Tax Sparing Rule: the tax on dividend earned by a NRFC within the Phil.

is reduced by imposing a lower rate of 15% (in lieu of the 35%), on the condition that the country to which the NRFC is domiciled shall allow a credit against the tax due from the NRFC, which taxes are deemed to have been paid in the Philippines (Sec.28 [B] [5] b) (CIR vs. Procter & Gamble G.R. No 66838 December 2, 1991) =================================================== What is the tax sparing rule with regard to foreign corporation? What is the purpose for enacting the tax sparing rule? A foreign corporation not engaged in trade or business in the Philippines can avail of the 15% preferential rate of tax on gross income on the condition that the country in which the nonresident foreign corporation is domiciled shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to 17% which represents the difference between the regular tax of 32% on cooperatives and the 10% as provided in Section 28 (B) of NIRC. The purpose of the tax sparring rule is to reduce the impact of international double taxation.
Who may not avail of deductions from gross income? 1. Citizens and resident aliens whose income is purely compensation income. They are allowed personal and additional exemptions and deduction for premium payments on health and hospitalization insurance. 2. Non-resident aliens not engaged in trade or business in the Philippines Non-resident foreign corporations

3.

Option to private educational institutions In addition to the allowable deductions, a private educational institution 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 To deduct allowance for depreciation thereof.

2. Tax credit

Tax credit refers to the taxpayers right to deduct from the income tax due the amount of tax he has paid to a foreign country subject to limitations.

Tax deduction v. tax credit In the former, the taxes are deducted from the gross income in computing the net income, while in the latter, the taxes are deducted from Philippine income tax itself. In the former, all taxes as a general rule, are allowed as deductions with some exemptions (enumerated above), while in the latter, only foreign income taxes may be claimed as credits against Philippine income tax.

Equitable doctrine of tax benefit This doctrine holds that a recovery of bad debt previously deducted from gross income constitutes taxable income if in the year the account was written off, the deduction resulted in a tax benefit, that is, in the reduction of taxable income of the taxpayer.
AND

CHARITABLE

OTHER CONTRIBUTIONS

Kinds of Charitable Contributions 1. Ordinary or those which are subject to limitations as to the amount deductible from gross income. Special or those which are deductible in full from gross income.

2.

Requisite for deductibility of charitable contributions 1. The contribution must actually be paid or made to the Philippine government or any political subdivision thereof or to any of the domestic corporations or associations specified by the NIRC. No part of the net income of the beneficiary must inure to the benefit of any private stockholder or individual. It must be made within the taxable year. It must not exceed 10% in the case of an individual and 5% in the case of a corporation of the taxpayers taxable income (except where the donation is deductible in full) to be determined without the benefit of the contribution. It must be evidenced by adequate records or receipts.

2.

3. 4.

5.

Contributions deductible in full 1. Donations to the Philippine government or to any of its political subdivisions according to a national priority plan determined by NEDA. Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties or commitments entered into by the Philippines or in pursuance of special laws. Donation to accredited non-governmental organization.

2.

3.

Non-government organization It means a non-profit domestic corporation: 1. Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual. Utilizes the contribution directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated not later than the 15 th day of the their month after the close of the accredited NGOs taxable year in which the contribution were received. Administrative expense shall, in no case, exceed thirty percent (30%) of the total expenses. The assets, in the event of dissolution, would be distributed to another non-profit domestic corporation organized for similar purpose, or to the State for public purpose, or would be distributed by a court to another organization.

2.

3.

4.

Utilization 1. Utilization means: Any amount in cash or kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited non-governmental organization was created or organized.

2.

Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernmental organization was created or organized.

Proof of deductions Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance.

Gains and losses from short sales, etc. Gains or losses from short sales of property shall be considered as gains or loses from sales or exchanges of capital assets. Gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as capital gains or losses.

General rule on the recognition of gain or loss upon the sale or exchange of property The general rule is that the entire amount of the gain or loss, as the case may be, shall be recognized, i.e. taxable or deductible.

Exceptions 1. Transactions where gains and losses are not recognized a. Exchange of property where the property received is not substantially different from the property disposed of. [Section 140, Reg. No. 2] Exchange of property solely in kind in pursuance of corporate mergers and consolidations. Exchange by a person of his property for stocks in a corporation as a result of which said person, alone or together with others not exceeding four persons, gains control of said corporation.

b.

c.

2.

Transactions where gain is recognized but not the loss a. b. Transactions between related taxpayers Illegal transactions

c. Exchanges of property, not solely in kind, in pursuance of corporate mergers and consolidations

Losses from wash sales of stock or securities No deduction for loss shall be allowed for wash sales unless the claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of the business of such dealer.

Wash sale A wash sale occurs where it appears that within a period beginning thirty (30) days before the date of the sale or disposition of shares of stock or securities and ending thirty (30) days after such date, the taxpayer has acquired (by purchase or exchange) or has entered into a contract or option to so acquire, substantially identical stock or securities.