of the taxpayer.

 Present global treatment on taxable corporations Tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the tax payer.

CHAPTER 3

PERSONS SUBJECT TO INCOME TAX

Income tax may be imposed on the following persons: (Sec. 22(a), NIRC)

a) INDIVIDUALS

 Resident Citizen (Sec.23 (a), NIRC)  Non Resident Citizen (Sec.23 (b), NIRC)  Overseas Contract Worker (Sec.23 (c), NIRC)

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REQUIREMENTS for a seaman to be considered as OCW:

a. must be a member of the employment of a vessel;

b. the vessel must be exclusively engaged in international trade/commerce (does not include seaman in the navy);

c. registered OFW with POEA; d. valid OEC;

e. valid SIRB from MARINA  Resident Alien (Sec.32(d), NIRC)

 Non Resident Alien engaged in trade or business (Sec.32(d), NIRC)

 Non Resident Alien not engaged in Trade and Business (Sec.32(d), NIRC)

b) CORPORATION

 Domestic Corporation

 Resident Foreign Corporation  Non-resident Foreign Corporation

(see table page 89) c) ESTATES AND TRUSTS

Sec. 60 of NIRC, provides that income of estates or of any kind of property held in trust including:

1. Income accumulated in trust for the benefit of unborn or unascertained person or persons with contingent interests and income accumulated or held for future distribution under the terms of the will or trust;

2. Income distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct;

3. Income received by estates of deceased persons during the period of administration or settlement of estate;

4. Income which in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. d) OTHER ENTITIES INCLUDING PARTNERSHIP

(Sec.22(b),NIRC)

1. Partnerships, no matter how created or organized, but does not include:

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b. Joint venture or consortium formed for the purpose of undertaking construction projects;

c. Joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government;

2. Joint stock companies; 3. Joint accounts;

4. Association; 5. Insurance GR: A Partnership is a corporation. XPN: GPP

XPN to the XPN: if the GPP derives income from other sources it is considered as a corporation, thus liable to pay corporate income tax.

REQUISITES FOR NON-TAXABLE JOINT VENTURES:

1. must be for the undertaking of a construction project;

2. involves a joining or pooling of resources by licensed local contracts that is licensed by PCAB;

3. local contractors are engaged in construction business; 4. Joint venture itself must be duly licensed by PCAB If foreign:

 Foreign contractor is covered by a special license as contractor by PCAB;

 Must be certified by the appropriate tendering agency that it is foreign financed and that international bidding is allowed under the bilateral agreement between the Philippine government and the international financing institution.

CHAPTER 4 Taxable Income Taxable income

- the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any authorized for such types of income by this Code or other special laws. (Sec.31, NIRC)

FACTORS AFFECTING GROSS INCOME 1. Persons

2. Sources of Income 3. Imposable tax 4. Inclusions 5. Exclusions

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6. Exemptions

KINDS OF INCOME TAX 1. Net Income Tax 2. Final Income Tax 3. Gross Income Tax

4. Minimum Corporate Income Tax 5. Improperly accumulated earnings tax 6. Optional Gross Income Tax

TAXPAYERS SUBJECT TO NET INCOME TAX a) Resident Citizen

b) Non-resident citizen c) Resident Alien

d) Non-resident Alien engaged in trade or business e) Domestic Corporation

f) Resident Foreign corporation

TAXPAYERS SUBJECT TO GROSS INCOME TAX a) DC and RFC subject to gross income tax; b) NRANETB

c) NRFC

“and/or” – deductions can be claimed singly to the exclusion of personal additional exemption save in the case of corporations.

ANNUAL ACCOUNTING PERIOD (Sec.43, NIRC) 1. FISCAL YEAR

-begins in any day of the month and ends on the 12th month thereafter.

2. CALENDAR YEAR

-begins on January 1 and ends on December 31. Calendar year is mandated on the following:

1. Taxpayer‟s annual accounting period is other than a fiscal year;

2. Taxpayer has no annual accounting period; 3. Taxpayer does not keep books;

4. Taxpayer is an individual

**Corporations can either use fiscal or calendar year provided, it secures a prior approval from the Commissioner in case of change. (Sec.47, NIRC) TAXABLE YEAR

-means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed.

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GROSS INCOME (Sec.32 (a))

- all income derived from whatever source, including but not limited to the following items:

1. Compensation for services in whatever form paid, including but not limited to fees, salaries, wages, commissions and similar items; 2. GI derived from the conduct of trade or business or the exercise of

profession;

3. Gains derived from dealings in property; 4. Interest;

5. Rents; 6. Royalties; 7. Dividends; 8. Annuities;

9. Prizes and winnings; 10. Pensions;

11. Partner‟s distributive share of the net income of GPP

**If the interest is an income without and the individual taxpayer is a RC, the tax treatment is that it is included in the determination of GI subject to NIT. *** It is only interest income derived from sources within that is subject to final income tax.

Sec.44, NIRC. Period in which items of Gross Income included.

The amount of all gross income shall be included in the gross income for the taxable year in which received by the taxpayer.

Gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain.

Loss from the sale or other disposition of property shall be the excess of the basis or adjusted basis for determining the loss over the amount realized.

 Basis for Determining Gain or Loss from sale or disposition of property.

a. Property acquired on or after March 1, 1913 – acquisition cost.

b. Property acquired bi inheritance- FMV

c. Property acquired by donation- acquisition cost

d. Property acquired by donation if acquisition cost is greater than FMV, for purposes of determining loss- FMV e. Acquired for less than money’s worth- amount paid. Exchange for property (solely in kind) see page 105

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CHAPTER 5

INCOME TAX ON INDIVIDUALS INDIVIDUALS ARE SUBJECT TO THE FOLLOWING TAX:

 Net Income Tax

Schedular tax rates subject to NIT on the ff: 1.RC

2.NRC 3.OCW 4.RA 5.NRAETB

-NB: if the non resident individual shall stay for an aggregate of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines.

Individuals subject to schedular tax rates derive income from the ff:

a. Pure compensation income;

b. Engaged in trade or business or exercise of profession; c. Mixed income

*Services rendered by individuals pursuant to an er-ee relationship shall be exempt from VAT.

Income Taxation on Professionals 1. Subject to NIT

2. VAT to be remitted on the 20th month of the succeeding month

3. Income is subject to creditable withholding tax  Final Income Tax

-passive income derived from sources within the Philippines is subject to final income tax under the withholding tax system. - the amount of income tax withheld by the withholding agent is constituted as a full and final payment of income tax due from they payee on the said income

Requisites:

1. derived from sources within; 2. passive income;

3. specifically provided in the NIRC  Gross Income Tax

Unfinished!

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Income Tax on Individuals Individuals are subject to the following:

1. Net Income Tax

Sec. 24 (a) provides the scheduler tax rates to compute for the tax on the taxable income of individual tax payers subject to net income tax:

a.) Resident Individuals

b.) Non Residents citizen and OCWs c.) Resident Aliens

d.) Non Resident Alien Engaged in Trade or business Tax on Non Resident Alien Individuals

Sec.25 (a) provides the tax on NTRAEB within the Philippines:  NTRAEB are subject to an income tax on taxable income

received from all sources within the Philippines.

 A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year shall be deemed a non-resident alien doing business in the Philippines notwithstanding Sec.22 (g) of NIRC.

 Sec.22 (g) defines “non resident alien” as an individual whose residence is not within the Philippines and who is not a citizen thereof.

Individuals subject to net income on the STR derive income from the following:

1) Pure Compensation Income;

2) Engaged in trade or business or exercise of profession; 3) Mixed income or combination of 1 and 2

Individual Payers subject to NIT: 1) Resident Citizen

2) Non Resident Citizen Sec 22 (e) 3) Overseas Contract Worker Sec.23(c) 4) Resident Alien Sec 22 (f)

5) Non Resident Alien Sec 22 (g) Income Taxation on Professionals  Subject to NIT

 VAT to be remitted on the 20th

of the succeeding month  Income tax is subject to creditable withholding of income

tax

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Passive income derived from sources within the Philippines is subject FIT under the withholding tax system.

Withholding agent – any person required to deduct and withhold any tax under Sec.57

Requisites:

a. Derived from sources within; b. Passive income;

c. Specifically provided by NIRC 3. Gross Income Tax

CHAPTER 6

DEDUCTIONS, PERSONAL EXEMPTIONS, AND EXCLUSIONS

TAX EXEMPTION – any claim from the tax statute should be strictly construed against the taxpayer.

GR: Any claim for exemption from the tax statute should be strictly construed against the taxpayer.

XPN: Tax exemptions must be construed strictissimi juris against the tax payer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law.

*Deductions in income taxation partake the nature of exemptions. Hence, it must be strictly construed.

Burden of proof: on the taxpayer.

NB: Deductions to be allowed must be either paid or incurred within or without the Philippines depending upon the class of the taxpayer. The place where deductions are paid or incurred affects the deductibility in addition to what is provided in the Code.

ALLOWED DEDUCTIONS 1. Expenses; 2. Interest; 3. Taxes; 4. Losses; 5. Bad debts; 6. Depreciation;

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7. Depletion of oil and gas wells and mines; 8. Charitable and other contributions;

9. Research and development; 10. Pension Trusts;

11. Optional Standard Deduction;

12. Premium payments on Health and Hospitalization insurance of an individual taxpayer.

GR: All taxpayers subject to NIT may avail of these deductions.

XPN: Taxpayers earning purely compensation income arising from employer-employee relationship, no deductions shall be allowed.

XPN TO XPN: Sec. 34 (M), Premium payments on Health and Hospitalization insurance of individual taxpayers.

WHO ARE ENTITLED TO AVAIL OF DEDUCTIONS?  RC;  NRC;  RA;  NRAETB;  Partners in a GPP;  GPP although exempt;  DC;

 Proprietary educational institutions and hospitals which are non-profit;

 GOCCS, agencies, or instrumentalities which are non-exempt;  RFC

Requisites to be deductible:

1. must be an ordinary and necessary trade, business or professional expense;

2. must be paid or incurred during the taxable year; 3. tax required to be withheld has been deducted or paid;

4. must be substantiated with official receipts or adequate records; 5. has direct connection or relation to the development, management,

operation and/or conduct of trade, business, or profession of the taxpayer or in pursuit of trade or business;

6. expense incurred must not be contrary to law, morals, public policy or public order;

7. amount must be reasonable.

REQUISITES OF DEDUCTIBILITY OF ORDINARY AND NECESSARY TRADE, BUSINESS, OR PROFESSIONAL EXPENSES:

a.) the expense must be ordinary and necessary;

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c.) must have been paid or incurred in carrying on the trade or business of the taxpayer;

d.) must be supported by receipts, records or other pertinent papers. KINDS OF DEDUCTIONS:

a. Itemized Deductions A.Expenses

1. Ordinary and Necessary Trade, Business or Professional Expenses (sec. 34(A))

1. Ordinary and necessary expenses paid or incurred during the taxable year.

2. Directly attributable to the development, management, operation and or conduct of the trade, business, or exercise of a profession, including:

a. Salaries and wages including fringe benefits,

Reasonable allowance for salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished or granted by the employer to the employee.

Provided, that the final tax imposed under sec. 33 hereof has been paid.

b. Travel Expenses

Reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business, or profession.

Under the Code, travel expenses may be granted by way of:

1. Travel expenses under Sec. 34(A)(1)(a)(ii) in the pursuit of trade, business or profession

*here, the same is considered as ordinary and necessary expense. It is deductible as long as the requisites are present as required for an allowable deduction whether local or foreign.

2. Expenses for foreign travel under sec. 22(B)(7)

*here, it is in a form of fringe benefits. Its grossed up monetary value is deductible furnished or granted to managerial or supervisory employees so long as the final tax imposed under Sec. 33 has been paid.

c. Rentals and other expenses

Reasonable allowance for rentals and or other payments which are required as a condition for the continued use profession, for purposes of the trade, business or profession, of property to which the taxpayer has not taken or is not taking title or in which he has no equity other than that of a lessee, user or possessor.

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Reasonable allowance for entertainment, amusement, and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business, or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business or profession of the taxpayer.

Provided, that any expense incurred for entertainment, amusement or recreation that is contrary to law, morals, public policy, or public order shall in no case be allowed as a deduction. The herein allowed deduction, the entertainment, amusement, and recreation expenses are subject to limitation as provide under RR no. 10-2002 namely;

1. If the taxpayer is engaged in selling of goods or properties the allowable deductions must not exceed ½% of net sales

2. If the taxpayer is engaged in sale of service, including the exercise of a profession and use of lease of properties the allowable deductions must not exceed 1% of the net revenue.

NOTE: the basis of the BIR in prescribing the ceiling is the Code itself. This is not a legislative encroachment on the part of the executive branch of the government.

Last par. Of Sec. 34:

Notwithstanding the provision of the preceding subsections, the Sec. of Finance, upon recommendation of the Commissioner, after a public hearing shall have been held for this purpose, may prescribe by rules and regulations, limitations or ceilings for any of the itemized deductions under Subsections A to I of this Sec: Provided that for purposes of determining such ceilings or limitations. The secretary of finance shall consider the following factors:

1. Adequacy of the prescribed limits on the actual expenditure requirements of each particular industry and

2. Effects of inflation on expenditure levels, provided, further that no ceilings shall futher be imposed on items of expense already subject to ceilings under the present law

1. Optional Deductions

Sec. 34 par. K for the additional requirements for deductibility of certain payments, to wit:

“ Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation

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or amortization may be allowed under this sec. shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with sec. 58 and 81 of this Code”.

SIMPLY:

The tax required to be withheld on the income of the recipient and as expense on the part of the payor must be taken into consideration in order for the same to be allowed as deduction.

Requisites to be deductible:

1. It must be an ordinary and necessary trade, business, pr professional expense;

2. It must be paid or incurred during the taxable year

3. The tax required to be withheld has been deducted and paid 4. It must be substantiated with official receipts pr adequate records 5. Has direct connection or relation to the development , management,

operation and of conduct of the trade, business or profession of the taxpayer or in the pursuit of trade or business,

6. The expense incurred must not be contrary to law, morals, public policy, or public order, and

7. The amount must be reasonable.

Requisite for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services:

1. The expense must be ordinary and necessary;

2. It must have been paid or incurred during the taxable year;

*this is further qualified in sec 45. “the deduction provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred” dependent upon the method of accounting upon the basis of which the net income is computed xxxx”

3. It must have been paid or incurred in carrying on the trade or business of the taxpayer; and

4. It must be supported by receipts, records or other pertinent papers. Revenue Audit Memorandum Order no. 1-2000 provides:

-that under the accrual method of accounting, expenses not being claimed as deductions by the taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year.

SIMPLY: a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year, but failed to do so cannot deduct the same for the next year.

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Substantiation Requirements

No deductions from gross income shall be allowed under subsection hereof unless the taxpayer shall be substantiate with sufficient evidence, such as official receipts or other adequate records:

1. The amount of the expense being deducted, and

2. The direct connection or relation of the expense being deducted to the development, management operation, and or conduct of the trade, business or profession of the taxpayer.

Bribes, Kickbacks, and Other Similar Payments

No deductions from gross income shall be allowed under subsection (A) hereof for any payment made, directly or indirectly, to the ff. if the payment constitutes a bribe or kickback:

1. An official or employee of the National Government 2. An official or employee of the LGU

3. An official or employee of the GOCC

4. An official or employee or representative of a foreign govt. 5. A private corp

6. GPP

7. Similar entity

Expenses allowable to Private Educational Institutions

In addtl to the expenses allowable a deductions under this Chapter, a private educational institution, referred to under sec. 27(b)of this Code, may at its option elect either:

1. To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or

2. To deduct allowance for depreciation thereof under Subsection (F) hereof

B. Interest 1. In General

a. Amount of interest paid or incurred within a taxable year.

b. Indebtedness in connection with the taxpayers profession, trade or business.

c. the taxpayers otherwise allowable deduction for interest expense shall be reduced by an amount equal to the percentages of the interest income subjected to final tax, 33% beginning January 1, 2009.

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3. Exceptions

No deduction shall be allowed in respect of interest under the succeeding paragraphs:

a. Interest paid in advance

1. If within the taxable year an individual taxpayer reporting income on cash basis incurs indebtedness

2. An interest is paid in advance through discount or otherwise. 3. Such interest shall be allowed as a deduction in the uear the

indebtedness is paid. b. Interest on amortization

If indebtedness is payable in periodic amortizations:

-the amount of interest which corresponds to amount of principal amortized or paid during the year shall be allowed as deduction in such taxable year.

See p 180 for illustration

c. Between members of the family and related taxpayers

-If both the taxpayer and the person to whom the payment has been made or is to be made are persons specified under Sec. 36(b) d. If the indebtedness is incurred to finance petroleum

exploration

Optional Treatment of Interest Expense

At the taxpayers option, interest incurred in trade business or exercise of a profession may be allowed as a deduction or treated as a capital expenditure.

The taxpayer is given the option to charge the interest expense incurred as a capital expenditure or treat the same as part of the cost of the property acquired used in trade or business or exercise of profession and the corresponding deduction. Simply put, it is amortized by way of depreciation expense.

C. Taxes

1. taxes paid or incurred within a taxable year.

2. in connection with the taxpayers profession, trade, or business, shall be allowed as deductions, example: real property tax if the prop. is used in trade, or business, sec. 80 of RR. N0.2 provides the ff. as deductible: import duties, business tax, occupational tax, license, privilege tax, excise tax, stamp taxes, automobile registration fees. 3. Exception:

a. The income tax provided for under this Tile

b. Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of par (3) of this subsection (relating to credits for taxes of foreign countries)

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This paragraph pertains to RC and DC considering that their income from sources without are taxable in this jurisdiction and may likewise be taxable in that foreign country, by virtue of this provision may be claimed either as:

i. Itemized deduction

A deduction from G.I (if the taxpayer dies not signify in his return his desire to avail of the benefit of the foreign tax credit); or

ii. Tax credit

As a tax credit against the income tax due.

Take note this is an option on the part of the taxpayer that is in the alternative. Once the taxpayer opted to claim the foreign taxes paid abroad as a tax credit, it cannot be claimed anymore as a deduction or vice versa.

c. Estate and Donor‟s Taxes

d. Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

Taxes allowed under this SubSec., when refunded or credited, shall be included as part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

RR 14-2011 (Sec. 4): all tax credit certificates issued by the BIIR shall not be allowed to be transferred/assigned to any person.

Tax credit certificates are not nego. Inst. For it lack the req. enunciated in Sec.1 of the NIL.

Limitations on Deductions

Non-resident alien engaged in trade and business and Resident foreign corp. – deductions for taxes provided in par. (1) of this SubSec. (C ) shall be allowed only if and to the extent that they are connected with income from sources w/in the phils.

Tax Credit Paid in Foreign Countries

Only RC and DC may avail of this kind of tax credit, coz‟ their income from w/o is taxable in this jurisdiction and may likewise be taxable in Foreign countries where they likewise derive income from trade/bus.

The principle is to minimize the effect of indirect double taxation. The income derived abroad is alreadu taxed in this country and yet, it may also be taxable in foreignt countries. In sec. 34(c)(3), this is otherwise known as the credit against tax for taxes of foreign countries. An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes of foreign countries allowed under this par.

PAT and estates can avail of this tax credit, in the case of any such individual who is a member of a GPP or a beneficiary of an estate or trust, his proportionate share of such taxes of the GPP or the estate or trust paid or incurred during the taxable year to a foreign country, if his distributive share of the income of such PAT or trust is reported for taxation under this Title.

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The ff. are requisites: 1. Must be a RC or DC

2. The taxpayer signifies in his return his desire to avail of the tax credit for taxes paid in foreign country; and

3. Subject to limitation. Foreign Tax Credit

1. It simply means taxes paid to foreign countries and such taxes paid are considered as a deduction or credit against taxes due in the Philippines

2. If taken as an item of deduction, under sec. 34(C)(3), in order to be decutible, the taxpayer must not signify in his return his desire to have the benefits availed of or be credited with his taxes due.

3. And if taken as a tax credit, it is imperative that the taxpayer therefore must signify his intention to avail of the same as a tax credit.

4. The tax paid for in the foreign country must be the amount of income taxes paid or incurred during the taxable year to any foreign country.

5. Only the RC and DC who are entitled to the benefits of foreign tax credits for the simple reason that their income derived from sources without are also taxable from such foreign country.

6. An alien individual and FC are not privileged nor allowed to avail of the credits against the tax for the taxes of the foreign countries. 7. The amount of the credit to be taken is subject to the limitations.

Limitations on Credit See sec 34(c)(4)

SIMPLY: if there is only one foreign country involved, apply the 1st par. To wit: The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year If there are two or more foreign countries apply both paragraphs.

a.The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire taxable income for the same taxable year. b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's taxable income

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from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.

The tax against which such credit is taken simply means the income tax imposed by the Code or the Philippine income tax. It is also specified that the tax credit or the income tax paid to the foreign country shall be subject to the foregoing limitations. Simply, it is the income tax paid to the foreign country or the limit, whichever is lower.

Adjustments on Payments of Incurred Taxes

If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall:

Notify the Commissioner, who shall redetermine the amount of the tax for the year/s affected, and the tax amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer.

In case such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to:

Give a bond with sureties satisfactory to and to be approved by the Commissioner is such sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may require.

Year in which Credit taken

The credits provided for in Subsection ( C) (3) of this section, may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in subsection ( c).

if the taxpayer elects to take credits in the year I which the taxes o the foreign country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

Proof of Credits

The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner the following:

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a credit under said paragraph, such

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amount to be determined under rules and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such credits.

Carry-Over of Excess Income Tax Payments

Sec. 76 provides that a taxpayer has the option to file a claim for refund or to over its excess income tax payments. The option to carry-over, however is irrevocable.

Once a taxpayer opted to carry-over its excess income tax payments, it can no longer seek refund of the unutilized excess income tax payments.

The taxpayer however may apply the unutilized excess income tax payments as a tax credit to the succeeding taxable years until such has been fully applied pursuant to sec. 76 of the NIRC. (Belle Corp v. cir)

Irrevocability of Carry-over Option

Once the corp. exercises the carry-over option and apply the excess quarterly income tax against the tax due for the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount representing such overpayment.(Cir vs. Mirant operations corp)

D. Losses

Losses speak of two kinds: Ordinary Losses

-refer to losses incurred in connection with the trade or business or in the exercise of profession or property therein which are considered deductible in arriving at the taxable income. These are legitimate losses incurred in business

e.g. operating losses, casualty losses, losses due to robbery, theft, or embezzlement

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-refer to losses incurred in connection with the sale or exchange of capital assets which are deductible only to the extent of capital gain. e.g. losses from sale or exchange of capital assts, losses on wash sales, and securities becoming worthless classifies as capital assets.

Losses Deductible from Gross Income

Ordinary loss or losses in general Sec. 34 (D) (1) Casualty loss sec. 34 (D) (1) (b)

Net operating loss cary over sec. 34(D) (2)  Ordinary Loss Sec. 34 (D) (1)

Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity shall be allowed as deductions:

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties,

or from robbery, theft or embezzlement.

In addition sec 22(Z) of the NIRC states that the term “ordinary loss” includes:

-any loss from the sale or exchange of property which is not a capital asset.

Proof of Loss

a. In the case of a NRA individual or corp.

b. Actually sustained during the year incurred in business, trade, or exercise of a profession conducted within the Philippines

c. Such losses are not compensated for by the insurance or other forms of indemnity

d. Submit a declaration of loss sustained from casualty of from robbery, theft, or embezzlement during the taxable year not be less than 30 days not more than 90 days from the date of discovery of the casualty, or robbery, theft or embezzlement giving rise to the loss

 Capital loss sec. 34 (D) (4) (a)

These are losses incurred involving assets or transactions which are considered capital.

Simply, capital loss can only be deducted from capital gain. This is because gross income includes ordinary course of trade or business of the taxpayer.

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Capital losses on the other hand are not related to the said ordinary course of trade or business of the taxpayer, hence cannot be deducted except from capital gain.

Ex. Of capital gains

1. Securities becoming worthless

2. Losses from wash sales of stock or securities

3. Capital losses on sale or exchange of capital assets

4. Unser sec. 39(f), losses from short sales and losses attributable to the failure to exercise the privileges or options to buy or sell property.

Net Operating Loss Carry-Over (NOLCO)

Means the excess of allowable deduction over gross income of the business in a taxable year. As such, net operating loss carry-over allows individuals and corp. subject to net income tax to take up net operating loss as deduction from gross income.

a. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss.

b. any net loss incurred in a taxable year during which the taxpayer

was exempt from income tax shall not be allowed as a deduction under this Subsection

c. That a net operating loss carry-over shall be allowed only if there

has been no substantial change in the ownership of the business or enterprise in that -

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons.

See illustration page 190-191 Capital Losses

Means the excess of cost over the amount realized as a result of sales or exchanges of capital assets.

Loss from sales or exchanges of capital assets shall be allowed only to the extent provided in sec. 39 of NIRC

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Limitation on Capital Losses See sec. 39 (C )

Net Capital Gain sec. 39 (2)

means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

Net Capital Loss

means the excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges sec. 39 (3)

Capital Losses on Bank or Trust Co. which is a DC

If a bank or trust company incorporated under the laws of the Phils, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corp. with interest coupons or in registered form, any loss resulting froom such sale shall not be subject to the foregoing limitation and shall no tbe included in determining the applicability of such limition to other losses.

This is because such substantial part of business is regarded as ordinary assets of banks and trust companies. As such, any loss resulting from the sale shall not be subject to the foregoing limitation on deduction of capital losses.

Holding Period

B) Percentage Taken into Account. - In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net capital gain, net capital loss, and net income:

(1)One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and

(2)Fifty percent (50%) if the capital asset has been held for more than twelve (12) months.

Short sales

In par f. of sec 39 the gains or losses from short sales are considered either as capital gains or losses.

Securities Becoming Worthless See Sec. 34 (D) (4) (b) of the NIRC

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since it is classified as capital asset, any resulting loss is considered as a capital loss.

The provision conveys that the loss sustained by the holder of securities, which are capital assers, is to be treated as a capital loss as if incurred from a sale or exchange transaction. A capital gain or capital loss normally requires the concurrence of 2 conditions for it to result: 1. There is a sale or exchange

2. The thing sold or exchanged is a capital asset

When securities become worthless, there is strictly no sale or exchange of capital assers. A similar kind of treatment is given by the NIRC on the retirement of certificates indebtedness with interest coupons or in registered form, short sales and options to buy or sell property where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard requirement of sale or exchange for the application of the capital gain and loss provisions of the Code. (Chinabanking v. CA)

Wash Sale See sec. 38 NIRC

It is defined as any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that within a period of 30 days before the date of such sale or disposition and ending 30 days after such date,the taxpayer has acquired or has entered into a contract or option so to acquire, substantially identical stock or securities.

SIMPLy: wash sale is a sale or other disposition of stocks or securities acquired by the taxpayer within a 61 day period or beginning 30 days before the date of sale and 30 days after said date of sale. Any losses as a result thereto is not deductible but any income is a taxable income.

Wagering Losses (sec. 34 (D) (6))

Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

e.g. gambling losses

Abandonment Losses (sec. 34 (D) (7) (7) Abandonment Losses. -

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(a) In the event a contract area where petroleum operations are undertaken is partially or wholly abandoned, all accumulated exploration and development expenditures pertaining thereto shall be allowed as a deduction: Provided, That accumulated expenditures incurred in that area prior to January 1, 1979 shall be allowed as a deduction only from any income derived from the same contract area. In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs thereof, as well as the undepreciated costs of equipment directly used therein , shall be allowed as a deduction in the year such well, equipment or facility is abandoned by the contractor: Provided, That if such abandoned well is reentered and production is resumed, or if such equipment or facility is restored into service, the said costs shall be included as part of gross income in the year of resumption or restoration and shall be amortized or depreciated, as the case may be.

Losses between related Taxpayers Sec. 36 (B)

(B) Losses from Sales or Exchanges of Property. - In computing net income, no deductions shall in any case be allowed in respect of losses from sales or exchanges of property directly or indirectly -

(1) Between members of a family. For purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and corporation more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations more than fifty percent (50%) in value of the outstanding stock of which is owned, directly or indirectly, by or for the same individual if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale of exchange was under the law applicable to such taxable year, a personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of and the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust; or

(34)

(6) Between a fiduciary of a trust and beneficiary of such trust. NOL for mines other than oil and gas well

b. Optional Standard Deductions

Sec. 34 (L) An individual subject to tax under Sec.24 (NIT), other than a non-resident alien, may elect a standard deduction in an amount not exceeding 40% of hid gross sales or gross receipts as the case may be.

Corporation - subject to Secs.27 and 28 (GIT), may select a standard deduction in an amount not exceeding 40% of its gross income.

*unless the taxpayer signifies in his return his intention to elect the OSD, he shall be considered as having availed himself of the deductions allowed in the subsections (itemized deductions). Such election when made in the return shall be irrevocable for the taxable year for which the return is made.

WHO ARE ENTITLED TO OSD:

1. Individual taxpayers, except NRA;

2. Corporation, except non resident foreign corporation PERSONS COVERED:

1. RA; 2. NRC; 3. RA

4. ESTATE AND TRUST; 5. DC;

6. RFC

RULE ON INDIVIDUAL TAXPAYERS

An individual subject to tax under Sec.24 or individual taxpayers subject to NIT other than NRA may elect a standard deduction in an amount not exceeding 40% of his gross sales and gross receipts as the case may be. XPN: NRAETB (since they are subject to Sec.24, they are subject to the itemized deduction and OSD)

RULE ON CORPORATIONS

A corporation subject to Sec.27 (A) for DC and 28 (A)(1) for RFC, may elect a standard deduction in an amount not exceeding 40% of its gross income.

Additional requirements:

1. Taxpayers must signify in their return his intention to elect the OSD to be availed;

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2. Treat such election when made in the return as irrevocable for the taxable year for which the return is made;

3. Not be required to submit with his tax return such return such financial statements otherwise required by the Code;

4. To keep records pertaining to his gross sales or gross receipts for individuals and records pertaining to GI during the taxable year.

BASIS OF OSD:

OSD allowed for individual TPs shall be a maximum of 40% of gross sales or gross receipts during the taxable year.

a. ACCRUAL BASIS – based on gross sales b. CASH BASIS – based on gross receipts

NB: cost of sales and cost of services in case of seller of services are not allowed to be deducted in determining the basis of OSD

Corporate TPs- basis is amount not exceeding 40% of their GI.

Passive income subject to FIT shall not form part of the GI in determining the 40% OSD.

II. PERSONAL EXEMPTIONS 1. Basic Personal Exemption

-the theoretical personal. Living and family expenses of an individual allowed to be deducted from the gross or net income of an individual taxpayer.

-equivalent to minimum of subsistence, taking into account the personal status and additional qualified dependents of an individual TP. -it is fixed because it is predetermined by the lawmakers as provided under Sec. 35 (A) and (B).

50,000 PhP for each taxpayer.

In case of married individuals, where only one of the spouses is deriving GI, only such spouse shall be allowed a personal exemption. [Sec.35 (A)]

(no distinction if purely compensation or is engaged in trade or business or in the exercise of profession)

2. Additional exemption for dependents

There shall be allowed an additional exemption of 25,000 PhP for each dependent not exceeding four. [Sec.35(B)]

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Exemption shall be claimed by only one of the spouses in case of married individuals.

Legally separated spouses, additional exemptions may be claimed by only by the spouse who has custody of the child or children: Provided, the total amount of exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed.

QUALIFIED DEPENDENTS FOR ADDITIONAL EXEMPTIONS: a. Legitimate;

b. Illegitimate;

c. Legally adopted child REQUISITES:

1. chiefly dependent upon and living with the taxpayer; 2. dependent is not more than 21 years of age;

3. unmarried;

4. not gainfully employed;

5. if dependent, regardless of age, is incapable of self-support because of mental or physical defect.

SENIOR CITIZEN DISCOUNT ALLOWED AS DEDUCTION  SC not considered as dependents under Sec.35.

 SCD considered as a deductible expense from GI and no longer as tax credit.

 Not considered as qualified dependent, enumeration is exclusive to children.

CHANGE OF STATUS

-change in the qualifications of the taxpayer when he: 1. marries;

2. have additional dependents;

3. dies during the taxable year (estate may still claim the personal and additional exemptions for himself and his dependents when he died at the close of each year);

4. spouse or any of the dependents dies; 5. any of the dependents marries;

6. dependents become 21 years old;

7. any of the dependents become gainfully employed during the taxable year.

NB: what the law should consider for the purpose of determining the tax due for an individual TP is his status and qualified dependents at the close of the taxable year and not at the time the return is filed and the tax due thereon is paid.

References

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