Taxation1 Transcription Part2

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty.
Emery Tiu
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August 31, 2010 PART IV CORPORATE INCOME TAX A. Introduction and Definition of Terms Corporation includes partners ip no matter o! created or or"ani#ed$ %oint account companies$ insurance companies and ot er associations e&cept' (. )eneral professional partners ip *. +oint Venture for t e purpose of underta,in" construction pro%ects -. +oint consortium for t e purpose of en"a"in" in petroleum$ "eot ermal and ot er ener". operations pursuant to a consortium a"reement !it t e "o/ernment What is a corporation? Does it include partnership? What does it include? o Yes, except general professional partnerships. A corporation is defined based on Section 22, includes partnership no atter ho! created or organi"ed, #oint account co panies, insurance co panies and other associations except$ 1. %eneral professional partnership 2. &oint 'enture for the purpose of underta(ing construction pro#ects
3. &oint consortiu for the purpose of engaging in petroleu , geother al and other energ) operations pursuant to a consortiu agree ent !ith the go*ern ent Sec 22. +,- .he ter "corporation" shall include partnerships, no atter ho! created or organi"ed, #oint/stoc( co panies, #oint accounts +cuentas en participacion-, association, or insurance co panies, but does not include general professional partnerships and a #oint *enture or consortiu for ed for the purpose of underta(ing construction pro#ects or engaging in petroleu , coal, geother al and other energ) operations pursuant to an operating consortiu agree ent under a ser*ice contract !ith the %o*ern ent . "General professional partnerships" are partnerships for ed b) persons for the sole purpose of exercising their co on profession, no part of the inco e of !hich is deri*ed fro engaging in an) trade or business. Wh) does it exclude general professional partnership? 0or tax purposes, that a corporation includes all partnership except general professional partnership? Are there an) t)pe of partnership that )ou (no!? o 1artnerships a) be taxable business partnerships or the non/taxable partnerships !hich is the general professional partnership. 2n so e boo(s or in so e discussions, )ou !ill see general co/partnership, but the) are actuall) partnerships !hich are still taxable. o %enerall), let3s #ust classif) the into 2 (inds. .he taxable partnerships, these are the business partnerships, the unregistered partnerships4 And the non/taxable partnerships, !hich are the general professional partnerships. What is a partnership? So if this roo o ,inig)an ans!ers$ Yes. for s a partnership, it !ill be taxable to 305?
Does corporation include associations? 2s an association a corporation? 6ote$ Don3t confuse )ourself !ith corporations being taxable all the ti e. 7) 8uestion is si ple, is an association a corporation? Does it fall under corporate tax pa)ers? o o 6ote that 69. A:: corporations are taxable. Yes,
What is a #oint *enture? ;xa ple.

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T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu
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o 2f )ou ha*e a 10 hectare parcel of land and )ou put it in a corporation. So, corporation is a real estate corporation because the business is into land holdings. What !ill )ou do if )ou !ant to de*elop the land but )ou don3t ha*e the funds to do it?
-0 .i%%io" ,0 .i%%io" 100 .i%%io" tota% i")ome
To /our I")ome To t(e i")ome of t(e Co"'tru)tio" Com*a"y
I' t(i' rea%%y e0em*t from i")ome ta01 NO2 Someo"e e%'e i' %ia#%e a"& "ot t(e 3oi"t +e"ture. 4Someo"e e%'e i' ta0e& 'e*arate%y5
<orporations enter into #oint *entures !ith other corporations for purposes of de*eloping construction pro#ects. if )ou are a land o!ner and )ou don3t ha*e funds to de*elop that land that )ou o!n. You tas( a construction co pan) !ho !ill de*elop the parcel of land and a(e condo iniu units, subdi*ision units out of it. Sharing !ould be =0/>0 fusion or 30/?0. You don3t spend. You are the o!ner of the land, )ou don3t spend for an)thing in the construction. After all is finished, =05 of the units gi*en to )ou and ?0 percent of the units !ill be o!ned b) the construction co pan). 2n that case, if )ou are the land o!ner and )ou get to ha*e =05 of the subdi*ision units transferred in )our na e, is this sub#ect to <apital %ains .ax? 2s it a sale?
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<%. is i posed not onl) in sale and exchange but an) other odes of disposition. ,ut in this case it is 69. sub#ect of <%. for the reason that the transfer is not reall) for a disposition of propert) but to si pl) effect !hat has been agreed in the #oint *enture agree ent. 6o!, if the #oint *enture bet!een )our corporation and the construction co pan) earns inco e, is it sub#ect to inco e tax? 2s )our #oint *enture sub#ect to the corporate tax rate of 305? %eneral corporation or partnerships, the) are not sub#ect to the corporate tax. .he) are exe pt fro inco e tax actuall). .he inco e of #oint *entures bet!een 2 corporations under the sole anage ent of either one co pan) or particular group of persons !ill also be not co*ered under the corporate tax of 305.
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,ut is the inco e reall) taxable? <an the go*ern ent not collect an) for of tax co*ered b) the #oint *enture? 1arcel of land !ith houses, e*er)thing !as sold, =05 of the inco e, =0 illion !as gi*en to )ou, >0 illion !as retained b) the construction co pan). Since the total of 100 illion inco e is not taxable in a #oint *enture. So is this reall) free fro tax? <an the go*ern ent not reall) collect an) for of tax on the inco e deri*ed fro the acti*it) co*ered b) the #oint *enture agree ent? Who !ill be liable for the 100 illion inco e, is it the #oint *enture or so eone else?
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So eone else. Who is this so eone else?
&oint *enture for purposes of underta(ing construction pro#ects are not sub#ect to corporate tax of 305. 6onetheless, an) inco e distributed to the parties !ho enter into a #oint *enture agree ent !ill be separatel) taxable to inco e tax. So, eaning to sa), that the = illion !ill be added to )our other inco e of )our corporation and the >0 illion to the inco e of the construction co pan). 2t !ill still be sub#ect to 305 tax still as part of the inco e for the entire taxable )ear.
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2t does not ean that #oint *enture is reall) free fro the corporate tax of 305. 2t is free fro the corporate tax of 305 but the liabilit) !ill be
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shouldered separatel) b) the parties of the #oint *enture agree ent. 6o! that3s #oint *enture. <orporations are defined to include partnerships, associations or #oint *entures, #oint stoc( co panies, #oint accounts except for 3$ o o 1. %eneral 1rofessional 1artnerships 2. &oint 'enture for the purpose of underta(ing construction pro#ects
o 3. &oint consortiu for the purpose of engaging in petroleu , geother al and other energ) operations pursuant to a consortiu agree ent !ith the go*ern ent You ha*e to be specific, all #oint *entures as a rule, are sub#ect to the corporate tax of 305 except if it for underta(ing construction pro#ects or a #oint consortiu for the petroleu , geother al and other energ) operations but it has to be !ith the go*ern ent. 2f it3s a #oint consortiu NOT in contract with the government , it is ta&a0le still. So )ou ha*e to be careful on the re8uisites for these 3 entities !hich are not co*ered b) the definition of a corporation. )eneral Professional Partners ip 1)PP2 partners ips formed 0. person for t e sole purpose of e&ercisin" t eir common profession$ no part of t e income of ! ic is deri/ed from en"a"in" in an. trade or 0usiness. Persons en"a"ed in 0usiness as partners in a )PP$ s all 0e lia0le for income ta& onl. in t eir separate and indi/idual capacities. 3or purposes of computin" t e distri0uti/e s are of t e partners$ t e net income of t e partners ip s all 0e computed in t e same manner as a corporation. Eac partner s all report as "ross income is distri0uti/e s are$ actuall. or constructi/el. recei/ed$ in t e net income of t e partners ip. Income of a )PP is deemed constructi/el. recei/ed 0. t e partners. %eneral 1rofession partnership. We no! (no!, that the inco e of a #oint *enture is not taxable to the #oint *enture but taxable separatel). @o! about general professional partnerships? Would the inco e of general professional partnerships be absolutel) be free fro tax or is it taxable on so eone else? o You re e bered !hen !e said that an) share of the partners in %11s, the undistributed shares !ill still be considered as constructi*e inco e alread) taxable on the part of the indi*idual partners. 6o!, e*en if the %11 is not sub#ect to 305 corporate tax rate on the net inco e, the net inco e is considered as earned b) the partners co posing the %11. And taxable separatel) on the part of these partners to A5/ 325. o ,ut is the %11 free fro the obligation of filing an inco e tax return? %eneral professional partnerships e*en if the) are exe pt fro inco e tax are re4uired to file an Income Ta& Return for the si ple reason that it is the onl) tool that the go*ern ent !ill use to deter ine !hether the partners co posing the %11 are correctl) declaring their inco e. 2t3s the basis, if there are 3 partners, the onl) thing that the go*ern ent !ill do is di*ide it into 3, 143 ust ha*e been reported as part of the inco e tax return of the indi*idual partners. 2n fact, the indi*idual partners, !hen the) sub it their inco e tax return, strictl), the) ha*e to include and sub it the inco e tax return of the %11. So )ou !ill see class that taxation a) not be i posed in this t)pe of person, !hether natural or #uridical but so eho! since there is an inco e, the tax !ill be i posed upon so e other tax pa)er. +oint Venture created ! en * corporations$ ! ile re"istered and operatin" separatel.$ are placed under one sole mana"ement ! ic operated t e 0usiness affairs of said companies as t ou" t e. constituted a sin"le entit. t ere0. o0tainin" su0stantial econom. and profits in t e operation.
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+oint Account created ! en * persons form or create a common fund and suc persons en"a"es in a 0usiness for profit. T is ma. result in a ta&a0le unre"istered association or partners ip +oint 5toc, Companies t e mid!a. 0et!een a corporation and a partners ip$ a .0rid personalit.6$ some! at a corporation 0ecause t is is mana"ed 0. a 7oard of directors and suc persons ma. transfer t eir s are8s !it out t e consent of ot ers$ and some! at a partners ip 0ecause it is an association$ and persons or mem0ers of t e same contri0ute fund$ mone. to a common fund. Emer"enc. Operation t ese ma. 0e formed 0. * corporations !it separate personalities. If t e. form t at emer"enc. operation 1it is a reall. a special acti/it.2 to en"a"e in a %oint /enture. Corporation ( ma. 0e ta&ed onl. from t e income deri/ed from suc 0usiness. T e income deri/ed from suc emer"enc. operation s ould also 0e included in t at ta&a0le income su0%ect to corporate income ta&. In t e same !a.$ t at corporation *$ as a separate and distinct personalit.9 if it:s a part of t at emer"enc. operation$ t e income deri/ed from suc special acti/it. s ould also 0e included in t e income of t at corporation *$ su0%ect to corporate income ta&$ e/en if it is not re"istered !it t e 5ecurities and E&c an"e Commission. +oint Venture' it is bet!een 2 corporations placed under one sole special operation. anage ent for so eti es, a
+oint Account$ it is bet!een 2 persons for ing or creating a co on fund for profit. 2t is usuall) an unregistered association. .he) do not need to register that !ith the S;<. +oint 5toc, Companies$ probabl), the onl) ti e this !ill co e out is !hen )ou are as(ed to define !hat it is. 2s a co/o!nership a taxable entit)? o )eneral rule$ A co/o!nership is tax/exe pt. 2t is not considered as a corporation, not a partnership. o E&ception' !hen the co/o!ners in a co/o!nership are earning profits, it !ill be considered as an unregistered partnership, sub#ect to 305 tax. When )ou sa) earning profits, does ele*ating their status as an unregistered partnership, does it include sharing in the inco e of the estate left to the b) the decedent? 2f a co/o!ned propert) produces inco e and en#o)ed b) the co/o!ners, it is not automatic that it !ill be sub#ect to the corporate tax rate of 305 as an unregistered partnership.
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2t !ill onl) be considered as an unregistered partnership if co/o!ners the sel*es ha*e underta(en steps to infuse in*est ent and a(e it a profitable business.
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7. Ta&a0le Corporations DC$ R3C$ NR3C 1. Do estic <orporations +D<- See Section 2? A corporation formed or or"ani#ed under P ilippine la!s. It is su0%ect to ta& on its net ta&a0le income from sources ;IT<IN and ;IT<O=T t e P ilippines. 2. Besident 0oreign <orporation +B0<-, See Section 2CA A corporation formed$ or"ani#ed$ aut ori#ed or e&istin" under t e la!s of an. forei"n countr.$ and en"a"ed in trade or 0usiness ;IT<IN t e P ilippines. It is su0%ect to ta& on its net ta&a0le income from sources !it in t e P ilippines.
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T ere is no fi&ed criterion as to ! at constitutes > engaged in trade or business. 7ein" >en"a"ed in 0usiness6 implies continuit. of commercial transactions or dealin"s ? continuit. of 0usiness or continuit. of intention to conduct continuous 0usiness. 3. 6on/Besident 0oreign <orporations +6B0<-, See Section 2>, A corporation formed$ or"ani#ed$ aut ori#ed$ or e&istin" 1foae2 under t e la!s of an. forei"n countr.. It is su0%ect to ta& on its "ross income from sources ;IT<IN t e P ilippines. 5uc "ross income ma. include interests$ di/idends$ rents$ ro.alties$ salaries$ premiums 1e&cept reinsurance premiums2$ annuities$ emoluments or ot er fi&ed or determina0le annual$ periodic$ or casual "ains$ profits$ and income and capital "ains$ EXCEPT$ capital "ains from t e sale of s ares of stoc, not traded in t e stoc, e&c an"e. Who are the taxable corporations? @o! do !e classif) corporations in the 1hilippines, as taxpa)ers? 2llustration of Att). 2n the board$ +explanation belo! the illustrationCORPORATE 8O.ESTIC 1. P(i%i**i"e ;a<' 2. =it(i" a"& =it(out >. NET 4a%%o<e& to &e&u)t e0*e"'e <it(i" a"& <it(out5 9OREI:N 1. 9oreig" ;a<' 2. A#roa& >. =it(i" If a%%o<e& to &e&u)t e0*e"'e &e*e"&' o"? Re'i&e"t 9oreig" Cor*oratio" Ta0e& at NET A%%o<e& to &e&u)t e0*e"'e' =IT@IN Ta0 Rate? >0A No" Re'i&e"t 9oreig" Cor*oratio" Ta0e& at :ROSS NOT A%%o<e& to &e&u)t e0*e"'e' Ta0 Rate? >0A
Ta& Rates' Domestic Corporation 305 Resident 3orei"n Corporation 305 Non?Resident 3orei"n Corporation 305
Domestic corporations 1. for ed and organi"ed under 1hilippine la!s 2. inco e is taxable !ithin and !ithout 3. 2n so far as co puting their tax due, the) are allo!ed to deduct expenses, and taxable on their net taxable inco e =. .ax rate D 305 IN CONTRAST WITH:
3orei"n corporations 1. 0or ed and organi"ed under la!s of a foreign countr) 2. 2nco e is taxable !ithin
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3. 2n so far as co puting their tax due and !hether the) can deduct expenses, it depends !hether the) are$ a. Resident forei"n corporation 1. Allo!ed to deduct expenses but onl) those in relation to inco e generated !ithin the 1hilippines. 2. Since resident foreign corporations are taxable onl) on inco e generated !ithin, therefore, NET, eaning the) are allo!ed to deduct expensesE the expenses that the) are allo!ed to deduct against their inco e !ould onl) be expenses !ithin the 1hilippines or those !hich the) ha*e incurred in relation to producing the inco e that is taxable under 1hilippine la!sE 3. As to tax rate D 305 0. Non?resident forei"n corporation 1. 69. allo!ed to deduct expenses. 2. .herefore, the) are taxed at )RO55, eaning there are no deductionsE Fexpenses !ithin and !ithoutG ha*e no bearing because it is sub#ect to tax at gross. 3. tax rate D 305 You see, under the diagra sho!n abo*e, corporate tax pa)ers are si pler to understand. .here are onl) 3 (inds of taxable corporations. .he) do recei*e so e other source of inco e !hich is passi*e inco e, !e don3t ha*e the 2A5 for non/resident not engaged in trade or business. All of the are taxable at 305. .he ain difference is that this is taxable !orld!ide and no expenses allo!ed for 6B0<. What a(es a foreign corporation FBesidentG and !hat a(es it a Fnon/residentG corporation? What is the si plest !a) of deter ining !hether it is resident or non/resident? o 2f !e go to the legal phase, a foreign corporation !ould li(e to do business in the 1hilippines, to register itself as a resident foreign corporation in the 1hilippines. So if it is registered as a 1hilippine branch of a foreign co pan), it is auto aticall) considered as a resident forei"n corporation. o ,ut 696/B;%2S.BA.296 of a foreign corporation does not classified as a resident foreign corporation. ; .@ ean that )ou can ne*er be
,ecause the criteria reall) is not the registration for tax purposes, or )our official registration in the 1hilippines. ,ut it is W96 )ou are doing business in the 1hilippines. >Doin" 0usiness in t e P ilippinesG !ould re8uire the deter ination of !hether the acti*it) )ou are doing in the 1hilippines is done in a continuous basis or regular basis. So )ou cannot escape taxation si pl) b) not registering. ,ecause non/resident foreign corporations are foreign corporations not doing business in the 1hilippines. If t e. are considered as not doin" 0usiness in t e P ilippines$ ! . do !e a/e to discuss t em$ as a corporate ta&pa.er@
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6ot!ithstanding that this foreign corporation, organi"ed or incorporated abroad, not doing business in the 1hilippines, !e also consider the as part of the 3 t)pes of corporate taxpa)ers because in so e cases, foreign corporations not registered in the 1hilippines, not doing business in the 1hilippines enters into isolated transactions !ith a do estic corporation
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or an indi*idual. .herefore, #ust for the purpose of (no!ing !hat their taxabilit) is in the 1hilippines, to consider the as part of the taxpa)er F69. D926% ,HS26;SSG, eaning not regular or not on a continuous basis, but taxable still to the sa e 305. .he proble is, the) are taxable on the gross. 3ilin" of an Income Ta& Return 1ITR2 Domestic corporations are liable for 305 on the net inco e +because the) are allo!ed expenses incurred !ithin and !ithout-, are the) re8uired to file an 2.B at the end of the )ear or on a 8uarterl) basis and finali"e at the end of the )ear? o <orporations, especiall) do estic corporations, it abounds in the 1hilippines, the) are re8uired to declare their inco e in a 8uarterl) basis. .hese are ere esti ates and at the end of the )ear it is annuali"ed. 9n their o!n, the) ha*e to do that, this is called self/ assess ent +)ou assess )ourself as to ho! uch )our inco e is, ho! uch expenses and !hat is )our tax liabilit) to the go*ern ent-. Resident forei"n corporations' Are the) re8uired to file an 2.B at the end of the )ear? o Y;S, being resident foreign corporations, the) are categori"ed still ha*ing the sa e obligation of filing the 2.B at the end of the )ear and4or a 8uarterl) basis. ,ut !hat about Non?resident forei"n corporations. .hese are corporations organi"ed abroadE not doing business in the 1hilippines. When the) enter into one isolated transaction in the 1hilippines, are the) re8uired to file an 2.B at the end of the )ear or on a 8uarterl) basis? o 2f )ou are fro gross inco e? the ,2B, !hat !a)s are there a*ailable to collect the 305 tax on the
An) pa) ents ade to non/resident foreign corporations, #ust li(e pa) ent to non/resident aliens 69. engaged in trade or business of 2A5, since the) are not considered as doing business in the 1hilippines, the) !ould ha*e to be !ithheld of the tax. 1a) ents to$
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Non?R3C / !ithhold 305 of the tax
Non?resident aliens not en"a"ed in trade or 0usiness D !ithhold 2A5 +the) !ill recei*e ?05 free fro tax alread) or ?A5 B;AS96$ the 1hilippine go*ern ent does not ha*e #urisdiction o*er these taxpa)ers, hence, the go*ern ent cannot expect the to declare their inco e at the end of the )ear or on a 8uarterl) basis. What it expects is that, an) pa)or of the inco e, eaning to !ho these persons is transacting !ith has the obligation of a !ithholding agent. As a !ithholding agent, he !ill be liable for non/ !ithholding. 2s this a final tax or a creditable tax? 2s the tax !ithheld fro a non/resident foreign corporation, including non/resident alien not engaged in trade or business a final !it oldin" ta& or credita0le !it oldin" ta&@ A final !ithholding tax. 2s a non?resident forei"n corporation expected to file an 2.B at the end of the )ear? 6o, because he is not doing business in the 1hilippines, and not e*en registered as a business in the 1hilippines. T erefore$ not being re8uired to file an 2.B e*er)ti e pa) ent is being ade to the , it should be taxed !ith finalit).
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What is the FWithholding !ith finalit)G D it is the final !ithholding tax considered as the full and final pa) ent of the tax. <ontraril), the nature of a creditable !ithholding tax is that it is a tax !ithheld to approxi ate the liabilit) of the taxpa)er4pa)ee at the end of the )ear. We don3t expect these foreign corporations to file at the end of the )ear.
;xa ple$ if )ou ha*e a do estic corporation, and )ou enter into a contract !ith a foreign corporation for the to render repairs to )our achiner) in the 1hilippines, is that sub#ect to tax? Yes. 2f the contract fee is 1 7illion HS dollars, ho! uch !ill )ou pa) to the ? )eneral Rule' You onl) pa) the ?00 HS dollars. 300 HS dollars !ill be re itted to the go*ern ent. .hat is the general rule, there is al!a)s an exception. 2n so e schools, the) are re8uired to read at least 1 tax treat). Hsuall) in a ta& treat., there is a pro*ision on business profits, !hich sa)s that F2f a foreign corporation not doing business in the 1hilippines transacts business !ith a do estic corporation, the pa) ent to the foreign corporation is not taxable as long as that foreign corporation has no per anent establish ent here in the 1hilippines + eaning no office or an) branch in the 1hilippines-. 2n that case, if !e go b) the .ax <ode, that is taxable of 305, deduct, it3s a final tax. ,ut the tax treat) is so ething that gi*es a relief fro double taxation. Wh) does it gi*e relief fro double taxation? 2n !hat !a) does it gi*e relief fro double taxation if )ou !ould not be re8uired to !ithhold the 305? .hat foreign corporation !ho ca e to the 1hilippines for 1 !ee( to repair the e8uip ents of 7s. Du agat !ill surel) be taxable in the countr) !here it is a resident. ,eing a resident abroad, it is taxable !ithin and !ithout, and !e !ill tax that foreign corporation, that is double taxation alread). Although not in a strict sense, because these are 2 different taxing #urisdictions. Hnder the .ax <ode, it is 305. ,ut if !e in*o(e the .ax .reat), that is totall) tax free.
2n cases of conflict bet!een the +7unicipal la!- .ax <ode and .ax .reat), usuall) the .ax treat) !ill pre*ail because !e respect agree ents !ith other countries. 9nl) in case !here the .ax treat) is ore burdenso e, do !e follo! the .ax <ode. 2n ore cases than not, the tax treat) is there in order to gi*e relief, that is the purpose !h) the tax treat) is there, to ease the burden of that corporation fro 2 taxations in 2 different taxing #urisdictions. S;<. 2C. Bates of 2nco e .ax on 0oreign <orporations. D +,- Ta& on Non resident 3orei"n Corporation. D +1- In General. / ;xcept as other!ise pro*ided in this <ode, a foreign corporation not engaged in trade or business in the 1hilippines shall pa) a tax e8ual to thirt)/fi*e percent +3A5- of the gross inco e recei*ed during each taxable )ear fro all sources !ithin the 1hilippines, such as
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interests, di*idends, rents, ro)alties, salaries, pre iu s +except reinsurance pre iu s-, annuities, e olu ents or other fixed or deter inable annual, periodic or casual gains, profits and inco e, and capital gains, except capital gains sub#ect to tax under subparagraphs +<- and +d-$ rovi!e!" .hat effecti*e 1, 1IIC, the rate of inco e tax shall be thirt)/four percent +3=5-E effecti*e &anuar) 1, 1III, the rate shall be thirt)/three percent +335-E and, effecti*e &anuar) 1, 2000 and thereafter, the rate shall be thirt)/t!o percent +325-. 2f )ou read through S;<. 2C , on non/resident foreign corporations, the gross inco e of non/ resident foreign corporations includes the sa e gross inco e that has been enu erated in non/ resident aliens not engaged in trade or business, such as$ 1. 2nterests 2. Di*idends 3. Bents =. Bo)alties A. Salaries >. 1re iu s ?. Annuities, etc E&cept' <apital gains on sale of shares of stoc(s, !hich !ill be sub#ect to the sa e rate of$ A5 and 105 Wh) did it not ention, Fexcept capital gains on the sale of real propert)G?
6on/resident aliens not engaged in trade or business are sub#ect to 2A5 final tax on gross inco e, for all t)pes of gross inco e including interest, etc. except capital gains on sale of shares of stoc( and sale of real properties classified as capital assets. 2n this case, exception is onl) capital gains on sale of shares of stoc(. .he reason is that non/resident foreign corporations are not expected to ha*e probabl) real properties in the 1hilippines.
.hese are the general rules, the 305. .o!ards the end of the outline, )ou !ill see special do estic corporations and special resident foreign corporations and non/resident foreign corporations. .he tax rates are different, it is not the 305. As of no!, let us concentrate on inco e being sub#ect to 305. C. Income Ta& E&empt Entities$ 5ection -A (. )eneral Professional Partners ip *. +oint /enture for t e purpose of underta,in" construction pro%ects. -. +oint consortium for t e purpose of en"a"in" in petroleum$ "eot ermal and ot er ener". operations pursuant to a consortium a"reement !it t e "o/ernment B. Ca0or$ a"ricultural or orticultural or"ani#ation not or"ani#ed principall. for profit D. Mutual sa/in"s 0an, not a/in" capital stoc, represented 0. s ares and cooperati/e 0an, !it out capital stoc, or"ani#ed and operated for mutual purposes and !it out profit E. A 0eneficiar. societ.$ order or association$ operatin" for t e e&clusi/e 0enefits of t e mem0ers suc as fraternal or"ani#ation operatin" under t e lod"e s.stem 1one ! ic must operate under a parent and su0sidiar. associations2$ or a pa.ment of life$ sic,ness$ accident$ or ot er 0enefits e&clusi/el. to t e mem0ers of suc societ.$ order or association$ or non?stoc, corporation or t eir dependents F. Cemeter. compan. o!ned and operated e&clusi/el. for t e 0enefit of its mem0ers 1must 0e a non?profit cemeter.2
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 10> | P a g e I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.
P a g e | 10-
G. Non?stoc, corporation or association or"ani#ed and operated e&clusi/el. for reli"ious$ c arita0le$ scientific$ at letic$ or cultural purposes$ or for t e re a0ilitation of /eterans9 no part of its income or asset s all 0elon" to or inure to t e 0enefit of an. mem0er$ or"ani#er$ officer$ or an. specific person H. 7usiness lea"ue$ c am0er of commerce$ or 0oard of trade$ not or"ani#ed for profit$ and no part of t e net income of ! ic insures to t e 0enefit of an. pri/ate stoc, older or indi/idual Re4uisites' a. T is must 0e esta0lis ed for common 0usiness interest 0. No part of t e income s all inure to t e 0enefit of a particular indi/idual (A. Ci/ic lea"ue or or"ani#ation not or"ani#ed for profit 0ut operated e&clusi/el. for t e promotion of social !elfare ((. 3armers associations or li,e associations$ or"ani#ed and operated as a sales a"ent$ for t e purpose of mar,etin" t e products of its mem0ers and turnin" 0ac, to t em t e proceeds of sales$ less t e necessar. sellin" e&penses on t e 0asis of t e 4uantit. produce finis ed 0. t em 1must 0e a non?profit association2 (*. 3armers cooperati/e or ot er mutual t.p oon or fire insurance compan.$ mutual ditc or irri"ation compan.$ or li,e or"ani#ation of a purel. local c aracter$ t e income of ! ic consists solel. of assessments$ dues$ and fees collected from mem0ers of t e sole purpose of meetin" its e&penses (-. )o/ernment educational institution (B. Non?stoc, and non?profit educational institution )eneral Rule' All corporations$ a"encies or instrumentalities o!ned and controlled 0. t e "o/ernment s all pa. suc rate of ta& upon t eir ta&a0le income as are imposed upon corporations or associations en"a"ed in a similar 0usiness$ industr. of acti/it.. E&ception' (D. )5I5 1)o/ernment 5er/ice Insurance 5.stem2 (E. 555 15ocial 5ecurit. 5.stem2 (F. P<IC 1P ilippine <ealt Insurance Corporation2 (G. PC5O 1 P ilippine C arit. 5!eepsta,es Office2 (H. NAPOCOR 15pecial Ca!2 %i*e e 1 entit) not sub#ect to tax. o %o*ern ent educational institutions are a ong the inco e tax exe pt entities. 2n outline letter < )ou !ill see se*eral enu erations of entities not sub#ect to inco e tax, found in section 30, for those associations or entitites not ade for profit. Section 22, definition of a corporation in the .ax <ode. And fro 1A/1I in the outline, these are go*ern ent controlled corporations !hich are a ong the exceptions not sub#ect to inco e tax. 5EC. -A. Exemptions from Tax on Corporations. / .he follo!ing organi"ations shall not be taxed under this .itle in respect to inco e recei*ed b) the as such$ +A- :abor, agricultural or horticultural organi"ation not organi"ed principall) for profitE +,- 7utual sa*ings ban( not ha*ing a capital stoc( represented b) shares, and cooperati*e ban( !ithout capital stoc( organi"ed and operated for utual purposes and !ithout profitE +<- A beneficiar) societ), order or association, operating fort he exclusi*e benefit of the e bers such as a fraternal organi"ation operating under the lodge s)ste , or utual aid association or a nonstoc( corporation organi"ed b) e plo)ees pro*iding for the pa) ent of life, sic(ness, accident, or other
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 10- | P a g e I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.
;xa ple of an educational institution o!ned b) the go*ern ent.
P a g e | 105
benefits exclusi*el) to the their dependentsE
e bers of such societ), order, or association, or nonstoc( corporation or e bersE
+D- <e eter) co pan) o!ned and operated exclusi*el) for the benefit of its
+;- 6onstoc( corporation or association organi"ed and operated exclusi*el) for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of *eterans, no part of its net inco e or asset shall belong to or inures to the benefit of an) e ber, organi"er, officer or an) specific personE +0- ,usiness league cha ber of co erce, or board of trade, not organi"ed for profit and no part of the net inco e of !hich inures to the benefit of an) pri*ate stoc(/holder, or indi*idualE +%- <i*ic league or organi"ation not organi"ed for profit but operated exclusi*el) for the pro otion of social !elfareE +@- A nonstoc( and nonprofit educational institutionE +2- %o*ern ent educational institutionE +&- 0ar ersJ or other utual t)phoon or fire insurance co pan), utual ditch or irrigation co pan), utual or cooperati*e telephone co pan), or li(e organi"ation of a purel) local character, the inco e of !hich consists solel) of assess ents, dues, and fees collected fro e bers for the sole purpose of eeting its expensesE and +K- 0ar ersJ, fruit gro!ersJ, or li(e association organi"ed and operated as a sales agent for the purpose of ar(eting the products of its e bers and turning bac( to the the proceeds of sales, less the necessar) selling expenses on the basis of the 8uantit) of produce finished b) the E 6ot!ithstanding the pro*isions in the preceding paragraphs, the inco e of !hate*er (ind and character of the foregoing organi"ations fro an) of their properties, real or personal, or fro an) of their acti*ities conducted for profit regardless of the disposition ade of such inco e, shall be sub#ect to tax i posed under this <ode. +TAIE NOTE' in the outline there are additionalL li(e fro Are the collections ade b) a condo iniu corporation? building. A,< is the de*eloper. .he inco e of A,< is fro the units. 2s A,< the condo iniu corporation that !e are tal(ing What is a condo iniu nu ber 1 D 3-$ corporation sub#ect to 305 inco e tax? 6o.
o .his is a condo iniu sales of the condo iniu about? 69.
9nce a condo iniu building is set up, the de*eloper is separate fro this building and e*er) unit o!ner is a separate taxpa)er. So if he decides to lease it out, he !ill be sub#ect to inco e tax on the rents. ,ut there !ill be a condo iniu corporation co posed b) the different unit o!ners for the anage ent of the entire building. You call it a condominium corporation. .he proceeds or collections of a condo iniu corporation are$ 1. Association dues 2. ;lectricit) 3. <o =. Water Are these collections collected b) the condo iniu corporation sub#ect to inco e tax i posable on the condo iniu corporation? 9r !ould a condo iniu corporation fall under inco e tax exe pt entit) +Sec 30-?
o
on charges expense
Are these considered inco e collected for profit? And are condo iniu corporations ade for profit?
o
P a g e | 10,
69, these are not inco e and these are not collected for profitMMM <ondo iniu corporations are not ade for profit.
<ondo iniu corporations in so far as the) collect association dues, e bership dues, etc. so long as it is not ade for ar(/up or for profit, the) are not sub#ect to inco e tax, 'A., local business taxes. EXCEPTION' 9nce collections of condo iniu corporations exceed ore than that !hich the) re8uire for the aintenance of the building, it !ill be sub#ect to tax. ,ecause in so e areas, li(e 2. 1ar(, although it is not a condo iniu , but there is a corporation association of all the locators. 2f the) collect for electricit) to raise +att) said rise, but ura pud ug raise- the actual usage of that locator, or unit o!ner, then it is alread) inco e/earning, it is a profitable acti*it), it !ill alread) be sub#ect to tax. ,ut so long as it is onl) for ini u e bership dues to aintain this, the aintenance of the building, and reco*er onl) for the co on charges, it is not taxable. What is taxed, the excess or the entire a ount? Whiche*er !a), because if !e ha*e to declare the entire a ount, )ou can deduct the actual cost. What !ill be paid of tax is onl) the difference. 2f there is a ce eter), and there is a big space rented out for a concert, !ill the proceeds be sub#ect to tax? What if the proceeds !ill be used to repaint the gra*estones? o Y;S, it is taxable. o ;*en if that leasing out !ould not fall under acti*ities for profit, let3s sa) it is onl) for once a )ear or t!ice a )ear, still it is an inco e generated fro the use of the real propert). o :egal basis .here is a ca*eat in the last paragraph of Section 30, that not!ithstanding that these exe pt entities ha*e been granted exe ption fro inco e taxes, the) !ill still be sub#ect to inco e tax if and ! en t e. reali#e income comin" from an. of t ese t ree' 1. .he usage of a real propert), !hether it is regular or not. 2. .he usage of a personal propert), !hether regular or not. 3. An) acti*it) ade for profit, !hich is regular. .hese are sub#ect to inco e tax regardless of ho! the proceeds !ill be used or utili"ed. ;*en if it !ill be used for beautification purposes. Since the la! is clear that it does not gi*e an) preference, !hether it is used for the purpose or not, it !ill be sub#ect to inco e tax. 2f )ou run through the inco e tax exe pt entities, under Section 30, )ou !ill note that these are actuall) associations or entities !hich are ade$
o
69. for profit. :etter A$ :abor, agricultural or horticultural organi"ation not organi"ed principall) for profit.
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 10, | P a g e
P a g e | 106
2t can be profitable in so e sense, as long as it is not Fprincipall)G but other entities or associations are strictl) re8uiring that it is not for profit. And so e of these entities or associations should onl) cater for e bers.
o
9nce there is an acti*it) or usage of an) real or personal propert) defining the rule in the last paragraph auto aticall), it !ill be sub#ect to inco e tax. @o! !ill the ,2B expect pa) ent fro these t)pes of organi"ations? What first co es to ind is that, if )ou a(e up a ce eter) co pan), +not the one selling the lots because it is a corporation-, a ce eter) co pan) is usuall) not for profit, can the ,2B (eep trac( of the liabilities of these corporations or entities? 9r ho! !ill the) (eep trac( the liabilities of these entities? Are t ese entities re4uired to file an ITR$ if t e default is t at t e. are e&empt from income ta&$ 0ut once t e. /enture - acti/ities$ t e. !ill 0e su0%ect to income ta&@ o Y;S, the) !ill be re8uired to file an 2.B. o 9nce )ou register an association, entit) or corporation !ith the S;< and !ith it co es the registration of the ,2B, )ou are expected to be under the co*erage reportorial re8uire ents that ha*e to be co plied !ith before the ,2B. ;*en if it is a ong the tax exe pt entities, but )ou are registered for ,2B purposes, )ou are expected to file an 2.B )ear in )ear out. All )ou ha*e to do is si pl) put there the details, !hate*er proceeds there is, the expense, and at the botto that it is exe pt. o 2f )ou !ant to a*oid the reportorial re8uire ents, an)!a) )ou are not liable for inco e tax, )ou ha*e to pro*e before the ,2B, get a ruling that )ou are exe pt so that )ou !ill be ta(en out fro the co*erage of those !ho are re8uired to file an 2.B. o 9nce registered in the ,2B, the default is !hether )ou are exe pt or not, )ou are expected to file an 2.B, unless )ou ha*e been gi*en a special pri*ilege of exe ption of not filing an 2.B. o .his is one !a) of onitoring the acti*ities of tax exe pt declare huge a ounts of proceeds but still considered as exe authorities to exa ine the legalit) of the exe ption being clai )ou are a tax exe pt entit) )ou don3t ha*e huge a ounts expenses !ill go as !ell. 3 <ategories of the .ax/exe pt entities$ 1. .hose !hich do not co e !ithin the definition of a corporation 2. .ax/exe pt entities under Section 30 3. 0ro nu bers 1A/1I of letter < in the outline, their exe ption does not co e fro Section 30, but fro Section 2?+c- !hich co*ers do estic corporations. %9<< are do estic corporations. Section 2? is do estic corporation. Section 2C is resident foreign corporation )eneral Rule D %9<< are taxable. E&ception' 1. %S2S 2. SSS 3. 1@2< =. 1<S9
o
entities, because if )ou do pt, it is one !a) for the tax ed. ,ecause usuall), !hen of proceeds and ho! the
T ere are B )OCCs as specified under t e ta& code'
6A19<9B is not b) *irtue of the tax code, is a special la!. And there are an) special la!s that !e actuall) don3t need to stud) in taxation. 1robabl) !hen )ou are in practice.
P a g e | 107
2n indi*idual inco e taxation, !e identified !hat are the t.pes of income t at an indi/idual ma. 0e earnin". 1. <o pensation inco e 2. ,usiness inco e 3. %ains deri*ed fro =. 2nterests D. Rents' A..Y$ 2 included here rents, because there is a bar 8uestion, on !hat is the difference bet!een an operation lease and financial lease. When )ou sa) that )ou are spending rent pa) ent of an office space, is that an operating lease or financial lease. ;xa ple$ You are renting an apart ent in <ebu. 2s that rental pa) ent an operating lease or financial lease? :ease and rent are the sa e. What distinguishes lease as operating lease and lease as financial lease? o .he basic difference bet!een these 2 t)pes of leases, 2 usuall) associate it !ith the !ord FnalangG +not clear !hat !ord Att). eans o Operatin" Cease 6or al rent4lease that !e (no!. dealings in propert)
What )ou are pa)ing is for the te porar) use of propert) !ithout the transfer of o!nership at the end of the lease period. .he o!ner of the propert) does not foresee relin8uishing o!nership o*er it at the end of the contract period, !hile the one using it is onl) pa)ing for the te porar) usage of it. o 2t is for the operation of the business of the one leasing it. F:ease to o!nG in co on ter . 3inancial Cease +0ull pa)out lease
A purchase of the propert)
.he o!ner !ill relin8uish o!nership o*er the propert) at the end of the contract, !hile the one leasing it !ill beco e the o!ner of the propert). .he o!ner of the propert) is expecting that o*er the lease period not to go belo! ?30 da)s, he !ill reco*er the full *alue of the propert). So if )ou3re in a financial lease, !hate*er )ou are pa)ing to the lessor is a purchase price, )ou don3t recogni"e it as an expense in )our boo(s. 2f )ou3re into business and )ou lease out under financial lease, !hate*er pa) ents )ou are a(ing is not an expense, but is an ad*ance pa) ent, part of the purchase price. 3. Ro.alties o o .here are an) t)pes of acti*ities for !hich )ou can pa) ro)alties. Hnder Section =2, can )ou na e so e acti*ities$ 2n letter c, do )ou thin( the ro)alt) pa) ents ade b) NYO to the Bepublic of Oi bab!e, classifies under an) of the classification? 2t !as ore on extracting the econo ic rent or the pri*ilege to extract natural resources in a foreign land. 6onetheless, )ou !ill see that it is ore of a right, pri*ilege, or use. Hse or pri*ilege !hich can co and the pa) ent of ro)alties. 2t3s not the si ple 7cDonald3s that !e ha*e been tal(ing about. Bo)alt) pa) ents can be the transfer of technical (no!ledge.
o
P a g e | 109
If .ou purc ase a soft!are, it can be co*ered as ro)alt) pa) ent or not. 2t !ill be ro)alt) pa) ent if !hat )ou purchase is custo i"ed, !ith the transfer of technical (no!ledge. ,ut the soft!are )ou purchase is an offshelf a*ailable to all. You are not re8uired to pa) ro)alt) fees for that. 2t is si pl) the purchase of an ite .
So ro)alties are ore on the pri*ilege of ha*ing the right to use a scientific or technical (no!ledge.
o
). Di/idends @o! an) t.pes of di/idends do !e ha*e as of toda)? o Hnder the <orporation code, a corporation can declare di*idends in an) for so long as it has unrestricted retained earnings, eaning, profits !hich ha*e accu ulated in the corporation are distributable to the o!ners. 2n !hat !a) this !ill be distributed, that !e ha*e the different (inds of di*idends$ 1. Cas di/idends D gi*en through cash *. Propert. di/idends All enco passingE !hate*er propert) )ou !ould !ish to gi*e to )our stoc(holders it !ill be taxable.
o o
;xa ple$ if )ou are 7ann) 'illar and )ou ha*e in*estors. You li(e to distribute di*idends, in the for of subdi*ision units, is the subdi*ision units gi*en to stoc(holders sub#ect to tax?
@ou'e a"& ;ot' :i+e 1 ea)( a' &i+i&e"& BI;;A .ANN/ T(ere <ere -, i"+e'tor'
.his is 'illa 7ann). .here are different subdi*ision units. => in*estors, aside fro 7ann) 'illar. After accu ulating profits, instead of distributing cash, let3s sa) the financial state ent of 'illa 7ann) is in short of cash. 2t is not li8uid, but it has enough properties to declare as di*idends. @e decided to gi*e 1 each stoc(holder, is t is su0%ect to ta&@
o
Becall that di*idend is a passi*e inco e. 2nco e deri*ed fro an acti*it) in !hich )ou don3t ateriall) participate, and under the la!, 105 tax shall be i posed on a cash and4or propert) di*idend. ; o is lia0le to remit t e (AJ ta& on t e "o/ernment$ .ou or Villa Mann.@ It is not "i/en in cas $ so o! !ill !e pa. t e ta& on t e di/idends@ 2f )ou !ish to recei*e this propert) as a stoc(holder, )ou better prepare 105 as the tax on the propert) di*idends )ou !ill be recei*ing. a. Illustration$ You are a stoc(holder. <orp A declared stoc( di*idends and also ga*e )ou , shares. <orp A is the o!ner of <orp ,. 2nstead of gi*ing cash di*idends, !hat <orp A did !as to declare as di*idends the shares it holds in <orp. ,. .he effect is that H ' W N Y !ill be part/o!ners of <orp. , b) *irtue of the shares gi*en b) A to these stoc(holders. Is t e
P a g e | 110
issuance of 7 s ares to = V ; X K L to t e stoc, older$ a propert. or stoc, di/idend@ Is it su0%ect to ta&@

Com*a"y A I' t(e o<"er C S(are' Com*a"y C
B = X / D Com*a"y A &e)%are' i' 'to)$ i" C a' &i+i&e"& PROPERT/ 8IBI8EN
Who is the inco e earner? H'WNY 1a)or? <orporation A 2s <orp. , a part of the pa)or/pa)ee relationship of H'NWY? , is the ite . 2t is not the taxpa)er or the !ithholding agent. , is si pl) the ite gi*en b) A to its stoc(holders. 2f <orp. A decides not to gi*e in cash or an) other propert), but instead gi*es out the , shares that it holds to the stoc(holders. A is the pa)or of the di*idend. H'NWY is the inco e earner of the di*idend. , is the propert) gi*en b) A to H'WNY. .he difference is the shares. 0. Is t at a stoc, di/idend@ 7ecause ! at are "i/en are s ares. .a(e note of !hat shares !ill be declared b) the corporation as di*idends. R=CE5' 2f !hat are declared as di*idends are the shares of <orp. A +or its o!n shares-E therefore increasing their o!nership in the corporation STOCK DIVIDE D, because !hat is gi*en are the sa e corporation.
Com*a"y A 100 100 B 100 100 = 100 X / 100 100 E E Sto)$ 8i+i&e"&' C S(are' Com*a"y C
P a g e | 111
;xa ple$ 2f H'WNY o!ns 100 shares each and instead of gi*ing cash, A said o( 2 !ill gi*e another 100 A shares. .hese are stoc( di*idends not )et reali"ed inco e, unless it !ill be con*erted into cash, or under the exe ptions gi*en. 2f !hat <orp. A !ill be gi*ing out is the share of an) other corporation, except its o!n, it is not a stoc( di*idend, because it is not the stoc(s of <orp. A, rather it is the propert) in*est ent of <orp. A. 2f other shares !ill be gi*en, it is ?!"O!E"T# DIVIDE D, sub#ect to tax #ust li(e a cash di*idend. -. 5toc, Di/idends 2llustration$ 10 )ears ago )ou for ed a corporation. You are => all in all. You put => 7illion, 1 7illion each. You are a part/o!ner, )ou ha*e been gi*en 1 7illion shares each for the 1 7illion in*est ent that )ou put into the corporation.
1't 8ay of #u'i"e'' year' A''et' ;ia#i%itie' 100 .i%%io" Net =ort( Ca*ita% 4%e''5 Profit' -, .i%%io" 500 .i%%io" 4"o %ia#i%itie' yet5 -00 .i%%io" -, .i%%io" >,- .i%%io" 10
-, .i%%io" -, .i%%io" 4"o *rofit yet5
-,.i%%io" 9or ea)( to re)ei+e 1.
3>= 7illion profit is distributable to all of )ou. 2t is part of the A00 7illion asset. 2f )ou ha*e a cash of A00 7 )ou can distribute 3>= 7 to the o!ners. ,ut !hat if this A00 7 is in propert), )ou cannot distribute in cash, unless )ou sell first the propert). And selling propert) !ould entail tax on the inco e. So )ou don3t sell it, other!ise it !ill be double. You sell propert) in order to generate cash, then )ou are taxable on the inco e fro selling. When )ou declare it as Fcash di*idends, taxable again. So ight as !ell declare it auto aticall) as Fpropert) di*idends, because there is onl) 1 tax on the propert) di*idend. o ,ut as stoc(holders, if )ou don3t !ant to pa) an) tax to the ,2B, all )ou ha*e to do is declare FS.9<K D2'2D;6DS. And di*idends can be declared out of the unrestricti*e profits of the corporation. <o! to declare stoc, di/idend@ Si pl) put in or transfer the profits to the capital. 2f )ou ha*e 1 7 each, and )ou are gi*en another or another => 7 !ill be transferred there. 2t eans to sa) that )ou recei*ed 1 7 stoc( di*idends. Are .ou su0%ect to ta&@ 6ot )et, because there is si pl) a transfer of capital. Your o!nership !ill increase but )ou ha*e not reali"ed the inco e as )et, unless )ou sell it or it is in cash. )eneral Rule' Stoc( Di*idends are 69. taxable. Stoc( Di*idend representing the transfer of surplus to capital account shall not be sub#ect to tax.
o o
P a g e | 112
E&ception' !hen stoc( di*idends !ill be taxable. 1. If su0se4uentl. cancelled and redeemed 0. t e corporation ? 2f in order to a*oid the tax on di*idends, )ou declare stoc( di*idends and the corporation !ill cancel or redee it right after. 2 agine => 7 !ill be declared as stoc( di*idend. As a rule, it is not taxable. ,ut if behind that, there is alread) an agree ent after declaration it !ill be cancelled or redee ed b) the corporation, eaning as stoc(holders )ou !ill surrender that, and the corporation !ill redee that, in lieu of 1 7 each. You are circu *enting the la!, instead of outrightl) declaring that, )ou !ent through the path of stoc( di*idends first then exe ption. .hat is sub#ect to tax, as if it !as an auto atic declaration of cash di*idends. *. If it leads to a su0stantial alteration in t e proportion of ta& o!ners ip in a corporation.
Ca*ita% -, .i%%io" Profit'
>,- .i%%io"
8e)%are& 50 .i%%io" a' Sto)$ 8i+i&e"&'
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You decided to declare stoc( di*idends a!hile ago of => 7. :et3s sa) )ou !ant A0 7 to be declared as stoc( di*idend. ,ut the proble is, )ou are onl) =>. All of )ou =A !ill recei*e 1 7 each. ,ut the 1 person 7s. <ristoria, !ill recei*e the A 7 re aining. 2t !ill lead to an alteration of the interest of proportional holdings in the corporation. 2nstead of all of )ou e8uall) o!ning the corporation through shares, she !ill no! ha*e an edge. @er total in*est ent !ill be > 7. @er original 1 7 plus the A 7 stoc( di*idends. All the rest !ill be ha*ing onl) 2 7. Since it lead to a substantial alteration of delusion P???? in )our interest or o!nership, it !ill no! be sub#ect to tax. ,ut !hat is sub#ect to tax is onl) the difference of 1 7. ; . is it su0%ect to ta&@ ,ecause she ga*e an inco e o*er the other stoc(holders. What she !ill be
P a g e | 11>
recei*ing is ore than !hat )ou !ill be recei*ing in the future. Alteration :o*el)3s 8uestion$ When can !e sa) it is FsubstantialG or an) difference !ill be taxable alread)? o 2n so e boo(s, it is si pl) delusional???+a bot unsa na !ord- .he interest of the other stoc(holders it !ill alread) be taxable. Substantial, probabl) !hat it eant (ung 1 share lang or 1 peso. ,ut once the percentage of shareholdings !ill be different, auto aticall) it !ill be sub#ect to di*idend3s tax or the final tax. Wh)? ,ecause there is a rule in <orporation <ode, that declaration of stoc( di*idends ust follo! strictl) the percentage of o!nership of the stoc(holders that are to recei*e it. So if it is 1 o*er => all of )ou, it is 2 o*er => na that she !ill recei*e, it is alread) an alteration. She !ill ha*e ore interest in the corporation. <arlo3s 8uestion$ Who pa)s for the final tax in propert) di*idend? o <orporation !ill re it it in behalf of the recipient. 2n case it is a pure propert) di*idends, the corporation !ill ha*e to collect in cash fro the stoc(holders, )our propert) di*idends. ,efore the di*idends !ill be gi*en out, 105 !ill be re itted or else to be paid b) the stoc(holder to the corporation, !ho !ill in turn re it it to the go*ern ent. 0ollo! up Question of <arlo$ What !ill be deducted fro the retained earnings? o 2t3s reall) the *alue in the boo(s, not the fair ar(et *alue. 0or tax purposes, 105 !ill be co puted in the fair ar(et *alue. ,ut for the boo(s of the corporation, !hat !ill be deducted is the actual cost that !ent out of its o!nership. What are dis"uised di/idends? What t)pe of pa) ent !ill be considered as disguised di*idends? o /So are )ou sa)ing these are reall) di*idends co ing fro the profits of the corporation? o .he other di*idends that !e ha*e discussed, in cash propert) and stoc( ca e fro retained earnings and profit. ,ut disguised di*idends is so ething else, but it is called di*idends. o Disguised di*idends are pa) ents ade b) the corporation to the stoc(holders in an) other for , other than di*idend pa) ent. 1st ;xa ple$ 2f the o!ners co posed of the ,oard of Directors, and the honorariu for e*er) eeting e*er) onth is 1 7 for the presence of a 10/ inute eeting, is that not a di*idend distribution disguised as honorariu . 2t a) be an) other (ind of pa) ent to the o!ners or stoc(holders not deno inated as di*idends but actuall) profit distribution si pl) to a*oid tax. 2nd ;xa ple$ Befer to pre*ious illustration. => o!ners. 2nstead of declaring the 3>= 7illion )ou !ill be gi*en 1 otor *ehicle each. 2t !ill be clai ed b) the co pan) as an expense, not as a di*idend distribution. .he co pan) !ill be benefited b) the depreciation of the otor *ehicle that the) ac8uire. .he point is, !hene*er there are huge a ounts of pa) ents to the o!ners not considered as di*idends, the) are actuall) disguised di*idends. o Are disguised di*idends taxable? ;xa ple$ .here is a parent co pan) abroad. .here is a subsidiar) in the 1hilippines. Whene*er the subsidiar) !ill declare di*idends abroad it !ill be sub#ect to 1A5 final !ithholding tax. ,ut if the corporation !ill si pl) pa) ro)alties of A5, or ro)alties declared to foreign corporation, it !ill not be taxed of 1A5 final !ithholding tax in di*idends. ,ut once pa) ents to its stoc(holder, !hich is its parent/co pan) beco es too excessi*e, it !ill be considered as di*idend distribution sub#ect to the rate of? ; at rate is imposed on dis"uised di/idends@
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 11> | P a g e
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.he point is, once excessi*e pa) ent of expenses is considered as a disguised di*idend, the taxabilit) of the disguised di*idend !ould be the sa e as cash or propert) di*idends being gi*en. If t e recipient of t e dis"uised di/idend is an indi/idual D follo!$ 105 / for Besident citi"ens, 6on/resident citi"ens and resident aliens 205 / for non/resident aliens engaged in trade or business 2A5 / for non/resident aliens 69. engaged in trade or business If t e recipient is a domestic corporation D pa) ents to do estic corporations of di*idends AB; 69. AS Y;. .ANA,:;. Wh)? ,ecause it is still an u brella before the ulti ate o!ner !ill recei*e the di*idends. 2f it is corporation to corporation do esticall), no tax. 6onetheless, it is not )et part of the topic, but the point is, if a distribution of pa) ent is found to be a disguised di*idend, it is taxable #ust li(e cash or propert) di*idends. What is a li8uidating di*idend? o When )ou decide, )our corporation decides to stop operations, )ou RRRR. You dissol*e, li8uidate !hate*er re aining assets )ou a) ha*e. .he distribution !ill be considered as li8uidating di*idend. Whate*er )ou recei*e !ill be sub#ect to tax. 9n !hat tax, it !ill be . . . . . . Y9HB ASS2%67;6.MMM SE!T. $% &'(' Tuesda) DI5)=I5ED DIVIDEND5 Disguised di*idends Agree or disagree? o o a) be considered as distributed to an indi*idual !ho is not a stoc(holder.
Disagree. Di*idends are onl) gi*en to stoc(holders of a corporation. .hus, !hene*er an excessi*e pa) ent of honorariu +17 a onth- is gi*en to a 1resident of the <o pan), !ho is not a stoc(holder, it !ill not be treated as disguised di*idends. ,ut !hat !ill happen to the pa) ent? .axable still? 2t !ill be taxable on the part of the 1resident but not as di*idends. Whate*er inco e !ill be deri*ed b) an indi*idual, it !ill be taxable. 2n !hat !a)? 2t depends on !hat is the treat ent gi*en b) the .ax <ode. 2n case excessi*e pa) ent is ade to an indi*idual !ho is a stoc(holder, it !ill be treated as disguised di*idends and sub#ect to the usual rates of 105 for B<, 6B< and BA, 205 for 6BA/;.,, and 2A5 for 6BA/6;.,. ,ut if it so happens that the indi*idual !ho recei*ed excessi*e pa)outs or pa) ents is not a stoc(holder, it !ill not be considered as disguised di*idends. 6o di*idends shall be gi*en to a non/ stoc(holder. ,ut still, being an inco e or an inflo! of !ealth in the hands of such indi*idual, it !ill be taxable sub#ect to the ordinar) rates to be !ithheld, if he3s an e plo)ee, of the A/325 inco e tax according to the !ithholding tax on !ages table.
CIM=IDATIN) DIVIDEND5 Whene*er a corporation dissol*es, li8uidates and !inds up its business operations, it a) happen that assets !ill be left after pa)ing all the creditors and these assets !ill be distributed to the stoc(holders in accordance !ith the proportion of o!nership that the) ha*e in the business and it3s called li8uidating di*idends. 2t3s taxable. o :i8uidating di*idends gi*en, li(e cash, properties or other re aining assets after pa)ing out all the creditors of the corporation, if distributed to the stoc(holders, !ill it be sub#ect
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 11- | P a g e
P a g e | 115
to 0W. 105, 205 or 2A5 depending on the classification of the taxpa)er or the corporation? 69. Do )ou thin( a stoc(holder !ill experience loss in recei*ing a li8uidating di*idend? Y;S.
A''et' ;ia#i%itie' ,0H000H000 Net <ort( Ca*ita% 'to)$ Profit' o -,H000H000 0 -,H000H000 -,H000H000 0 -0H000H000 1H000H000 100H000H000
;xa ple$ =>7 as in*ested b) => people for 17 each 10 )ears ago and 0 liabilit). 6et !orth, therefore, is =>7. <apital stoc( of first da) of operation is =>7 and profits is 0. 10 )ears after, assets gre! to 1007, liabilities to >07. 6et !orth, therefore, is =07. 2f )ou dissol*e and !ind up the affairs of the corporation, )ou distribute the =07 after )ou pa)out the liabilities to the creditors. Would the stoc(holders be recei*ing the sa e a ount that the) in*ested of 17 each? 69. .he stoc(holders !ill recei*e less than 17. 2s there a gain sub#ect to tax? 69, since there is a loss. <an !e consider the less than 17 receipt of cash, propert) or assets as li8uidating di*idend? Y;S. Would such li8uidating di*idend be taxable? 69, it !ill be deductible. So if it !ill happen that )our receipt of li8uidating di*idend is less than !hat )ou ha*e in*ested in the corporation, )ou actuall) suffered a loss fro the in*est ent. Whate*er )ou recei*ed, considered as li8uidating di*idend, is not sub#ect to tax.
o
A''et' ;ia#i%itie' ,0H000H000 Net <ort( Ca*ita% 'to)$ Profit'
-,H000H000 0 -,H000H000 -,H000H000 0
-00H000H000 >-0H000H000 1H000H000
,ut if it3s the other !a) around, there is a gain or )ou recei*e ore than !hat )ou ha*e in*ested. And !hate*er )ou ha*e in*ested is the cost of )our in*est ent. An) difference of !hat )ou recei*e as li8uidating di*idend fro such cost !ill be considered as taxable inco e sub#ect to the rate of A/325. So !hene*er )ou recei*e a li8uidating di*idend, #ust treat it as a capital inco e. <o pute )our tax liabilit) together !ith all )our other inco e. 2t3s ne*er sub#ect to 0W.. What happens if the stoc(holder recei*ing the li8uidating di*idend is a X/D corporation? Cor*. o ;xa ple$ <orporation NYO is o!ned b) A/0 and &K: <orporation. A C 2f NYO <orporation li8uidates and distributes the re aining assets C to all > indi*idual stoc(holders and a corporate stoc(holder. 2s 8 such corporate stoc(holder sub#ect to tax? E
9 Cor*.
I" 'traig(t %i"e #or&er' are IJ )o&a% *ro+i'io"'.
P a g e | 11,
Whate*er the taxabilit), on a nor al basis, if the stoc(holder, !hether he is sub#ected to A/325 or 2A5 because he is a 6BA/6;.,, or the stoc(holder is a corporation sub#ect to 305, then use those rates in co puting the tax due on the difference bet!een )our li8uidating di*idend and the initial in*est ent or the cost of the in*est ent that )ou put into the corporation. After all, it3s the inco e that atters. You shall not be taxed on the cost of the in*est ent )ou put into unli(e cash and propert) di*idend, )ou get it out free fro the cost as )et because the corporation is not !inding up. Still !hene*er )ou recei*e cash and propert) di*idends, )our capital is intact in the corporation. ,ut in li8uidating di*idends, it3s the end of the corporation and the end of )our in*est ent. An) inco e is taxable. An) loss is deductible. 69.;$ :osses fro in*est ent or inco e fro in*est ent, such as li8uidating di*idends, are capital losses and capital inco e, respecti*el). .he)3re onl) taxable as capital inco e and deductible against capital inco e if a loss is experienced.
;. D;DH<.296S 1. 0unda ental 1rinciples Are corporations allo!ed deductions? Y;S. .he sa e as the a*ailable deductions for indi*idual taxpa)ers? 69. o What t)pes of deductions and4or exe ptions are a*ailable to indi*idual taxpa)ers? 1. 1ersonal and additional exe ptions 2. 1re iu s on health and hospitali"ation insurance 3. 2te i"ed deductions, or in lieu of such, optional standard deductions @o!e*er, not all these three are a*ailable to all t)pes of indi*iduals. 2f an indi*idual is purel) a co pensation inco e earner, onl) 1 and 2 !ould be deductible. ,ut if the indi*idual is into business alread), !hether together !ith ;B/;; relationship, he can also clai an) of the ite i"ed deductions or optional standard deductions because ite i"ed deductions is for business expenses. ,ut then, all three !ould not be a*ailable to an indi*idual !ho is classified as a 6BA/6;.,. 2n so far as the corporation is concerned, !hich of the 3 deductions are a*ailable to a corporation? o o 2te i"ed deductions, or in lieu of such, optional standard deductions B;AS96$ <orporations *enture into an acti*it) !hich is for profit. .herefore, it is for business and !ith it co es the incurrence of
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business expenses. .hat3s !h) as a rule, corporations doing business in the 1hilippines, in fact, all corporations engaged in trade or business in the 1hilippines can deduct ite i"ed deductions or optional standard deduction if it so chooses. ,ut exe ptions are not a*ailable because it co*ers for personal and fa il) li*ing expenses and corporations are not natural persons. And pre iu s on health and hospitali"ation insurance are not as !ell considered as deductions. What are the underl)ing principles that need to be follo!ed before a corporation can deduct ite i"ed deductions? o o o i. .he taxpa)er ii. .he taxpa)er ust pro*e that there is a la! authori"ing deductions ust pro*e that he is entitled to deductions
iii. 2f the la! pro*ides for re8uire ent that the a ount or the expense pa) ent needs to be !ithheld of tax, a tax should ha*e been !ithheld, other!ise, the deduction is not allo!ed i*. Al!a)s, !e construe it strictl) against the taxpa)er 9SD? Y;S, except 6B0<. B;AS96 for exception$ Such corporation, its tax base is at gross. And the ere fact that a 6B0< is construed as a corporation 6;.,, there is no deductions allo!ed fro their inco e. Whate*er the) earn in the 1hil. is sub#ect to 305 inco e tax except those capital gains fro the sale of shares of stoc(s in a do estic corporation. ite i"ed deductions?
o o
,ut !hat about 9SD? <an corporations reall) clai
<an 9SD be allo!ed as a deduction if the corporation is not allo!ed to clai o
69, 9SD is in lieu of ite i"ed deductions. So if a corporation or an) taxpa)er is not allo!ed to clai ite i"ed deductions, there is no 9SD allo!ed. ,ut there are cases or exceptions !hen ite i"ed deduction is allo!ed but 9SD is not allo!ed, such as !hen the taxpa)er is a 6BA/;., since 9SD can be clai ed b) an) indi*idual except 6BA but 6BA/;., can clai ite i"ed deductions because the) are sub#ect to tax on net inco e. 9SD exa ple$ 2f )our gross inco e is 17, )ou can auto aticall) deduct 9SD of =00K. 1a) tax as a corporation on the >00K. 2te i"ed deduction is onl) 300K, go for 9SD. You don3t need to substantiate it !ith receipts. You don3t e*en ha*e to incur such expense. ,ut if )our ite i"ed deduction is I00K, forget about 9SD. <lai such ite i"ed deduction as an expense. .he onl) proble is that )our boo(s !ill be audited to deter ine !hether )ou reall) ha*e incurred I00K in total expenses and !hether it is substantiated !ith official receipts, or in*oices or in contracts. ite i"ed deductions? 1. 2ndi*iduals, !hoe*er that indi*idual is, if he is purel) earning inco e fro ;B/;; relationship, forget about ite i"ed deduction because ite i"ed deduction is onl) in business, trade, or profession. 2. 2f the indi*idual is a 6BA/6;.,, no ite i"ed deduction. 3. 6B0< are ne*er allo!ed ite i"ed deduction or 9SD.
Who are not allo!ed to clai o
o o
2te i"ed deduction beco es the default of e*er) businesses. ;*er) business, !hether indi*idual taxpa)er or a corporation, is re8uired to report on a 8uarterl) basis the inco e tax liabilit) of that business. o 2f the taxpa)er forgets to choose !hich option is it ta(ing, !hether it is ite i"ed deduction +2D- or 9SD, auto aticall), the default is 2D. ,ut once in the first 8uarter, the
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taxpa)er has alread) chosen 9SD, )ou can no longer shift bac( to or re*ert bac( to 2D for the entire )ear. So that eans, 9SD, as an option, is irre*ocable for the )ear at issue. o o <an the taxpa)er choose 2D the follo!ing )ear? Y;S because irre*ocabilit) of an 9SD is onl) for the current )ear. 2t3s on a )ear/to/)ear basis. 2f a %11, !ho is not taxable, elects to report its taxable inco e choosing 9SD, then the partners !ho ha*e to report their tax liabilit) and paid !ill also be liable under 9SD. 2f the %11 elects 2D, the partners don3t ha*e an) other choice but to go for 2D. So %11s and the indi*idual partners are ta(en as a single entit) for tax purposes. 6ot one of the taxpa)ers, %11 or the partners, can choose the other and the other one go for the other option.
;N1;6S;S What are ordinar) and necessar) expenses? o 9rdinar) expenses +9;- D refers to the expenses !hich are nor al, usual or co the business, trade or profession of the taxpa)er. on to
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2f )ou3re clai ing an expense !hich is for the future, ad*ance rental pa) ents, is it deductible? o Hnder the accrual ethod, it !ould be deductible. 2s the expense pertaining to last )ear3s acti*it) deductible? o o 69. All the expenses ust be paid or incurred during the )ear except net operating loss carr)/o*er. 6;. 91;BA.26% :9SS <ABBY/9';B +69:<9 2f the business incurs a loss, it3s deductible. ,ut once a business incurs 69:, eaning, the botto line figure for the entire )ear3s operations is a loss, there is an option for the business to carr) it o*er to the next 3 )ears. So, it eans to sa) if it3s carried o*er to the next 3 )ears, in the next 3 )ears, it3s not the expense during those )ears. 2t pertains to the pre*ious )ears. ,ut since it is andated b) la! to be deductible, it3s an exception to the rule that it does not reall) ha*e to pertain for this )ear3s operations.
iii. 2t ust be paid or incurred in connection !ith the trade, business or profession of the taxpa)er ;xa ple$ 2n )ou3re in 3 businesses. 9ne anufacturing corporation. 9ne real estate business. And the other is a sio ai business. You don3t ix the expenses. You cannot clai the expenses of this business to that business. 2t should necessaril) be connected !ith the business that )ou3re in. ust be reasonable in a ountE 2f )ou are the president of the corporation earning 100K a onth, it a) be reasonable in so far as that business is concerned but )our 100K !ill be unreasonable in another t)pe of corporation. So there is no fix a ount !ithin !hich !e can deter ine !hether this t)pe of expense clai ed is reasonable or not. 6o fix a ount but )ou ha*e to consider it in so far as the operation is concerned. ,ut there is one t)pe of expense that is regulated b) the tax authorities and that expense is ;ntertain ent, A use ent and Becreation expense +;AB expense-. Wh)? ,ecause this t)pe of expense as a deduction has been abused. 7an) businesses clai representation expense D bringing clients to clubs. And the a ount is unreasonable. 2nstead of distributing as di*idends, the) clai it as representation expense D the) re8uire stoc(holder or e plo)ee to bring in receipts and th) can e*en as( receipts fro )ou and ha*e it rei bursed, such as edical representati*es. ;AB expense has been abused. .here is alread) a regulation that sets a 8uota for such expense. What is the ceiling set b) the Secretar) of 0inance? o ;AB expense D to the extent onl) of 15 of the net sales if the corporation is engaged in ser*ices. And 0.A5 of the net sales if the corporation is into the sale of goods or properties. B;AS96 for the difference$ ,ecause those engage in ser*ices usuall) needs representation expense to entertain their clients or
i*. 2t
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 12> | P a g e
P a g e | 12-
treat the o*er eetings, lunch eetings, etc. ,ut if it is goods or properties, so long as )ou ha*e the product, )ou can sell it. o What happens if )ou are both engaged in the sale of ser*ice or in the sale of goods? Which !ill )ou follo!? You still ha*e to follo! the for ula D 15 for the ser*ice and 0.A5 for the goods and properties. ;xa ple$ So it eans to sa) that if the corporation, net sales is 17 and it is engaged in the sale of ser*ice and goods, the axi u ;AB expense for ser*ices is onl) 10K !hile for goods or properties, it3s onl) AK. 2f the corporation has A0K expense, auto aticall), =AK is not deductible for goods or properties since onl) AK is the axi u deductible a ount.
2n so far as salaries are concerned or bonuses of directors, it3s pro*ided under the <orporation <ode that ,oard of Directors, as honorariu , should not exceed 105 of the net inco e of the corporation because if it exceeds, it !ill be considered alread) as disguised di*idends. o ;xa ple$ 2f the net inco e is onl) 17, onl) 100K should be gi*en to the ,oard of Directors for the entire )ear D for all of the . An) excess !ill be considered as unreasonable.
*. 2t ust be substantiated b) sufficient e*idence such as official receipts and other official recordsE and 9fficial receipts Ade8uate records A ount of expense being deducted Date and place !here such expense is paid or incurred 6ature of expense D direct connection or relation of the expense being deducted to the de*elop ent, anage ent, operation and4or conduct of the trade, business, or profession of the taxpa)er .he e*idence ust be recogni"ed or produced b) the third part). 2f the e*idence solel) co es fro the co pan) D )ou ade it, )ou drafted it, no signature fro the other part), it is self/ser*ing so it is not sufficient e*idence. ;xa ple$ You3re in the business of anufacturing !ooden to)s for export in ;urope. And for cost/cutting purposes, )ou don3t ha*e a large pool of e plo)ees so that )ou sub/contract the ra! aterials to the different ho e!or(ers. And those ho e!or(ers are actuall) not registered in the business. .he) #ust do !hat the)3re re8uired to do and !hen the) bring it bac( to )ou, )ou pa) the . @o e!or(ers, not being registered !ith the tax authorities because the)3re not reall) into business, cannot produce an 9.B. nor an in*oice. What proof !ill )ou present to the tax authorities in order to clai the pa) ents )ou ade to these ho e!or(ers? o A contract or an ac(no!ledg ent receipt !ill do. .he) can surel) sign. 2t3s not al!a)s in all cases that )ou can re8uire )our supplier to produce an 9.B. 2n one of the a#or cases that !e ha*e in the 1hilippines is those in the business of anufacturing Fcara#inanG. You purchase it fro different suppliers to gro! such but the) are
P a g e | 125
not registered in the business of suppl)ing. .he) cannot produce an 9.B. .he proble is that if the) do not produce an 9.B., !hat proof do )ou present to the go*ern ent that indeed that )ou3*e ade pa) ents for these !hen it cost illions? So in one of the co panies here, the onl) thing that the) can produce is the proof that it had been !eighed b) a reputable !eighing co pan), the deposit that the) ade in illions to an indi*idual in 7indanao. ,ut if )ou reall) !ant the to produce an 9.B., the) can sho! )ou their guns. So as a business an, )ou don3t force the to issue an 9.B. So ho! to pro*e to the ,2B that these are *alid and legiti ate expenses? .here3s alread) a S< actuall) follo!ing the <ohan Bule in the H.S. that so e expenses need not be supported b) 9.B. but so long as it can be substantiated !ith other ade8uate records pro*ing that in fact it has been purchased b) the co pan) and the goods recei*ed b) the co pan) !hich !ere actuall) con*erted to the product sold, can be proof enough that expenses ha*e been paid or incurred. ,ut not in all instances. 9SD?
2n this t)pe of re8uisite, is it necessar) !hen )ou !ant to clai o
69, because the la! in 9SD sa)s F!hether or not )ou ha*e incurred actual expensesG. So this re8uisite applies onl) in so far as 2D is concerned. orals, public polic) or public order
*i. 2t
ust not be against la!,
;xa ple$ ,ribes and (ic(bac(s gi*en to go*ern ent personnel You ha*e an assess ent of 107 in unpaid taxes or delin8uent taxes. You co e into a co pro ise or co on grounds. You !ill onl) pa) A7 and )ou !ill be issued a tax clearance. And for the A7 that )ou !ill pa), onl) 2.A7 !ill be receipted as recei*ed b) the go*ern ent. Where*er the other 2.A7 !ill go, !e do not (no!. @o! uch is deductible fro )our business operations? 107, A7, 2.A7 or none of the abo*e? o 696; of the abo*e. Whate*er pa) ents )ou ade to the go*ern ent, as (ic(bac(s or bribes, e*en to the e bers of the ,9< or ,2B or D90, so long as it3s not a legiti ate pa) ent of an expense, it is not deductible. @o! about pa) ents to rebels as re*olutionar) taxes? .eleco unications to!ers, so that it !ill not be blo!n up, )ou ha*e to pa) a certain a ount. 2s that deductible? 69. All taxes, as a rule, are deductible, except inco e tax paid to the 1hil. go*ern ent, inco e tax paid to the foreign go*ern ent, estate tax, donor3s tax and 'A.. All the other taxes are deductible. @o!e*er, e*en if the) call it as a for al tax that is paid to the rebels, it doesn3t go to the go*ern ent, therefore, ho!e*er edia !ill tr) to a(e it legal in the ne!s, it3s still a non/deductible expense because it3s contrar) to la! and public order.
ADVERTI5IN) AND PROMOTIONAC EXPEN5E 1APE2
P a g e | 12,
As a rule, A1; are deductible unless it borders to creation of good!ill for the co pan) or creating a na e for the co pan), future recall, etcL o ;xa ple$ Dandruff sha poos D !e ha*e %uard, @ead and Shoulders. We3*e been through that for )ears alread). When <lear ca e in, al ost all actors and actresses beca e endorsers for it. @o! uch did the) ha*e as a budget for that? 2t3s 1,. 2s it deductible as A1; in the )ear it !as incurred? 69. 2t3s excessi*e and the purpose of actuall) of <lear is not to a(e it as an expense in the )ear of entr) but rather its purpose !as to gi*e a brand and gi*e a na e recall for the custo ers and it3s expected to benefit a nu ber of )ears for the co pan), therefore, !hate*er expense it had paid during the )ear of entr) !ill be a orti"ed o*er future )ears. :et3s sa), for A )ears.
TRAVEC EXPEN5E5 1TE2 .; are deductible e*en if it3s not receipted because the)3re .; that !e incur !ithout ha*ing a receipt fro the carriers, etcL OPTION TO PRIVATE ED=CTIONAC IN5TIT=TION 1OPEI2 1;2s ha*e the option to deduct capital expenditures in the )ear it !as paid or incurred or the other option is to depreciate the expense o*er the useful life of the asset. o ;xa ple$ HS< !ould purchase a 1007 *alue building. 2t can opt to deduct entirel) the 1007 in the )ear of purchase or a orti"ed the 1007 o*er its useful life. 2n an) case, !hate*er the option chosen b) HS<, since it3s not sub#ect to tax, it !on3t ha*e an) effect. 2t doesn3t need to atch the expense incurred toda) against the inco e for toda) or )ear/to/)ear basis.
INTERE5T5 EXPEN5E 1IE2 What is interest? o 2t3s the a ount paid for the use or forbearance of one). ;xa ple$ 2f )ou ha*e a business and )ou obtained a loan for the !or(ing capital of )our operation and )ou are to pa) 10K onthl) as interest. 2s the 120K for the entire )ear be deductible as a business expense if it3s related to the business? Y;S. As a rule, 2; incurred b) a business, corporation, co pan) or 11 is deductible so long as the co on re8uisites are co plied !ith$ o 1. .he interest o 2. 2t o o o o o 3. 2t =. 2t ust be ordinar) and necessar). So if )ou obtained a loan to use it as a !or(ing capital of )our operations, the interest paid is deductible. ust be reasonable. Beasonableness !ould depend on the si"e of the business operation. ust be paid or incurred during the taxable )ear ust be paid or incurred in connection !ith the business
A. 2t ust be substantiated b) the contract itself and pa) ent *ouchers, etc. >. 2t ust not be contrar) to la! a(e 2; deductible$ 9ther additional re8uisites to i. .here
ust be an obligation !hich is *alid and subsisting
P a g e | 126
ii. .here
ust be an agree ent in !riting to pa) interest
9ther!ise, not in !riting, no 2; deduction, !hether or not )ou ha*e actuall) paid an interest ust obser*e the li itation under the arbitrage rule ust not be bet!een related taxpa)ers aintaining the controlling
iii. .his i*. .his
2; !hich are non/deductible$ +See outline<orporation to corporation !here onl) one indi*idual is interest, the interest is not deductible.
;xa ple$ <o. A +parent co pan)- and <o. , +subsidiar) co pan)-. Hsuall) the parent co pan) grants a loan to a subsidiar) co pan) for operational purposes. 2f the agree ent is stated that interest shall be paid in !riting, is the indi*idual, according to the grandfather ruleL 2f <o. A is o!ning <o. , 1005 and the loan is granted to the subsidiar) co pan) !here interest is stipulated to be paid, is the interest pa) ents ade b) the subsidiar) to the parent co pan) deductible? 69. @ere, <o. A is a holding co pan) of <o. ,. When one is a holding co pan) of the other and extends loans, the 2; beco es a non/deductible expense. .he A05/rule +controlling interest rule- is onl) applicable to non/existing holding co panies. ;xa ple$ A co pan) declares di*idends. Di*idends co es out fro )our shareholdings and shareholdings, usuall), shares that )ou ha*e can be classified as co on shares or preferred shares. Whene*er )ou organi"e a corporation, )ou a) sa) that this group has co on shares, this group !ill ha*e preferred shares. .he ter preferred shares, )ou !ill ha*e a preference in the distribution of di*idends, as a rule. 2f there co es a point in ti e that the business, in a certain )ear, cannot declare a di*idend, so e di*idend !ould accrue to the but not totall) paid out, nothing !ould accrue to )ou. 7eaning, the) ha*e a collectible. 2n the follo!ing )ear, !hen distribution happens, the) !ill get their prior/)ear accrual di*idends plus interest, )ou !ill recei*e )ours for the )ear. Will the interest on the preferred shares be considered as deductible 2;? .he concept of pa)ing interest and interest as a deducible expense ite is it ust be pa) ent for the use of so eone else3s one) D the forbearance of one). You te poraril) borro! one), use it and for the use, )ou are to pa) interest in addition to the principal pa) ents that )ou !ill a(e. ,ut di*idend declaration is not an obligation of the corporation. 2n fact, under the <orporation <ode, a di*idend can onl) be declared if there is enough unrestricted retained earnings or corporate profits that a corporation has. 2f it is not dependent upon corporate profits on the preferred shares, it is deductible. 2f it is dependent upon corporate profits, as a rule, it is not deductible expense. B;AS96$ .he corporation did not reall) loan an) one) co ing fro the stoc(holders. .he corporation is obligated to pa) out di*idends once it has profits.
2nterest expense on preferred stoc(
What is the Arbitrage Bule? o o .he taxpa)er3s allo!able deduction for 2; shall be reduced b) an a ount e8ual to 335 of the interest inco e earned b) hi !hich has been sub#ected to final tax. .he arbitrage rule auto aticall) li its the deductibilit) of the 2; b) reducing 335 of the interest inco e sub#ect to final tax, !hether or not engaged in bac(/to/bac( loan transactions.
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;xa ple$ :et3s sa) that the co pan) has an 2; of >00K but it has no interest inco e, is the 2; deductible full)? Y;S. Sa) for exa ple, <o. A +earning interest inco e of 100K sub#ect to 205 final tax-, <o. , +earning 100K interest inco e fro loans to e plo)ees- and <o. < +no interest inco e-. All of the obtained the 17 loan running for 10 )ears !herein the) !ould be liable each for >00K annuall) as 2;. Which of the 3 corporations can clai the full >00K as expense and !hich cannot? <o. A cannot clai full) the >00K as a deductible 2; but onl) A>?K +>00K D r335 x 100Kl-. .he arbitrage rule applies since <o. A is earning interest inco e sub#ected to final tax. 2f none, the arbitrage does not appl), auto aticall) full interest pa) ent can be deductible. <o. , can full) clai the >00K as a deductible 2; since its interest inco e is not sub#ected to final tax. 2nterest inco e sub#ected to final tax is onl) those co ing fro the ban(ing institutions. <o. < can full) clai interest inco e. the >00K as a deductible 2; since it is not earning
.he principle !h) such rule exists$ .o discourage ,ac(/to/,ac( loan transactions D obtaining loan fro one ban( and in*est it to another ban( in order to benefit the difference bet!een the tax due on interest inco e and the tax benefit fro the 2;.
o o
2f the 2; is 100K, interest inco e sub#ect to final tax is 100K, do )ou ha*e a deductible 2;? Y;S. You ha*e a deductible 2; of >?K +100K D r335 x 100Kl-. 2f the interest inco e is A00K sub#ect to final tax, 2; is 100K, do )ou ha*e a deductible 2;? 69. 335 of A00K is 1>AK. So the 1>AK !ill be deducted to 100K, !hich results to no deductible 2;. 2t3s an interest !hich is co puted or calculated, not paid or incurred, for the purpose of deter ining the opportunit) cost of in*esting in a business. 2t3s not real. .here3s no pa) ent at all. .hus, it3s not deductible nor taxable. Sec. A0 of the tax code D Allocation of 2nco e and Deductions D 2n the case of 2 or ore organi"ations, trades or businesses +!hether or not incorporated and !hether or not organi"ed in the 1hilippines- o!ned or controlled directl) or indirectl) b) the sa e interests, the <o issioner is authori"ed to distribute, apportion, or allocate gross inco e or deductions bet!een or a ong such organi"ation, trade or business, if he deter ines that such distribution, apportion ent, or allocation is necessar) in order to pre*ent e*asion of taxes or clearl) to reflect the inco e of an) such organi"ations, trades or businesses. Such pro*ision is po!erful in the sense that the ,2B can do an)thing !ith it so long as it sees relationships bet!een corporations. ;xa ple$ 2f <o. A is related to <o. , as the controlling or full) o!ning the other corporation, an) expense loan +let3s sa) 17- to <o. ,, !hich is interest/free, so <o. A did not earn an) interest inco e. <an <o. , deduct 2;? Auto aticall), no 2; because 2; ust be stipulated in !riting and there is no interest pa) ent ade. ,ut the ,2B can i pute an interest based on the legal rate of 125 and sub#ect such interest inco e on the part of <o. A to tax. ,ut <o. , is absolutel) not allo!ed to clai the 2; for no interest has been paid and there is no stipulation in !riting.
What is theoretical interest? 2s it deductible? o
What is i puted interest? 2s it deductible? 2s it an actual expense? o
<an pa) ent of interest for delin8uent taxes be deductible?

P a g e | 129
Y;S. Whene*er a taxpa)er, corporate or indi*idual, is assessed of delin8uent taxes, that taxpa)er is not onl) liable to pa) the basic tax but also has to pa) surcharges of 2A5 and A05 if it is found to be fraudulent plus interest of 205 pa and additional co pro ise penalties. So !hether or not these pa) ents are deductible, is interest deductible? Y;S, because it3s an indebtedness to the go*ern ent. You te poraril) !ithheld the pa) ent of taxes to the go*ern ent for the use of one) during the ti e !hich )ou ha*e not paid properl) )our taxes. ,ut in so far as penalties, surcharges and co pro ise penalties are concerned, on top of the tax , these are not deductible. .he taxpa)er cannot benefit fro a *iolation that he co itted against the go*ern ent. 2t is onl) the interest that is deductible. At the option of the taxpa)er, interest incurred to ac8uire propert) used in trade, business or exercise of a profession a) be allo!ed as a deduction or treated as a capital expenditure. ;xa ple$ <o. A obtained a loan for !or(ing capital purposes. <o. , obtained a loan for construction of a building. ,oth of the paid 17 in interest. 17 in 2; and no interest inco e sub#ect to final tax. .hus, the 2; not li ited !ith the arbitrage rule. Does <o. A or <o. , ha*e an option in treating the 2;, !hether deductible no! or deductible in the future? <o. A, the incurrence of expense is for !or(ing capital purposes, da)/in da)/out operations, the 2; incurred, if it3s not sub#ected to arbitrage rule, !ould be full) deductible as an expense for the )ear of incurrence. ,ut since <o. , obtained a loan to construct a propert) that is a capital expenditure, the 2; can also be considered as a capital expenditure. Where the principal cost goes, the accessor) interest expense can also #oin the principal cost. So if the building has an esti ated life of 10 )ears or 20 )ears, the 2; can be considered as capital added to the cost of the building and it !ill be considered as an expense o*er the esti ated life of the asset that !as ac8uired using the loan a ount.
9ptional treat ent of 2; +9.2;o
3. .AN;S %B$ All taxes, national or local, paid or incurred !ithin the taxable )ear in connection !ith the taxpa)er3s trade, business or profession are deductible fro gross inco e. o ;$ i. Special assess ent D tax i posed on the i pro*e ent of a parcel of land ii. 2nco e tax D includes foreign inco e tax 1hilippine inco e tax D absolute rule$ totall) not deductible 0oreign inco e tax o 1aid b) do estic corporations and resident citi"ens +taxable !ithin and !ithout- D a) be clai ed as a deduction if it opts for tax deduction, other!ise, it beco es non/deductible if it uses the foreign tax paid as tax credits. 2f the foreign tax is clai ed as a tax credit, )ou cannot clai it as a tax expense. ,ut if )ou clai it as a tax expense, )ou cannot clai it as a tax credit. <lai ing it as a tax credit, )ou can clai the full benefit of the tax paid abroad since tax credit is a deduction fro 1hilippine inco e tax. ,ut if )ou clai it as an expense, onl) to the extent of 305 of that foreign tax !ill it reduce the tax due since tax deduction, as an expense, is a
P a g e | 1>0
deduction fro gross inco e in co puting the net inco e. .hus, tax credit is ore beneficial. iii. .axes !hich are not connected !ith the trade, business or profession of the taxpa)er Whate*er t)pe of tax that is, since it3s not connected !ith the trade, business or profession of the taxpa)er, auto aticall), it3s not deductible.
i*. ;state tax, donor3s tax *. 'A.
2s the real propert) tax +local taxpa) ent ade b) the corporation on its real propert) used in trade or business a deductible expense for purposes of co puting inco e tax liabilit), not real propert) tax liabilit)? o Y;S. Beal propert) taxes are deductible so long as$ 1. 2t is ordinar) and necessar) 2. Beasonable in a ount 3. 2t has been paid or incurred during the taxable =. 2t has been paid or incurred in connection !ith trade, business or profession A. Substantiated !ith 9.Bs >. 2t3s not contrar) to la!, public polic) or orals
;xa ple of national tax that is deductible$ <usto s duties !hen the corporation is engaged in i portation of goods. All taxes, !hether national or local tax, !ill be considered as deductible fro gross inco e in co puting the net taxable inco e so long as it follo!s the re8uisites of being paid or incurred during the taxable )ear in connection !ith the trade, business or profession of the taxpa)er sub#ect to the exceptions. What t)pe of taxpa)er can offset the foreign taxes directl) b) 1005 against the 1hilippine tax due? o o o o i. Besident <iti"ens D since liable of inco e !ithin and !ithout to a*oid double taxation 6B< D not included because liable of inco e !ithin onl) D no double taxation ii. Do estic corporations D since liable of inco e !ithin and !ithout to a*oid double taxation iii. 7e bers of %11s i*. ,eneficiaries of estates and trusts
2f the tax paid in <hina is 107 and the tax due on )our entire inco e here in the 1hilippines is 307, can <o. , +!hich operates C05 in the 1hilippines and 205 in <hina !ith 1007 total inco e. .hus, 207 fro <hina and C07 fro the 1hilippines-, can <o. , full) deduct the 107 against the 307? o 69, since the foreign inco e tax paid to the foreign countr) is not al!a)s the a ount that a) be clai ed as tax credit because under the li itation pro*ided under the tax code, it ust not be ore than the ratio of foreign inco e to the total or global inco e ultiplied b) the 1hil. inco e tax due. .hus, 207 +foreign inco e-41007 +global inco e- V 205 x 307 +1hil. inco e tax- due V >7 li it. .herefore, onl) >7 can onl) be clai ed as a tax credit.
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 1>0 | P a g e
P a g e | 1>1
@ad it been the other !a) around, if the li it is higher than the actual tax pa) ent abroad, )ou clai !hiche*er is lo!er in fa*or of the go*ern ent.
September (*% &'(' Q$ What ha*e !e discussed in taxes as a deductible expense. What are the taxes that are deductible and !hat are those that are not deductible expense? o %enerall) taxes are deductible, ho!e*er there are exceptions. .he) are not deductible if it is$
o o o o
1. 1hilippine inco e tax 2. 'alue added taxes 3. <apital gains tax4final taxes =. ;state and donor3s taxes, taxes D local benefit.
Wh) is estate and donors taxes not deductible? .he) are not deductible because the) are not related to the business of the taxpa)er.
o Wh) is *alue/added tax not deductible, !hen in fact it is related to selling )our product or ser*ices? 'alue added tax is not deductible for co puting gross inco e because 'A. is an indirect tax, not onl) that, the 'A. that the corporation is pa)ing to the go*ern ent is a tax that has been shouldered b) the custo er or consu er. While the 'A. that the corporation actuall) pa)s on its purchased product are not considered as part of the cost of the product but offset/able against the tax pa)able to the go*ern ent. Special assess ents of le*) D are the) deductible? 6o. 2s real propert) tax a deductible tax? Yes, it is deductible but special assess ents are not deductible. o Special le*ies are i posed on the i pro*e ent or the fact that a parcel of land has been benefited b) an i pro*e ent. 2t3s so e for of a real propert) tax. Wh) is it not deductible? What3s the difference? .he special assess ent is a tax on the i pro*e ent on a propert) but that i pro*e ent is not o!ned b) the o!ner of the propert). Special assess ent is that being paid or collected b) the go*ern ent fro lando!ners !hose propert) has been benefited b) an i pro*e ent ade b) the go*ern ent, !hich a(es it so e (ind of a tax on the propert).
o
What
o
a(es it different fro
real propert) tax being deductible taxes?
Beal propert) tax is a tax on the land itself !hile assess ent is a tax directed against the land for the benefit deri*ed fro the i pro*e ent ade b) the go*ern ent. 2t is not deductible because this is not the basic real propert) tax. All real properties are sub#ect to real propert) taxes, and !hene*er real properties are used in trade or business, the real propert) taxes due fro these real properties are rightfull) deductible against the gross inco e of the corporation.
o
,ut special assess ents are one (ind, onl) happens !hen there are i pro*e ents, and these are onl) pre iu fees that )ou need to pa) !hene*er )ou ha*e deri*ed an) benefit D !hich is not directl) related to the operation of the business itself !hich a(es it non deductible.
o
7r N, a non resident citi"en, has inco e !ithin and inco e !ithout. 2nco e !ithin a ounted to 17, inco e !ithout a ounted to 17. .ax due paid in the respecti*e countries a ounted to 300,000 and
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300,000 as !ell. 2s this inco e tax paid to the 1hilippine go*ern ent a deductible tax? 2s this a deductible tax? 69. 1hilippine inco e taxes are not deductible against gross inco e. o .he tax paid to the HS go*ern ent is a foreign inco e tax. 2s it deductible? 2f this has alread) been paid to the HS, this 300,000 tax on 17 inco e earned abroad, !hat benefit !ill 7r N get out of the 300,000 inco e tax? 2s there an) benefit? Do )ou thin( it is proper for 7r N to clai as deduction the 300,000 paid to the HS as an expense deduction or at his option as a tax credit against his 1hilippine tax due?
.R. XH No" re'i&e"t Cor*oratio"? 8ue =it(i" G 1H000H000 G >00H000 =it(out G 1H000H000 G >00H000 Ta0
Not 8e&u)ti#%e Ce)au'e i")ome ta0 "ot a%%o<e& Not 8e&u)ti#%e Ce)au'e NRC
2t is not deductible, in co puting !hether an expense is deductible or not, !e are onl) concerned !ith !hat is !ithin the #urisdiction of the 1hilippines. ,eing a non resident citi"en, the #urisdiction of the 1hilippine taxing authorit) pertains onl) to inco e !ithin. 2t eans to sa) that onl) expenses !ithin the 1hilippines are deductible, expense related to the inco e generated b) the taxpa)er. 2f it is not a deductible expense, can the foreign inco e tax paid be offsetted against the 1hilippine inco e tax due? 69, cannot be clai ed as tax credit. 0oreign inco e tax has onl) been co puted directl) against the foreign inco e, and the 1hilippine inco e tax has been exclusi*el) co puted onl) against the 1hilippine inco e. 6o co ponent of this 1hilippine tax due pertains to an) foreign inco e. ;xclusi*el) 1hilippine tax, exclusi*el) foreign tax.
o
What3s the difference bet!een allo!ing it as a tax credit or allo!ing it as a deductible expense? Are the) in the sa e direction? o .he deductibilit) of an expense is al!a)s pre ised on !hether or not it is related to the trade, business or profession or !hether it is directl) related to the inco e of the taxpa)er. o 0oreign tax credit can onl) be clai ed or offsetted against the 1hilippine tax due if the 1hilippine tax due is that of a resident citi"en or do estic corporation because these t!o t)pes of taxpa)ers are taxable on inco e !ithin and inco e !ithout. 2f )ou sa) !ithin and !ithout, the 1hilippine tax alread) co prises of tax on the 1hilippine inco e and the foreign inco e. .herefore, co ponent of that is a foreign tax, !hich should rightfull) be anaged. o Sa) for exa ple, this is a resident citi"en, !ould )our ans!er be different or the sa e? :et3s sa) inco e !ithin is 17, inco e !ithout is 17. 1hilippine tax is still at 300,000, for inco e !ithin and !ithout. 0oreign tax paid is 300,000. <an the taxpa)er clai the foreign inco e tax as an expense deduction or offsetted as a tax credit? <an he clai it as an expense? Yes, since a resident citi"en is taxable !ithin and !ithout, and re8uired to declare the total global inco e, he can also clai it as an expense. @is other option is to clai 1hilippine inco e tax due. o Sa e facts, can 7r N clai
.R. XH Re'i&e"t Cor*oratio"? Ta0 8ue =it(i" G 1H000H000 G >00H000 =it(out G 1H000H000 G >00H000
it as a tax credit, directl) offsetted against the
300,000 as foreign tax credit?
T(ereforeH L of >00H000 i' re)og"iMe& #y P(i%i**i"e go+er"me"t.
1 mi%%io" 2 mi%%io" X >00H000 G .a0 150H000
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@e can clai
in part, not the !hole 300,000.
@o! uch can he clai ? Since this is onl) one foreign countr), )ou can directl) go to global li itation. 2f there are ore than t!o foreign countries, )ou go for both li itations, !hiche*er is lo!er. Since this is onl) one foreign countr), !hat is the for ula? So, )ou !ill not forget the for ula.
o
0or ula$ // .he tax credit that shall be allo!ed to the taxpa)er 7r N shall onl) be to the extent of the foreign tax co ponent in the 1hilippine tax due. 2 agine this being the entire 1hilippine tax due of his global inco e. What is the co ponent recogni"ed b) the 1hilippine tax authorities as for ing part in this tax? What is that foreign co ponent? 2t is the proportion of his foreign inco e against his entire inco e ultiplied b) his 1hilippine inco e tax. @o! @o! uch is his inco e abroad? 17. uch is his total inco e? 27.
You !ill note that if this is the a ount collected b) the 1hilippine tax authorities, and the ratio is one/half, one/half of this is a foreign tax recogni"ed b) the 1hilippine tax authorit). .herefore, the axi u li it that can be clai ed as a tax credit is onl) 1A0,000, this cannot be clai ed totall) as a tax credit. 7r N cannot clai full), because tax credit clai shall not exceed the li it pro*ided b) la!. :et us change the facts. 2f the tax paid abroad is 100,000, and the li it still re ains the sa e. 9ne/ half proportion , one/half the proportion of the foreign inco e against the entire global inco e against the 1hilippine tax due so the co ponent is still 1A0,000 foreign. .he li it is still 1A0,000. @o! uch can 7r N clai as a foreign tax credit?
.R. XH Re'i&e"t Cor*oratio"? Ta0 1 mi%%io" 150H000 8ue 2 mi%%io" X >00H000 G .a0 150H000 =it(i" G 1H000H000 G >00H000 =it(out G T(ereforeH 1H000H000 )%aim G o"%y P(* 100H000 whichever is lower 100H000
o 100,000. 2t shall not exceed the axi u li it or the actual pa) ent abroad, !hiche*er is lo!er. You !ill see there a per countr) li itation. 1er countr) li itation !ould still be the sa e. .his eans to sa), !hat the resident citi"en or do estic corporation has ore than one foreign source, in considering !hat is the axi u li it, for a taxpa)er !ho has ore than t!o foreign sources, he has to consider the global li itation and the per countr) li itation. 1er countr), the taxpa)er should (no! per countr) ho! uch is the axi u total, in global li itation, foreign inco e against !orld!ide inco e.
Per Cou"try ;imit :%o#a% ;imitatio" A)tua% =it(i" 150H000 -00H000 200H000 150H000 >00H000
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 1>> | P a g e
T(ereforeH )%aim o"%y P(* 200H000 415.
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o 2f there are t!o foreign countries and the li it is 1A0K, 1A0K, this is 300,000. .his is !hat !ill co e out. o So global li itation, !e don3t co pute the li it per countr). You don3t ha*e this for ula for e*er) countr). 2n the global li itation, )ou Fpull in???G all the foreign countries here, aintain the sa e. So if the total of the global li itation is =00,000, and )our actual tax pa) ent is 200,000, )our tax credit !ould onl) be 200,000.
Per Cou"try ;imit :%o#a% ;imitatio" A)tua% =it(i" 150H000 -00H000 500H000 150H000 >00H000 T(ereforeH )%aim o"%y P(* -00H000.
2f )our actual tax pa) ent abroad is A00,000, )ou can onl) clai
300,000.
o 2f there is ore than one foreign countr), co pute the li it per countr), co pute it globall) using still the sa e for ula, and co pare it to the actual. Whiche*er is the lo!est is the a*ailable tax credit. Hse the principle. .he go*ern ent f the 1hilippines !ould onl) allo! )ou to clai a foreign tax credit to the extent of !hat )ou ha*e actuall) paid or to the extent of !hat it recogni"es as a foreign co ponent of the 1hilippine tax that it is tr)ing to collect, !hiche*er is lo!er in all cases. :ifeblood doctrine. 2n order to clai o foreign tax credits, !hat are the proofs that )ou need to sho!? ust establish to the satisfaction of the <o issioner the follo!ing$ +1- the total a ount of inco e fro sources !ithout the 1hilippines, each countr), the tax paid or incurred to .he taxpa)er
+2-the a ount of inco e deri*ed fro !hich is clai ed as a credit, and
+3- all other infor ation necessar) for the *erification and co putation of such credits. .he reason there in letter < in the outline, !ho o o Besident citi"ens do estic corporations ention e bers of general professional partnerships in the a) clai tax credits for taxes of foreign countries$
o We a) as !ell 1hilippines, o Wh)
,eneficiaries of estates and trusts. e ber of %11s in the 1hilippines D the) should still be resident citi"ens.
As a rule, !e onl) ha*e 0ilipino practitioners, foreign indi*iduals cannot engage in the practice of la!. ,eneficiaries of estates and trusts/ the) are allo!ed to clai foreign tax credit, but !e !ill discuss that !hen !e reach estate taxation. 0oreign inco e tax, if )ou loo( at the tax code, 2t is one of the exceptions to the rule that it is deductible unless if it is clai ed as a tax deduction. .he topic is ite i"ed deductions/ the topic is expense, can it be clai ed as an expense? o As a rule, probabl) )ou can sa) foreign inco e tax is not deductible as an expense unless the taxpa)er is a resident citi"en or a do estic corporation, !herein he has the
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option to clai it as an expense or a tax credit. ,ecause the tax credit benefit al!a)s is a*ailable to do estic corporation and resident citi"ens. @e can al!a)s forego clai ing the tax credit and opt for expense. So it3s a little bit co plicated if )ou don3t (no! the principle. You tr) to e ori"e it. o Again, let3s restate it. 0oreign inco e tax is one of the exceptions to the deductibilit) of taxes. ,ut it can be a deductible tax if the taxpa)er is a resident citi"en or a do estic corporation, because the option lies !ith hi either to clai it as a tax credit or a tax expense. ,ecause it is ore strict to clai the tax paid abroad as a credit, can a tax subse8uentl) refunded to a taxpa)er be taxable? Sa) for exa ple )ou ha*e o*erpaid taxes, )ou sought for a refund, )ou !ere refunded. 2s that a taxable refund or inflo! of one) or not?
Tax Refund Sa%e' 10H000H000 Co't 7H000H000 :ro'' I")ome 2H000H000 ;e''? E0*e"'e' 1H000H000 Net Ta0a#%e I")ome 1H000H000
E 1H000H000
o :et3s put that into illustration. 2n 200?, )ou ha*e o*erpaid 17 in inco e taxes. You are a resident citi"en, no inco e abroad. .he 17 tax that )ou ha*e o*erpaid pertains strictl) to 1hilippine inco e. 2n 200C, )ou i ediatel) applied for a refund. 2n 200I )ou !ere granted the refund. 2n filing )our inco e tax return for 200I, !ould )ou ta(e into consideration the inflo! of 17 cash that has been refunded to )ou for o*erpaid taxes? Yes, )ou !ill be taxable. You !ill ha*e additional 305 tax, )ou !ill ha*e additional 300,000 taxes on the 17. 6o exception to that? You ha*e to ans!er the 8uestion$ @a*e )ou been benefited pre*iousl)? ,ecause the taxabilit) of a tax that has been subse8uentl) refunded !ould lie on !hether )ou ha*e been benefited in prior )ears.
o
Be e ber, bad debts that ha*e been subse8uentl) refunded can onl) be taxable to the extent that )ou ha*e been benefited b) the expense that )ou ha*e pre*iousl) clai ed. 2n this case, !ould all tax refunds be taxable? Were )ou benefited b) the foreign tax that )ou ha*e o*erpaid prior?
o
Be e ber bad debts expense. ,ad debts expense is an expense that )ou clai , it !ill reduce )our inco e tax due. 2f it is subse8uentl) refunded because )our debtor has funds to pa) )ou, all )ou need to (no! is !hether in the )ear that )ou clai ed it as an expense, or in the )ear that )ou decided it3s no longer collectible, did )our tax liabilit) decrease? 2f it did, then it !ill be taxable at the )ear that )ou !ill collect it or )ou are able to reco*er it fro )our debtor. 2n this case it is the sa e, in the tax that )ou ha*e subse8uentl) been refunded, did it decrease )our tax liabilit) in the prior )ears? Did )ou e*er clai inco e tax as an expense before? 6o.
o
.herefore D Be e ber the tax benefit rule? 2f this is )our finances, gross inco e 27, )our expenses is 17, )our taxable inco e is 17, therefore )ou3re liable for 300,000.
P a g e | 1>,
2f !ithin the sa e )ear )ou decide to clai as an expense the bad debts a ounting to 17 also, this !ill be )our other expenses plus the uncollectible loan of )our debtor. .his !ill beco e "ero. Your tax !ould be "ero. 2f in the subse8uent )ear this !as reco*ered, the 17 is full) deductible. Wh)? .he go*ern ent !ill see( to reco*er the tax that it failed to collect because )ou clai ed it as an expense. So if it is subse8uentl) reco*ered b) )ou, )ou ha*e to pa) 300,000. .hat is the sa e principle in tax refund. 6o!, if the tax that has been refunded to )ou is not a deductible tax, there is ne*er an) taxable inco e at the ti e that it is refunded.
o
Wh)? ,ecause )ou ne*er clai ed it as an expense. 2t ne*er reduced )our tax liabilit). 2nco e tax is not a deductible tax, so if it subse8uentl) refunded b) the go*ern ent, it3s not taxable. 2f its real propert) tax +B1.- that has been refunded to )ou, !ill the B1. subse8uentl) refunded be taxable? You o*erpaid Beal 1ropert) .axes after filing a clai for refund, )ou are gi*en 1hp17 refund in cash, !ill the 1hp 17 subse8uentl) recei*ed as a tax refund be sub#ect to tax? Yes or no? o Yes, to the extent of the benefit that )ou ha*e deri*ed. o 0or exa ple, So that if )ou deducted 1hp17 real propert) tax here, !hich erased )our tax liabilit), if subse8uentl) that expense that )ou clai ed has been refunded because it !as a !rongful tax that )ou3*e paid, that !ill be taxable because that B1. !hich )ou erroneousl) paid before, effecti*el) reduced )our tax liabilit). .he go*ern ent !ill onl) tr) to reco*er that !hich )ou ha*e not paid. o ,ut if the B1. onl) benefited to the extent to the portion of the tax, onl) to that extent !ill the refund of taxes be taxable. 2t is entirel) the sa e principle as bad debts that )ou subse8uentl) reco*ered, in all aspects. .he onl) difference is that +in all aspects da! but there is a difference-$ 2n bad debts, so long as )ou can pro*e that it3s !orthless, uncollectible, )ou ha*e ta(en legal actions, etc., is deductible expense. As for taxes, )ou ha*e to be *er) a!are !hat (ind of taxes has been refunded. 2f it3s a deductible tax, follo! the bad debts principle. 2f it3s not a deductible tax, forget about the principle. B. Cosses Are all losses deductible losses? 6o. What losses are deductible? What3s the opposite of ordinar) losses? o 0or tax purposes, !e ha*e 9BD26ABY losses, for those losses arising fro ordinar) transactions in*ol*ing ordinar) assets. <apital losses are those losses arising fro capital transactions and capital transactions in*ol*e capital assets. S9 )ou (no! that ordinar) losses are those that !hich ha*e been sustained ordinaril) in the course of trade, business or profession. And these are deductible. What is a net operating loss? 2n our for ula, change it to an operating loss. What !ill )ou change in the for ula? <hange the cost to 37 and it !ill beco e net operating loss. ,ecause if )ou change the sales to 127, this !ill be gross loss. ,ut usuall) )ou don3t go into business selling at a loss. o ;xa ple, if )ou ha*e this, )ou purchase siopao at 1hp 10, )ou don3t sell it at 1hp > pesos or 1hp C pesos. You usuall) sell it at a ar( up. :et3s sa), )ou bought it at 1hp 10, )ou sold it at 1hp 12, )ou still ha*e gross inco e of 1hp 2. ,ut )ou a) suffer a net operating loss because the salar) of )our tinder is 1hp 10,000 a onth. .his is !hat !ill
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produce the net operating loss because ordinaril), tax authorities !ould expect this +gross inco e- to be positi*e. 9n this le*el onl). o .he cost. .his is the house that )ou are selling +Sales 1ortion-. <ost is the construction of the house. What is net operating loss carr) o*er? :et3s a(e the expenses 1hpA7illion )our net operating loss. ,ecause usuall) in the initial stages of )our business, !e !ill suffer a loss. 2f )our operating loss is 1hp 37illion, the la! pro*ides that it can be carried o*er to the next 3 succeeding )ears. And it is the exception to the rule that expenses or deductions shall onl) pertain during the )ear, paid or incurred during the )ear. 2n this case, if the 1hp 3 illion is carried o*er as a deduction, it is a *alid deduction not!ithstanding that this 1hp37illion is not incurred in )ear 2, not incurred in )ear 3, nor incurred in )ear = because that is the exception.
YEAR 1YEAR 2YEAR 3 Sa%e'10H000H00010H000H00010H000H000;e''? Co't7H000H0007H000H000-H000H000:ro'' I")ome2H000H0002H000H000,H000H000;e''? E0*e"'e'5H000H000-H000H0002H000H000Net Ta0a#%e I")ome4>H000H0005 4>H000H0005-H000H000Ta0a#%e I")ome 0 0 0
No ta0a#%e i")ome #e)au'e? Net Ta0a#%e I")ome? -H000H000 ;e''? ;o'' o" /ear 1? >H000H000 ;o'' o" /ear 2? 1H000H000 No Ta0a#%e I")ome 0
2n )ear 2, assu ing expenses exclusi*e of losses, can )ou carr) o*er the 1hp37, suffered in )ear 1? <an )ou carr) o*er or can )ou utili"e the 1hp37illion net operating loss in )ear 1 to )ear 2? <an )ou use the 1hp37illion loss in )ear 2? We are done !ith )ear 1, the losses or !hate*er net operating loss that )ou ha*e suffered, )ou can carr) it o*er to the next 3 succeeding )ears. 2f in )ear 2, )ou suffered still a loss, can )ou use the loss of 1hp37illion in )ear 1? 6o. Wh)? ,ecause )ou still suffered a loss in )ear 2. 0or )ear 3, gi*en the facts, ho! uch is )our net taxable inco e? 1hp = illion. So )ou ha*e to pa) 305 of 1hp = illion as a corporation? @o! uch !ill )ou pa)? @o! uch is )our tax liabilit) in )ear 3? O;B9 because )ou used used up 1hp37illion for )ear 1 and 1hp 17illion for )ear 2. o You accu ulated losses at the end of )ear 1 is 1hp 37illion. Your accu ulated losses as of )ear 2 is alread) A illion. At this point in )ear 2, )ou cannot use the 1hp3 illion because )ou are at a loss. .herefore, )our losses !ill onl) accu ulate. o 2n )ear 3, !hen )ou alread) earned positi*e inco e, )ou can utili"e the loss in )ear 1. ,ecause the loss in )ear 1 is usable in )ear 2, )ear 3 and )ear =. .his has a life of 3 )ears. 2t does ean that )ou should use the loss in )ear 1 in )ear 2, that )ou should use it consecuti*el). 2f it has no use in the next )ear, then the next succeeding )ear, until the 3 rd )ear. o So in )ear 3, )ou alread) used 1hp = illion of losses, )our accu ulated loss is onl) 1 illion. And 1 illion is ta(en fro )ear 2. Year 1 has been entirel) used up alread).
o So this is on a first in, first out. Whate*er ca e in first as an accu ulated loss, !ill ha*e to go out and offsetted against the inco e. 1oint is, !hate*er loss that )ou suffered, is alread) a deductible loss. 2s it fa*ourable to the go*ern ent? You ight thin( it is not. ,ut of course the go*ern ent has de*ised a !a) to still collect taxes not!ithstanding that )ou are losing. You a) be at a loss at the le*el of net inco e but )ou still ha*e to pa) taxes at the le*el of gross inco e, !hiche*er is higher. We !ill discuss this once !e reach ini u corporate inco e tax. :et us not co bine the 2 as )et.
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0or losses onl), if the loss in the first )ear, is not used up the next 3 )ears, !hether full) or partiall), it goes do!n the drain, it is no longer usable in the = th )ear after it has been suffered as a loss. 9nl) 3 )ears at a ti e. Year 1 is allo!ed 3 )ears. Year 2 has a life of 3 )ears. :et3s change the facts. .his is NYO <orporation, it has been gi*en = )ears inco e tax holida). 0or the first = )ears of operation, it totall) suffered annual operating losses. 2n the A th )ear of operation, it earned inco e. <an the losses suffered in the pre*ious )ears be used up to offset against the taxable inco e in the Ath )ear? 6o. o Wh)? What3s the reason? Whene*er a corporation is at a stage or it is granted exe ption fro inco e taxes, an) losses suffered during those )ears co*ered b) the exe ption cannot be considered as a loss or carr) o*er. 2t !ill not benefit )ears that the corporation !ill subse8uentl) be taxable. o 7eaning or !hich eans to sa) that net operating losses that can be carried o*er can onl) arise !hen a corporation is sub#ect to inco e tax. NYO <orporation and A,< <orporation, both co panies o!ned C05 b) A. Sho!n belo! are the list of shares in each co pan).
A 70A N 5A B 5A X/D Cor*oratio" /ear 1 ;OSS /ear 5 .ER:E ACC Cor*oratio" /ear 1 INCO.E /ear 5
A 70A C 5A C 5A
= 5A X 5A
8 5A E 5A
o A total of 1005 o!nership for both co panies. Year 1 until )ear A, operate at a loss. Year 1 to )ear A for A,< <orporation operated positi*e. .he stoc(holders of NYO <orporation could not use the losses suffered in )ear 1 to the next 3 )ears nor the losses in )ear 2 to the next )ears. Wh)? ,ecause it consistentl) operated at a loss. 2n this case, A,< has been pa)ing huge inco e taxes. So !hat stoc(holders of both corporation decided !as to erge in the hope of using the losses of NYO <orporation to offset against the inco e of A,< <orporation and clai it as a deductible expense. 2s it allo!ed? Yes as long as the change in o!nership is not less than ?A5. ore than ?A5? Which eans? 6ot less than ?A5 is FDJ or Should it be a0o/e.
o So if the facts abo*e is changed to ?A5 o!nership$ <an the loss be considered as deductible in the erged corporation? Yes. 2t is still deductible because the erger because the o!nership is still o!ned b) A at ?A5. o <o bining corporations in order to use up the losses suffered b) 1 corporation is allo!ed so long as there is no substantial change in o!nership fro the indi*idual corporations do!n to the erged corporation. Substantial o!nership, no change in substantial o!nership eans that at least ?A5 of the paid up capital of the corporation is still held b), or in behalf of the sa e person+s-.
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So in that case, it is still 7r. A !ho is still holding the sa e percentage prior to erger. So long as after erger, it is still A !ho is holding atleast ?A5.
o 2n cases, !here it does not reach ?A5 or there is a substantial change in the o!nership, the opposite, substantial change eaning there is alread) a change of ore than 2A5. 2t eans to sa) that the loss suffered b) 1 corporation cannot be used b) the erged corporation. When it erges, or there is a erger of corporation, there is onl) 1 sur*i*ing entit) !ill re ain. <A12.A: :9SS <ABBY 9';B What is eant b) capital loss carr) o*er? :osses fro sale or exchange of capital assets. o So can )ou sa) that there can be capital losses on sale of real properties classified as capital assets? 69. You do not disturb these rules class. .here are onl) 3 t)pes of capital assets !hich can gi*e rise to capital transactions.
o o o
Sale of real properties classified as capital assets.
Sale of shares of stoc( !herein )ou are not a bro(er of securities sub#ect to capital gains tax. And A:: other capital assets. Beal properties are taxable on the gross selling price or fair ar(et *alue !hiche*er is higher. So an) loss that )ou suffered fro the sale of this propert) cannot be carried o*er because it is on a per transaction basis and )ou are ne*er taxed on the profit alone. You are taxable on the gross selling price or the fair ar(et *alue itself. ,ut on the other 2, )ou can ha*e capital losses. +7eaning capital losses can onl) arise in sales of shares of stoc(s and all other capital assets. 6e*er on the sale of real properties.7otor *ehicle that )ou personall) o!n. So if )ou sell a otor *ehicle that )ou personall) o!n. You are not in the business of leasing or bu)ing or selling of otor *ehicles. You bought it at 1hp = illion and sold it at 1hp 27illion, )ou suffered a loss. .his is capital loss. And there is also !hat !e call as, 6;. <A12.A: :9SS <ABBY 9';B.
o
.he loss that )ou suffer in a capital transaction excluding the sale on real properties can be carried o*er onl) to the 6;N. Y;AB. 6ot 3 )ears.
o
CAPITA; ASSETS? A**%i)a#%e NC;CO1 1. Rea% Pro*erty ,A Ca*ita% :ai"' Ta0 X 2. S(are' of Sto)$ 5A O 10A o >. A%% ot(er .B 4*er'o"a%%y o<"5 Coug(t -.i%%io" So%& 2.i%%io" Ca*ita% ;o'' 2.i%%io" NC;CO )a" o"%y #e )arrie& o+er t(e NEXT YEAR ONLY!
Carry t(i' o+er t(e NEXT /EAR2
Does this rule appl), for capital losses to be carried o*er, is this a*ailable to corporate taxpa)ers? 2t is 69.. As pro*ided in the outline, it3s not a*ailable to corporate taxpa)ers. .herefore, !e !ill discuss the echanics of this one once !e reach capital transactions to!ards the end of the se ester. o <an )ou gi*e e so e exa ple of capital losses?
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Securities beco ing !orthless si pl) eans to sa) that if )ou are a corporate tax pa)er and ha*e in*ested in another corporation !hich that in*esting corporation, the other corporation !hich )ou ha*e in*ested in, is suffering a loss, insol*ent or dissol*ed, etc. Your shares or securities held in that corporation, )our o!nership is alread) !orthless. So the losses that )ou suffer is a capital loss. .his is not, )ou are not into acti*e trading of shares. @o! about li8uidating loss? o When the corporation in !hich )ou ha*e in*ested in as a stoc(holder has gi*en )ou a li8uidating di*idend lo!er than )our initial in*est ent or )our in*est ent cost. 2s the loss a capital loss? :osses fro li8uidation of corporations are in the sa e categor) as securities beco ing !orthless. 2t3s a capital loss. And !hoe*er the tax pa)er experiencing a loss, it !ould ha*e to depend !hether or not he can carr) o*er such loss. 9nl) indi*idual taxpa)ers experiencing capital losses ha*e the option to carr) it o*er to the next succeeding )ear. Without an S. 2n the outline, losses arising fro failure to exercise pri*ilege to sell or bu) propert) li(e option one) that )ou ha*e for !hich )ou did not exercise the option, it3s a loss if )ou are the one !ho put up the option one). 2t3s a capital loss. Abandon ent losses in the case of natural resources !herein )ou ha*e in*ested in a propert) hoping to find natural resources or inerals onl) to find out that there is none. So abandon ent losses is a capital loss because )ou are not )et in the operation of the ining business. 2t3s still under explorator) stage. :osses fro !ash sales or stoc( securities, 2 !ant )ou to read that class. We !ill discuss that once !e reach capital transactions. o Wash sales or stoc( securities are #ust li(e 2 thin( a si ulated sale. 2s this a si ulated sale? Wherein a sale and a purchase of the sa e t)pe of stoc(s or securities happens !ithin 30 da)s. 6o deduction of capital losses experienced !ill be allo!ed unless the one experiencing it is a dealer of stoc( securities. ,ecause !ash sales are t)pe of si ulated sales of securities in order to influence the stoc( ar(et. So as to a(e it appear that the shares of this co pan) is acti*el) traded in the ar(et in order to increase its *alue, so e person in trading, !ithin the span of 30 da)s, !ould bu) hi self for the sa e but it is si pl) si ulated in order to influence the *alue of the shares in the ar(et, its not an) loss that is deductible. Hnless )ou reall) are a dealer in shares. ,ecause if )ou reall) are a dealer in stoc( securities, )our e)es reall) is on the stoc( ar(et. You bu) and sell shares an) ti es !ithin the da). Are ga bling losses deductible? <an )ou deduct the excess of )our ga bling loss o*er )our ga bling gains? <an )ou deduct the excess against )our ordinar) business inco e? You cannot deduct? o Sa) for exa ple )our ga bling gain is 1hp2 illion, )our ga bling loss is 1hpA illion, separate da)s. Your net ga bling loss is 1hp 3 illion. <an )ou offset the 3 illion against )our business inco e of 1hp100 illion? <apital losses can 6;';B ,; D;DH<.;D A%A26S. 9BD26ABY 26<97;. <apital losses are off settable against capital gains to the extent of the gain. An) excess so long as its 69. 2::;%A: losses can be carried o*er as an indi*idual taxpa)er to the next )ear. <orporate forget about itM 6o carr) o*er of net capital losses. 9rdinar) inco e can onl) cater to ordinar) expenses and ordinar) losses because one of the co on re8uisites that !e ha*e in order for an expense to be
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deductible, is that it ust be incurred or paid directl) in relation to the trade, business or profession. Your ga bling losses is 69. reall) related to )our business. .herefore, )ou put a border line but in the end, as a indi*idual taxpa)er or corporate tax pa)er, )ou report under 1 inco e tax return )our ordinar) inco e, ordinar) losses, botto line, )ou pa) for the tax. As long as )ou don3t cross o*er. <apital for capital and ordinar) for ordinar). <asualt) :oss a(e it deductible? What is the casualt) loss? And !hat are the re8uisites to
o 6u ber 1, !hene*er )ou, !hene*er the business suffers a casualt) loss and casualt) losses are those a#or losses reall), fire, stor , ship!rec(, robber), e be""le ent, and theft losses. 2t ust be dul) reported !ithin =A da)s b) a s!orn state ent to the tax authorities. o .he loss ust be incurred in trade or business o 2t ust be actuall) sustained during the )ear in !hich )ou !ant the charge it off against )our inco e. o o ;*idenced b) a close and co pleted transaction. Actuall) sustained
o 7ust not be co pensated b) an insurance. 2n case there is an insurance, re e ber that onl) the difference bet!een that that has not been co pensated b) the 2nsurance <o pan) is deductible. And !e (no! for a fact that propert) can onl) be insured to the extent of the *alue other!ise, an) excess !ill beco e o*er insurance. 2t !ill not be paid b) the insurance co pan). So !e don3t actuall) ha*e to discuss the excess of the insurance o*er the loss because these are propert) losses, casualt) losses. Hnless of course if itsL.o(M +Wala gi ti!as n att). 2)a sentence..$+ Which leads e to princess of the stars. 2s the loss deductible in so far as sulpicio lines is considered? Deductible full) or does it ha*e..? 2s it still floating class? @ere, class interacts na no na da!. So it !ill be total loss not floatable na. Deductible? 2t happened in 200C. And insurance co panies !ill onl) pa) !hen e*er)thing has been cleared. .he finding of the fault, etc., etc., in so far as the shipping co pan) is concerned.
o
When do )ou thin( is the casualt) loss deductible? 2n 200C or in 200I, assu ing that it is onl) in 200I that e*er)thing has been settled !ith the insurance co pan). 2t is onl) in 200I that the insurance co pan) ad itted that it is liable to pa). 2f it re ains unclear b) 200C !hose fault !as it leading the insurance co pan) to suspend the pa) ent of the pa) ent or the face *alue. Do )ou thin( )ou can charge it still in 200I? 9r it !ould depend if )ou are for the go*ern ent or for the co pan) in that case? 2n 200I, because onl) then there is a closed and co pleted transaction of the loss. Diba )ou (no! that it sun( in 200C but if its still under in*estigation as to !hose fault is it, the go*ern ent !ill not allo! )ou to deduct full) in 200C !hen )ou are expecting to be co pensated b) the insurance co pan) in 200I. So, unless and until, in Att).3s opinion, e*er)thing has been settled !ith
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the insurance co pan), onl) then can )ou deter ine ho! uch is )our deductible loss. ,ecause onl) to the extent of the *alue that is not co pensated b) the insurance co pan) can )ou clai the loss. You cannot clai full) the loss. 1robabl) that3s the reason !h) Att). has heard that it has or it should not still float. Att) .does not (no! the reason. %aboobs$ 2s there a prescription? .$ 2 thin( that is the proble of Sulpicio :ines because if the in*estigation !ould drag on, to clai the exe ption, it should at least approxi ate the ti e !hen the loss !as suffered. So 2 thin( that has to be settled because this is a special case !hich needs to be settled, 2 heard !ith the ,2B that Sulpicio :ines, their hands should not be tied in clai ing the exe ption this )ear or next )ear. 2t !ould ha*e to be based on the agree ent !ith the insurance co pan) and the tax authorities as to !hen reall) there is a closed and co pleted transaction of the loss. ,ecause if )ou !ait fore*er for the insurance co pan), and its 10 )ears after alread), it !ill not be deductible alread) because there is no atching of the losses that occurred in 200C and 10 )ears after. o 6onetheless, )ou ha*e an idea that in case casualt) loss is suffered, )ou should act !ithin =A da)s to report the loss. 6on reporting of the loss !ould result to non deductibilit). D. 7AD DE7T5 ,ad Debts. What are bad debts? .hese are debts due to the taxpa)er !hich are usuall) ascertained to be !orthless and charged off !ithin the taxable )ear. When can )ou sa) that it is alread) !orthless? 2f )ou are a credit card co pan), if )ou are the ban(. We (no! that there are an) credit card holders !ho don3t pa) or settle their accounts. You !ill hire a la!)er for the collection case. And if the credit card holder !ill not pa) e*en upon receipt b) the de and letter issued b) the la!)er, is it enough for )ou as a credit card co pan) to clai the unpaid account as a deductible bad debt? 2f the loan is onl) 1hp10,000 pesos, is the filing of the case needed? o 2n an) supre e court cases, there are had been an) instances that the Supre e <ourt actuall) denied the clai ing of a bad debt or a debt unpaid as a deductible expense. o 0or exa ple, if the debtor is alread) dead is it enough for )ou to sa) that it is an uncollectible and !orthless loan? <an )ou auto aticall) deduct the unpaid debt of that decedent !ho #ust recentl) died? 2n 1 S< case, 6oM ,ecause )ou still ha*e the estate against !hich to collect. 2t3s not )et bad, )ou call it bad na if )ou cannot collect the unpaid debt. o So unless probabl) that !hen )ou are declared as insol*ent. When can )ou beco e insol*ent again class? When )our liabilities !ill exceed )our assets. 2f )our liabilit) is e8ual )our asset, )our still id sol*ent, )ou are still
@opefull) nalang, !hen its co*ered b) insurance, there is no real loss.
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sol*ent. You !ill beco e insol*ent onl) after !hen )our liabilities exceed 1hp1 o*er )our asset. What are the re8uisites to a(e a debt a deductible bad debt? ust arise fro a *alid and subsisting obligation. trade, business, or profession. 1. So nu ber 1,
2. 6u ber 2, arising fro
3. 6u ber 3, it ust ha*e been ascertained to be !orthless, and to be !orthless, there are steps that !e need to underta(e$
o o o o o
Sending state ents of accounts. A collection letter. Beferral to la!)er De and letter And if the debtor still fails to pa), )ou file an action in court.
=. And once )ou deter ine it to be !orthless this )ear, auto aticall) charge it against )our inco e this )ear. 9ther!ise, it !ill no longer be deductible in the subse8uent )ears. So, !hen )ou are able to deter ine it to be !orthless, that is the onl) )ear !hen )ou charge it against )our inco e as an expense.
o
A. .he final re8uisite, nu ber A, is that it

o o
ust be uncollectible in the near future.
So it probabl) !ill be collectible in the far future but not in the near future.
Att). .iu does not (no! !hat is near. As long as not next )ear, not t!o )ears fro no!. 0ar a!a). o Sa) for exa ple, )ou and )our seat ate, )ou ha*e separate businesses. ,ut during the election, )ou placed )our bet on ,rother ;ddie. .he other part) placed her bet on 1resident 6o). You !on. So )ou tried to collect as agreed, 1hp17illion. She failed to pa) despite persistent collections. <an )ou clai the 1hp1 illion as a bad debt expense? 0irst, 2t is not related to the trade or business or profession that )ou are in. an) *alid and subsisting obligation to pa). Second, it did not arise fro Be e ber it3s #ust a betting ga e. E. DEPRECIATION What is depreciation? .he gradual di inution of the useful *alue of the propert) used in trade, business, or profession of the taxpa)er arising fro !ear and tear or natural obsolescence. .he ter is also applied to a orti"ation of the *alue of intangible assets, the use of !hich in trade or business is definitel) li ited in duration. As against depletion, !hat is the difference? Depletion is the exhaustion of natural resources li(e ines and oil and gas !ells as a result of production or se*erance fro such ines or !ells. .hese are non/replaceable assets. We all (no! that all properties and assets, as a general rule !ould di inish in *alue unless of course if it pertains to parcels of land, !hich as a rule, opposite, !ill appreciate in *alue. 2s there an instance !here a parcel of land !ill di inish in *alue? Wear or tear? 2s it reall) !ear and tear? 2t does not depreciate as a rule but the *alue a) decrease in so e instances. :i(e if the *olcano near b) !ill erupt. :ahar/filled, the *alue !ill go do!n.
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What happens if the parcel of land that )ou are holding beco es a red district? ;r ita for exa ple in 7anila. Does it appreciate in *alue or depreciate? As a rule, it !ill increase in *alue because of the trade and profession. So !hen )ou are tal(ing about depreciation, !e refer to properties or assets !hich depreciate or !hose *alue graduall) di inish naturall). .he !ear and tear, obsolescence, etc. o So a achiner) !ill depreciate in *alue. uch, after probabl) a )ear, onl) s of o ;*en )our personal laptops. You bought it for this its price. Your resale *alue is onl) s.
Depletion refers onl) to natural resources. 2t is easier to depreciate than to deplete. ,ecause depreciation is an exact co putation. You onl) ha*e a for ula. 2f it !ill exist for 10 )ears, then di*ide it for ten )ears. o ,ut natural resources so eti es is undeter ined. You !ill ha*e to depend on ho! uch the esti ated produce fro that parcel of land. 2f )ou thin( )ou can produce 10 truc( loads of dia onds in 10 )ears, )ou cannot di*ide it for o*er 10 )ears. .he onl) thing that )ou can do if )ou expect 10 truc(loads of dia onds is if )ou can produce this )ear 2 truc(loads, o*er 10 expected, then 205 of )our cost of )our propert) should be depleted alread). 2f )ou produce A truc(loads in the first )ear, esti ated is 10. So s of the natural resources should be depleted as of that )ear.
o
So its dependent on the natural resource.
@o! different is this against a orti"ation? +Did it ring alread)? So she can finish a orti"ationA orti"ation is applied to intangible assets. o What asset can be a orti"ed? You can a orti"e intangible properties that )ou ha*e for exa ple$ .here are ne! rules alread), for good!ill, that3s an intangible propert). 0or accounting properties, good!ill is no longer deductible. ,ut for tax purposes, it a) be deductible if )ou reall) 1HB<@AS;D the good !ill. 2f )ou 1HB<@AS;D. ,ut if it3s a good!ill that )ou #ust put up )our business !ithout an) extra cost. 2t3s not deductible. 2t3s not a orti"able.
o
Another instance !herein )ou can a orti"e an expenses is !hen )ou under go research. Besearch and de*elop ent, during those stage )ou accu ulate cost for co ing up !ith a odel or a protot)pe. .he cost of )our research and de*elop ent can be a orti"ed o*er A )ears once )ou go full production. An)!a), research and de*elop ent is not reall) tangible. So its a orti"ed rather than depreciated or depleted. September &(% &'(' CA5T ;EEI:5 M=IL' :ast !ee(3s 8ui", an) of )ou didn3t get it right. NYO <orporation obtained a loan fro a ban(, !holl) o!ned b) a foreign go*ern ent. 2t paid interest of 1hp17 for the entire taxable )ear. ,ut no !ithholding of tax !as ade. Does it a(e an) rele*ance class? Doesn3t. .his is #ust a recap of !hat !e ha*e learned before idter s. o .hat !hene*er an interest is paid on a loan ade fro a ban( that is !holl) o!ned fro a foreign go*ern ent, it is not sub#ect to tax therefore, there is no need to !ithhold. 2t3s #ust a atter of fact. o Question is the interest a deductible expense? 2 a referring to the interest pa) ents ade to the foreign ban(. 9n the part of the do estic corporation if during the sa e taxable
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)ear it earned interest inco e of 1hp27 fro ans!er briefl).
loans of affiliate co panies. Discuss )our
So the 8uestion !as si ple, is the interest deductible in light of the existence of the interest inco e earned fro loans extended to affiliate co panies. .here !ere less than A !ho got it right.
o o
Ans!er is it3s deductible because it is a *alid expense.
So e !ere sa)ing that it3s not deductible because the loans !ere to affiliate co panies. @o! could )ou relate the ban( as an affiliate co pan) !hen the interest expenses !ere being paid to a foreign ban(, interest inco e !as earned fro an affiliate co pan). .he onl) issue is if the interest expenses !ere being paid to the affiliate co panies? @ere, it3s actuall) the other !a) around. .he interest expense !ere *alid pa) ents. .he issue !as or is it full) deductible in light of the inco e that !as earned fro loans to affiliate co panies? What did !e sa) about interest? 2nterest is deductible sub#ect to the arbitrage rule. 2n the assu ption that all other re8uisites are present, interest expense is full) deductible unless the arbitrage rule !ill appl).
o
Does the arbitrage rule !ill appl) if the interest inco e that the co pan) is earning co es fro loans extended to affiliate co panies? 6o. ,ecause arbitrage rule !ill onl) appl) if the interest inco e earned b) the co pan) is sub#ect to final tax. And interst inco e that is sub#ect to final tax are those interests inco es earned fro deposits and in*est ents or place ents in 0an,in" institutions and financial institutions or intermediaries. So 0H::Y D;DH<.2,:;M o 7an) ans!ered sub#ect to the arbitrage rule. Diba !e ade illustrations gani, <o pan) A,<, one earning interest inco e sub#ect to final tax. 9ne earning interest inco e not sub#ect to final tax. 9ne not totall) earning interest inco e. And in so far in our discussion, !e !ere all in the sa e trac(. o As to the rule !herein )ou cannot deduct if )ou did not !ithhold taxes? 9(a) Section 3=K+?- of the tax code sa)s that in so far as it is re8uired that it needs to be !ithheld, it should be !ithheld, other!ise, it !ill not be deductible. 7an) ans!er this. .o !ho !ere interest pa) ents ade? 2t !as ade to the foreign go*ern ent. .o the ban( that is full) o!ned b) the foreign go*ern ent. Section 32,, sa)s of the exclusion that in*est ents of the foreign go*ern ent !hich includes loans extended to do estic corporations is not sub#ect to tax, therefore no !ithholding is necessar). 9ne ore area, A,< <orporation declared di*idends in fa*or of its stoc(holders. .he di*idends !ere gi*en in for of NYO shares of stoc( held b) A,< corporation. Will the di*idends be sub#ect to final !ithholding tax? 7an) said it is not sub#ect to !ithholding tax because it is a stoc( di*idend. o Did !e not sa) that stoc( di*idends !ould onl) refer to di*idends gi*en in the for of shares issued b) the issuing co pan)? 2f the shares gi*en b) the co pan) is the shares held as in an in*est ent of another corporation, it is #ust li(e a propert) of that co pan) and if gi*en, a(ing the stoc(holders, the stoc(holders of the in*esting co pan), it !ill be considered as propert) di*idends. And propert) di*idends are sub#ect to tax #ust li(e cash di*idends. .rue or false, regional operating head8uarters are exe pt fro inco e tax except if it deri*es inco e fro an) of its real or personal properties or fro an) of its acti*ities conducted for profit. 0A:S;.
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o Begional operating head8uarters are 69. exe pt. .hat3s the onl) state ent that !e need to address. Begional AB;A head8uarters are the ones that are exe pt fro tax. A,< <orporation, a resident foreign corporation paid 1hpA7 inco e taxes to the Hnited states for the taxable )ear 2010. 2s this an expense deductible, !h) or !h) not? .otall), the expense is 69. deductible because the 1hp A7 inco e taxes paid to the HS is for taxes on inco e that is earned outside the 1hilippines. Besident foreign corporations are not taxable for inco e outside. .herefore, the 1hpA7 inco e taxes are not deductible not e*en for tax credit or expense. 7r. A in*ested 1hp17 in NYO. A )ears after he recei*ed 1hpA7 in case di*idends. After another A )ears, the business !as dissol*ed and its re aining assets !ere distributed to the creditors and after !hich stoc(holders got properties in proportion to the interest the) hold in the corporation. .o !hich 7r. A recei*ed 1hp17 in properties. 2s it sub#ect to inco e tax or final !ithholding tax? o 2t is not sub#ect to inco e tax because the corporation is alread) in the process of li8uidation. Whate*er !ill be recei*ed !ill be considered as li8uidating di*idends !hich is not a guarantee that tax !ill be i posed. :i8uidating di*idends if the *alue of the properties recei*ed in ti e of li8uidation is ore than the in*est ent ade in the co pan). o And if the in*est ent is onl) p@p17 and !hat he recei*ed thereafter is 1hp17, there is no gain, no tax. o What about the 1hpA7 that !as recei*ed throughout the existence of the corporation and gi*en as di*idends? 2t !as alread) sub#ected to final !ithholding tax as passi*e inco e. 2t !ill not be considered in deter ining !hether gain !as earned or not. 5tart of Classes' E. Depreciation Depreciation is the gradual di inution of the useful *alue of a propert) that is used in trade, business, or profession of the taxpa)er, corporation or indi*idual !hich gradual di inution of the useful *alue refers to the gradual !ear and tear or the natural obsolescence of the propert) that is depreciated. And !hene*er a propert), 2 heard this ca e out in the oc(bar exa last Sunda), !hat are the ethods for depreciating a propert) as pro*ided in the tax code, the easiest that !e can deter ine is the straight line ethod. ,ut if )ou are as(ed to enu erate. ,ut 2 doubt it if )ou !ill be as(ed to explain. 2f )ou are as(ed to enu erate, there are =$ o Straight/line ethod. So the nu ber of )ears that the propert) is esti ated to be useful is the factor !ith in !hich !e spread out the *alue of the propert). So if its 100 )ears, then )ou depreciate the propert) o*er a hundred )ears. o o Declining ,alance 7ethod. Su of )ears digit ethod. .his is for accountants.
o :ast ethod is an) other ethod that can be agreed upon or prescribed b) the Secretar) of 0inance !hich !ould include double declining ethod, etc2x. Whene*er a corporation co es into an agree ent as to the depreciation ode or ethod of depreciating a propert), it shall be used as long as that propert) shall exists in the boo(s unless )ou !ill appl) for a ne! ethod that !ill be used for that sa e propert). Appl) !here? Appl) !ith the ,ureau of 2nternal Be*enue for appro*al that )ou !ill be using another ethod. ;xa ple$ 2f )ou purchase a building or achiner), let3s sa) achiner) nalang because probabl) a building !ill ha*e an e8ual and gradual di inution of the *alue diba? ,ut achineries do not ha*e. 2n the first fe! )ears achineries !ould ha*e axi u use, to!ards the end, it !ill ha*e ini al use. So the proper depreciation for achineries that !ill be used full) in the earlier )ears !ill either be the double declining ethod or the su of )ear digit ethod.
o
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So, if )ou ha*e co e into an agree ent !ith the ,ureau of 2nternal Be*enue that )ou !ould be using the su of )ears digit ethod for a particular achiner), )ou should use it all through out the existence of the achiner). 2f )ou intend to change it sa) for exa ple to straight line ethod D !h) do )ou ha*e to change it class? So eti es )ou need to change in order to a(e do !ith )our financials. 2f )ou !ant to clai ore expenses, ini i"e the expenses, )ou can do so ething !ith the ethod of depreciating the assets. So if )ou need to change it, it3s a change in the ethod of depreciation, it re8uires appro*al b) the ,ureau of 2nternal Be*enue. 6o appro*al, depreciation shall not be allo!ed. 6o expense shall be deductible. @o! about if )our propert) !ill be obsolete alread)? What are the (inds of properties that a) beco e obsolete in a fe! )ears ti e? Soft!are, electronics +<lass ni ans!er ni. 2ngon Att)$ ;xactl)M-. .hese properties should not exist for ore than A )ears in the business. o 1robabl), if at the point that there !ill be no introduction of ne! technolog) and )ou thin( that )our asset is alread) obsolete e*en if )ou ha*e not full) utili"ed the nu ber of )ears intended for it to be useful, )ou can clai it as an obsolete product and )ou can clai an expense in addition to the depreciation that )ou are alread) clai ing. o 0or exa ple, )ou put it a ne! technolog) and expected it to last for A )ears. So its 1hpA illion, 1hp1 illion per )ear through the straight line ethod. 2f on the 3 rd )ear, )ou deter ine, that it is no longer usable fore*er, then the re aining *alue of the asset can be clai ed as obsolescence of the propert). 2t3s a deductible expense so long as it can be pro*en. And !e said that depletion of assets !ould onl) refer to assets !hich are referred to as natural resources. And !e ha*e actuall) illustrated that depleting a natural resource !ould depend on so e factors$ .he basis of propert) .he esti ated total reco*erable units in the propert) And the nu ber of units reco*ered during the taxable )ear.
o Diba re e ber, if )ou expect that this is the nu ber of units that )ou can reco*er and these are the nu ber of units that )ou actuall) reco*ered, it3s the percentage of the ratio that )ou can deplete the natural resource. And finall) !e said that a orti"ation is as !ell a*ailable to intangible properties. 2f and !hen )ou purchased an intangible, )ou ha*e A<.HA::Y S1;6. or shelled out one) for an intangible, such as patent, good!ill, cop)right, etc, )ou spend for it, can be depreciated o*er its useful life. o ,ut if the intangible is built solel) on good!ill for !hich )ou cannot trul) identif) the actual cost that )ou ha*e spent, it is not a deductible expense. 9nl) for those intangibles in !hich )ou ha*e actuall) incurred an expense. .hat is a orti"ed o*er its useful life. F. C arita0le Contri0utions Are contributions and donations deductible in, sa) for exa ple )ou ha*e a business, and )ou ha*e this concern for social !elfare. Are )our contributions and donations deductible for purpose of co puting )our tax liabilit) to the go*ern ent? What are the re8uisites to a(e a charitable contribution deductible? o 1. .he contribution ust actuall) be paid or ade to the 1hilippine %o*ern ent or an) political subdi*ision or to an) of the do estic corporations or associations specified b) the .ax <ode.
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o 2. 6o part of the net inco e of the beneficiar) stoc(holder or indi*idualE o 3. 2t ust be ade !ithin the taxable )earE
ust inure to the benefit of an) pri*ate
o =. 2t ust not exceed 105 in the case of an indi*idual and A5 in the case of a corporation of the taxpa)er3s taxable inco e except !here the donation is deductible in full to be deter ined !ithout the benefit of the contributionE and 105 of !hat? 9f taxable inco e. Would all contributions and donations and li itations be sub#ect to the li itation that it shall not exceed 105 for indi*iduals, 105 of the taxable inco e of indi*iduals or A5 of taxable inco e of corporations? 6o.
o
.here are actuall) 3 cases class that a contribution or donation Deductible in full 2t 105
a) be
a) be deductible partiall) sub#ect to the li itations of A5 or a) be totall) not deductible expense.
9r it
A. 2t
ust be e*idenced b) ade8uate records or receipts
0irst, full) deductible. We call these special contributions. What are the full) deductible contributions? 9r rather to !ho !ill the contributions, because class in our outline, !e ha*e said that contributions !ill be classified into 2$ Special <ontributions 9rdinar) <ontributions
o .he easiest to thin( is that, if and !hen a contribution is ade to particular persons !hich 8ualif) to special contributions, then, )our contribution is full) deductible, !hate*er a ount it is. 2f )ou decide to contribute or donate )our entire taxable inco e to a specific entit) that is a ong the recipients of these special contributions, totall) that is deductible.
S*e)ia% Co"tri#utio"' 8e&u)ti#%e Re)i*ie"t' Not i"ure to a *ri+ate 'to)$(o%&er =it(i" Ta0a#%e /ear Suffi)ie"t Re)or&' 9u%%y 8e&u)ti#%e Or&i"ary Co"tri#utio"' 8e&u)ti#%e Re)i*ie"t' Not i"ure =it(i" Ta0a#%e /ear Suffi)ie"t Re)or&' Partia%%y 8e&u)ti#%e Co"tri#utio"' No"8e&u)ti#%e A%% ot(er'
1 2 > 5
,ut nonetheless, special contributions, ordinar) contributions, and contributions !hich are not deductible. o 0irst, )ou ha*e to (no! !ho the recipients are. All others !hich do not 8ualif) to the recipients in the special and ordinar) contributions. o 6o. 2 !hate*er )ou a(e contributions that )ou a(e )our recipients in order to be dedutible, it ust not inure to a pri*ate stoc(holder or an indi*idual. 9ther!ise, )ou !ill #ust be transferring funds, a*oiding taxation. o o 6o. 3, it ust, as all other co on re8uisites, it ust be ade !ithin the taxable )ear. 6o. =, sufficient records.
o 6o. A, the ain difference, special contributions are full) deductible and ordinar) contributions are partiall) deductible, re8uire ents no. 2, 3, and =, are in order for a
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contribution and donation to be deductible, both contributions speciall) ade or ordinaril) ade ust not inure to an) pri*ate indi*idual or stoc(holder, it ust be ade !ithin the taxable )ear !ithin !hich )ou !ant to charge off the expense. .here ust be sufficient records to support )our contribution or donation. ,ut in so far as !ho the recipients are, there is a difference. 2n so far, as the tax !ise or the benefit, special contributions are full) deductible and ordinar) contribution is not full) deductible or #ust partiall) deductible. Who, for special contributions, !ho are the recipients? o 1. %o*ern ent or to an) of its agencies or political subdi*isions, including %9<<s, exclusi*el) to finance, to pro*ide for, or to be used in underta(ing 1B29B2.Y 1B9&;<.S. What do )ou call these +sports, health, and educational, etc-? What areas !ould all contributions to a local go*ern ent unit be full) deductible for tax purposes? 2t ust for priorit) pro#ects. 1riorit) pro#ects !ould be S@;$
o o o
Sports de*elop ent, science and in*ention @ealth and hu an settle ent ;ducational and econo ic de*elop ent
So !hat happens if )our donation is ade to the %o*ern ent or political subdi*isions or %9<< and it 2s intended to finance a non/priorit) pro#ect? 2s that deductible? Yes. @o!e*er not full) deductible. o 2. 0oreign go*ern ent or institution and international ci*ic organi"ations. %i*e e an exa ple of an international, ci*ic organi"ation? Wherein )ou a(e a donation that is full) deductible? Hnicef. 2nternational Bights Besearch 2nstitute, etc. o 3. Accredited 6%9. What ust be registered?
Would all donations to a non/go*ern ent organi"ation that is organi"ed for education be full) deductible? .he 6%9 class, 69. A:: donations to non/ go*ern ent organi"ations !ould be full) deductible, )ou ha*e to deter ine !hether the 6%9 is accredited or not. And accreditation !ould accrediting entit).
o
ean that it has been accredited b) the dul) appointed
1rior it has been the 1hilippine <ouncil for 6%9 <ertification !hich is 1<7<. ,ut there is alread) a ne! accrediting entities, DSWD, <@;D. So it !ould actuall) depend on !hat t)pe of 6%9 it is. 0or ed or organi"ed for educational purposes, then )ou (no! that the accrediting bod) !ould refer to <@;D or D;<S. 2f its for Science then it should be D9S.. And its for social !elfare, DSWD.
o
Accrediting !ould ean, the process of accreditation is that these accrediting bodies !ould deter ine !hether indeed that 6%9 has co plied !ith all the re8uire ents that it is, exa ple education, that it is to address or to support indigent students, etc. .he acti*ities itself and that no e ber of that organi"ation !ould be directl) or indirectl) benefited b) an) fundings ade b) outsiders. 6ot ore than 305 of its funding or donations or contributions !ould be used for ad inistrati*e purposes. 2 agine class if )ou are allo!ed to use the donation, if )ou are an organi"ation and allo!ed to use the donation !ithout an) li it for
o
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ad inistrati*e purposes, )ou can a(e the entire I05 as )our salar), to run the organi"ation, !hich is not actuall) addressing the issue. 2f its non/go*ern ent for ci*ic purposes, it should be for specific purposes and to benefit other people not the stoc(holders, not the e bers.
o
2f !e onl) ha*e 3 categories of recipients in order to a(e a donation full) deductible, !ho are the recipients !herein the donation is sub#ect to li itations? o You onl) ha*e three categories of recipients of donations or contributions$ +1- the 1hilippine go*ern ent, political subdi*isions, %9<<s for priorit) pro#ects, +2- foreign go*ern ents or international ci*ic organi"ations,
+3- non go*ern ent organi"ations !hich are dul) accredited for purposes of health, education, research, charitable, sports, etc. So gi*e an exa ple of a recipient of a donation !herein a donation is co*ered onl) as ordinar) but not special donation$ o When the donation is gi*en to a non/accredited 6%9, because if it !ere an accredited 6%9, the deduction is full) deductible. Question$ so if it is gi*en to an 6%9 that is not accredited, it is still a deductible expense but not full) D eaning sub#ect to li itations? Would a donation or a contribution to a particular group of indi*iduals that is not organi"ed as an association, not an entit), not an 6%9, be deductible contributions? o 2 don3t thin( so. .he accreditation is onl) needed for the a ount of deductions, but regardless of that, it should be ade to an 6%9 +?-. You3re sa)ing that A donation to a particular group of indi*iduals that is not organi"ed properl) is not a deductible expense? .otall)? So !hat3s the difference bet!een +!hite board-? o 6%9 is a non profit corporation, so an) group of indi*iduals !ho ha*e con*ened under a charitable cause does not necessaril) ean that the) are a non/profit corporation. 2n the la!, it a) onl) be deductible, !hether full) or partiall) if it is for ed as a non profit corporation. So, class, !hen )ou sa) that there is a donation, )ou cannot auto aticall) conclude that it is either partiall) deductible or full) deductible. 2t a) be not deductible. ,ecause for a donation to be deductible, it ust be ade to the go*ern ent, its political subdi*isions, %9<<s, or to a social !elfare institution or to an 6%9 !hether accredited or not. o .he difference lies in that if )ou gi*e )our contributions or donations to these (ind of entities, the onl) 8uestion that )ou ha*e is D does it belong to an ordinar) donation or a special donation. o ,ut if the recipient of )our donations is be)ond those identified in the tax code, not the go*ern ent etc, an) donation outside of those !ill 69. be deductible. o 2f )ou gi*e it to the go*ern ent, political subdi*isions, etc, it3s full) deductible if )ou fund it for a priorit) pro#ect. 2f it3s not a priorit) pro#ect, it3s partiall) deductible. o Donation to a forei"n "o/ernment or international ci/ic or"ani#ation al!a)s full. deductible because there is no 8ualification ade under the tax code. o ,ut for 6%9s, it !ill be full) deductible if it is accredited for the purpose of research, health, education, charitable and sports. 2f it3s an 6%9 that is not accredited b) an accrediting bod), the donation !ill still be deductible but sub#ect to li itations.
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2f it3s a social !elfare institution that is still not accredited, it !ill belong +deductible-. 9ther than that, all others are not deductible.
f full! deduc"i#le$ Sa%e' Co't :ro'' I")ome ;e''? E0*e"'e' Ta0a#%eO Net I")ome C8 Ta0 8ue 11.i%%io" 9 .i%%io" 2 .i%%io" 1 .i%%io" 1 .i%%io" 41.i%%io"5 0) f O%&'$ Sa%e' Co't :ro'' I")ome ;e''? E0*e"'e' Ta0a#%eO Net I")ome C8 Ta0 8ue 11.i%%io" 9 .i%%io" 2 .i%%io" 1 .i%%io" 1 .i%%io" 50H000 950H000
Note? E0*e"'e' (ere &o "ot i")%u&e )(arita#%e &o"atio"'
So !hen )ou sa) that it is sub#ect to a li itation, +illustration- )ou ha*e sales of 117, )ou ha*e cost of I7, )our gross inco e is 27, expenses is 17. Where do )ou base )our li ited deductibilit) of the expense? Hnder .axable inco e. o So if this is a corporation, !hat is the extent of the donation that )ou can accredited 6%9s? 2t ust not be a(e to a non/
ore than A5 of 17 !hich is the taxable inco e or A0,000.
o .he basis of the li it for a corporation, the) can actuall) donate e*er)thing. .he) can donate the 17, but if the) donate the entire 17 because the) !ant to a*oid pa)ing the tax to these (ind of recipients, it !ill be full) deductible D no tax due, "ero / assu ing this expense does not include )et the donations. o 2f the recipient of the 17 donation is recipient no 1 +go*ern ent, political subdi*isions, etc- for priorit) pro#ects, it3s full) deductible as expense, )ou report "ero taxable inco e, )ou pa) "ero tax dues. o 2f the recipient is a non/accredited 6%9, )ou donated the entire 17 +sa e facts and figures-, !ill )ou be liable to tax? Yes, )ou !ill get a deduction but )ou !ill still be liable for tax. What3s the basis for )our tax liabilit)? You ade 17 contribution, )ou contributed the entire 17 to an 6%9 that is not accredited, )ou said )ou are still liable for tax to the ,2B. What is the basis of )our 305 tax due?
o
IA0,000 is the basis for )our tax due.
o 9K class, e*en if )ou donate the entire 17, but since )our donation is sub#ect to li itation because the recipient is not one of those reported as full) deductible donation, )ou !ill still be liable for tax. .he basis !ould be the net taxable inco e less the axi u li it that )ou can actuall) contribute !hich is A5 of )our net taxable inco e, it3s not based on gross. You pa) 305 of the IA0,000 regardless of "ero cash. What usuall) happens no! is that e*er) 6%9 is stri*ing to ha*e itself accredited in order to encourage donors, because donors !ould onl) be encouraged to donate to 6%9s that are accredited because the) can clai full deduction of expense and the) can also be exe pt fro pa)ing the donors3 tax. Another exception pro*ided b) )our special la! is !hen )ou adopt a school. .here is !hat !e call as adopt/a/school progra . You pro*ide boo(s, co puter e8uip ents etc, and !hene*er )ou do that, ha*e )ourself accredited and !hate*er )our donation to that school is, it3s full) 1005 deductible plus A05 deductible. .his is be)ond the tax code, this is special la!. So if )ou donate 17 in boo(s to a school that )ou ha*e adopted, )our deductible donation is 1.A7.
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2 thin( !e discussed alread) research and de*elop ent, there are so e research and de*elop ent expenses that )ou can full) clai as an expense in the )ear that )ou ha*e incurred it or those that )ou can chose to a orti"e o*er A )ears so long as it is attributable to a capital asset or capital account. Question$ for that donation to be deductible, is acceptance necessar)? o .here can be no donation if the donation is not perfected, and perfection of the donation can onl) happen if there3s acceptance !hich is different on a case to case basis depending on !hat is being donated. o 2f it3s a real propert), it should be accepted in !riting in the docu ent or in a separate docu ent.. o 2f it3s ore than A000 / in another docu ent, if it3s less than A000 in cash D oral acceptance is allo!ed. o When )ou ha*e a perfected donation because there3s acceptance, donors tax is i posed depending on !hether or not exe ption is allo!ed. You re e ber our discussion on retire ent plans? ;*er) corporation is encouraged to ha*e a retire ent plan in order to address the need if so eone in the co pan) !ould be retired.
Cor*oratio"
Retireme"t P%a" Se*arate E"tity 'educ"i#le Ex(ense) Yes!
Em*%oyee'
.his is the retire ent plan, this is the corporation. 2f )ou ha*e a retire ent plan, an) one) that is placed b) the corporation here, for !hose benefit is this? 0or the e plo)ees. .his is a separate entit) fro the corporation. 2f the corporation puts in one) to this retire ent plan for the exclusi*e benefit of its e plo)ees, this is totall) a separate entit) and an) inco e earned fro this plan is not an inco e of the corporation. 7ind )ou, the inco e of this retire ent plan is totall) tax free. Would the transfer of funds to this retire ent plan b) the corporation be a deductible expense? o Yes. 2n order for the contributions to be deductible, the a ount contributed to the plan ust be$ Beasonable, the contribution ust be gi*en b) the e plo)er and the a ount contributed ust no longer be under the control of the corporation. 9nce the corporation has transferred the one), the corporation a) no longer get bac( the one) or use it in their operations.
o
Second re8uisite, the pa) ent has not )et been allo!ed as a deduction D it cannot be deducted t!ice. And plan is for the benefit of the e plo)ees and deductions apportioned in e8ual portions o*er 10 consecuti*e )ears beginning in the )ear in !hich the transfer !as first ade.
o
o Whene*er the corporation gi*es out one) for the retire ent plan for the benefit of the e plo)ees, it is alread) considered as an expense because it !ill not go bac( to the coffers of the corporation. .his is a separate entit) so !hate*er co es out of the corporation is an expense. Whether or not it is deductible is another issue. o Are all contributions ade b) a corporation to a retire ent plan deductible? 6o. 2f it is for that )ear, it can be deductible if it is considered as ordinar) expense for that )ear. ,ut if such deductions !ere ade for ser*ices that ha*e been rendered for
P a g e | 15>
the past )ears, )ou can ha*e it a orti"ed o*er a period of 10 )ears. Di*ide the a ount to be paid o*er the next 10 )ears. o Whene*er a corporation sets up a retire ent plan, the one) is gi*en to an insurance co pan) or !hoe*er is considered to hold the one) in trust. Whene*er an e plo)ee retires, the funds !ill not be ta(en fro the corporation but fro the plan. o Do )ou (no! actuaries? .hose !ho co pute the retire ent fees of indi*iduals, the) !ill co pute ho! an) indi*iduals are there in the co pan), !hat is the a*erage length of ser*ice the) !ill render, etc. So if the) !ill deter ine that there are 100 e plo)ees and the corporation need to put in 17 e*er) )ear, this 17 e*er) )ear !ill be deductible expense. Wh)? .his is for the current )ear ser*ice of the e plo)ees. 2f 17 !ill be placed in the funds this )ear, then the 17 is entirel) and full) deductible for that )ear. .his is not li(e other expenses, this !ill onl) be deductible if it is paid D eaning there is an actual contribution. 2f the corporation does not contribute this )ear, there !ill be no deduction of expense.
2*1* 8e&u)ti#%e Co"tri#utio"? 1.i%%io" 9or Pa't year 2.i%%io" 1O10 8R 2*11 1.i%%io" 9or Curre"t /ear 100A
:et us sa) the follo!ing )ear, the corporation ade a contribution of 27, 17 for the )ear !hich it failed to contribute and 17 for the current )ear. @o! uch contribution did the corporation gi*e to the retire ent plan? 27. o .he details$ 2010 the corporation is re8uired to contribute 17. .his is for the current ser*ice of the e plo)ees co*ered b) the plan. 2n 2011, it is re8uired to contribute another 17. o @o! 17. uch is deductible for next )ear? 17 !hich is for the current )ear and 1410 th of the
Wh)? 2f the corporation does actuall) contribute 17 this )ear, this !ill be full) deductible because this )ear pertains to the current )ear ser*ice of the e plo)ees co*ered b) the plan. 2f it foregoes contributing and decides to contribute next )ear 27, it is allo!ed but the proble is that if it contributes onl) next )ear, !hat is current for next )ear? .his one onl) +17-, the other +17- is for the past )ear3s ser*ice of the e plo)ees. And since !e said that expense can onl) be deducted in the )ear that it pertains, this is 1005 deductible +1 current )ear- and this is onl) 1410th deductible +17 past )ear-.
o o
@o! about the I410? 2t !ill be spread out for the next )ears. What !ill happen if the corporation does not contribute for 10 )ears, there3s no deduction for 10 )ears of 17. 2f on the 11th )ear, it decides to put in bul( of 117, onl) 17 is current and full) deductible , !hile the 107 !ill onl) be deductible 1410 e*er) )ear. .his still addresses the co on re8uisite that an expense ust pertain to the taxable )ear for it to be deductible. %. .ax Bates
:et3s go to tax rates. We3re alread) fa iliar that the tax rate for all corporations is al!a)s at 305. Hnless if it falls under special corporations. .he general rule is 305 tax of the net taxable inco e
P a g e | 15-
and there is an option not to be taxed at 305. .he option is gi*en to the do estic corporations and resident foreign corporations !here the) can choose to be taxed at the preferred rate of 1A5 gross inco e taxation, pro*ided that certain conditions are et. .hat, the ratio of the cost to their gross sales or receipts fro all sources should not exceed AA5, and if the) shall elect that option, it shall be irre*ocable for three )ears. What is 1A5 gross inco e taxation? Where shall )ou appl) the 1A5?
Sa%e' Co't 15A :ro'' I")ome 3**+*** ;e'' >0A Net I")ome 11H000H000 9H000H000 2H000H000 G 500H000 1H500H000 G ,**+*** 55A of 11. i' ,05H000. T(i' i' t(e )o't to a+ai%.
o 2n the 27 +gross inco e4sa e illustration-. Hsing this data, !ould )ou !ant to be sub#ected to the 305 net taxable inco e or !ould )ou !ant to pa) 1A5 of the gross inco e? What3s 305 of 17 D 300,000. What is 1A5 of gross inco e 27 D 300,000. You don3t actuall) benefit in choosing either. You should onl) opt for the 1A5 gross inco e taxation if it is ore beneficial to )ou. o 6o! +refer to lo!er part of illustration- still the gross inco e is 27, expenses A00,000, therefore net taxable inco e of 1.A7. 305 of 1.A7 is =A0,000. She !ants to chose gross inco e taxation of 1A5, because 1A5 of 27 gross inco e is onl) 300,000. Are )ou allo!ed to pa) 300,000? Assu ing that all the ratios, the %D1 rate etc, are present? Yes. o Would e*er)bod) be allo!ed to choose 1A5 gross inco e taxation? 69. 9nl) a*ailable to do estic corporations and resident foreign corporations.
6on/resident foreign corporations are not expected to file these tax returns and are sub#ect to final !ithholding tax of 305. o Assu ing illustration is a do estic corporation, can the do estic corporation chose to pa) 1A5 based on gross inco e? Yes, onl) a*ailable if the ratio of cost of sales to gross sales or receipts should not exceed AA5. Does this satisf) that re8uire ent? 69. Does I7 +costs- exceed AA5 of 117 +sales-? 9K, AA5 of 117 is >.0A7. .his +costs- should not exceed >7. o You don3t ha*e the co plete libert) of choosing 1A5 gross inco e. .he onl) ti e that )ou can opt to pa) the 1A5 gross inco e taxation, assu ing that all conditions are present is that$ +1- )ou ust either be a do estic corporation or resident foreign corporation, ust not exceed AA5. +2- the ratio of the cost to )our sales
o
9ther!ise, if )ou ha*e no li it here, for exa ple this is 107 +costs- !hich is al ost 1005, )ou !ill surel) be benefited b) gross inco e taxation. :ifeblood doctrine still dictates that )ou ha*e to pa) ore. 7ini u <orporate 2nco e .ax ini u corporate inco e tax? 7<2. is 25 fro the gross When are )ou re8uired to pa) the inco e of the corporation. o o 2s that inco e tax? Yes. Does the corporation ha*e to pa) 7<2. al!a)s? 6o.
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o When is a corporation re8uired to pa) the 7<2.? A corporation is re8uired to pa) the 7<2. if the nor al corporate inco e tax is less than the 25 gross inco e tax !hich is the 7<2.. 7ini u o corporate inco e tax is a 25 tax on the gross inco e of a corporation. Whether or not a corporation is liable at all ti es for 7<2., the ans!er is 6o. Wh)? 2f the corporation is not sub#ect to the 305 nor al corporate inco e tax, then it !ill not also be sub#ect to the 7<2.. o <an it happen that a corporation corporate tax and the 25 7<2.? 6o. a) be liable for both the 305 regular4nor al
What is the relationship of these t!o t)pes of taxes? 2t excludes the other. 2f one is used, the other is excluded fro being applied. .he 25 7<2. !ill appl) if the 25 7<2. is higher than the 305 nor al rate of gross inco e. So$ +1- if the 25 7<2. is higher than the 305 nor al corporate tax, the 7<2. !ill appl) and
o o
+2- if the corporation is operating at a loss then the 7<2. !ill appl). 25 7<2. !hich is 25 of the gross inco e, not the net taxable inco e, is onl) a tax that is ade in lieu of the 305. Your actual tax liabilit) to the go*ern ent is al!a)s the 305 tax. ,ut in )ears !herein the corporation is operating at a loss, )ou don3t ha*e 305 tax, )ou !ill ha*e to pa) the 305 7<2.. 9r in )ears !herein the corporation3s regular tax on net inco e is lo!er than 25 7<2., )ou ha*e to pa) the 25 7<2.. Whiche*er is ore fa*orable and higher in taxes to the go*ern ent for )our operations, )ou ha*e to pa) it to the go*ern ent. What is the principle of i posing the 7<2., prior to 1IIC, this !as not i posed, because corporations are abusing expenses. .he) bloat the expenses resulting to either ini al net taxable inco e or the) bloat this to the extent of reporting a loss, therefore there !ill be no inco e tax. And nor all) )ou don3t exist for 10 )ears at a loss, )ou should ha*e closed )our business alread). .his is !hat the ,2B !as loo(ing into, there are corporations !hich !ere operating at a loss for ore than 10 )ears. .he proble !as there !as o*er/clai ing of expenses but the ,2B !ould not belie*e )ou if )ou !ould report this at a loss at this le*el. 6o! at least the ,2B is assured, if )ou report a loss, the ,2B is assured of collection. <an the 25 7<2. be i posed if )ou are not liable for the 305 nor al corporate inco e tax? o 69, it !ill onl) be applicable if )ou are liable for 305 tax so those entities !hich are exe pt fro the 305 tax are not liable for the 7<2.. o 2f )ou are a corporation that has been granted inco e tax holida) for = or > )ears, during those )ears !hen )ou are not liable for the 305 nor al corporate inco e tax , )ou !ill not as !ell be liable for the 25 7<2.. @o! about non/profit hospitals or proprietar) educational institutions? .he) are sub#ect to 105 tax on net inco e. o Are the) liable for 25 7<2. in case the) operate at a loss. 6o, 7<2. also not applicable because the 305 nor al tax is not applicable to the . 6ext exa ple, a corporation that is registered !ith the 1hilippine ;cono ic Oone Authorit) or the Subic ,a) 0ree 1ort ;nterprise, the) are sub#ect to A5 tax on gross inco e in lieu of all taxes, are the) sub#ect to the 25 7<2.? o 6ot sub#ect to 25 7<2., unless if it refers to another acti*it) or the) are doing another acti*it) in !hich the) are not registered.
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o .hose corporations that are located inside the econo ic "one and e*en in 2. 1ar(, if the) opt to be sub#ect to A5 inco e tax based on gross inco e in lieu of all taxes, the) are not liable for 'A., not liable for other taxes, the) !ill not be liable to 7<2. at all because it is onl) i posed if )ou are sub#ect to 305. o .hese corporations !ithin the econo ic "ones ho!e*er are onl) allo!ed to pa) A5 tax on acti*ities that ha*e been registered !ith the go*ern ent. 2f the) *enture into acti*ities that are not co*ered b) the A5 tax, then D 2 agine .i ex, it3s !ithin the "one.
Ti-ex 100 .i%%io" 5 .i%%io" Regi'tere& Se%%i"g 99H EH . 5A >0A X
.CIT?
o .i ex has 1007 sales of registered acti*ities +!atch anufacturing and sales etc-. And the) earn A7 inco e fro selling old furniture, e8uip ents, otor *ehicles, etc, is this co*ered b) the registration? 6o, this is not sub#ect to A5 tax, this !ill be sub#ect to 305. As to !hether 7<2. applies to these acti*ities, it !ould depend on !hether 7<2. is higher or nor al corporate tax rate is higher. Question$ does that rule appl) also to proprietar) educational institutions?
.ro(rie"ar! Educa"ional ns"i"u"ions /% T /ES :R? 10A o" NTI NO E0)? >0A o" NTI
o 1roprietar) educational institutions are those pri*ate institutions !hich are o!ned and ad inistered b) indi*iduals and organi"ed for profit. .hese are not nonstoc( nonprofit. o Are the) sub#ect to tax? Yes, general rule is that the) are sub#ect to 105 tax rates on their net taxable inco e. ;xception is if the profits are a result of engaging in acti*ities that are not related to the trade and it exceed A05 of their inco e D the rate is 305 nor al tax on net taxable inco e.
0ross nco-e$ 100H000H000 from Tuitio" 9ee' 100H000H000 from Re"ta% 9ee' 200H000H000 Tota%
Su#3e)t to 10A
o 2f )ou o!n a school, and )our gross inco e, a proprietar) educational institution, is 1007 fro tuition fees and 1007 fro rental fees. You ha*e 2007 total inco e. What is the tax rate applicable? 2t is still 105 because it did not exceed A05 of the gross inco e. 105 tax on the entire net taxable inco e. 1roprietar) educational institutions and nonprofit hospitals are sub#ect to 105 tax on their net taxable inco e as preferred or special corporations. ,ut once the) *iolate the predo inance test, eaning once their inco e fro other acti*ities +other than educational or other than hospital ser*ices-, the entire inco e !ill be sub#ect to the regular rate of 305. You do not di*ide the inco e.
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Sa) for exa ple the gross inco e fro tuition fees is 1007 and fro rental fees is 1007, total of 2007. 2t did not *iolate the rule that it should not exceed A05, it3s A0/A0. .herefore, the entire taxable inco e of this school is sub#ect to 105 tax.
0ross nco-e$ 100H000H000 from Tuitio" 9ee' 100H000H000 from Re"ta% 9ee' 200H000H000 Tota%
Su#3e)t to 10A
o 2f this beco es 1017 +fro rentals, other inco e-, !hat rate shall appl)? 9nce the other inco e +other sources- exceeds A05 of the total inco e, 305 !ould appl) on the !hole net taxable inco e. 2t3s either 10 or 30 applied to the !hole inco e. Question, still on 7<2.$ if the school is still under 105 tax, is 7<2. applicable? 69. 2f the corporation surpasses the A05 boundar), sub#ect to 305, !ill 7<2. appl)? Y;S. o &ust si ple class +M-, !hene*er 305 is present, 25 is lur(ing around. So 7<2. !ill onl) be present if the school is 305 taxable. When do )ou begin to i pose the 7<2., on the first )ear of operations? 6o, in the fourth taxable )ear beginning after the )ear the corporation has co enced +pertains to registration !ith ,2Bbusiness operations. o So, in 200A Dece ber 2=$ )ou registered )our business. When should )ou start co paring )our 25 7<2. against )our 305 nor al corporate tax? 2n 200I. Wh)? 2t3s the fourth )ear after 200A. ,eginning the fourth taxable )ear follo!ing the )ear in !hich )ou co enced )our business operations. o You registered )our business !ith ,2B in 200A, assu ing )ou follo! the calendar )ear, !hen is the )ear after )ou co enced business operations D 200>. .he 25 7<2. is based is on gross inco e. When )ou sa) gross inco e, !hat is gross inco e as a general rule and !hat is gross inco e for a corporation that is engaged in the sale of ser*ice and a corporation that is engaged in the sale of erchandise? o So !hen )ou actuall) !ant to (no! !hat is gross inco e for purposes of co puting the 25 7<2., it !ould onl) refer to the definition found in Sec. 2?+e- of the .ax <ode. ,ut if )ou3re engaged into erchandising or trading business, the cost that )ou can deduct on )our sales in order to arri*e at the gross inco e !ould onl) pertain to the products that )ou actuall) trading plus the insurances plus the costs to put that product into the location or sale. o So if )ou3re selling sio ai, !hat !ould be the cost is the sio ai that )ou bought, if it3s trading, and the transportation cost fro getting it fro the supplier do!n to )our business. 9f course, the transportation that !ould pertain fro the deli*er) to )our consu ers or custo ers !ould no longer for part of the cost. 2t !ould alread) for part of )our selling expenses. o .he cost !ould pertain to the expenses for bringing the product into the location or sale. o And it !ould also depend if )ou3re into one t)pe of business. 2f it3s anufacturing business D the cost of the ra! aterials, the cost of bu)ing the ra! aterials, the freight4ship ent, the insurance, the co ission fro bu)ing it, and of course, the processing of the product. So these are, in short, the direct expenses D the direct cost to put the product a*ailable for sale, !hether the product be goods or ser*ices.
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You cannot deduct the expenses !hich are alread) for operation and for selling or for ar(eting. When )ou sa) transportation cost, it !ould refer to transportation fro bu)ing or transportation fro selling. o o So gross inco e is *er) restricti*e. .hat is the reason !h) the tax rate of 7<2. is *er) lo! D 25 lang unli(e 305 taxable inco e of nor al corporate inco e tax +6<2.- because )ou3re allo!ed to deduct all the business expenses that )ou3re incurring. .he 7<2. is onl) a tax te poraril) in lieu of the inco e tax that )ou cannot pa) probabl) because )ou3re losing or the 6<2. is lo!. 2t3s a te porar) tax that )ou ha*e to pa) but e*entuall), )ou are allo!ed to credit the excess of the 7<2. that )ou3*e paid be)ond the 6<2.. o What is that rule again? An) excess of the 7<2. o*er the 6<2. can be carried o*er to the next 3 consecuti*e )ears and offsetted against the 6<2.. <an it be offsetted against 7<2.?
o
69.
So an) excess or the excess of )our 7<2. o*er )our 6<2., dba !hen are )ou re8uired to pa) 7<2.? 9nl) if )our 6<2. is lo!er than the 7<2. or !hen )ou3re totall) at a loss !herein )ou don3t pa) an) 6<2.. So !hat )ou3ll ha*e to pa) is 7<2. D an) excess o*er the 6<2. can be used up as a credit against )our future 6<2. in the succeeding 3 )ears. 2t3s an offset.
Tiu? I <i%% i%%u'trate (o< it <or$'PP
Bt .ear 5ale Cess' Cost )ross income 1*J MCIT2 Cess' E&penses Net ta&a0le income 1-AJ NCIT2 -AJ ta& due 1NCIT2 MCIT 1*J2 Paid to t e "o/ernment E&cess MCIT 107 A7 A7 A7 A A A A A
Dt .ear 107 27 C7 ?.C7 *AAI EAI (EAI (EAI (AAI
Et .ear 107 27 C7 ?.?7 -AAI HAI (EAI (EAI (FAI
Ft .ear 107 37 ?7 >.C7 *AAI EAI (BAI (BAI *DAI
Gt .ear 107 =7 >7 A.A7 DAAI (DAI (*AI A (AAI
Ht .ear 107 =7 >7 A.>7 BAAI (*AI (*AI *AI A
%i*en the table abo*e, in the =th )ear, ho! o Be e ber, !hen do !e co
uch are )ou going to pa) to the go*ern ent? ence co puting 7<2.?
,eginning the =th taxable )ear follo!ing the )ear that )ou co ence business operations or !hich eans to sa), follo!ing the )ear )ou registered )our business for ,2B purposes. o So in the =th )ear, ho! uch is )our tax liabilit)? 0. 7<2. is 0. At this point, )ou3re not )et liable to 7<2. because 7<2. !ill co ence at the =th taxable )ear follo!ing the )ear that )ou co ence business operations, !hich in fact is the A th )ear. 2n this case, it is still the =th )ear. o Since here, )our 6<2. is also 0, )our pa) ent to the go*ern ent is 0. Your excess 7<2. is 0. :et3s go to the Ath )ear. @o! pa) to the go*ern ent?
uch is )our liabilit) to the go*ern ent? @o!
uch are )ou going to
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1>0K. So the go*ern ent !ill recei*e 1>0K because 7<2. is higher than 6<2..
o @o! uch is )our excess 7<2.? 100K. At this point, )ou ha*e a reser*e nahM Your true tax liabilit) to the go*ern ent is onl) the 6<2., but )ou paid the 7<2. of 1>0K because 7<2. is higher than 6<2.. .herefore, )ou ha*e a reser*e of 100K that is creditable against )our future tax liabilit) in the succeeding 3 consecuti*e )ears. :et3s go to the >th )ear. @o! o o uch !ill )ou pa) to the go*ern ent? 1>0K because 7<2. is higher than 6<2.. <an )ou not deduct )our reser*e of 100K? 69, because excess 7<2. is onl) offsettable against the 6<2.. 2t cannot be credited against the 7<2.. You al!a)s ha*e to pa) the 7<2., !hate*er it is. ,ut once )ou reach to the point that )our liabilit) is alread) the 6<2., it3s !hen )ou can use the reser*e. 2n this case, )our pa) ent to the go*ern ent is 7<2. so, therefore, )ou cannot deduct the reser*e )et. o o So ho! 1=0K. uch is )our reser*e at this point? 1?0K. uch is 7<2.? :et3s go to the ?th )ear. @o!
o @o! uch are )ou going to pa) to the go*ern ent? 1=0K because 7<2. is higher than the 6<2.. o @o! uch is )our reser*e no!? 2A0K. uch !ill )ou pa) to the go*ern ent? 2n the Cth )ear, ho!
o 0. @ere, the 6<2. is higher than the 7<2., therefore, )ou don3t need to pa) the 7<2.. You pa) the 6<2. supposedl). ,ut since in this case, )ou ha*e an existing 2A0K total of excess 7<2., thus, such excess is offsettable against the 1A0K 6<2., so the re aining reser*e is 100K r2A0K/1A0Kl. 2n the Ith )ear, ho! o o o @o! @o! uch !ill )ou pa) to the go*ern ent? uch is )our 7<2.? 120K. uch is )our 6<2.? 120K.
So, therefore, )ou pa) 20K to the go*ern ent r120K/100Kl
o You onl) pa) the 7<2. if the co pan) is operating at a loss or !hen 6<2. is lo!er than 7<2.. 2n this case, it3s e8ual, so )ou still pa) the 6<2.. ,ut since )ou ha*e an excess reser*e still of 100K co ing fro the prior )ears, )ou can offset it against the 120K, !hich is the 6<2., so therefore, )ou onl) pa) 20K. At an) point, did an) excess 7<2. expire? Was there an expiration of excess 7<2., !as carried for!ard for 3 )ears but !as ne*er used? o 69. eaning, it
o :et3s loo( at the Ath )ear. Was the 100K used !ithin the 3 succeeding )ears? Y;S, it !as used in the Cth )ear rfirst in/first out dba?l. So the 100K excess in the C th )ear pertains to a portion of the excess 7<2. in the >th )ear and ?th )ear. .herefore, nothing expired. @o! uch is )our total tax due +6<2.- fro o o =C0K. @o! uch did )ou actuall) pa) to the go*ern ent? =C0K still. the Ath )ear to the Ith )ear?
o .he difference is that )our true tax liabilit) is al!a)s the 305 6<2.. ,ut at an) point that )ou operated at a loss or )our 6<2. is lo!er than 7<2., )ou !ill be re8uired b) the go*ern ent to pa) 7<2. as an ad*ance pa) ent for future )ears. Wh) an ad*ance
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pa) ent for future )ears? ,ecause !hate*er excess 7<2. that )ou pa) to the go*ern ent !ill be creditable to the next 3 )ears. o So instead of pa)ing >0K in the Ath )ear, )ou are re8uired to pa) 1>0K. 2n the > th )ear, instead of I0K, )ou are re8uired to pa) 1>0K. 2n the ? th )ear, instead of >0K, )ou are re8uired to pa) 1=0K. ,ut in the Cth )ear, instead of pa)ing 1A0K, )ou paid actuall) 0. 2n the Ith )ear, instead of pa)ing 120K, )ou onl) paid 20K. o So botto line, )our true tax liabilit) +6<2.- for these )ears is onl) =C0K. .he a ount that )ou actuall) paid is also =C0K. So long as no 7<2. expires, eaning nothing is unused, )ou !ill al!a)s arri*e at e8ual a ounts. ,ut if at an) point, there !ill be an unused 7<2., that expired 7<2. !ill be the a ount that )ou ha*e o*erpaid the go*ern ent. o So assu ing that the excess 100K in the A th )ear is not used at an) ti e because )ou operated 7<2. all throughout, )our actual pa) ent !ould be higher than )our true tax liabilit) +6<2.-. o So 7<2. is not reall) )our tax liabilit). 2t3s not. 2t3s #ust an ad*ance pa) ent of )our 6<2. offsettable against )our future 6<2. because the go*ern ent !ould !ant to collect regularl) fro )ou.
E0am*%e? =(ere .CIT e0*ire'
5ale Cess' Cost )ross income 1*J MCIT2 Cess' E&penses A7 ?.C7 ?.?7 Net ta&a0le A *AAI -AAI income 1-AJ NCIT2 -AJ ta& due A EAI HAI 1NCIT2 MCIT 1*J2 A (EAI (EAI Paid to t e A (EAI (EAI "o/ernment E&cess MCIT A (AAI (FAI %i*en the table abo*e, let3s start/off !ith the Cth )ear. @o! the Cth )ear? o 120K because 7<2. is higher than the 6<2..
Bt .ear 107 A7 A7
Dt .ear 107 27 C7
Et .ear 107 27 C7
Ft .ear 107 37 ?7 >.C7 *AAI EAI (BAI (BAI
Gt .ear 107 =7 >7 A.?7 -AAI HAI (*AI (*AI
Ht .ear 107 =7 >7 A.=7 EAAI (GAI (*AI A
*DAI (GAI A uch !ill )ou pa) to the go*ern ent in
o What !ill happen to )our excess 7<2. in the Cth )ear? @o! uch is )our total reser*e for the Cth )ear that is usable or that can be carried for!ard in the Ith )ear? 1C0K r+2A0K/100K- t 30Kl. 2A0K is the total reser*e of the ?th )ear and )ou deduct the 100K fro 2A0K because the 100K excess 7<2. of the Ath )ear has alread) expired. .hen )ou add 30K !hich is the excess 7<2. in the C th )ear. So therefore, the total reser*e !ould no! be 1C0K. .he 100K excess 7<2. of the Ath )ear can onl) be carried for!ard in the > th, ?th and Cth )ear. Since at the end of the Cth )ear, !e3re loo(ing at the excess 7<2. that !ill be applied in the Ith )ear, )ou onl) co*er the excess 7<2. fro the >th )ear. .he excess 7<2. of the Ath )ear has alread) expired because )ou !ere unable to use the excess 7<2. of 100K of the Ath )ear. .he life of the 100K excess 7<2. of the A th )ear !ould onl) exist for 3 )ears after. Since such excess !as not used because in the C th )ear, )ou paid 7<2., it3s no longer usable in the C th )ear, so )ou ha*e to ta(e it out on the total reser*es in the Cth )ear. So )ou onl) ha*e 1C0K, !hich co es fro 30K excess 7<2. of the Cth )ear t C0K excess 7<2. of the ?th )ear t ?0K excess 7<2. of the >th )ear.
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 1,0 | P a g e I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.
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2f !e ha*e the sa e figures in the I th )ear, ho! )ear? o 0.
uch !ill )ou pa) to the go*ern ent in the I th
o 2n this case, it is onl) in the I th )ear !herein )ou benefited fro the excess 7<2. pa) ents because it !as onl) in the Ith )ear that )ou ha*e a higher 6<2.. @o! uch did )ou actuall) pa) to the go*ern ent fro o o AC0K. @o! uch is )our true tax liabilit) +6<2.-? =C0K. the Ath )ear to the Ith )ear?
o B;7;7,;B$ Your true tax liabilit) is onl) the 6<2.. So long as no 7<2. excess !ill expire, )our actual pa) ent to the go*ern ent !ill e8ual )our 6<2. liabilit). o ,ut in this case, !e ha*e an expir) of excess 7<2. in the C th )ear. .he first 100K excess 7<2. of the Ath )ear !as not being utili"ed. .herefore, although )our true tax liabilit) is =C0K, )ou actuall) paid AC0K because )ou failed to utili"e )our excess 7<2. or ad*ance pa) ents to the go*ern ent. o So that3s the difference !hen there is an expired excess 7<2.. o So if )ou feel that on the 3rd )ear, so ething is expiring, report a higher 6<2. so )ou can utili"e )our excess 7<2.. What are the instances !herein )ou can as( te porar) relief fro o o o 1. 1rolonged labor dispute 2. 0orce a#eure 3. :egiti ate business re*erses the pa) ent of 7<2.?
7<2. eans that )ou are re8uired to pa) regularl) to the go*ern ent. 2t3s #ust an ad*ance pa) ent. You can utili"e it after!ards. 2t3s in order to plug the loophole in the tax code !herein the taxpa)er is abusing the expenses that the) clai as deductible. You can "ero out )our net taxable inco e b) clai ing huge expenses then !hen )ou "ero out )our net taxable inco e, )ou3re not re8uired to pa) an) inco e tax due. ,ut because of the 7<2., )ou !ill be pa)ing 7<2. due. And in order to a*oid expiring the 7<2., at so e point, in the 3rd )ear, )ou !ill be honest enough to declare )our true inco e tax in order to be liable for 6<2.. S1;<2A: D97;S.2< <9B19BA.296S 1roprietar) ;ducational 2nstitutions +1;2- D !hat are the re8uire ents? 9r should it be a for al ;2 for )ou to a*ail of the 105 special rate? o Y;S, it ust ha*e been issued a per it to operate fro as the case a) be. o the D;<S or <@;D, or .;SDA,
What are the rules on the taxabilit) of 1;2 or 6on/1rofit @ospital +61@-? .ax rate is 105 if its inco e deri*ed fro unrelated trade, business or acti*it) does not exceed A05 of its gross total inco e. .ax rate is 305 ordinar) tax rate is its inco e fro or acti*it) exceeds A05 of its gross inco e. unrelated trade, or business
So !e ha*e to consider that if this is the gross total inco e of the 1;2, ho! uch of it co es fro unrelated trade, business or acti*it). 2f ore than A05, then auto aticall), the net taxable inco e of that 1;2 !ould be sub#ect to 305. You don3t apportion 105 to tuition fees and related educational inco e and 305 to other inco e. 2t3s either all the net inco e !ill be sub#ect to 105 because it did not exceed A05 on unrelated trade, business or acti*it) or all the net inco e !ill be sub#ect to 305.
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,ut for purposes of deter ining !hether the pre!ominance test has been *iolated or not, )ou loo( into the gross total inco e, not the net inco e, because the net inco e of educational acti*ities and the net inco e of co ercial acti*ities is different. You ha*e lots of expenses that )ou can clai in co ercial acti*ities but for educational, tuition lang, etcL it3s not an). 61@ D sa e rule as 1;2 o ,ut if it3s profitable? 2t3s sub#ect to the 305 ordinar) tax rate. sources !ithin and !ithout. 1;2 and 61@ are special do estic corporations, !hich are taxable fro S1;<2A: B;S2D;6. 09B;2%6 <9B19BA.296S 2nternational Air <arrier +2A<- and 2nternational Shipping +2S- are taxable !ithin on their tax base of %ross 1hil. ,illings +%1,- at the tax rate of 2.A5. o 0or purposes of 2A<, %1, refers to the a ount of gross re*enue deri*ed fro carriage of persons, excess baggage, cargo and ail originating fro the 1hilippines in a continuous and uninterrupted flight irrespecti*e of the place of sale or issue, and the place of pa) ent of the tic(et or passage docu ent. .ic(ets re*alidated, exchanged, and4or endorsed to another international airline for part of the %1, is the passenger boards a plane in a port or point in the 1hilippines. o 0or purposes of 2S, %1, eans gross re*enue !hether fro passenger, cargo or ail originating fro the 1hilippines up to final destination, regardless of the place of sale or pa) ents of the passage or freight docu ents. :ets sa) a corporation, S2:KA2B, !hich is based in Singapore, opens an agenc) in the 1hilippines to accept purchase of tic(ets for Singapore airlines. Would it be sub#ect to the 2.A5 tax on %1,? .he outlet caters to all sales of S2:KA2B tic(ets. o 2t3s an outlet D a sale of tic(ets D !hether or not originating in the 1hilippines. o 2f )ou register a foreign corporation here and it *entures on the sale of tic(ets fro !hate*er point of origin or airport of origin, !ould the sales be considered as sub#ect to 2.A5 tax as %1,? o What is the basic re8uire ent for a foreign corporation to be allo!ed to a*ail of the lo!er rate of 2.A5? o Would all foreign corporations selling tic(ets here in the 1hil. be sub#ect to the 2.A5 on %1,? 69. 6;<;SSAB2:Y. So !hat is the re8uire ent? What is that basic re8uire ent that a(es the tax rate a lo!er rate of 2.A5 on %1,? %1, !ould not appl) to all sales of air!a)s or airlines or transport co panies. %1, !ould onl) appl), specificall), to the a ount of gross re*enues deri*ed fro the carriage of passengers, excess baggage, cargo and ail 9B2%26A.26% 0B97 .@; 1@2:. in a continuous and uninterrupted flight regardless of !here the tic(et is sold. 6o!, if and !hen a foreign corporation, li(e S2:KA2B or QA.AB A2BWAYS, open up an agenc) or outlet here in the 1hil. selling tic(ets, !hate*er the destination is or the port of origin or airport of origin, it !ill alread) be co*ered b) the nor al tax rate for B0<, not the special rate. Wh)? 2t3s alread) engaged in selling tic(ets. 9n the nor al basis, it beco es sub#ect to the 305 tax. 2f the existence of such corporation is reall) to sell tic(ets, !hate*er the port of origin or airport of origin is, it !ill be sub#ect to the nor al tax of 305 because the 2.A5 on %1, refers onl) to the re*enues based on a flight originating fro the 1hil. in a continuous and uninterrupted flight. 2t !ould also include tic(et sales ade else!here other than the 1hil. so long as the origin of the flight is in the 1hilippines.
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So it3s different. When )ou put up a corporation and register it here and )ou sell tic(ets, it does not guarant) )ou 2.A5 on %1,. 2t !ould reall) depend on !hat )ou3re selling and !hat is co*ered b) %1,. Begional 9perating @ead8uarters +B9@Qs-, sub#ect to tax on !hat? o o .he) are sub#ect to 105 tax. Wh) 105? A B9@Q is defined in )our Sec. 22 of the tax code, a)be engaged in operations in the 1hil., therefore, being operational, it !ill generate profits, and an) profits, the taxable inco e of !hich, !ill be sub#ect to the special rate of 105, in the sa e anner that the e plo)ees of these B9@Qs of ultinational corporations are gi*en the preferential rate of 1A5 so long as the)3re occup)ing, if foreigner, anagerial or technical, if 0ilipino, anagerial and technical positions, B9@Qs as !ell are granted the preferential rate as a corporation at 105. B9@Qs are #ust li(e an) other corporations. 2t has e plo)ees. 2t !ill be liable for other taxes. 2t3s #ust that as far as inco e tax is concerned, it !ill be sub#ect to the preferential rate of 105. .he 8uestion as to !hether it !ill be re8uired to !ithhold taxes on the e plo)ees3 co pensation? Y;S. Will it be re8uired to re it? Y;S. ;*er)thing is the sa e except to the preferential rate of 105 to the corporation and 1A5 to its e plo)ees occup)ing anagerial and4or technical positions. 2n so far as BA@Qs are concerned, are Begional Area @ead8uarters +BA@Qs- liable for inco e tax as a special B0<? o o o 69. ,eing non/operational, it !ill not be sub#ect to inco e tax. As B0< also, 9,Hs are onl) taxable on inco e deri*ed !ithin. ,ut !hat t)pe of inco e is sub#ect to tax? 2nco e deri*ed b) the 9,Hs fro foreign currenc) loans to residents is sub#ect to the preferential rate of 105. ,ut if the inco e is deri*ed fro foreign currenc) loans or transactions to non/residents, other 9,Hs, local co ercial ban(s, it !ill be exe pt. And if it3s an inco e deri*ed fro in*est ents or deposits or other loans to non/residents, !hether indi*idual or corporation, is exe pt. ;as) recall !ould be D if the inco e is deri*ed b) the 9,Hs fro residents, indi*idual residents, taxable at 105. 2f the inco e is deri*ed fro non/residents, !hether indi*iduals, corporations, 9,Hs, exe pt. ,ut there is one ;N<;1.296 to the rule D if the inco e is deri*ed fro a 1hil. co ercial ban( or a local co ercial ban(, it is still exe pt. 9,Hs are #ust an extension of foreign ban(s. When it grants foreign currenc) loans to also non/residents, it3s as if off/shore. 2t3s be)ond the 1hil. #urisdiction. .hat3s !h) it3s exe pt. ,ut if the foreign currenc) loan to residents, dba !hat is the situs of interest or inco e fro loan transactions? 2t3s !here the debtor resides. And if the loan is granted to a resident and a resident of the 1hil., the situs is in the 1hil. 2t3s an inco e !ithin for 9,Hs. .hat3s !h) it3s taxable at 105. 7RANC< PRO3IT5 REMITTANCE TAX ,ranch 1rofits Be ittance .ax +,1B.-, !hat is that? When are the) re8uired to pa) it? What does it i pl)? Would a D< be liable for the 1A5 ,1B. before it pa)s off to a 0<? What (ind of relationship ust exist for the 1A5 ,1B. to appl)? o 2llustration$ .here is A 2nternational <orp. .here is , <orp. +do estic-, !hich is 1005 full)/o!ned b) A 2nternational <orp., and <, !hich is a 1hil. ,ranch of A 2nternational <orp. Which relationship ust exist? .he relationship bet!een A and , or A and <? @o! about 9ff/shore ,an(ing Hnits +9,Hs-?
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A and < relationship.
,1B. !ill onl) be applied in the A and < relationship and not A and , relationship. .he A and , relationship D !hen a 6B0< full) o!ns a corporation, )ou call such relationship as the parent/subsidiar) relationship. @ere, , is a separate corporation distinct fro the parent co pan). , is registered !ith its o!n set of stoc(holders and o!n set of ,oard of Directors. A as !ell has its o!n set of stoc(holders and o!n set of ,oard of Directors. .he A and < relationship D )ou call it a ho e/office branch under the single entit) concept. A and < are one and the sa e. Since < is a ere branch of the ho e/office abroad established in the 1hilippines as a B0<, < doesn3t ha*e an) stoc(holders. 2n the absence of the stoc(holders, it eans to sa) that the o!ner of < is the o!ner of A. .here is no set of ,oard of Directors. &ust a general anage ent because the set of ,oard of Directors is found in the ho e office, !hich is A 2nternational <orporation. 2f let3s sa) A in*ested in , corporation and A put up a branch, <. ,oth are perfor ing !ell +, and <-. @o! !ould , distribute the profits to A and ho! !ould < distribute the profits to A? @o! !ould , corporation gi*e profits to its stoc(holders? 9r ho! !ould A get profits fro ,? , corporation !ill declare di*idends. ,, !hene*er it has unrestricted retained earnings, the next step for it is to declare the profits in fa*or of its o!ner/stoc(holders. So it !ill go outside of the countr). You call this declaring di*idends to its stoc(holders.
o
.he di*idends that !ill be declared b) , in fa*or of A as stoc(holder, !ho is a 6B0<, !hat is its taxabilit)? Di*idends declared b) a D< to a D< is exe pt. Di*idends declared b) a D< to a B0< is exe pt. ,ut once di*idends !ill be declared to a 6B0<, it is sub#ect to tax. 2llustration$ D<, o!ned b) A indi*iduals +21, 22, 23, 2= and 2A-. Another D<. Another B0<. 2f the D< !ill declare di*idends to 21 D 2A, all indi*iduals, it3s sub#ect to 105 0W. on di*idends if it3s cash or propert) to B< and 6B<, 205 if it3s 6BA/;., and 2A5 if it3s 6BA/ 6;.,. ,ut !hat about a stoc(holder !ho is D< and a stoc(holder !ho is B0<? ,oth are exe pt. Wh) exe pt? 2n order to a*oid double taxation because D<s are also o!ned b) corporations. At the point that the D< declared di*idends to another D< of propert) and cash di*idends, it is exe pt to a*oid double taxation. .he profit is si pl) transfer to the other D<. .axabilit) !ould onl) arise once it goes out to an indi*idual. ,ecause if )ou tax the di*idend gi*en to the other D< and the ulti ate distribution to the latter3s indi*idual stoc(holders, there !ould be no! 2 stages of tax nah. .here should onl) be one. .hus, the di*idends gi*en to a D< is si pl) a transfer of profits. 2n the sa e !a) that B0<s are also exe pt for further distribution to its indi*idual stoc(holders. ,ut in recei*ing the di*idends fro a D<, !hen the recipient is 6B0<, it follo!s the general rule that all inco es of a 6B0< are sub#ect to the 305 tax except on capital gains fro capital gains on sale of shares. 2t eans to sa) that di*idends recei*ed b) a 6B0< are sub#ect to the nor al rate of 305. ,ut !hat is that special rule on di*idends being gi*en to 6B0<?
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2f a foreign go*ern ent grants or allo!s tax credits to 1hil. corporations abroad, !hat credit does it gi*e? At least ho! uch? 2f the foreign countr) grants tax credits of at least 1A5 to 0ilipino corporations deri*ing inco e fro an) do estic corporations abroad, the 6B0< !ill be sub#ect to 1A5 intercorporate di*idends. ;xa ple$ 2f the D< gi*es di*idends to another D< or to a B0<, it3s exe pt. ,ut if the recipient is a 6B0<, it3s 1A5, !hich is 305 tax rate for 6B0< inus 1A5 credit granted b) the foreign go*ern ent. .his is #ust to put the sa e relationship, sa e taxabilit). Whether )ou are a foreign corporation in*esting in a branch in the 1hil. or in*esting in its subsidiar) that is totall) distinct fro itself, an) profit going outside the 1hils. !ill be sub#ect to the sa e tax rate. <, since it has no stoc(holders on its o!n, it !ould si pl) erge its inco e !ith A. 2t !ill re it !hate*er profits it has recei*ed. You call this re itting profits of the branch to the head office. @ere, the profit that is ear ar(ed for abroad to be re itted to its head office !ill be sub#ect to 1A5 ,1B..
o o
Would all 1hil. branches be sub#ect to the 1A5 ,1B. on re ittances ade abroad? .he tax code pro*ides that if and !hen the 1hil. branch is located !ithin the econo ic "one, an) re ittances ade to its ho e office !ill not be co*ered b) the 1A5 ,1B.. 2n order to totall) a*oid the 1A5 ,1B. and totall) a*oid the 1A5 intercorporate tax di*idends, )ou locate )ourself as a 1hil. branch !ithin the econo ic "one +.ax a*oidance sche e-. .hat3s !h) there !ere so e subsidiaries !ithin the econo ic one that con*erted itself into 1hil. branches so that to a*oid the 1A5 ,1B.. So e*er)thing that goes outside the 1hil. branch office !ill be totall) tax/free.
October +% &'(' Tuesda) <an a D< be liable for the 1A5 ,1B.? 69. ,1B. is onl) applicable to B0<. When is ,1B. due to the go*ern ent? o ,1B. is due to the go*ern ent !hen a B0<, !hich is a ho e/office branch here in the 1hilippines of a 6B0< under the single/entit) concept, re its profits to such 6B0<. o So is it possible that a D< be liable for 1A5 ,1B.? 2s it possible for the go*ern ent to collect ,1B. on a profit/distribution ade b) a D< to a 6B0<? 69, since ,1B. is onl) applicable to a ho e/office branch relationship under the single/entit) concept bet!een a B0< and 6B0<. ,1B. *is/u/*is intercorporate di*idends or under the tax sparing credit rule. What is the difference bet!een the t!o?
NR9 C 100 A
8C Su#'i&iary Cor*.
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o 2llustration$ 2f a 6B0< puts t!o in*est ents in the 1hils. 9ne in a D<, full)/o!ning it and one establishing a 1hil. branch. A D<, being a subsidiar) corporation, !ill ha*e entirel) different sets of officers, its o!n capital stoc(, etcL onl) that 1005 of it is o!ned b) a parent co pan). So an) distribution ade b) a D< is called di*idends/distribution. 2t3s not re ittance of profits because for e*er) capital stoc( that is o!ned b) a stoc(holder, the fruit of that capital stoc( is a di*idend. ,ut !hen that 6B0<, li(e!ise, establishes or opens up a 1hil. branch, such branch is not a separate entit) fro the 6B0<. 2t is si pl) a branch D an extension of its ho e/office D and an) profit of the branch is directl) a profit of the ho e/ office. 2t3s #ust that for e*er) instance that there !ill be profits ear ar(ed for re ittance abroad, it !ill cross borders D territorial #urisdiction D it !ill alread) be sub#ect to the 1A5 ,1B. in order to e8ual the tax on the di*idends that !ill be declared b) the subsidiar) corporation. So in both cases, a 6B0<, !hether he chooses the parent/subsidiar) t)pe of in*est ent or the ho e/office branch t)pe of in*est ent, !ill be sub#ect at the sa e rate of 1A5, differentl) ter ed. 9ne is intercorporate di*idends. .he other is a ,1B.. 2n ,1B., this in*ol*es 2 countries D the 1hilippines and one fro abroad, a foreign countr). .here !ill be no ,1B. of a D< ha*ing a branch an)!here in the 1hils. because it3s one and the sa e entit) co*ered b) one #urisdiction D the 1hil. #urisdiction. So ,1B. should in*ol*e the 1hils. and another foreign countr). o Would all 1hil. branches of a 6B0<, !hen it ear ar(s profits for re ittance abroad, be liable for the 1A5 ,1B.? As a rule, 1hil. branches of a 6B0< is liable for 1A5 ,1B. on the total profits that it ear ar(s for re ittance abroad except if the 1hil. branch is located !ithin the econo ic "one that is legall) recogni"ed b) the go*ern ent. 2ntercorporate di*idends. What is the general rule of the taxabilit) of a 6B0<? o All inco e recei*ed b) a 6B0< !ill be sub#ect to 305 tax except capital gains fro sale of shares of stoc(, not traded in the stoc( exchange. the
o ,ut !ould di*idends declared and paid b) a subsidiar) corporation to a 6B0< be sub#ect to the 305 tax? 2f the foreign go*ern ent of such 6B0< allo!s or grants tax credit to 1hil. corporations located abroad, the intercorporate di*idends !ould be sub#ect to 1A5 tax, not the 305 tax. o .he reason !h) intercorporate tax on di*idends is at 1A5 is because$ 1. 2n order to e8ual the rate of the ,1B.
2. As a rule, 6B0< !ill be taxed at 305 on gross inco e including di*idends earned fro a D<. ,ut if there is a tax credit that is granted b) the foreign countr) to 1hil. corporations, not a resident there, e8ui*alent to 1A5 then, !e can onl) i pose tax of 1A5 as !ell. 2t eans to sa) that 305 tax rate of 6B0< less the tax credit that is expected to be granted b) the foreign countr) to 1hil. corporations at 1A5 / so the difference is 1A5. .he difference of 1A5 is the rate of intercorporate tax on di*idends. BA@Qs are not taxable because the)3re not expected to be perfor ing an) profitable acti*ities in the 1hils. What about B9@Qs? o .he) are sub#ect to 105 tax on their taxable inco e deri*ed !ithin. B9@Q is operating acti*ities !ithin the 1hils. in fa*or of its affiliates !ithin the Asia 1acific Begion. 2t is considered as a special B0< sub#ect onl) to 105, instead of the 305 tax, on the inco e co ing fro !ithin the 1hils. .he tax base is onl) the taxable inco e because it3s regarded as a B0< and B0<s are taxed at net inco e.
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 1,, | P a g e
P a g e | 1,6
o And if e*er a B9@Q re its profits abroad to its ho e/office, it !ill also be sub#ect to the 1A5 ,1B.. o .he 105 is inco e tax. .he 1A5 is the tax on the profits re itted abroad. 2t3s #ust li(e a corporation taxable on its inco e and a corporation re8uired to !ithhold on the di*idends or the profits that it !ill re it abroad. S1;<2A: 6B0< 6on/resident cine atographic fil deri*ed fro !ithin. o!ner, lessor or distributor D taxed at 2A5 on their gross inco e
o A cine atographic fil o!ner, lessor or distributor D it does not include leasing out D'Ds or <Ds. What it includes is onl) fil s D one !hich is used probabl) for o*ies. 6on/resident o!ner or lessor of *essels chartered to 0ilipino 6ationals or <orporations D taxed at =.A5 on gross rentals, lease or charter fees deri*ed fro !ithin o o .he <harter Agree ent of !hich is appro*ed b) 7ariti e 2ndustr) Authorit). So e D<s !ould lease out *essels fro foreign o!ners in order to ship in the ra! aterials that the)3re purchasing. So !hate*er the arrange ent is !ith the lease, !hether it be b) bareboat charter or de ise charter, !hether it3s !ith cre! or not, it3s co*ered b) the =.A5 on gross inco e for the lease pa) ents. 6on/resident o!ner or lessor of aircraft, or fees deri*ed fro !ithin 1ASS2'; 26<97; 2ndi*iduals, as a rule, are sub#ect to the 205 tax !ithheld on the interest inco e that the) earn, except that if the)3re 6BA. When !e loo( at corporate taxpa)ers, the)3re, as a rule, sub#ect to the 205 tax !ithheld on the interest inco e that the) earn D D< and B0<. o @o! about 6B0<? Are the) sub#ect to the general rule of 305? 9r are the) gi*en the preference as !ell of 205 tax on interest inco e? :et3s sa) that )ou are the anager of the ban(. A 6B0< places a ti e deposit in )our ban(. Are )ou going to !ithhold on the interest inco e? Y;S. At !hat rate? 305. :et3s sa) the 6B0< placed its ti e deposit in an 9,H. Sub#ect to tax or not? 69, since the)3re exe pted. <an !e consider it as a passi*e inco e sub#ect to 0W.? 9r !hat is co*ered b) passi*e inco e of corporations sub#ect to 0W.? When )ou sa) passi*e inco e of corporation that is sub#ect to 0W., it ust be an inco e that is deri*ed !ithin the 1hils. in order for us to ha*e #urisdiction o*er the !ithholding agent. 2f the inco e, !hether it is a (ind of passi*e inco e, is earned abroad or has situs abroad, it !ill not be considered as inco e sub#ect to 0W. but the inco e, if applicable, !ill #ust si pl) for part of the other inco e of the taxpa)er, !hether corporate or indi*iduals. An interest inco e is a passi*e inco e. An inco e deri*ed fro inacti*it). When a D< or a B0< deri*es interest inco e fro ban( deposits, it !ill still be sub#ect to the sa e 205 i posed on indi*iduals. When a 6B0< deri*es interest inco e on ban( deposits, it3s 305. ,ut interest inco e on loans, 205 final tax. Hnder the expanded 0<DH, it3s ?.A5 for B0< and D< !hile 6B0< is exe pt #ust li(e placing )our deposit or in*est ent in an 9,H. 2t3s offshore. 2t3s outside the #urisdiction of the 1hils. so, although it3s located in the 1hils., as a special treat ent, it is exe pt if the depositor and the ban( that is accepting the deposit are treated as non/residents.
achiner) and e8uip ent D taxed at ?.A5 on gross rentals
P a g e | 1,7
Bo)alties deri*ed !ithin the 1hils., if the inco e/earner is a D< or a B0<, it3s both at 205. 2t does not negate fro the rates that is applicable to indi*idual taxpa)ers. ,ut if the ro)alt) inco e that3s considered as passi*e inco e, the earner is 6B0<, it3s 305 because as a rule, 6B0<s are taxable at 305. o 69.;$ Bo)alties should be considered first as a passi*e inco e before )ou appl) the special rates of 205 and 305. 2f the ro)alt) inco e is alread) an acti*e inco e that is earned in the usual course of trade or business of the corporation, it !ill be sub#ect to the ordinar) tax rate of 305. 0or capital gains deri*ed fro o the sale of shares of stoc($ 2f it is listed and traded thru local stoc( exchange$ s of 15 of the %S1
o 2f it is not listed or traded thru local stoc( exchange$ 6ot o*er 100K D A5 and o*er 100K D 105 2s this the sa e rate applicable to indi*idual taxpa)ers? Y;S. Would the rates differ if the seller is a 6B0<? 69. .his is one inco e or one t)pe of gain D capital gain D !herein the rate holds true or the sa e for all t)pes of corporate taxpa)ers. 2f )ou loo( into Sec. 2C+b- D 6B0< are sub#ect to 305 tax on gross inco eL. ,lah, blah, blahL all t)pes of inco e ha*e been entioned, except capital gains on sale of shares of stoc(, !hich eans that it !ill be sub#ect to the A and 105. <apital gains deri*ed fro taxpa)ers? o o the sale of real propert). What is the taxabilit) of the different corporate
0or D< D >5 of the %S1 or Oonal 'alue, !hiche*er is higher 0or B0< and 6B0< D should be treated as 9.@;B 26<97; sub#ect to 305
NR9C 4STN5
100 A
R9C 4IJ;5 P(i%. Cra")(
8C 4ACC5 Su#'i&iary Cor*.
2llustration$ ,ased on the illustration abo*e, !hat is the relationship bet!een D< +A,<- corporation and 6B0< +S.H-? 1arent/subsidiar) relationship. @o! about B0</1hil. branch +&K:- and 6B0< +S.H-? @o e/office branch relationship.
NR9C 4STN5 Si"g%e e"tity CPRT5 R9C 4IJ;5 P(i%. Cra")( 20A 8C 4X/D5 415A
,0A
20A
8C 4ACC5 Su#'i&iary Cor*. Profit' 100. 8e)%aratio" !!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. of I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'. 8i+i&e"&' 1,7 | P a g e
P a g e | 1,9
Another illustration$ ,ased on the illustration abo*e, let3s sa) D< +A,<- is not 1005 o!ned b) B0< +S.H-. D< +A,<- !as setup b) the 6B0< +S.H-. .here is also a B0<, !hich is a 1hil. branch of 6B0< +S.H-. Such 6B0< setup a 1hil. branch, B0</1hil. branch +&K:-. After!ards, both of the +the 6B0< +S.H- and B0</1hil. branch +&K:-- in*ested in the D< +A,<-. D< +A,<- is >05 o!ned b) 6B0< +S.H-, 205 o!ned b) B0</1hil. ,ranch +&K:-9W and 205 o!ned b) another D< +NYO-. 6o! D< +A,<- earned profits and it !ould li(e to distribute the profits. @o! !ill it distribute the profits? Declaration of di*idends or re ittance of profits? o Declaration of di*idends. Di*idends !ill ha*e to be declared and distributed to all stoc(holders. o 2f 1007 !ill be distributed as the total di*idends, 207 !ill go to NYO. 2s A,< re8uired to !ithhold tax on the di*idends to NYO? 69, since it is exe pted fro tax on di*idends recei*ed fro a D< +Sec. 2?-. .he la! alread) pro*ides, under Sec. 2?, that di*idends declared b) a D< to another D< is not sub#ect to tax as )et. 9nl) !hen the di*idends !ould be ulti atel) declared to indi*idual stoc(holders !ill the tax rates appl) of 105, 205 or 2A5 applicable to indi*idual taxpa)ers o @o! about the 207 di*idends to &K:? Will it be sub#ect to !ithholding tax? 69, since it is also exe pted fro 2C+a--. tax on di*idends recei*ed fro a D< +Sec.
Sec. 2C+a- +?- also pro*ides that the di*idends declared b) D< to a B0< is as !ell exe pt fro tax. o @o! about the >07 di*idends to S.H? :iable for tax at 305 but sub#ect to the tax sparing credit rule +Sec. 2C+b--.
@ere, the tax sparing credit rule can be applied. 2f the foreign go*ern ent of S.H grants or allo!s tax credit, the intercorporate tax of 1A5 shall be i posed on the di*idends recei*ed b) S.H fro A,<. 6o actual grant is necessar) so long as it can be seen that the foreign countr) allo!s a tax credit to 1hilippine corporations in such countr), therefore, it3s auto atic that !e can appl) the tax sparing credit rule D instead of the 305 general rate on 6B0<, !e can actuall) i posed the 1A5 intercorporate tax on di*idends declared b) a D< to a 6B0<. Sec. 2C+b- pro*ides that the di*idends declared b) a D< to a 6B0<, sub#ect to the tax sparing credit rule, !ill be sub#ect to 1A5 tax. <an the 6B0< raise the argu ent that under the single/entit) concept, it !ill also be exe pt #ust li(e a B0<? 69. According to the S<, the 6B0< cannot use the single/entit) concept in a*oiding the tax of 1A5 on di*idends declared to it in co parison to the di*idends declared b) the subsidiar) corporation to a B0< of !hich it o!ns. 2f !e pull out such 1A5 tax #ust so to e8uali"e the exe ption granted to B0<, there !ill be no tax that can be collected b) the go*ern ent. .he reason !h)
o
P a g e | 160
the B0< is exe pt and !h) the 6B0< is taxable is because the 6B0< is alread) a gi*en state D it3s direct di*idends. Hnli(e B0<, it3s still exe pt. 9nce the B0< recei*es the di*idends fro a D<, it !ill still re it the profits abroad sub#ect to the 1A5 ,1B.. And the S< clearl) stated that for purposes of in*esting in a corporation in the 1hils., the single/entit) concept !ill not appl) !herein a 6B0< and its 1hil. branch, both in*esting in the sa e corporation, the) !ill be considered as separate entities for purposes of taxing the di*idends. And ,1B. is onl) directed to a B0<. So D< is not sub#ect to the 1A5 ,1B.. With ore reason that a 6B0< is not sub#ect to ,1B. since a foreign branch is not !ithin our #urisdiction.
o
.AN 96 27B91;B:Y A<<H7H:A.;D ;AB626%S 2A;. D 2 properl) Accu ulated ;arnings .ax, !hat is this 2A;.? o 2t is a 105 tax i posed for each taxable )ear on the i properl) accu ulated taxable inco e of each corporation. o .here3s a principle !h) 2A;. has to be i posed.
A''et' ;ia#i%itie' Net <ort( 'to)$ Profit' 4retai"e& ear"i"g'5 19. 17. for future e0*a"'io" 100. 70. 20. Ca*ita% Sto)$ 1. 1. a' )a*ita%
2llustration$ .he net !orth of )our business is bro(en do!n into capital stoc( and profits +earnings that )ou retain in the business or in the corporation-. You accu ulate earnings i properl). When )ou accu ulate the earnings of )our business i properl), )ou ight be i posed of the 105 2A;.. 2f )our asset is 1007. :iabilities is C07. Your net !orth is 207. 2f )our capital or in*est ent fro the start of )our business is onl) 17. 2t eans to sa) that the profits that )ou ha*e accu ulated is 1I7. @a*e )ou accu ulated profits unreasonabl)? 2s there a chance that the ,2B !ill i pose the 2A;.? What3s the principle behind i posing the 2A;.? Wh) is the ,2B taxing a profit that is alread) exe pt fro the tax? Dba class, !hen )ou earn inco e, )ou !ill be sub#ect to the inco e tax. Whate*er re ains is the profit that )ou !ill accu ulate and !ill onl) be taxable again once it !ill be distributed to the stoc(holders. So this is the current state D )ou did not distribute the 1I7 !orth of profits to )our stoc(holders. Wh) is the ,2B taxing the profits that )ou ha*e accu ulated?
o
.he reason !h) there is 2A;. is to actuall) penali"ed corporations that ha*e been unreasonabl) !ithholding the profits fro being distributed to the stoc(holders. Wh)? ,ecause had it been distributed to the stoc(holders, at !hat rate can the ,2B collect the tax on the distribution of di*idends to stoc(holders? Dba, generall), if the recipient is a B<, 6B< and BA, it !ould ha*e been sub#ected to 105 tax. .he ,2B could ha*e collected tax on the profits had this profits been distributed. ,eing unreasonabl) accu ulated +the profits-, the ,2B is going to penali"e the corporation.
P a g e | 161
<ase scenario$ 2f )ou !ill be sub#ected to the 105 2A;. for unreasonabl) !ithholding of profits and )ou decide later on to distribute the profits as di*idends to all of )our stoc(holders, !ho are all B<, !ould )ou still be re8uired to !ithhold another 105 tax on the di*idends subse8uentl) declared to such stoc(holders after being penali"ed of the 105 2A;.? Y;S. .here is no double taxation here. ;*en if )our profits !hich )ou ha*e unreasonabl) accu ulated ha*e been exposed alread) and )ou ha*e paid the 105 2A;., subse8uent distribution as di*idends !ould still entail !ithholding of the regular rates of 105 to B<, 205 to 6BA/;.,, and 2A5 to 6BA/6;.,. 2t doesn3t eans that if )ou ha*e alread) shouldered the 105 2A;., it !ill alread) co*er for the nor al 105 0W. on di*idends. .hese taxes +2A;. and 0W. on di*idends- are entirel) separate. .he) ha*e different purposes. 9ne +2A;.- is i posed as a penalt) and the other one +0W.- is si pl) a tax on the inco e earned b) the stoc(holders.
o
A*erage for the di*idends or accu ulated earnings that is a probable area for i posing the 105 2A;. !ould onl) start fro 1IIC. Your di*idends or accu ulated earnings fro Dec. 31 do!n !ould still be free fro the 2A;. because this (ind of tax has alread) been effecti*e &an. 1, 1IIC. And if )ou3re operating on a fiscal )ear basis, !hich eans that )ou start at an) da) other than &an. 1, )our free co*erage fro 2A;. !ould be starting fro the last onth in 1IIC D the end of )our fiscal )ear. So if )our fiscal )ear is 6o*. 1 ending in 9ct. 31. 9ct. 31, 1IIC do!n !ould still be free fro 2A;.. 2f )ou3re fro the ,2B, do )ou ha*e the figure or taxable base !ithin !hich )ou can i pose the 2A;.? 2s it readil) a*ailable in the gi*en illustration abo*e? Where do )ou ha*e to pic( out the taxable base for the 105 2A;.? o .he 105 2A;. !ill be co puted according to the for ula gi*en in Sec. 2I of the tax code. .he 1I7 accu ulated retained earnings gi*en in the illustration abo*e is onl) an indicator, a red light, for the ,2B to assess. .he o ent that the retained earnings !ould exceed 1005 of )our capital stoc(, it !ill tr) to co pute the 2A;.. ,ut it is not a guarant) that the ,2B !ill actuall) collect the 2A;.. .he retained earnings is not the base. 2t is #ust an indicator that )ou ha*e i properl) accu ulated )our earnings. o Hnder Sec. 2I, co puting 2A;. !ould start/off fro that the ,2B is considering i posing the 2A;.. 09B7H:A$ .axable inco e ad#usted b)$ ADD
o o o o
)our taxable inco e for the )ear
2nco e exe pt fro 2nco e excluded fro
tax gross inco e
2nco e sub#ect to final tax A ount of net operating loss carr)/o*er deducted +69:<9of$ 726HS Di*idends actuall) or constructi*el) paidE and 2nco e tax paid for the taxable )ear
And reduced b) the su

o o
.AN ,AS; +2A; D 2 properl) Accu ulated ;arnings- V taxable inco e t inco e exe pt fro tax t inco e excluded fro gross inco e t inco e sub#ect to final tax t 69:<9 D rdi*idends actuall) or constructi*el) paid t inco e tax paid for the taxable )earl So the basis of the 105 2A;. is not the retained earnings gi*en fro in the illustration gi*en abo*e but the for ula on the .AN ,AS; +2A;-. the for ula
P a g e | 162
So if )our taxable inco e for the )ear that is co*ered b) the assess ent of the 2A;. is 0. You ha*e no exe pt inco e, 0 as !ell. And )ou ha*e not paid an) tax. .herefore, )ou ha*e no 2A;., e*en if )ou ha*e retained earnings because again, such retained earnings is onl) an indicator for audit and assess ent, not necessaril) the pa) ent of 105 2A;. because 105 2A;. is based on the .AN ,AS; +2A;for ula. ,ut the ,2B is not so unreasonable as to not allo! )ou to accu ulate profits. .here are instances !hen )ou are allo!ed to accu ulate profits e*en be)ond )our capital stoc(. What are the instances !hen )ou ha*e the free ti e to accu ulate the profits ore than 1005 of )our capital stoc(? What are the instances !hen )ou are allo!ed to accu ulate profits be)ond 1005 of )our capital stoc(? 2f it is #ustified under the Freasonable needs of the businessG. @o! do )ou #ustif) the Freasonable needs of the businessG according to Be*. Beg. 2/01?
o
1. Allo!ance for the increase in the accu ulation of earnings up to 1005 of the paid/up capital of the corporation as of ,alance Sheet date, inclusi*e of accu ulations ta(en fro other )earsE So )ou can retain profits up to 1005 of )our capital stoc(.
2. ;arnings reser*ed for definite corporate expansion pro#ects or progra s re8uiring considerable capital expenditure as appro*ed b) the ,oard of Directors or e8ui*alent bod) So for definite corporate expansion pro#ects
3. ;arnings reser*ed for building, plants or e8uip ent ac8uisition as appro*ed b) the ,oard of Directors or e8ui*alent bod) =. ;arnings reser*ed for co pliance !ith an) loan co*enant or pre/existing obligation established under a legiti ate business agree ent .his onl) eans that if )ou ha*e an existing loan agree ent !ith an) national ban(s or do estic ban(s or international ban(s !herein it is re8uired that )ou ha*e to aintain a ratio of )our profits against capital stoc(, therefore, )ou ha*e to co pl) !ith that pro*ision strictl), and so therefore, )ou !ill not be liable, to the extent of the co pliance, for 2A;.. 2t si pl) eans that if the ban( re8uires )ou to aintain D not disposing of )our retained earnings, not declaring it as di*idends D then )ou are allo!ed to accu ulate profits be)ond 1005 of )our capital stoc(. A. ;arnings re8uired b) la! or applicable regulations to be retained b) the corporation or in respect of !hich there is legal prohibition against its distribution >. 2n the case of subsidiaries of 0<s in the 1hils., all undistributed earnings intended or reser*ed for in*est ents !ithin the 1hil. as can be pro*en b) corporate records and4or rele*ant docu entar) e*idence. When )ou sa) that )ou !ould !ant to accu ulate profits for expansion pro#ects, !hat are the steps that )ou need to a(e? 2s it enough that )ou !ill tell the ,2B that )ou are planning to expand )our business? @o! !ill )ou pro*e? What if for 10 )ears alread) )ou ha*e been placing in )our financial state ents that this is for future expansion pro#ects, etcL. but it ne*er reall) too( place? <an )ou no! be i posed on the 2A;.?
P a g e | 16>
o 1ro*en b) a ,oard resolution, blue prints, etcL.. ,ut it should be definite expansion pro#ects pro*en b) sufficient docu entar) e*idence o 2f at the end of this )ear, )ou ha*e an in(ling that )ou !ill be audited or assessed b) the ,2B so )ou decided to put into record, prepare a board resolution b) )our ,oard of Directors that 1C7 of the retained earnings !ill be declared as di*idends, !ithin ho! an) onths or )ears should )ou actuall) pa) out the 1C7? What is the ti e fra e that is gi*en )ou b) the tax authorities to reali"e the actual distribution of di*idends? At the end of e*er) taxable )ear, )ou are gi*en the lee!a) on ho! to distribute )our accu ulated earnings. 2f )ou !ant to a*oid the 2A;., aintain 1005 of )our capital stoc( and the excess, either for future expansion pro#ects or di*idend distribution. ,ut it cannot sta) fore*er as is. 2t should actuall) be distributed !ithin 1 )ear fro the close of the taxable )ear !herein )ou declare the di*idends. So it should be paid out !ithin 1 )ear, other!ise, )ou !ill pa) the 2A;.. What corporations or entities are not co*ered b) the 2A;.? o 1. 1ublicl) held corporations What is a publicl) held corporation? 2s that the sa e as a publicl) listed corporation? 69, because a publicl) held corporation eans that !hich is not co*ered b) the definition of a closel) held corporation What is a publicl) listed corporation? 2t is a publicl) listed corporation if its stoc(s are listed in the stoc( exchange. 1ublicl) listed corporations are corporations !herein the stoc(s are listed and offered to the public. So auto aticall), a publicl) listed corporation is a publicl) held corporation because being listed, it !ould nor all) ha*e nu erous stoc(holders. 2t3s open to the public. ,ut a publicl) held corporation is different because publicl) held corporations are corporations !hich are not closel)/held. And for purposes of the 2A;., )ou ha*e to (no! the definition first of !hat a closel)/held corporation is. What is not co*ered b) a closel)/held corporation beco es a publicl) held corporation. <losel)/held corporations are those corporations at least A05 in *alue of the outstanding capital stoc( or at least A05 of the total co bined *oting po!er of all classes of stoc( entitled to *ote is o!ned directl) or indirectl) b) or for not ore than 20 indi*iduals. D<s not falling under the aforesaid definition are, therefore, publicl) held corporations.
50A more t(a" 20 i"&i+i&ua%'
50A 1 i"&i+i&ua%
C;OSE;/ @E;8 CORPORATION
2llustration$ A D<, A05 of its capital stoc( is o!ned b) and the other A05 is o!ned b) 1 indi*idual.
o
ore than 20 indi*iduals,
,) )our definition of closel)/held, is the illustration abo*e closel)/held, that is A05 of the *oting stoc( is o!ned b) not ore than 20 indi*iduals?
P a g e | 16-
Y;S, ha*ing co plied the definition of closel)/held that A05 of the *oting stoc( is o!ned b) not ore than 20 indi*iduals, then it is closel)/held for purposes of 2A;.. .herefore, the illustration abo*e is not a publicl) held corporation. <onse8uentl), !hene*er such corporation in the illustration abo*e !ill unreasonabl) or i properl) accu ulate its earnings, it !ill be sub#ect to the 105 2A;.. An) corporation, !hich does not fall !ithin the definition of a closel)/held corporation, !ill auto aticall) be considered as publicl) held. When can !e sa) in the illustration abo*e be publicl) held?
-9A 1 i"&i+i&ua%
51A 21 i"&i+i&ua%'
PNC;IC;/ @E;8 CORPORATION
;xa ple$ 2f the o!nership of the corporation is at =I5, !hich is not at least A05, o!ned b) 1 indi*idual. While A15 is o!ned b) 21 indi*iduals. .his is alread) a publicl) held corporation. ,eing a publicl) held corporation, this is not co*ered b) the 2A;..
-9A 21 i"&i+i&ua%'
51A 1 i"&i+i&ua%
C;OSE;/ @E;8 CORPORATION
Another illustration$ A D<, =I5 of its capital stoc( is o!ned b) 21 indi*iduals and A05 of its capital stoc( is o!ned b) A15 of 1 indi*idual.
o
2s the illustration abo*e publicl) held or closel) held? <:9S;:Y/@;:D because at least A05 is o!ned b) not than 20 indi*iduals. ore
1urpose for the difference bet!een a publicl) held and a closel) held corporation$ 1ublicl) held corporations are not exposed to liabilit) for 2A;. !hile closel) held corporation are exposed to such liabilit).
o
2s a closel) held corporation a fa il) corporation?

o o
69. ,ut a fa il) corporation is a closel) held corporation. Would all closel) held corporations be fa il) corporations?
P a g e | 165
69.
6ot all closel) held corporations are fa il) corporations because so long as a corporation satisfies at least A05 o!ned b) not ore than 20 indi*iduals, it is considered a closel) held corporation. o BH:;S D +See 7a alateo on p. =>>Wh) is it not co*ered b) the 2A;.?
o
2. ,an(s and other non/ban( financial inter ediaries ,ecause the)3re re8uired to aintain a certain le*el of cash or li8uidit) aintain so e reser*es and
3. 2nsurance co panies 6ot co*ered b) 2A;. because the)3re re8uired to regulated !ith the 2nsurance <o ission
=. 1;OA/registered co panies 6ot co*ered b) 2A;. because the)3re liable, instead of the 305 corporate tax, to a special rate of A5 tax on gross inco e in lieu of all taxes, !hether national tax or local tax, !hich includes the exe ption fro the pa) ent of 2A;.. As a rule, 1;OA/registered co panies are sub#ect to the A5 special rate or preferential rate on gross inco e in lieu of all national or local taxes. .herefore, these co panies !ithin the econo ic "one are not liable to pa) 305 on their taxable inco e. ,ut the option is still gi*en to the . 1;OA/registered a) opt to be liable for 305 on taxable inco e instead of the A5 on gross inco e. @o! !ould that happen? 9r !h) !ould it happen? Wh) !ould the 1;OA co pan) choose to be liable of 305 instead of A5? .he reason is si ple. .he A5 tax is based on the gross inco e and gross inco e for co panies located !ithin the econo ic "one is hea*il) regulated !herein the) can onl) deduct I t)pes of expenses or costs fro the sales. r%ross total sales D costs V gross inco el. 0or 1;OA, the costs is regulated to I t)pes of expenses that is directl) related. Whereas if the) choose to be liable for 305, it3s based on the taxable inco e D all expenses related to the trade, business or profession of the taxpa)er can be deducted.
o
2f the 1;OA/registered co pan) opts to be taxed at 305, !hich is an irre*ocable choice, !ill it be liable for 2A;. or not?
o
Y;S. Be*. Beg. 2/01 on 2A;. pro*ides that a corporation registered !ith the 1;OA +1hilippine ;cono ic Oone Authorit)- is not co*ered b) the 2A;. if it en#o)s the preferential rate or special rate gi*en to it. 6o!, if it does not opt to be sub#ect to the special rate of A5 tax in lieu of all taxes, if it aintain the 305 regular rate, then the 2A;. !ill still appl). o A. 0oreign corporations o 2s a B0< co*ered b) the 2A;.? Will a 1hil. branch of a 6B0< be liable for 2A;.?
o
69, because a 1hil. branch does not ha*e a capital stoc(.
>. .axable business partnerships 2t3s not co*ered b) the 2A;. because it does not ha*e a capital stoc(
6ot taxable #oint *entures are as !ell not co*ered b) the 2A;. because it is not considered as a corporation for tax purposes. o ?. %eneral professional partnerships
P a g e | 16,
2t3s also not co*ered b) the 2A;. because it is not considered as a corporation for tax purposes. <A12.A: .BA6SA<.296S 2 t)pes of assets$ o o <apital asset D capital inco e 9rdinar) asset D ordinar) business inco e or trade inco e
<apital transactions are transactions arising fro the use of capital assets. When )ou sa) capital loss, it3s the loss that )ou suffered fro transacting using capital assets. What3s an 9rdinar) Asset +9A-? +Sec. 3I D negati*e definition of !hat capital assets areo 1. Stoc( in trade or propert) of the taxpa)er !hich in*entor) at the end of the taxable. a) be properl) included in the
o 2. 1ropert) pri aril) held for sale to custo ers in the ordinar) course of trade or business o 3. 1ropert) used in trade or business sub#ect to depreciation, !hich be depreciable propert) o o o =. Beal propert) used in trade or business 1. 1roperties not considered as ordinar) assets. 2. 1roperties used in trade or business classified as capital assets$ i. accounts recei*able Hnless )ou are in a business of selling accounts recei*able, it is considered as capital asset.
o o
eans that this
ust
What are <apital Assets +<A-?
2f )ou ha*e an accounts recei*able or collectible fro )our custo er and )ou are short of cash and !ould li(e to assign that recei*able or collectible to another corporation b) selling )our right to collect. ;*en if it3s part of )our trade, business or profession but because )ou3re not into selling recei*able or collectible, it3s still considered as capital transaction. ii. propert) for in*est ent in stoc( 2f )ou ha*e a business and )ou3d li(e to in*est in another business, so long as )ou3re not a holding co pan) into in*esting another businesses, that particular asset D the in*est ent in capital stoc( D is still considered as capital asset !hile )ou are not into trading shares. ,ut if )ou3re a bro(er of shares, that3s auto aticall) considered as ordinar) assets.
o
o Y;S.
iii. subdi*ision of lots to tenants at the instance of the go*ern ent i*. 2nterest of a partner in a partnership
<an an 9A be con*erted into a <A? o ;xa ple$ .he properties of a taxpa)er engaged in real estate business are considered as 9A. 2f the taxpa)er dies, these properties !ill be trans itted to the heirs. Should the heirs discontinue the real estate business of the deceased parent, such properties !hich are ordinaril) held for sale to custo ers a) be con*erted into <A. <on*ersel), can a <A be con*erted into an 9A? o Y;S.
P a g e | 166
o ;xa ple$ :and inherited b) the heirs fro their deceased parents is considered as <A. 2n the e*ent that this propert) is substantiall) i pro*ed b) the heirs and sold at profit, said <A a) be con*erted into an 9A. .he profit deri*ed fro the sale of the land is alread) considered as ordinar) gain. :ets sa) for exa ple )ou got interested in bu)ing a certain parcel of land and sold it to )our seat ate. After a onth, )ou bought a house and lot, i pro*ed it, and sold it again to )our other seat ate. .his !ent on onthl) during the )ear. You3re not registered in an) business. .he first sale D is that a capital transaction or ordinar) transaction? 9r can )ou sa) that )our inco e is sub#ect to the >5 <%. or )ou3re alread) co*ered b) the A/325 9. +9rdinar) .axes-? <an )ou no! be considered at the end of the )ear that )ou3re no! alread) into ordinar) transactions of bu)ing and selling real properties? 2s registration of a real estate business necessar) to a(e )our real estate transactions ordinar) transactions? o 69. .herefore, if )ou sold house and lots 12 ti es last )ear e*er) onth, can )ou alread) be sub#ect to the 9. of A/325 as an indi*idual or !ill )ou still be co*ered >5 <%.? ,ecause of the regularit) and the continuit) of the conduct of the bu)ing and selling of real estate properties, )ou !ill alread) be considered into engaging ordinar) transactions of bu)ing and selling real estate properties. <%. of >5 !ill no longer appl). Begistration of acti*ities is not necessar) for )ou to be co*ered b) 9. rates. 'ie!ing the tax rates of >5 and A/325 on a propert), !hich is
o
ore fa*orable?
2t depends. >5 is based on the %S1 +%ross Selling 1rice- or 07' +0air 7ar(et 'alue-, !hiche*er is higher. .he A/325 is based on the net taxable inco e. .he difference in rates !ould actuall) ha*e to depend on ho! uch )our actual cost is and the selling price. 2f )ou3re selling a propert) that )ou ac8uired A0 )ears ago and )ou sell it toda). You better be sub#ected at >5 <%. because if )ou sell that propert) )ou purchased A0 )ears ago, the difference in the selling price and the cost is *er) !ide !herein )ou can alread) be sub#ect to the highest tax brac(et in the indi*idual tax table of A/325. And ordinar) transactions are liable for 'A. !hile capital transactions, no 'A..
o
2t is reall) better to stic( selling pure pieces of real properties e*er) )ear in order to be still co*ered b) <%..
o o
,2B has alread) set the li it. 2f )ou are able to sell at least > real properties in one )ear on )our indi*idual capacit) !ithout registration, )ou !ill be considered as in the regular conduct of selling real properties D ordinar) transactions. 2f )ou sell lo!er than > during the calendar )ear, still capital transactions, !ithout ,2B registration. So )ou stop at A. What is the difference bet!een !ash sale and short sale? o Wash sale 2t3s li(e selling the shares toda) but 30 da)s before, )ou ac8uired the sa e or substantiall) si ilar shares or 30 da)s after, )ou ac8uired the sa e or substantiall) si ilar shares. Your rec(oning point is W96 30 da)s before the sale, )ou ac8uired the sa e or substantiall) si ilar shares or 30 da)s after. 2t3s a !ash sale. 2t3s a si ulated sale. 2s the gain taxable or is the loss deductible in this (ind of transaction? 2n all cases, the 8uestion !hether the gain is taxable or not, lifeblood doctrine, the gain is taxable and the loss, being a si ulated sale, is not deductible.
o
Short sale
P a g e | 167
2t3s #ust li(e ad*ance selling but #ust a(e sure that at the ti e )ou need to deli*er the shares that )ou ha*e sold prior, )ou alread) ha*e the o!nership of such shares D still *alid basta so long as he has the o!nership at the ti e that he needs to deli*er. 2t3s a transaction !herein a person sells securities !hich he does not o!n )et, pro*ided, ho!e*er, that he has o!nership of the securities at the ti e of deli*er) D he has the right to transfer o!nership. 2s the gain taxable and is the loss deductible?
o o
Y;S. .he gain is taxable and the loss is deductible.
2s there an instance !here a capital loss arising fro a sale !herein 30 da)s prior, )ou ac8uire the sa e or substantiall) si ilar shares, be deductible? 2s there an instance !herein )our capital loss is deductible in such case? Y;S, if the seller is a dealer in securities or shares of stoc(, in !hich case, )ou3re into ordinar) transactions of bu)ing and selling shares !hether it3s !ithin 30 da)s, !ithin 1 da) or !ithin 2 da)s that )ou ha*e ac8uired substantiall) si ilar shares or the sa e shares, )ou can deduct the losses and offset it !ith )our other capital gains. ,asta the rule is, in capital transactions, !hene*er a loss is deductible, onl) offset it against the capital gains. Do not cross the border of offsetting the capital losses fro ordinar) inco e. .here are 3 rules go*erning capital transactions !hich are not applicable to ordinar) transactions, !hat are these? o 1. @olding/period rule Applies onl) to indi*idual taxpa)ers D because the capital gain deri*ed fro capital transaction of corporate taxpa)ers is al!a)s 1005 recogni"ed irrespecti*e of the nu ber of onths during !hich the propert) !as in the possession of the corporate taxpa)er. 2f the propert) has been held b) the taxpa)er for a period of not onths, the gain or loss is 1005 recogni"ed. ore than 12 ore than 12
2f the propert) has been held for recogni"ed.

2 ;a"&' Iu"e >1H 2009 Co't 1.
onths, the gain or loss is A05
:ai" 15 8e)em#er >1H 2009 Se%%i"g *ri)e 1.5. 25 O)to#er 5H 2010 Se%%i"g *ri)e 2. 500J C(a"ge of fa)t'? 15 8e). >1H 2009 Se%%i"g *ri)e 1.5. 25 O)t. 5H 2010 Se%%i"g *ri)e .5. 4250J5 100A of 500J 50A of 1. 500J
100A of 500J 50A of 4500J5
500J Not &e&u)ti#%e agai"'t 500J #e). "ot o" t(e 'ame year
P a g e | 169
;xa ple$ You ha*e 2 parcels of land. You3re not engaged in the real estate business or in an) other businesses !herein the land is used in trade or business. You purchased such lands &an. 31, 200I for a cost of 17 each. .he 1 S. parcel of land, )ou sold it at Dec. 31, 200I for the selling price of 1.A7. .he 2 nd parcel of land, )ou sold it toda), 9ct. A, 2010 for the selling price of 27. 0or indi*idual taxpa)ers holding capital assets !hich the) sell, )ou ha*e to consider the period !ithin !hich the propert) !as !ith the seller D the holding period +for ho! an) onths !as it !ith the taxpa)er !ho3s selling it-. 2f the taxpa)er sold it !ithin a fe! onths, 12 onths or less, e*er)thing is taxable and deductible +1005-. 2f the propert) has been held on to b) the taxpa)er for ore than 12 onths, onl) A05 is taxable or A05 is deductible.
o
2n the case of the 1st parcel of land, )ou gained A00K and 1005 of A00K, !hich is A00K, is taxable because such land !as held on to for 12 onths. While the 2nd parcel of land, )ou gained 17 but onl) A05 of 17, !hich is A00K, is taxable because such land !as held on to for ore than 12 onths.
o
.he reason for such rule is that !hene*er )ou purchase a personal propert), )ou are not expected to dispose of it easil). When )ou dispose of personal propert) ore often !ithin 1 )ear, )ou are considered to be in trade or business but not necessaril). So gain D 1005 is taxable or A05 is taxable. 2t3s the sa e !a) that the loss is onl) A05 deductible or 1005 deductible.
o
Another exa ple$ :ets change the facts. .he 2nd parcel of land !as sold for .A7. 9ther facts are the sa e !ith the preceding exa ple. What !ill happen? 2n this case, the sale of the 2nd parcel of land constitutes a loss of +A00K-. A05 of +A00K- is +2A0K-. 2s the +2A0K- recogni"ed loss deductible on the capital gain of A00K fro the sale of the 1st parcel of land?
o
69. .he loss is deductible but not against such A00K. .he loss is deductible against the capital gain that has been earned in 2010 but not against the A00K because such A00K !as earned a )ear ago, in 200I. Assu ing that )ou had no other transactions in 2010, no other sale, )ou ha*e a loss of +2A0K-, can )ou carr) for!ard such loss? 69. .he net capital loss carr)/o*er rule cannot be applied. .he net capital loss carr)/o*er rule pro*ides that if an) indi*idual taxpa)er sustains in an) taxable )ear a net capital loss, such loss +in an a ount not in excess of the net inco e for such )ear- shall be treated in the succeeding taxable )ear as a loss from t,e sa-e or exc,ange of a capita- asset ,e-d for not more t,an (& mont,s. 2n this case, since the loss of +2A0K- !as fro the sale of a capital asset held for ore than 12 onths, the net capital loss carr)/o*er rule cannot be applied. 2n net capital loss carr)/o*er rule, ho! carr) for!ard a net capital loss? o an) )ears can )ou
2n the succeeding taxable )ear onl). So 1 )ear onl).
.he difference bet!een 69:<9 and net capital loss carr)/ o*er is that 69:<9 can be carried o*er for the succeeding 3 consecuti*e )ears but net capital loss carr)/o*er can be carried onl) to the next )ear. Another distinction is that
P a g e | 170
69:<9 in*ol*es loss arising fro ordinar) transactions !hile net capital loss carr)/o*er in*ol*es loss arising fro capital transactions. Another distinction also is that net capital loss carr)/o*er can onl) be a*ailed of b) indi*idual taxpa)ers !hile 69:<9 can be a*ailed of both b) indi*idual and corporate taxpa)ers so long as the)3re registered for business. o 2. <apital loss li itation rule <apital losses are deductible onl) to the extent of capital gains during the )ear D on a )earl) basis. <an capital loss li itation rule appl) to corporations as !ell? Y;S. Such rule applies to both indi*idual and corporate taxpa)ers, ;N<;1. on ban(s and trust co panies +because the) are considered as dealer in securitieso
3. 6et capital loss carr)/o*er rule 6et capital loss carr) o*er rule is *er) co plicated$ 1. 2t3s a capital loss. 2t3s the excess of the loss o*er the capital inco e or capital gains.
o o o
2. 2t can be carried o*er onl) to the succeeding next )ear b) an indi*idual. 2f it re ain unutili"ed, it !ill no longer be usable the 2nd )ear. 3. .he a ount that can be carried o*er is not exactl) the sa e a ount that )ou !ill see as the net capital loss for the )ear for capital assets held on to for not ore than 12 onths. You ha*e to consider that it should not exceed the net inco e fro the ordinar) transactions of the )ear !hen such loss is incurred. You ha*e to loo( into ho! uch is the net inco e fro ordinar) transactions. ;xa ple$ Assu ing that the +2A0K- net loss arose fro the sale of capital assets held on to for not ore than 12 onths. 2f the ordinar) net inco e is 2A0K, )ou can carr)/o*er such +2A0K- loss in the succeeding taxable )ear. 2f the ordinar) net inco e is 200K, )ou can carr)/o*er onl) 200K. 2f the ordinar) net inco e is A00K, )ou can carr)/o*er 2A0K D it should not exceed. %A26S D;B2';D 0B97 D;A:26%S 26 1B91;B.Y .he basic for ula in deter ining the gain that )ou deri*ed fro selling )our real propert) or propert), in general, is the Fa ount that )ou recei*ed as consideration for the propert)F. .his is basicall) the %S1 or an) consideration. 2t a) be exchange of propert) or a) be sale of propert). ,ut as to ho! uch is sub#ect to tax, )ou ha*e to deter ine !hat is the cost of )our propert). .he cost of )our propert) that )ou3re selling or exchanging !ould differ according to ho! )ou ac8uired )our propert). So ho! do )ou deter ine the cost of the propert) that )ou3re selling? o 1. 2f it !as ac8uired through purchases D the cost of the propert) o 2. 2f the propert) sold !as pre*iousl) ac8uired through inheritance D the 07' of the propert) at the ti e of the ac8uisition +the ti e )ou3*e inherited such propert)-. o 3. 2f the propert) sold !as ac8uired through donation D the sa e as if it !ould be in the hands of the donor +so, it3s the sa e a ount at the ti e the donation !as ade- ,H.$ ;xception$ 2f the basis is greater than the 07' of the propert) at the ti e of the donation4gift then, for the purpose of deter ining loss, the basis shall be such 07'. 2t si pl) eans that if )ou3re selling a propert) toda), 9ct. A, 2010. You3re selling it at 17. .he propert) that )ou3re selling has been donated to )ou. .he la! sa)s that the a ount that )ou ha*e to deduct as cost in
o
P a g e | 171
deter ining )our inco e sub#ect to tax !ould be the a ount as if it is in the hands of the donor. 2t eans at the ti e it !as donated. 2f at the ti e it !as donated, its *alue !as A00K. .hen )ou deduct it fro the 17, so )ou get an inco e of A00K D taxable. ,ut there3s an exception to the rule. 2f the A00K that )ou3re deducting +07' at the ti e of donation- is greater than the 07' toda), 9ct. A, 2010, sa) for exa ple, the 07' of the propert) toda) is 200K D so )ou use such 200K. :ifeblood doctrine. Wh)? 2f )ou use 200K, the taxable inco e is C00K.
o
What t)pe of propert) do )ou thin( that the 07' is lo!er toda) than the ti e it !as donated?
o
Depreciable assets. ;xa ple$ 7otor *ehicles. one) or
=. 2f the propert) sold !as ac8uired for less than an ade8uate consideration in one)3s !orth D the a ount paid b) the transferee for the propert)
;xa ple$ 2f )ou purchase it at an a ount that is inconsiderabl) lo! as co pared to the 07', lifeblood doctrine states that the cost in deter ining )our inco e for tax purposes !ould ha*e to be the a ount that )ou3*e gi*en up. So if )ou bought a 17 car for 1 peso and )ou sold it for 17, )ou can onl) deduct as cost 1 peso. .he general rule is that for e*er) sale of propert), )ou ha*e to be taxed if there is an inco e after costs has been deducted fro the selling price or consideration for all t)pes of exchanges in propert). o ;xa ple$ You ha*e a parcel of land in Alabang. .he other person has a parcel of land in 7untinlupa. ,oth lands ha*e the sa e s8uare eters D 1 ha or 10K s8. . .here is an exchange of propert) !ithout an) cash in*ol*ed. Will there be tax? Y;S, sub#ect to <%. or 9., as the case a) be. ,oth properties do not actuall) ha*e the sa e *alue in so far as the o!ners are concerned. .here are instances !herein no gain and no loss is recogni"ed for certain t)pes of exchange. What are these? o 1. .ransactions ade pursuant to plan of erger or consolidation .his happens !hen )ou ga*e out )our properties in exchange for the shares of the sur*i*ing4absorbing corporation or !hen )ou exchange shares for the shares of the other corporation. o 2. 2f a person alone or together !ith other, not exceeding = +so total of A-, exchanges his propert) for stoc( in a corporation and this person or persons, after this exchange, ac8uired controlling interest o*er that corporation. .his eans to sa) that the) ac8uired at least A15 of the shares of stoc( of such corporation. +Sec. =0+c-+2- .his is also a transaction solel) in (ind.
ACC Cor*. -, N Q -5
-,. 5. 51. -, *eo*%e 1 *er'o" 51 *eo*%e
;AN8 I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'. -,.
P a g e | 172
;xa ple$ :ets sa) there is A,< <orp. 2t has existing capitali"ation of A7 o!ned b) A people at 17 shares each. You and )our class ates, => of )ou, !ant to in*est in such corporation. So the => of )ou in*ested =>7 !orth of land co/o!ned b) => of )ou. 2f )ou put such land as an in*est ent in A,< <orp., the total capitali"ation !ould no! be A17 +A7 t =>7- and the total o!ners !ould be A1 people. +A t =>-. .his is a case of an exchange of propert). You ga*e out land to A,< <orp. in exchange of =>7 shares. :and for shares D shares for land. 2s the =>7 parcel of land sub#ect to >5 <%.? Y;S +appl) the Ffirst/highest/A/ruleG, !hich !ill be discussed laterE in this case, appl)ing the first/highest/A/rule, the interest of the first A !ould onl) be 10.C?5, thus, the) did not ac8uire controlling interest, so therefore, all the gains of the => people fro the exchange of propert) !ill be sub#ect to >5 <%.o
69.;$ rthe Ffirst/highest/A/ruleG (a) g/hi o/hi o ra n(o na rule.. !ala #ud na na ter actuall)L hehe.. para short/cut lng sa transcriptionL. An)!a)s (asabot ra o later as )ou go on readingL 2 hopeLl
o
So, ho! do !e
a(e the facts non/taxable?
ACC Cor*. 5 NQ-
-,. 5. 51. 5 *eo*%e 1 *er'o" , *eo*%e
;AN8 -,.
So that the facts !ould be that there are A people !ho in*ested =>7 parcel of land in exchange for the =>7 shares in A,< <orp. So the total capitali"ation is A17 and there are alread) > people o!ning A,< <orp. 2n this case, the A people ac8uired controlling interest o*er A,< <orp. because the) o!n =>7 shares out of the total A17 shares fro the exchange of propert) + ore than A15-, so therefore, this case is co*ered b) the exception, and as such, the =>7 parcel of land is ACC 6. 6. 2.and docu entar) sta p tax. exe pted fro the >5 <%.
Cor*. 2. 9. 9. 6 *eo*%e 5 *eo*%e 12 *eo*%e
ACC Cor*. 6 NQ,
6 NQ,
6 *eo*%e 1 *er'o" 7 *eo*%e
!!!I" #ro$e" %i"e #or&er' are out%i"e ;AN8"ote'. 172 | P a g e
I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'. ;AN8
6.
P a g e | 17>
<hange of facts$ A,< <orp. has a capitali"ation of 27 o!ned e8uall) b) A people4stoc(holders. You together !ith > others ha*e a ?7 parcel of land. You !ant to in*est in A,< <orp. So )ou !ant to put in the parcel of land so )ou3ll be gi*en ?7 !orth of shares of stoc(. So the total capitali"ation of A,< <orp. is I7 r27 t ?7l o!ned b) 12 people rA t ?l. 2s the gain fro the exchange of propert) sub#ect to <%.? 2s it co*ered under the tax/free exchange?
o o o o
Y;S, but partiall). r7ao nani si)a ang Ffirst/highest/A/ruleGl
<onsider first !hether the first A transfers ac8uired controlling interest o*er the capital stoc( of the corporation. 2n this case, the first A transfers a ounts to A7. A7 o*er I7 total capital stoc( is AA.AA5. rA74I7 V AA.AA5l. .hus, the first A transfers ac8uired ore than A15 so that the) ha*e ac8uired controlling interest o*er the capital stoc( of A,< <orp. .herefore, e*en if the transfer nu bers ore than A people, so long as the first highest A, !ould ac8uire controlling interest o*er the ne! capital stoc( of the corporation, the) +the first highest A- !ill be granted exe ption fro the >5 <%.. Since in this case, the ?7 is e8uall) o!ned b) the ? people, so )ou (no! that the first A !ould ha*e A7. And A74I7 is ore than A15. .herefore, the gains fro the exchange of propert) !ill not be sub#ect to the >5 <%. !ith respect onl) to the first A. What !ill happen is if of the an), A !ill ac8uire controlling interest, A !ill be exe pt, the rest !ill be sub#ect to >5 <%..
o
<onsider first the first highest A, so that the first highest A !ill be exe pted fro <%.. 2f the) o!n the stoc(s e8uall), then, there !ould be a proble . 2t depends actuall) on their agree ent !hether the) !ill share the burden of tax or !hether !ho !ill be exe pted and !ho !ill be sub#ected to <%.. 2nstances !here gain is recogni"ed and loss is not recogni"ed$ o o o o 1. Wash sale 2. 2llegal transactions 3. .hose transactions in*ol*ing related taxpa)ers =. .ransactions not solel) in (ind 2t eans to sa) that transactions not solel) in (ind is !hen the transfer in*ol*es cash. 2f cash, in addition to propert), is transferred, in exchange for shares, it3s no longer exchange solel) in (ind, therefore, no exe ption fro <%.. ACCO=NTIN) PERIOD9 MET<OD5 O3 ACCO=NTIN)9 TAX RET=RN5 AND PAKMENT O3 TAX Beturns and 1a) ent of tax
P a g e | 17-
2ndi*iduals re8uired to file returns +%eneral Bule-$ 1. ;*er) 0ilipino citi"en residing in the 1hils. sources
2. ;*er) 0ilipino citi"en residing outside the 1hils., on his inco e fro !ithin the 1hils. 3. ;*er) alien residing in the 1hils., on inco e deri*ed fro 1hils.
sources !ithin the
=. ;*er) 6BA/;., or in the exercise of a profession in the 1hils. Who has not been entioned here? What t)pe of indi*idual taxpa)er is not re8uired to file 2.B?
o
6BA/6;.,
Wh)? ,ecause the)3re sub#ect to a 0W. rate of 2A5. .hus, e*er) pa)or of that 6BA/6;., is re8uired to !ithhold a final tax. Withholding of a final tax is a tax !ith finalit). .here3s no re8uire ent for that inco e/earner to report the inco e alread) sub#ected to final tax as part of his 2.B. So in all instances, a 6BA/6;., is ne*er expected to file an 2.B. What are the instances !hen indi*iduals are not re8uired to file an 2.B? o 1. An indi*idual !hose gross inco e does not exceed his total personal and additional exe ptions ;xa ple$ 2f )our inco e is 1K a onth, )ou ha*e 12K in a )ear. Your personal and additional exe ption is A0K. .hat3s belo! ini u !age. You3re not re8uired to file an 2.B. o 2. An indi*idual !ith respect to pure co pensation inco e deri*ed fro the 1hils., the inco e tax on !hich has been correctl) !ithheld. sources !ithin
2f )ou ha*e onl) 1 e plo)er and )our tax has been correctl) !ithheld b) )our e plo)er, no need to file an 2.B. @o! do )ou call that? What3s the correct ter for that? ;xa ple$ You3re the president of A,< <orp. You earn 100K a )ou re8uired to file an 2.B or not?
o
onth. Are
69, if the inco e tax has been correctl) !ithheld b) the e plo)er and )our onl) inco e is the 100K )ou earn a onth as the president of A,< <orp. .his is called the SH,S.2.H.;D 02:26% 90 2.B. inco e tax
o o o
3. An indi*idual !hose sole inco e has been sub#ected to a 0W. =. An indi*idual !ho is exe pt fro
What is the substituted filing of 2.B? o 2t is !hen an e plo)ee is no longer re8uired to file an 2.B at the end of the )ear so long as he is a pure/co pensation inco e earner, regardless of the a ount that he3s earning, and he has onl) one e plo)er !ho has been correctl) !ithholding the tax. o When )ou sa) pure/co pensation inco e earner, he does not ha*e an) other inco e fro an) source, !hether fro trade, business or profession. ;xa ple$ 9nce this is *iolated, eaning to sa), if )ou3re the 1resident of the corporation, )ou ha*e 100K inco e onthl). You onl) ha*e one e plo)er !ho has been correctl) !ithholding )ou but during brea( ti e, )ou sell siopao to )our
!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 17- | P a g e I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.
P a g e | 175
office ates, that3s alread) other inco e. And being other inco e, )ou ha*e to co bine that !ith )our inco e fro )our e plo) ent. 7a)be )our inco e fro siopao business !ill escalate )our brac(et of inco e. .he reason !h) )ou3re re8uired to co bine )our inco e is to deter ine !hat brac(et )ou reall) belong to. .hat3s !h) e*er) inco e should be consolidated. And substituted filing is *er) strict in a sense that$
o o o o
1. You onl) ha*e to ha*e 1 e plo)er 2. 1ure/co pensation inco e earner 3. <orrect !ithholding of tax =. 6o other inco e. 2f the re8uire ents are not et, all of the are not et or one of the is not et, at the end of the )ear, )ou ha*e to file an 2.B.
Who are the indi*iduals not 8ualified for substituted filing? o See outline. o 69.;$ :etter c of outline is no longer applicable in the ad*ent of BA IA0= D indi*iduals !ho are ini u /!age inco e earners are exe pt fro inco e tax so the)3re no longer re8uired to file an 2.B. o 2llustration$ You !ere e plo)ed b) A,< <orp. fro &an. 1, 2010/9ct. A, 2010. ,) 6o*e ber, )ou applied and got hired b) NYO <orp. .here !as no o*erlapping of e plo) ent. ,oth e plo)ers, according to their o!n records, correctl) !ithheld the taxes. Are )ou 8ualified for substituted filing? 69, because the re8uire ent ust ha*e to be onl) 1 e plo)er. 2f )ou ha*e 2 e plo)ers no!, !hether 2 e plo)ers e plo)ing at the sa e ti e or 2 e plo)ers e plo)ing successi*el), )ou3re not 8ualified for substituted filing because the)3re a) be a chance that the correct tax !hen the co bined inco e is co puted has not been correctl) !ithheld b) those e plo)ers. o Another illustration$ You3re the 1resident of a ulti/national corporation. You onl) ha*e 1 e plo)er. Your tax has been correctl) !ithheld b) )our e plo)er. ,ut )our husband is selling sio ai. Are )ou 8ualified for substituted filing? 69, because )ou are no longer re8uired for substituted filing if and !hen an) of the spouses !ould not as !ell 8ualif) !ith the full re8uire ents. So in order for )ou to be 8ualified for substituted filing, spouse is also 8ualified for substituted filing. a(e sure that )our
2f )ou3re 8ualified for substituted filing but )our spouse is earning business inco e, li(e sio ai business, no substituted filing for )ou both. Wh)? ,ecause at the end of the )ear, in so far as it is practicable to co bine both )our inco e D husband and !ife D it +the filing of 2.B- has to be done for purposes of deter ining the true tax brac(et that )ou belong to. Self/e plo)ed indi*iduals. o So if )ou are a practicing la!)er !ith no la! fir , etc. You are re8uired to file )our 2.B +professional or trade inco e- on a 8uarterl) basis still. <orporations. When are corporations re8uired to file an 2.B? o Quarterl) D 3 ti es. >0 da)s after the end of e*er) 8uarter and the last is on or before the 1Ath da) of the =th onth follo!ing the close of the taxable )ear. o o .o a(e it eas), corporations can follo! the calendar )ear or the fiscal )ear. What is fiscal )ear?
P a g e | 17,
Starts on an) da) other than Dec. 31 and ends 3>A da)s after.
o So if the corporation follo!s the calendar )ear, 8uarterl) 2.B has to be filed >0 da)s after 7arch 31, after &une 30, after Sept. 30 and the final 2.B has to be filed on or before the 1A th da) of the =th onth follo!ing the end of the calendar )ear, !hich is April 1A D the =th onth. o o 2f it3s fiscal )ear, it3s a little bit co plicated. ,ut for indi*idual taxpa)ers, can !e ha*e fiscal )ear basis? 69. Al!a)s !e ha*e to follo! calendar )ear basis and the 8uarterl) 2.B is =A da)s after the end of e*er) 8uarter except first 8uarter. 0irst 8uarter 2.B has to be filed April. 1A, 26D 8uarter of &une 30 has to be filed =A da)s after, 3 rd 8uarter of Sept. 30 has to be filed =A da)s after, and the final 2.B has to be filed April 1A D 6o other date. Wh)? ,ecause !e onl) follo! calendar basis. So it !ould appear that on April 1A, !e indi*iduals +indi*idual business inco e earners- !ould file 2 2.Bs D one is for full )ear and one is for 1st 8uarter of the ne! )ear. <%. return has to be filed !ithin 30 da)s after the transaction and paid !ithin 30 da)s after the transaction. o <an !e pa) on install ent basis on inco e taxes due? o @o! Y;S for indi*iduals and if their inco e tax due is ore than 2K.
69 for corporations. <orporations ha*e to pa) the taxes on due dates. an) ti es is a business taxpa)er re8uired to file an 2.B? = +3 8uarterl)s and 1 final 2.B-
7AR EXAM RE5=CT5' @a*e )ou read the bar exa for tax? .here are around =0 ite s. So for those !ho ha*e read, ho! did )ou find it? :et3s go through the ite s that !e ha*e discussed. :et us see ho! )ou !ill fare if )ou ha*e ta(en the bar exa . .rue or 0alse. o A . %ains reali"ed b) the in*estor upon rede ption of the shares of stoc( in a utual fund co pan) are exe pt fro inco e tax. Are the) exe pt? ;xclusion fro gross inco e class. 2n the outline. o ,. A corporation can clai the optional standard deduction e8ui*alent to =05 of its gross sales or receipts as the case a) be. V 0A:S;. Against gross sales or gross inco e? %ross inco e. What is stated here is gross sales or receipts. What is the difference? Be e ber the for ula that !e ha*e had before? +Sales D <ost V %ross 2nco e- less ;xpense V .axable inco e What is optional standard deduction for? 2t3s in lieu of D 2te i"ed deductions. So since this is !hat )ou don3t !ant to clai , =05 9SD is applicable. o <. pre iu pa) ents for health insurance of an indi*idual !ho is an e plo)ee in an a ount of 1h12A00 per )ear a) be deducted fro gross inco e if his gross salar) per )ear is not ore than 1h12A0,000. 0alse. 1h12=00. o D. .he tax code allo!s an indi*idual taxpa)er to pa) in t!o e8ual install ents, the first install ent/ !e !ill discuss that to!ards the end. .his is true. o An indi*idual taxpa)er can adopt either the calendar or fiscal )ear period for purposes of filing his inco e tax return V 0alse.
P a g e | 176
2ndi*idual taxpa)er, in all cases, an indi*idual can ne*er chose to be taxable in the fiscal )ear basis. Al!a)s his taxabilit) begins &anuar) 1 and ends Dece ber 31. 9nl) corporate taxpa)ers ha*e the option to be taxable on a taxable )ear !hich starts on an) da) other than &anuar) 1, ending 3>A da)s thereafter. o o .he <apitali"ation rules a) be resorted D this !ill be discussed, 2 thin( next !ee(. 2nfor er3s Be!ard is sub#ect to final !ithholding tax of 105. Yes this is true. 2f )ou report so eone and it !ill lead to collection of taxes, )ou !ill be gi*en infor er3s re!ard, !hich re!ard is still sub#ect to 105 tax. o .his one, interesting. A non/resident alien !ho sta)s in the 1hilippines for less than 1C0 da)s during the calendar )ear !ill be entitled to personal exe ption not to exceed the a ount allo!ed to citi"ens of the 1hilippines in the countr) of !hich he is a citi"en. 0A:S;M 0alse, because onl) non/resident aliens engaged in trade ore than 1C0 da)s in the 1hilippines are allo!ed through reciprocit) rule to clai personal exe ptions. A,<, a do estic corporation entered into a soft!are license agree ent !ith NYO, a non resident foreign corporation based in the Hnited States. Hnder the agree ent, !hich the parties forged in the HS, NYO the nonresident foreign corporation granted A,< the do estic corporation the right to use the co puter s)ste progra and to a*ail of the technical (no!/ho! relati*e to such progra . 2n consideration for such rights, A,< agreed to pa) A5 of the re*enues it recei*es fro the custo ers !ho !ill use and appl) the progra in the 1hilippines. Discuss the tax i plication of the transaction. 2s the pa) ent b) the do estic corporation A,< to the non/resident foreign corporation NYO !hich is A 5 of its re*enues recei*ed fro custo ers. o o What are these pa) ents? Bo)alt) pa) ents abroad. Who is the inco e earner? .he non/resident foreign corporation.
o 2s it taxable in the 1hilippines? Yes. Bo)alties !ill ha*e situs in the countr) !here it is used. o And !here is the technical (no!ledge i parted b) the non/resident foreign corporation. Where is it used? 2n the 1hilippines, !here the custo ers of the do estic corporation are using it. 2n 200I, a resident 0ilipino citi"en recei*ed di*idend inco e fro a HS based corporation !hich o!ns a chain of 0ilipino restaurants in the West <oast HS. S9 !ho is the inco e earner? .he resident citi"en / 0ilipino. 0ro !here is his inco e? 0ro a non/resident foreign corporation. .he di*idend re itted to the resident citi"en is sub#ect to HS !ithholding tax !ith respect to the Hnited States, hi being a non resident alien in the HS. What !ill be )our ad*ice to hi the sa e inco e? o in order to lessen the inco e and possible double taxation on
.ax credit or a*ail of the tax treat) pro*isions under the B1/HS tax treat).
Would )our ans!er in letter A be the sa e if he beca e a HS i igrant in 200C prior to recei*ing the di*idends and had beco e a non resident 0ilipino citi"en. o 2t !ould be different because if he beco es a non resident citi"en, he is onl) taxable on inco e !ithin and the di*idends gi*en b) the non/resident foreign corporation based in the HS is an inco e !ithout so it is totall) sub#ect to HS tax onl), no 1hilippine tax. 6o use of tax credits, no use in a*ailing tax treat). A is a tra*elling sales an !or(ing full ti e for ne! +6H- s(in products. +2 (no! )ou ha*e read losses na, losses is a deductible expense-. @e recei*es a onthl) salar) plus 35 co ission on his sales in the Southern pro*ince !here he is based. @e regularl) uses his o!n car to axi i"e his *isits e*en to far/flung areas. 9ne fine da), a group of ilitants sei"ed his car. @e !as notified
P a g e | 177
the follo!ing da) b) the police that the arines and the ilitants had a blood) encounter in his car and his car !as co pletel) destro)ed after a grenade hit it. A !ants to file a clai for casualt) loss +losses fro theft, robber) , e be""le ent etc-. ;xplain the legal basis for )our tax ad*ice. o What3s )our tax ad*ice D can A file for casualt) loss? 69. o What is the status of A? A is a sales an !or(ing full/ti e as an e plo)ee and as an e plo)ee. o What are the deductions or exe ptions that he can clai ? 1ersonal exe ptions, additional exe ptions, pre iu s and health and hospitali"ation insurance. Hnless and until the taxpa)er clai ing casualt) losses has a business, trade or profession , he !ouldn3t ha*e that expense deductible for hi . A inherited a t!o store) building in 7a(ati fro his father a real estate bro(er in the >0s +?-. A group of on(s approached A and offered to lease the building in order to use it as a *enue for their ,uddhist rituals and cere onies. A accepted the rental of 17 for the !hole )ear. .he follo!ing )ear the cit) assessor issued assess ent against A for non pa) ent of real propert) taxes. 2s the assessor #ustified in assessing A3s deficienc) real propert) taxes? o .he 8uestion here is$ 2s it correct for the cit) assessor to collect real propert) tax? Question is real propert) tax D if a real propert) is actuall), directl), and exclusi*el) used for religious purposes, it !ill be exe pt fro real propert) tax?
,ut D the assess ent is for real propert) tax, not inco e tax.
:ocal go*ern ent code exe ption fro real propert) taxes D Yes, this is exe pt fro real propert) tax based on Hse and not o!nership. 9!nership is for the go*ern ent propert).

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T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty.

What is a #oint *enture? ;xa ple.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

-0 .i%%io" ,0 .i%%io" 100 .i%%io" tota% i")ome

To /our I")ome To t(e i")ome of t(e Co"'tru)tio" Com*a"y

So eone else. Who is this so eone else?

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 96 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 97 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 99 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 100 | P a g e

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

Non?R3C / !ithhold 305 of the tax

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

;xa ple of an educational institution o!ned b) the go*ern ent.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

benefits exclusi*el) to the their dependentsE

e bers of such societ), order, or association, or nonstoc( corporation or e bersE

o .his is a condo iniu sales of the condo iniu about? 69.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 10, | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T ere are B )OCCs as specified under t e ta& code'

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 106 | P a g e

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

A purchase of the propert)

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

issuance of 7 s ares to = V ; X K L to t e stoc, older$ a propert. or stoc, di/idend@ Is it su0%ect to ta&@

B = X / D Com*a"y A &e)%are' i' 'to)$ i" C a' &i+i&e"& PROPERT/ 8IBI8EN

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 110 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

-, .i%%io" -, .i%%io" 4"o *rofit yet5

-,.i%%io" 9or ea)( to re)ei+e 1.

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 111 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

8e)%are& 50 .i%%io" a' Sto)$ 8i+i&e"&'

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 112 | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 11> | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 11- | P a g e

I" 'traig(t %i"e #or&er' are )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

A''et' ;ia#i%itie' ,0H000H000 Net <ort( Ca*ita% 'to)$ Profit'

-,H000H000 0 -,H000H000 -,H000H000 0

-00H000H000 >-0H000H000 1H000H000

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 115 | P a g e

I" 'traig(t %i"e #or&er' are IJ )o&a% *ro+i'io"'.

T A X A T I O N I T R A N S C R I P T I O N S 2010 2011 of Atty. Emery Tiu

!!!I" #ro$e" %i"e #or&er' are out%i"e "ote'. 11, | P a g e

i. ;state tax, donor3s tax . 'A.