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PRE-WEEK REVIEWER 2015

LAW ON TAXATION
INCOME TAX
RA 8294, Tax Reform Act of 1997 (NIRC)
Amended by RA. 9504, RA No. 10653

2. in accordance with the method of


accounting employed in the keeping
the books (cash or accrual basis)

NATURE OF INCOME TAX


Excise tax, (tax on the privileged to
earn profit or income), NOT a property
tax
National Tax
Direct Tax
Annual Tax

CALENDAR PERIOD IS ALLOWED IN


INSTANCES:
When the taxpayer is an:
1. individual
2. has no annual accounting period
3. estate or a trust
4. or does not keep books of account

SYSTEMS OF INCOME TAXATION


1. Global Tax System
2. Schedular Tax System
3. Semi- schedular or semi- global tax
system

SHORT PERIOD IS ALLOWED WHEN:


1. the corporation is newly organized
and commenced operations on any
day within the year;
2. the
corporation
changes
its
accounting period;
3. the corporation is dissolved;
4. CIR, by authority, terminates the
taxable period of a taxpayer;
5. In case of final return of the
decedent and such period ends at the
time of his death.

BASIC FEATURES OF PHIL. INCOME TAX


1. Direct tax
2. Progressive tax
3. Comprehensive
4. Semi- schedular or semi- global tax
system
Gross Income Taxation tax base is total
gross income of an individual during the
taxable year without any deductions.
DEFINITION OF INCOME FOR INCOME TAX
PURPOSE
a. Any material gain, not excluded by
law
b. realized
out
of
a
close
and
completed transaction
c. where there is an exchange of
economic value for economic valued
Note:
1. Security deposits paid by the lessee to
the lessor is NOT income, rationale:
eventually it will be returned.
2. Award of damages, such as moral,
exemplary and attorneys fee is NOT
income.
Rationale:
they
are
reimbursement for expenses in the course
of a hearing.
3. Employer
payment
of
appreciated
property to an employee for service
rendered, TAX IMPLICATIONS:
a. Employer should pay CGT, if
applicable,
otherwise
as
an
ordinary gain.
b. Employee should recognized such
as part of his income.
c. Employer could deduct the salary
paid as part of his allowable
deductions.
TAXABLE INCOME/ NET TAXABLE INCOME
Pertinent items of gross income specified in
the NIRC, LESS the deductions and/or
personal and additional exemptions.
Note: Should be computed on the basis of:
1. annual accounting period employed
(fiscal or calendar year

INCOME v. CAPITAL
INCOME
It is the Fruit
It
Service
of
wealth.

It denotes a flow
of
wealth
during a definite
period of time
other
than
a
mere return on
capital.
It is a
gain derived and
severed
from
capital.

CAPITAL
is the Tree
Wealth or fund.
Is a fund or
property existing
at one distinct
point in time

REALIZATION PRINCIPLE
a. The earning process is complete or
virtually complete, and
b. An exchange has taken place.
Revenue must be earned before it
is recognized.
Accounting method should be
considered.
Increase in value without exchange
is NOT recognized as income.
Q: Arwin entered into a contract with
ABS CBN Co., where he will perform as a
singer in their event for P400,000. He
performed in the said event, however he
has not been paid yet by ABS CBN Co.,
After sometime, he wrote to ABS CBN
stating
that
his
compensation
be
assigned to his son Arwin Junior aka
Junjun. What are the tax implications?
A:
1. Arwin should recognized as income the
400,000 compensation.

ACADEMICS COMMITTEE

PRE-WEEK REVIEWER 2015


LAW ON TAXATION
2. It can be claimed by ABS CBN as
allowable
deductions.
(accounting
method used by ABS CBN should be
considered)
3. Donors tax should be paid by Arwin
for the assignment of the right to his
son, JunJun.
4. NOT recognized as income of JunJun,
(excluded by law: gift)
Receipts NOT considered as Income
a. Advance payment or deposit
b. Property received as compensation but
subject to forfeiture
c. Assessments for additional corporate
contributions.
d. Increment resulting in revaluation of
property.
e. Parent
Corp.s
share
in
the
accumulated and current equity on
subsidiaries of its Net Income prior to
distribution.
f. Money/property borrowed.
TESTS
IN
DETERMINING
WHETHER
INCOME IS EARNED FOR TAX PURPOSE
1. Realization test - Income is considered
realized for tax purposes when the earning
process is complete or virtually complete
and an exchange has taken place.
2. Claim of right doctrine or doctrine of
ownership, command, or control - A
taxable gain is conditioned upon the
presence of a claim of right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay.
3. Economic benefit test, doctrine of
proprietary interest - Taking into
consideration the pertinent provisions of
law, income realized is taxable only to the
extent that the taxpayer is economically
benefited.
4. Severance test - Income is recognized
when there is separation of something
which is of exchangeable value
5. All-events test This test requires:
a. fixing of a right to income or liability to
pay; and
b. the availability of the reasonable
accurate determination of such income
or liability.
Note: The amount of liability does not have to
be determined exactly; it must be determined
with reasonable accuracy.
The term
reasonable accuracy implies something less
than an exact or completely accurate amount.
Debt foregone is NOT an Income to the
debtor,
unless
there
is
some
other
consideration for its being condone aside from
gratuity or liberality.
Q: Atty. Abogado, a lawyer, owes
Butchukoy, a businessman, the sum of
P25,000.
He engages the services of
Atty. Abogado to defend him in a case

against him for sexual harassment filed


by Marian Rivera.
The value of the services is P100,000.
Accordingly, Butchokoy cancelled the
debt of Atty. Abogado.
1. Is the P100,000 considered as income
subject to tax?
2. Supposed that Butchokoy paid Atty.
Abogado P100,000 for the services
rendered, and at the same time
condoned the debt. Is the amount
condoned
considered
as
income
subject to tax?
A:
1. The accounting method used by Atty.
Abogado should be considered.
If he uses the accrual method, he
needs to recognize the income up to
the total amount of 100,000, there was
constructive receipt in such case.
If cash method is used, he should be
subjected to the tax only up to 25,000,
the extent of the condoned debt. The
reason for this is that the condonation
was in exchange of the services
rendered. The 75,000 difference is not
yet collected.
2. When Butchokoy pays the 100,000
then the same is considered as income
for Atty. Abogado for the professional
services rendered.
On the other hand, the amount of
25,000 which was condoned is
considered as a gift which is excluded
by law because the cancellation was
without any consideration aside from
liberality or gratuity.
GROSS INCOME
The income required to be reported less
income which is by statutory definition or
otherwise exempt from tax imposed by law
(Sec. 36, RR2)
Except when otherwise excluded, gross
income means all income derived from
whatever source, including but not limited to
the following items:
C-G2-IRDAP2 (refer to sec. 32A)
Note: *NIRC definition is broad enough to
include all receipts of money or property
UNLESS excluded by specific provision of law
or doctrine. Rationale: lifeblood doctrine.
This definition of gross income is broad
enough to include all passive incomes subject
to specific rates or final taxes. However, since
these passive incomes are already subject to
different rates and taxed finally at source,
they are no longer included in the
computation
of
gross
income,
which
determines taxable income. (CIR v. PAL)

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PRE-WEEK REVIEWER 2015


LAW ON TAXATION
CONCEPT OF INCOME FROM WHATEVER
SOURCE
The source of Income may be legal or illegal.
Even though the law imposes a legal
obligation upon the embezzler or thief to
repay the funds, the embezzled or stolen
money is gross income.
Rationale: The
embezzler has no intention of repaying the
money. (James v. US) JAMES DOCTRINE
Wilcox doctrine is not applicable in the
Philippines because of Sec. 32A where gross
income means all income derived from
whatever source, whether legal or illegal.
Money received under solution in debiti
income subject to tax. (Gutierrez v. CIR)

A citizen of the A
citizen
of
Philippines who
Philippines who:
-stays
in
the
Philippines
without
the
intention
of
transferring his
physical
presence abroad
whether to stay
permanently or
temporarily
as
an
overseas
contract worker.

is

Under the claim of right doctrine, if the


recipient has an obligation to return the same,
has a voidable title to the money received
through mistake.

AND

Classification of individuals:
I.
Citizens
a. Residents Citizen (RC)
b. Non-Resident Citizen (NRC)
c. Overseas Contract Worker (OCW)
II.

Aliens
a. Resident Aliens (RA)
b. Non Resident Aliens
i. NRA- engaged in Trade or
Business (NRA-eTB)
ii. NRA-Not engaged in Trade
or Business (NRA-NeTB)
CITIZENS
RESIDENT
NON-RESIDENT
CITIZEN (RC)
CITIZEN (NRC)

b)
Leaves
the
Philippines during the
taxable year to reside
abroad, either as an
immigrant
or
for
employment
on
a
permanent basis.

d) Has been previously


considered
as
a
nonresident
citizen
and who arrives in the
Philippines at any time
during
the
taxable
year
to
reside
permanently in the
Philippines.

The BIR would like to tax the P50,000 as


income of Mrs. Ferrer. Is the BIR correct?

CLASSIFICATION OF TAXPAYERS
TAXATION OF THEIR INCOME
Person for tax purposes means:
a. Individual
b. Trust
c. estate or
d. corporation

a) Establishes the
satisfaction
of
the
Commissioner
of
Internal Revenue the
fact of his physical
presence abroad with
a definite intention to
reside therein.

c) Works and derives


income from abroad
and
whose
employment
thereat
requires him to be
physically
present
abroad most of the
time
during
the
taxable year.

Q: Miley Ferrer, negotiated a check upon


a worthless account on UST Bank.
Because of such, she received P50,000
which he used to gamble in the USTLaSalle game. The UST won in the game,
however, she placed her bet to the DLSU
side, thus, he lost the said P50,000 on
the same day he received such.

A: Yes, the BIR is correct. Following Sec. 32A


of the NIRC, Mrs. Ferrer the said 50,000 form
part of his income derived from whatever
source.

the

e)
Taxpayer
shall
submit proof to the
Commissioner
of
Internal Revenue to
show his intention of
leaving the Philippines
to reside permanently
abroad or to return to
and reside in the
Philippines.
(Sec.
22(E), NIRC)
ALIENS
RESIDENT
NON-RESIDENT
ALIEN (RA)
ALIEN (NRA)
- an individual - an individual whose
whose residence residence is not within
is
within
the the Philippines and
Philippines
but who is not a citizen
who is not a thereof. (Sec. 22 (G),
citizen
thereof. NIRC)
(Sec.22(F),NIRC)
Engaged NOT
in trade engaged
or
in trade
business or
business
- an alien - an alien

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LAW ON TAXATION
exclusions, itemized deductions and
tax rates:
a. Allowed
to
use
Optional
Deduction.
b. In addition to the itemized
deductions, it may deduct:
i.
Amount of income for the
taxable year distributed
currently
to
the
beneficiaries (Sec. 61 (A)
(1) )
ii.
Amount of the income
collected by the guardian
of the infant which is to be
held or distributed as the
court may direct.
iii.
Amount of income properly
credited
to
the
beneficiaries. (Sec. 61 (B))

who stays who stays


in the
in the
Philippine Philippines
s for an
for 180
aggregat days or
e period less.
of more
(Sec. 25
than 180 (B), NIRC)
days.
(Sec. 25
(A), NIRC)
SPECIAL CLASS OF INDIVIDUAL
EMPLOYEES: MINIMUM WAGE
EARNER
Refers to a worker in the private sector
paid the statutory minimum wage, or to
an employee in the public sector with
compensation income of not more than
the statutory minimum wage in the nonagricultural sector where he/she is
assigned.
Other Kinds of Aliens under the NIRC
The following are liable for final tax of
15% on their gross income from
salaries, wages, annuities, etc.
Same tax treatment for Filipinos
occupying the same position.
a. Aliens employed by Regional or
Area headquarters & Regional
Operating
headquarters
of
multinational companies.
b. Aliens
employed
by
Offshore
Banking Units
c. Aliens employed by Petroleum
Service Contractor and Subcontract
NON-RESIDENT ALIEN NOT ENGAGED IN
TRADE
OR
BUSINESS
WITHIN
THE
PHILIPIPNES. (NRA-NeTB)
They are being tax for 25% final tax on their
gross income from sources within.
ESTATES
The income that is subject to income taxation
is the income received by the estate of the
deceased person during the period of
administration or settlement of the estate
(Sec. 60 (A) (3))
Income taxation of a RESIDENT ESTATE
1. Subject to income tax in the same
manner as an individual citizen:
a. On all income received from all
source.
b. Final tax on certain passive
income except on distributable
net income from partnerships &
dividends which are included in
the taxable income; Capital gains
from sale of shares of stock not
traded in the stock exchange and
capital gains from sale of real
property.
2. It shall be subject to the same manner
as individuals, also to the same

3. Allowed to deduct exemptions up to


20,000. (Sec. 62, ibid)
Income taxation of a NON RESIDENT
ESTATE
Same as the above, except that it may not be
allowed to use optional deductions if nonresident estate because estate has no
citizenship.
Classification of TRUST
1. Taxable Trust
2. Tax Exempt Trust
Any part of the Income of a trust which
in the discretion of the grantor, or of
any person not having a substantial
adverse interest in the disposition of
such part of income; may be held or
accumulated for future distribution to
the grantor; or may be applied to the
payment of premium upon policies of
insurance on the life of the grantor.
(Sec. 64 (A))
Revocable
trust
distinguish
from
Irrevocable trust
The income of a revocable trust is included in
computing the taxable income of the grantor
without any of the deductions allowed for
estates while the income of an irrevocable
trust is subject to tax as income of the trust
after deducting the allowable deductions.
CORPORATIONS
The term corporation shall include
1. Partnerships, no matter how created
2. Joint stock companies
3. Joint
accounts
(cuentas
en
participacion)
4. Associations or insurance companies
But the term does NOT include:
1. General Professional Partnerships and
2. A joint venture or consortium formed
For the purpose of undertaking
construction projects; or

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LAW ON TAXATION

Engaging in petroleum, coal,


geothermal and other energy
pursuant to an operating or
consortium agreement under a
service
contract
with
the
government. (Sec. 22 (B))
3. Co-ownerships**
Co-ownerships are not deemed
unregistered partnerships and
therefore NOT taxable like
corporations. Article 1769(3) of
the Civil Code provides that,
The sharing of gross returns
does not of itself establish a
partnership, whether or not the
persons sharing them have a
joint or common right or
interest in any property from
which the returns are derived.
There must be an unmistakable
intention to form a partnership
or joint venture.
INCOME
TAXATION
OF
DOMESTIC
CORPORATIONS
Taxable for income from sources within and
w/o the Phil.
A tax of whichever is greater of:
1. The normal income tax rate of 30%;
or
2. A minimum corporate income tax
rate (MCIT) of 2% of gross income
as of the end of the taxable year,
beginning on the 4th taxable year
immediately following the year in
which such corporation commenced
its business (Sec. 27 (E))
Optional Taxation of 15% of Gross
income (Sec. 27 (A))
Subject to the same final tax like
resident individuals on their passive
income. (Sec. 27 (D))
Dividends received by a domestic
corporation from another domestic
corporation shall not be subject to tax.
(Sec. 27 (D)(4))
MINIMUM
CORPORATE
INCOME
TAX
(MCIT)
When is it imposed?
By a Domestic Corporation when:
a. It has zero or negative taxable
income
b. Or when the amount of MCIT is
greater than the Normal Corporate
Income tax of 30% due on taxable
income.
The computation and payment of MCIT shall
likewise apply at the time of filing the
quarterly corporate income tax. (RR 9-98)
The MCIT shall be applicable only to Domestic
Corporations (DC) that are subject to Normal
Corporate Income Tax.
Rationale of MCIT

The imposition of the Minimum Corporate


Income Tax (MCIT) is designed to forestall the
prevailing practice of corporations of over
claiming deductions in order to reduce their
income tax payments. The filing of income tax
returns showing a tax loss every year goes
against the business motive which impelled
the stockholders to form the corporation. This
is the reason why domestic corporations (and
resident foreign corporations) after the
recovery period of four years from the time
they commence business operations, they
become liable to the MCIT whenever this tax
imposed at 2% of gross income exceeds the
normal corporate Income tax imposed on net
income.
RELIEF FROM THE MCIT under certain
conditions:
The Sec. of Finance is authorized to suspend
the imposition of the MCIT on any corporation
which suffers losses on:
a. account of prolonged labor
disputes*; or
b. because of force majeure, or
c. because of business reverses.
*Losses arising from a strike
staged by the employees which
lasted for more than 6 months
within the taxable year and which
has caused temporary shutdown
of business operations. (RR 9-98)
For the purposes of MCIT, the taxable in which
operations commenced shall be the year in
which the domestic corporation is registered
with the BIR.
The Itemized Deductions under the Normal
Income Tax rate are not allowed as deductions
under the MCIT.
CARRY FORWARD OF EXCESS MCIT
Excess MCIT over the MCIT shall be carried
forward and credited against NCIT for the
three (3) immediately succeeding taxable
years.
MCIT IS NOT VIOLATIVE OF DUE PROCESS
The constitutional safeguard of due process is
embodied in the fiat "[no] person shall be
deprived of life, liberty or property without
due process of law." Due process clause may
properly be invoked to invalidate, in
appropriate cases, a revenue measure when it
amounts to a confiscation of property.
However, the Court not strike down a revenue
measure as unconstitutional (for being
violative of the due process clause) on the
mere allegation of arbitrariness by the
taxpayer. There must be a factual foundation
to such an unconstitutional taint.
Certainly, an income tax is arbitrary and
confiscatory if it taxes capital because capital
is not income. In other words, it is income, not
capital, which is subject to income tax.

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LAW ON TAXATION
However, the MCIT is not a tax on capital. The
MCIT is imposed on gross income which is
arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the
cost of goods and other direct expenses from
gross sales. Clearly, the capital is not being
taxed.

iii.

GPB for International Shipping


means:
Gross
revenue
whether
for
passenger, cargo or mail
i.
originating
from
the
Philippines
ii.
up to final destination,
regardless of the sale or
payments of the passage or
freight documents.

MCIT IS NOT AN ADDITIONAL TAX


IMPOSITION
It is imposed in lieu of the normal net income
tax, and only if the normal income tax is
suspiciously
low.
The
MCIT
merely
approximates the amount of net income tax
due from a corporation, pegging the rate at a
very much reduced 2% and uses as the base
the corporations gross income.

3. Offshore Banking Units income


from foreign currency transactions with
non-residents is exempt from all taxes
EXCEPT interest income from residents
with is subject to 10% final tax.2
4. Regional or Area Headquarters of
multinational
companies
not
subject to income tax
5. Regional Operating Headquarters
of multinational companies 10%
of their taxable income.

IMPROPERLY ACCUMULATED EARNINGS


TAX (IAET)
It is 10% of the improperly accumulated
taxable income. In additions to other taxes
imposed, the IAET is imposed for each
corporations
retaining
improperly
accumulated earnings without distributing
them as dividends to their stockholders.
The purpose of the IAET is to curtail the
practice of corporations in holding or retaining
earning without declaring dividends in order
to avoid Dividends Tax for the stockholders.
Corporations NOT subject to IAET:
1. Publicly held corporations
2. Banks & other nonbanks financial
intermediaries and
3. Insurance Companies
4. Taxable Partnership
5. General Professional Partnerships (GPP)
6. Non-taxable joint ventures
7. Enterprises duly registered with PEZA
8. Foreign Corporations (including branch
of foreign corporations)
INCOME
TAXATION
OF
FOREIGN
CORPORATIONS
a. Resident Foreign of
Corporations
(RFC)
1. RFC, in general 30% normal
corporate income tax or 2% MCIT,
whichever is greater, OR Option to be
taxed at 15% of Gross Income
(Sec.27). (Statutory Conditions for the
applicability of Optional Taxation for
Corporations have not yet been met.)
2. International Carriers 2.5% of
Gross Philippine Billings (GPB)*
GPB
for
international
Air
Carrier means:
Amount of gross revenue derived
from carriage of persons, excess
baggage, cargo and mail
i.
originating
from
the
Philippines
ii.
in
a
continuous
and
uninterrupted flight,

irrespective of the place of


sale/issue and the place of
payment of the ticket.

b. Non-Resident Foreign Corporations


1. NRFC, in general 30% final tax for
all gross income from sources within
2. Non-Resident
Cinematographic
film
owners,
lessors
or
distributors 25% of Gross Income
from sources within
3. Non-Resident Owners of Vessels,
chartered by Phil. Nationals 4
% of Gross Income from sources within
4. Non-Resident lessors of Aircrafts,
machineries and other equipment
7 % of Gross Income from sources
within
TAXATION
OF
RESIDENT
FOREIGN
CORPORATION, in general
1. 30% NCIT or 2% MCIT, whichever is
HIGHER
2. Has the option to be taxed at 15%
Gross Income (Sec. 27) (statutory
conditions have not yet been met)
3. Subject to Tax on Branch Remittances
(Sec. 28 (A) (5))
15% based on total profits applied or
earmarked for remittances without any
deductions for the tax component
thereof (except activities registered
with PEZA)
4. Subject to the same final tax like
Domestic Corporations (Sec. 28 (A)
(7))
*not subject on capital gains tax from
sale, exchange or disposition of
land/building, thus, such is part of
income tax, whether ordinary or
capital gains.
5. Dividends received from a domestic
corporations shall not be subject to
income tax.

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LAW ON TAXATION
KINDS OF PARTNERSHIP AND THEIR
TAXATION
A. Taxable Partnerships
Subject to taxation like a Corporation.

supervisory
employees

Distributive share is subject to final tax


under Sec. 24 (B) (2), and not reported
any more by the partners as part of their
taxable income. (Final tax rate will depend
whether a partner is a citizen, resident
alien = 10% on distributable income or
non-resident alien = 20% of their share in
the distributable income after tax.)

The fringe benefit is


instead levied upon
the employer, who is
required to pay.

B. General Professional Partnerships


Not subject to income tax (Sec. 26).
The members/partners are liable for
income tax only in their separate and
individual capacity.
Shall report as gross income his
distributive
share,
actually
or
constructively received, in the net income
of the GPP. (Tan v. Del Rosario)
Not allowed to deduct the optional
standard deduction or the itemized
deductions, except the premium on health
and hospitalization insurance and the
personal and additional exemptions.
SOURCES OF INCOME SUBJECT TO TAX
Compensation income - It includes all
remuneration for services rendered by virtue
of an employer-employee relationship unless
specifically excluded under the NIRC.
Requisites for taxability of compensation
income
1. Personal services actually rendered
2. Payment is for such Services rendered
3. Payment is Reasonable.
a. Fringe benefits - any good,
service or other benefit furnished
or granted by an employer in cash
or in kind in addition to basic
salaries, to an individual employee,
except a rank and file employee
(Sec. 33 [B], NIRC; Sec. 2.33 [B],
RR 3-98)
Special treatment of fringe benefits
RECIPIENTS
TAX TREATMENT
Rank and file The value of such
employees
fringe benefit shall be
considered as part of
the
compensation
income
of
such
employee subject to
tax payable by the
employee. (Sec. 33,
NIRC).
Managerial
It is not part of the
and
compensation

income
of
the
recipient
but
is
subject to final tax on
the
grossed-up
monetary value of
fringe
benefits
furnished or granted
to the employee to
be
paid
by
the
employer.

TAXABLE FRINGE BENEFITS


Any good, service or other benefit furnished
or granted by an employer in cash or in kind
in addition to basic salaries, to an individual
employee, except a rank and file employee
are taxable fringe benefits.
NON-TAXABLE FRINGE BENEFITS
a. Fringe benefits which are authorized
and exempted from tax under special
laws
b. Contributions of the employer for the
benefit of the employee to retirement,
insurance and hospitalization benefit
plans;
c. Benefits given to rank and file
employees, whether granted under a
collective bargaining agreement or
not;
d. De minimis benefits as defined in the
rules
and
regulations
to
be
promulgated by the Secretary of
Finance, upon recommendation of the
CIR
e. When the fringe benefit is required by
the nature of, or necessary to the
trade, business or profession of the
employer
f. Employers Convenience Rule - when
the
fringe
benefit
is
for
the
convenience of the employer (Sec. 32,
NIRC; Sec. 2.33 [C], RR 3-98
CONVENIENCE OF THE EMPLOYER RULE
The fringe benefits shall not be taxable if:
a. It is furnished in the employers
business premises; and
b. Employee is required to accept such
lodging as a condition of his
employment.
EXLUSIONS FROM GROSS INCOME are
not included in gross income and exempt from
income taxation:
1. Proceeds of Life Insurance
The proceeds of life insurance policies
paid to the heirs or beneficiaries upon the
death of the insured, whether in a single
sum or otherwise

ACADEMICS COMMITTEE

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LAW ON TAXATION
The proceeds of life insurance received
upon the death of the insured constitute a
compensation for the loss of life, hence a
return of capital, which is beyond the
scope of income taxation. (Section 32(B)
(1) 1997 Tax Code)

Note: Public policy recognizes the


principles of reciprocity and comity among
nations.
Reasons for granting tax exemption
through a treaty:
a. Reciprocity
b. To lessen the rigors of international
juridical double taxation

Note: If such amounts are held by the


insurer under an agreement to pay
interest thereon, the interest payments
shall be included in gross income.

Most Favored Nation Clause


This grants to the contracting party
treatment not less favorable than which
has been or may be granted to the most
favored among other countries. It allows
the taxpayer in one state to avail of more
liberal provisions granted in another tax
treaty to which the country of residence of
such taxpayer is also a party; provided
that the subject matter of taxation is the
same as that in the tax treaty under which
the taxpayer is liable and paid under
similar circumstances. (CIR v. SC Johnson
and Son Inc., GR 127105, June 25, 1999)

2. Amount Received by Insured as


Return of Premium under life insurance,
endowment, or annuity contracts, either
during the term or at the maturity of the
term mentioned in the contract or upon
surrender of the contract
Note: The amount returned is not income
but mere return of capital.
Return of Premium v. Life insurance
proceeds
The difference lies in cases where the
insured in a life insurance contract
survives. In order that life insurance
proceeds may be totally exempt from
income taxation, the insured must die. If
he survives, there is only a partial
exemption , i.e., only the portion of the
proceeds representing return of premiums
previously paid is excluded, being a mere
return of capital.

6. Retirement
Benefits,
Pensions,
Gratuities, etc.
Retirement
benefits
received
under
Republic Act No. 7641 and those received
by officials and employees of private
firms, whether individual or corporate, in
accordance with a reasonable private
benefit plan maintained by the employer.

3. Gifts, Bequests, and Devises. - The


value of property acquired by gift,
bequest, devise, or descent:
Note: Income from such property shall be
included in gross income.
GIFT TAX TEST
When a person gives a thing or right to
another and it is not a legally
demandable obligation then it is treated
as a gift and excluded from gross income.
However, if there is a legally demandable
obligation to give such as for services
rendered by one to the donor or due to his
merits, the amount received is taxable
income to the recipient.
4. Compensation for Injuries or Sickness
plus the amounts of any damages
received, whether by suit or agreement,
on account of such injuries or sickness.
Note: They are mere compensation for
injuries or sickness suffered and not
income. It is intended to make the injured
party whole as before the injury.
5. Income Exempt under Treaty. - Income
of any kind, to the extent required by any
treaty obligation binding upon the
Government of the Philippines.

ACADEMICS COMMITTEE

Requisites:
i.
The RPBP must be approved by the
BIR;
ii.
The retiree must have been in the
service of same employer for at
least 10 years at the time of
retirement;
iii.
The private employee or official
must be at least 50 years old at
the time of his retirement;
iv.
The benefits under the RPBP must
have been availed of only once.
Note: Once the benefits under the RPBP
have been availed of, the retiree can no
longer avail of the same exemption for the
second time under another RPBP but can
avail exemption under another ground
such as SSS or GSIS benefits.
Reasonable Private Benefit Plan - a
pension, gratuity, stock bonus or profitsharing plan maintained by an employer
for the benefit of some or all of his officials
or employees, wherein contributions are
made by such employer for the officials or
employees, or both, for the purpose of
distributing
to
such
officials
and
employees the earnings and principal of
the fund thus accumulated, and wherein it
is provided in said plan that at no time
shall any part of the corpus or income of

PRE-WEEK REVIEWER 2015


LAW ON TAXATION
the fund be used for, or be diverted to,
any purpose other than for the exclusive
benefit of the said officials and employees.

interest on deposits in banks in the


Philippines by
i. foreign governments
ii. financing institutions owned,
controlled,
or
enjoying
refinancing
from
foreign
governments, and
iii. international
or
regional
financial institutions established
by foreign governments

A. Retirement benefits in the absence of


a reasonable private benefit plan
maintained by the employer.
1. Where the retirement plan is established in
the CBA or other applicable employment
contract - Any employee may be retired upon
reaching the retirement age established in the
CBA or other applicable employment contract.
In case of retirement, the employee shall be
entitled to receive such retirement benefits as
he may have earned under existing laws and
any CBA and other agreements: Provided,
however, that an employee's retirement
benefits under any collective bargaining and
other agreements shall not be less than those
provided by the law.

B. Income Derived by the Government or


its Political Subdivisions from any
public utility or from the exercise of
any essential governmental function
C. Prizes and Awards
i. In recognition of religious,
charitable,
scientific,
educational, artistic, literary, or
civic achievement
ii.The recipient was selected
without any action on his part
to
enter
the
contest
or
proceeding; and
iii.
The recipient is not
required to render substantial
future services as a condition to
receiving the prize or award.

2. In the absence of a reasonable private benefit


plan or agreement providing for retirement
benefits of employees in the establishment
a. Optional the conditions are:
An employee upon reaching the age of 60
years or more;
ii. Who has served at least 5 years in the said
establishment;
iii. May retire and shall be entitled to retirement
pay equivalent to month salary for every
year of service, a fraction of at least 6 months
being considered as one whole year.
i.

D. Prizes
and
Awards
in
Sports
Competition
i. Granted to athletes in local and
international
sports
competitions and tournaments
ii. whether held in the Philippines
or abroad and
iii. sanctioned by their national
sports associations

b. Mandatory the conditions


are:
i. An employee upon reaching the age of
beyond 65 years which is the compulsory
retirement age;
ii. Who has served at least 5 years in the said
establishment;
iii. May retire and shall be entitled to retirement
pay equivalent to month salary for every
year of service, a fraction of at least 6 months
being considered as one whole year. (RA
7641, Retirement Pay Law)
B. Separation pay due to death, sickness
or other physical disability or for any
cause beyond the control of the
official or employee
C. Social security benefits, retirement
gratuities, pensions and other similar
benefits received by resident or nonresident
citizens
from
foreign
government
agencies
and
other
institutions, private or public.
D. Benefits from the United States
Veterans Administration.
E. SSS benefits
F. GSIS benefits
7. Miscellaneous Items.
A. Income derived from investments in
the Philippines in loans, stocks, bonds
or other domestic securities, or from

E. 13th Month Pay and Other Benefits


such as productivity incentives and
Christmas
bonus
not
exceeding
P82,000
(RA
No.
10653,
implemented by RR 3-201)
F.

GSIS, SSS, Medicare, Pag-ibig


Other Contributions (union dues)

and

G. Gains from the Sale, exchange or


retirement of Bonds, Debentures or
other Certificate of Indebtedness with
a maturity of more than five (5) years
H. Gains from Redemption of Shares in
Mutual Fund
ALLOWABLE DEDUCTIONS
It partakes of the nature of business
expenses
To recover or recoup the cost of doing
business
May be claimed by individual and corporate
taxpayers except NRANETB and NRFC.

ACADEMICS COMMITTEE

P
It partakes
family expe
To recover
expenses p
year
Are grant
except
1. NRA
resp

PRE-WEEK REVIEWER 2015


LAW ON TAXATION
government will not allow such personal
2. exemption also.
NOTE:
In granted
the case
of married individuals
Arbitrary
amounts
to approximate
the
where
only
one
of
the
personal expenses that may bespouses
incurredisbyderiving
gross
income, only such spouse shall be
individual
taxpayer
allowed
Classified into: the personal exemption.
1.
ADDITIONAL PERSONAL EXEMPTION FOR
2.
DEPENDENTS
25,000 for each qualified dependent not
exceeding four (4)
DEDUCTIONS FROM GROSS
INCOME NOTE:
The
additional
exemption
for
Something spent ordependents
paid in
shall be claimed by only one of
earning the income, which
the
the spouses
in the case of married individuals.
law allows to be In
deducted
the case of legally separated spouses,
from gross income inadditional
order to exemptions may be claimed only
arrive at net income by the spouse who has custody of the child or
children

The actual expenses paid or incurred in the


conduct of trade, business or profession
Classified into:
a. Itemized deductions
b. OSD
EXCLUSIONS FROM GROSS
INCOME
Incomes received or earned
but are not taxable because:
1. It is expressly exempted
from income tax by the
fundamental law or statute;
2. It is subject to another kind
of internal revenue tax;
3. It does not come within the
definition of income as when
the
amount
received
represents return of capital
Necessary
for
the
computation of gross income

Qualified Dependent
a. Legitimate, illegitimate or legally
adopted child;
b. Chiefly dependent upon and living with
the taxpayer;
Necessary for the computation
c. If such dependent is:
of net/taxable income
1. Not more than 21 years old;
2. Unmarried;
EXCLUSIONS
DEDUCTIONS
3. Not gainfully employed or
Incomes received or earned These are deducted fromd.the
If such dependent:
but are not taxable because gross income to arrive at net 1. Regardless of age;
of exemption by virtue of a income /taxable income
2. Is incapable of self-support;
law or treaty; hence, not
because of mental or physical
included in the computation
defect. (Sec. 2.79 I [1] b, RR 2-98
as amended by RR 10-2008; Sec.
of gross income.
35 [b], NIRC)
Necessary
for
the Necessary for the computation
computation
of
gross of net income/taxable income
NOTE: A senior citizen who is not gainfully
income
employed, living with and dependent upon his
benefactor for chief support, although treated
as dependent will not entitle the benefactor to
PERSONAL
AND
ADDITIONAL
claim the additional personal exemption of
EXEMPTIONS
P25,000. The entitlement to claim additional
RC NR RA
NRAE
NRANE
personal exemption per dependent (not
C
BT
BT
exceeding four) is allowable only to individual
BASIC
taxpayers with a qualified dependent child or
PERSONAL
Yes Yes Yes
Yes*
No
children. (R.R 7-2010)
EXEMPTION
ADDITIONA
L
PERSONAL
EXEMPTION

Yes

Yes

Yes

No

No

BASIC PERSONAL EXEMPTION


P50, 000 irrespective of the status of the
taxpayer
XPN: In the case of NRAEBT = personal
exemptions allowed in his country to Filipino
citizens not residing in such country, or that
allowed in the Philippines, whichever is lower.
This is subject to the rule of reciprocity. Thus,
if the foreign country of which the NRAEBT is
a subject or citizen does not allow personal
exemptions to non-resident Filipino citizens
doing business in such country, the Philippine

Status-at-the-end-of-the-year rule
Mar and Joy got married in 2010. A week
before their marriage, Joy received, by
way of donation, a condominium unit
worth P750.000.00 from her parents.
After marriage, some renovations were
made at a cost of P150,000.00. The
spouses were both employed in 2011 by
the same company. On 30 December
2012, their first child was born, and a
second child was born on 07 November
2013.
In
2014,
they
sold
the
condominium unit and bought a new
unit.
Under the foregoing facts, what were
the events in the life of the spouses that
had income tax incidences?

ACADEMICS COMMITTEE

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LAW ON TAXATION
i. the amount of the expense being
deducted, and
ii.the direct connection or relation of
the expense being deducted to the
development,
management,
operation and/or conduct of the
trade, business or profession of the
taxpayer.

A:
The events in the life of spouses Mar and Joy
which have income tax incidences are the
following:
(a) Their marriage in 2010 qualifies them to
claim personal exemption for married
individuals;
(b) Their employment in 2011 by the same
company will make them liable to the income
tax imposed on gross compensation income;
(c) Birth of their first child in December 2012
would give rise to an additional exemption of
P25.000 for taxable year 2012;

a. Salaries, wages and other forms of


compensation for personal services
actually rendered, including the grossedup monetary value of fringe benefit
furnished or granted by the employer to
the employee;
Requisites for deductibility:
a. The payments must be reasonable;
b. They are, in fact, payments for
personal services rendered. (Sec. 70,
Rev. Regs. 2)

(d) Birth of their second child in November


2013 would likewise entitle them to claim
additional exemption of P25, 000 raising their
additional personal exemptions to P50,000 for
taxable year 2013; and Sale of their
condominium unit in 2014 shall make the
spouses liable to the 6% capital gains tax on
the gain presumed to have been realized from
the sale.

Note:
Reasonable
and
true
compensation is only such amount as
would ordinarily be paid for services like
enterprises in like circumstances.

ALLOWABLE DEDUCTIONS
1. Itemized deductions
2. Optional Standard Deductions
ITEMIZED DEDUCTIONS
A. ORDINARY
AND
EXPENSES:

Requisites
for
deductibility
of
bonuses:
a. The payment of the bonus is made in
good
faith
for
additional
compensation.
b. It must be for personal services
actually rendered; and
c. The bonus when added to salaries is
reasonable when measured by the
amount and quality of the services
performed with relation to the
business of the particular taxpayer.

NECESSARY

Ordinary expense - It is any expense


that is normal or usual in relation to the
taxpayers business and the surrounding
circumstances.
Necessary expense - one which is
appropriate
and
helpful
in
the
development of taxpayers business and is
intended to minimize losses or to increase
profits
Requisites for deductibility:
i. The expense must be directly
attributable to the development,
management, operation, and or
conduct of trade or business of the
taxpayer, or in the exercise of the
taxpayers profession
ii. Paid or incurred During the taxable
year;
iii. The expense must be Substantiated
by proof; (substantiation rule)
iv. The expense must be Reasonable;
v. If subject to Withholding taxes, proof
of payment to BIR; and
vi. Expenses must Not be against public
policy, public moral or law

Factors to be considered:
i. The payment made in good faith
ii. The character of the taxpayers
business; e.g. the volume and
amount of its net earnings; its
locality; the type and extent of
the services rendered; the salary
policy of the corporation
iii. The size of the particular
business
iv. The employees qualification and
contributions to the business
venture
v. General
economic
conditions
(C.M. Hoskins & Co., Inc. v. CIR,
GR L-24059, Nov. 28, 1969)
b. Travel expenses, here and abroad, while
away from home in the pursuit of trade,
business or profession;

Substantiation requirements - The


expenses must be supported by official
receipts or adequate records showing

ACADEMICS COMMITTEE

Away from home - away from the


location of the employees principal place
of employment regardless of where the
family residence is maintained.

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LAW ON TAXATION
Note:
Travelling
expense
includes
transportation, meals and lodging. (RR No.
2)
c. Rentals
Requisites for deductibility:
i. Payment was made as a condition to
the continuous use of or possession
of the property;
ii. Taxpayer has not taken or is not
taking title to the property or has no
equity other than that of a lessee,
user or possessor;
iii. Property must be used in the trade or
business; and
iv. The withholding tax must have been
withheld and paid

ii.

iii.

NOT CONSIDERED EAR:


a. expenses treated as compensation or
fringe benefits for services rendered
under
an
employer-employee
relationship;
b. expenses
for
charitable
or
fundraising events;
c. expenses for bonafide business
meeting of stockholders, partners or
directors;
d. expenses for attending or sponsoring
an employee to a business league or
professional organization meeting;
e. expenses for events organized for
promotion,
marketing
and
advertising; and
f. other expenses of similar nature.

d. Entertainment,
amusement
and
recreation expenses (EAR) includes
representation
expenses
and/or
depreciation or rental expense relating to
entertainment facilities
Representation expenses - expenses
incurred by a taxpayer in connection with
the conduct of his trade, business or
exercise of profession, in entertaining,
providing amusement and recreation to, or
meeting with, a guest or guests at a dining
place, place of amusement, country club,
theatre, concert, play, sporting event and
similar events or places.
Entertainment facilities - yacht, vacation
home or condominium; and any other
similar item of real or personal property
used by the taxpayer primarily for the
entertainment, amusement, or recreation
of guests or employees. (Sec. 2, RR 102002)
WHO MAY CLAIM EAR:
a. Individuals engaged in business,
including taxable estates and trusts
b. Individuals engaged in practice of
profession
c. DC
d. RFC
e. GPP, including its members

e. Repairs and maintenance


a. Minor repairs outright expense, i.e.,
deductible in the period such
expense is incurred
b. Major repairs capitalized and
included in determining depreciation
expense because they tend to
prolong the life of the asset
f.

N.B.
Any
expense
incurred
for
entertainment, amusement or recreation
that is contrary to law, morals public
policy or public order shall in no case be
allowed as a deduction.
Bribes, Kickbacks and Other Similar
Payments not allowed as deduction from
gross income
i.

CEILING ON THE AMOUNT OF EAR:


For taxpayers engaged in sale of
goods or properties 0.50% of net
sales (i.e., gross sales less sales
returns or allowances and sales
discounts)

For taxpayers engaged in sale of


services,
including
exercise
of
profession and use or lease of
properties 1% of net revenue (i.e.,
gross revenue less discounts)
For taxpayers deriving income from
both sale of goods and services the
allowable deduction shall in all cases
be
determined
based
on
an
apportionment formula taking into
consideration the percentage of the
net sales/net revenue to the total net
sales/net revenue, but which in no
case shall exceed the maximum
percentage ceiling provided (Sec. 5,
RR 10-2002)

Promotional
and
advertising
expenses
a. Advertising
to
stimulate
the
CURRENT sale of merchandise or use
of services are deductible as
business expenses, provided the
amount incurred is reasonable.
b. Advertising designed to stimulate the
FUTURE sale of merchandise or use
of services are not deductible as
expense but must be spread over a
reasonable period of time that it help
earn the income (matching concept
of deductibility)
c. Advertising to promote the sales of
shares of stock or to create a
favorable corporate image are not
deductible.

g. Cost of materials
Materials and supplies are deductible only
to the amount actually consumed or used
in the operation during the taxable year.

ACADEMICS COMMITTEE

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LAW ON TAXATION
Note: The rate of interest limitation is
actually the difference between the
normal corporate income tax and the 20%
final tax as a percentage of the NCIT rate,
rounded off. Thus under the 30% NCIT,
(30%-20%) / 30% = 33.33%.

h. Expenses for professionals


a. Supplies expense;
b. Expenses paid in the operation and
repair of transportation equipment
used in making professional calls;
c. Membership dues to professional
associations
or
societies
and
subscriptions to journals;
d. Office rentals
e. Utilities expense for water and
electricity consumed in connection
with the exercise of the profession
f. Communication expense
g. Expenses for hiring employees or
office assistants
h. Expenses
incurred
for
books,
furniture and professional

Tax Arbitrage the percentage by which


the
taxpayers
otherwise
allowable
deduction for interest expense shall be
reduced by 33% of the interest income
subjected to final tax. It is a strategy
which takes advantage of the difference in
tax rates or tax systems as the basis for
profit. The limitation on the deductibility
of interest expense was legislated to
specifically address the tax arbitrage
arising from the difference between the
20% final tax on interest income and the
normal corporate income tax rate under
which interest expense can be claimed as
a deduction.

B. INTEREST EXPENSE
Payment for the use or forbearance or
detention of money, regardless of the
name it is called or denominated. It
includes the amount paid for the
borrowers use of money during the term
of the loan, as well as for his detention of
money after the due date for its
repayment (Sec. 2 [a], RR 13-2000)

Non-deductible interest expense:


1. Interest paid in advance through
discount or otherwise
Notes:
i.
Such interest shall be allowed as
deduction in the year the
indebtedness is paid:
ii.
If the indebtedness is payable in
periodic
amortizations,
the
amount
of
interest
which
corresponds to the amount of the
principal amortized or paid during
the year shall be allowed as
deduction in such taxable year;
2. Interest between related taxpayers.
3. If the indebtedness is incurred to
finance petroleum exploration.

Requisites for deductibility:


i. There must be an indebtedness;
ii. The indebtedness must be that of
the taxpayer;
iii. The interest must be legally due and
stipulated in writing;
iv. The interest must be paid or incurred
during the taxable year;
v. The indebtedness must be connected
with the taxpayers trade, business,
or exercise of profession;
vi. The interest arrangement must not
be between related taxpayers.
vii. The allowable deduction have been
reduced by an amount equal to 33%
of the interest income subject to tax.
(Sec. 34[B][1], NIRC as amended by
Rep. 6337)
Limitation on the deductible interest
expense:
The
taxpayers
otherwise
allowable
deduction for interest expense shall be
reduced by an amount equal to 33% of the
interest income subject to final tax.
This limitation shall apply regardless of
whether or not a tax arbitrage scheme
was entered into by the taxpayer or
regardless of the date of the interest
bearing loan and the date when the
investment was made, for as long as,
during the taxable year, there is an
interest expense incurred on one side and
an interest income earned on the other
side, which interest income had been
subjected to final withholding tax.

Optional
Treatment
of
Interest
Expense incurred to acquire ordinary
assets:
1. deduction or
2. treated as a capital expenditure.
C. Taxes
Requisites for deductibility:
i. Payments must be for taxes;
ii. Tax must be imposed by law on, and
payable by the taxpayer;
iii. Paid or incurred during the taxable
year in connection with taxpayers
trade, business or profession; and
iv. Taxes are not specifically excluded by
law from being deducted from the
taxpayers gross income.

ACADEMICS COMMITTEE

Treatment
of
surcharges/
interests/fines for delinquency.
Interests
on
delinquent
taxes
are
deductible as they are considered as
interest on indebtedness and not as taxes.
(Commissioner of Internal Revenue v.
Prieto, 109 Phil. 592; Commissioner of

13

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LAW ON TAXATION
Internal Revenue v. Palanca, Jr. 18 SCRA
496)

b. A tax credit differs from deduction to


the extent that the former is
subtracted from the tax, WHILE the
latter is subtracted from the income
before the tax is computed. (M.E.
Holding Corporation v. Commissioner
of Internal Revenue, CTA Case No.
5314, August 17, 1998 citing Black's
Law Dictionary, 6th ed.)

NOTES AND COMMENTS:


The unpaid
delinquent taxes referred to are only
business taxes and not income taxes.
(Domondon)
Non-deductible taxes:
i.
Philippine income tax
ii.
Income taxes imposed by authority
of any foreign country
XPN: When the taxpayer does not
signify in his return his desire to avail
of the tax credit
iii.
Estate and donor's taxes
iv.
Special
assessments
taxes
assessed against local benefits of a
kind tending to increase the value of
the property assessed
v.
VAT
vi.
Stock transaction tax

Taxpayers who may claim tax credit:


1. Citizens
2. DC
3. A member of a GPP
4. Beneficiary of an estate or trust
D. Losses actually sustained during the
taxable year and not compensated
for by insurance or other forms of
indemnity.
Requisites for deductibility:
i. Loss belongs to the Taxpayer;
ii. Actually sustained and charged off
during the taxable year;
iii. Evidenced
by
a
closed
and
completed transaction;
iv. Not compensated by Insurance or
other forms of indemnity;
v. Not claimed as a deduction for Estate
tax purposes in case of individual
taxpayers; and
vi. Must be connected with taxpayers
Trade, business or profession or
incurred in any transaction or
incurred by an individual in any
transaction entered into for profit
though not connected with his trade,
business or profession
vii. If it is Casualty loss (loss arises from
fires, storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement), it is evidenced by a
declaration of loss file within 45 days
with the BIR.

Limitation on deductible taxes for


NRAETB and RFC - only if and to the
extent that they are connected with
income
from
sources
within
the
Philippines.
Note:
No deductions are allowed for
amounts representing:
i.
Interest*
ii.
Surcharges and
iii.
Fines or penalties incident to
delinquency
*Interest on delinquent taxes, although
not deductible as a tax, can be deducted
as interest expense at its full amount.
TAX BENEFIT RULE When taxes
allowed to be deducted are subsequently
refunded or credited, they shall be
included as part of gross income in the
year of receipt to the extent of the income
tax benefit of said deduction.

Non-deductible losses:
i. Losses in dealings between related
taxpayers.
ii. Losses from wash sales of stocks.
iii. Loses due to removal of buildings
purchased (not existing and not
incident to renewal)

Foreign Tax Credit


It is the right of an income taxpayer to
deduct from income tax payable the
foreign income tax he has paid to a
foreign
country
subject
to
certain
limitations. This is to avoid the rigors of
indirect double taxation, although not
prohibited by the Constitution for being
violative of the due process, results to a
tax being paid twice on the same subject
matter or transaction.
Tax credit vis--vis deduction
a. A tax credit reduces the taxpayer's
liability dollar for dollar, COMPARED to
a deduction which reduces taxable
income upon which the tax liability is
calculated.

Marcelo Doctrine - A loss in one line of


business is not permitted as a deduction
from gain in another line of business.
LOSSES
Ordinary
losses

Capital losses
Securities

ACADEMICS COMMITTEE

RULES
ON
DEDUCTIBILITY
Deductible,
net
of
indemnity
N.B.
May be deducted
from capital gains
Deductible to the extent of
capital gains only
Deductible if worthless

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LAW ON TAXATION
becoming
worthless

Losses
on
wash sales of
stocks/securit
ies

securities are capital assets


(except where the taxpayer
is a bank or trust company)

Note: If such abandoned


well is re-entered and
production is resumed, or if
such equipment or facility is
restored into service, the
said costs shall be included
as part of gross income in
the year of resumption or
restoration

Non-deductible
If
worthless securities are
ordinary assets
G.R.
Losses from wash
sale are not deductible

XPN. When taxpayer is a


dealer in securities, and the
transaction from which the
loss resulted was made in
the ordinary course of
business of such dealer, the
loss is deductible in full.
Wagering
Deductible only to the
losses
extent of wagering gains.
NOLCO
Deductible for the next 3
consecutive years following
the year of such loss.
Provided that:
i. The taxpayer was
not exempt from
income tax in the
year of such net
operating loss; and
ii. There has been no
substantial change
in the ownership of
the
business
or
enterprise.
N.B. A net operating loss
during the first ten years of
operation shall be allowed
as NOLCO for the next 5
years in case of mines
other than oil and gas wells,
Abandonmen i. When a contract area
t losses
where
petroleum
operations
are
undertaken is partially
or wholly abandoned,
all
accumulated
exploration
and
development
expenditures
pertaining
thereto
shall be allowed as a
deduction.
ii.
When a producing
well is subsequently
abandoned,
the
unamortized
costs
thereof, as well as the
undepreciated
costs
of equipment directly
used therein, shall be
allowed
as
a
deduction in the year
of abandonment.

Effect of NOLCO when the Corporate


taxpayer is subject to MCIT
The running of the three-year period for
the expiry of NOLCO is not interrupted by
the fact that such corporation is subject to
MCIT in any taxable year during such
three
year
period.
However,
such
corporation cannot enjoy the benefit of
NOLCO for as long as it is subject to MCIT
in any taxable period.
E. Bad debts
Requisites for deductibility
i. There must be a valid and subsisting
debt;
ii. It must be actually ascertained to be
worthless
iii. It must be charged off within the
year of worthlessness
iv. It must be connected with profession,
trade or business; and
v. Must not be sustained in a
transaction
between
related
taxpayers
Factors
to
be
considered
in
determining bad debts:
i. The debtor has no property or visible
income;
ii. The debtor has been adjudged
bankrupt or insolvent;
iii. There are numerous debtors with
small amounts of debts and further
action on the accounts would entail
expenses exceeding the amounts
sought to be collected;
iv. The debt can no longer be collected
even in the future; and
v. Collateral shares have become
worthless.
TAX BENEFIT RULE/RECAPTURE RULE
- recovery of bad debts previously allowed
as deduction in the preceding years shall
be included as part of the gross income in
the year of recovery to the extent of the
income tax benefit of said deduction.
F. Depreciation - a reasonable allowance
for the exhaustion, wear and tear
(including
reasonable
allowance
for
obsolescence) of property used in the
trade or business

ACADEMICS COMMITTEE

Requisites for deductibility:

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LAW ON TAXATION
i.
ii.
iii.
iv.
v.

The property depreciated must be


used in trade, business, or exercise
of a profession;
The property subject to depreciation
must be property with life of more
than one year;
The depreciation must have been
charged off during the taxable year.
The depreciation method used must
be reasonable and consistent.
A depreciation schedule should be
attached to the income tax return.

production or severance from such mines


or wells.
Requisites for deductibility:
i. There must be a depletible asset
ii. The allowance for depletion must be
charged off within the taxable year
iii. It must be computed based on cost
depletion method
Deductible depletion:
i. DC oil, gas wells or mines located
within and without
ii. RC gas wells and mines located in
the Phils.

Options
granted
to
Private
Educational Institutions
A private educational institution, may at
its option elect either:
a. to deduct expenditures otherwise
considered as capital outlays of
depreciable assets incurred during
the taxable year for the expansion of
school facilities or
b. to deduct allowance for depreciation

Election to Deduct Exploration and


Development Expenditures of mines
(not oil and gas)
When applicable:
The taxpayer may deduct exploration and
development expenditures provided that it
shall not exceed twenty-five percent (25%)
of the net income from mining operations
computed without the benefit of any tax
incentives under existing laws.
Such
election is irrevocable and shall be binding
in succeeding taxable years.

Depreciable Assets:
i. Tangible property used in trade or
business
ii. Intangible
property
like
patent
copyrights and franchises
Depreciation of Properties Used in
Mining Operations.
i.
At the normal rate of depreciation if
the expected life is ten (10) years or
less; or
ii.
Depreciated over any number of
years between five (5) years and the
expected life if the latter is more
than ten (10) years
Note: The contractor must notify the
Commissioner at the beginning of
the
depreciation
period
which
depreciation rate allowed by this
Section will be used.
Depreciation expense for NRAETB or
RFC
A
reasonable
allowance
for
the
deterioration of property arising out of its
use or employment or its non-use in the
business trade or profession shall be
permitted only when such property is
located in the Philippines.

Net income from mining operations- gross


income from operations less "allowable
deductions" which are necessary or
related to mining operations
Allowable deductions - mining, milling and
marketing expenses, and depreciation of
properties directly used in the mining
operations.
When not applicable:
Expenditures for the acquisition or
improvement of property of a character
which is subject to the allowance for
depreciation.
Depletion expense for an NRAETB or
RFC - the oil and gas wells or mines must
located within the Philippines.
H. Charitable and other contributions

Note:
The starting point for the
computation of the deductions for
depreciation is the reasonable cost of
acquiring the asset and its economic life.
The fact that the machineries were
already depreciated by its original owner
does not matter.

Requisites for deductibility:


i. It must be actually paid during the
taxable year
ii. Must be given to the organization
specified by the Tax Code or special
law
iii. The net income of the institution
must not inure to the benefit of any
member or individual

G. Depletion of Oil and gas wells and


mines reasonable allowance for the
exhaustion of natural resources like mines
and oil and gas wells as a result of

Contributions deductible in full


1. Donations to the Government of the
Philippines, or political subdivisions
including fully-owned government

ACADEMICS COMMITTEE

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LAW ON TAXATION
corporation to be used exclusively in
undertaking priority activities in:
a. Culture
b. Health
c. Economic
Development
Education
d. Science
e. Human Settlement
f. Youth and Sports development

Note: Contribution to a candidate in an


election is not an allowable deduction
because the said expense is not directly
attributable
to
the
development,
management and/or operation and/or
conduct of trade or business or profession.
EXPENSES OF POLITICAL PARTIES
All individuals, juridical persons and
political parties, with respect to their
income payments made as
campaign
expenditures and/or purchase of goods
and services intended as campaign
contributions
are
constituted
as
withholding agents for purposes of the
creditable tax withheld on income
payments (R.R. No. 8-2009).

2. Donations to Foreign institutions and


international
organizations
in
compliance
with
treaties
and
agreements with the Government.
3. Donations to Accredited NGOs
a. Exclusively for:
i. Cultural
ii. Charitable
iii. Health
iv. Educational
v. Scientific
vi. Social welfare
vii. Character building & Youth
and Sports Development
viii. Research
ix. Any Combination of the
above
b. Donation must be utilized not
later than the 15th day of the
3rd month following the close of
taxable year;
c. Administrative expense must
not exceed 30% of the total
expenses;
d. Upon dissolution, assets shall
be transferred to another nonprofit domestic corporation or
to the State.

Note: A creditable income tax at the rate


of 5% shall be withheld on income
payments made by political parties and
candidates of local and national elections
of all their campaign expenditures, and
income payments made by individuals or
juridical persons for their purchases of
goods and services intended to be given
as campaign contribution to political
parties and candidates (R.R. No. 8-2009).
I.

4. Donations of prizes and awards to


Athletes (Sec. 1, RA 7549)
Contributions subject to limitation:
1. Donations that are not in accordance
with the priority plan.
2. Donations whose conditions are not
complied with.
3. Donations to the Government of the
Philippines or political subdivision
exclusive for public purposes.
4. Donations to domestic corporations
organized exclusively for:
a. Scientific
b. Educational
c. Cultural
d. Charitable
e. Religious
f. Rehabilitation of veteran
g. Social Welfare

Research and Development


The taxpayer may either treat it as:
1. Revenue Expenditure it will be wholly
deducted as ordinary and necessary
expense in the year it is paid or
incurred
2. Deferred Expense allowed as
deduction ratably distributed over a
period of at least 60 months starting
from the month benefits are received
from such expenditure. (Sec. 34 I [1
and 2], NIRC)
Non-deductible R&D expense:
1. Any expenditure for the acquisition or
improvement of land or for the
improvement of property to be used in
connection
with
research
and
development subject to depreciation
and depletion; and
2. Any expenditure paid or incurred for
the purpose of ascertaining the
existence, location, extent or quality of
any deposit of ore or other mineral
including oil or gas. (Sec. 34 I [3],
NIRC)

J.

Limitations:
a. For individuals - 10% of taxable
income before contributions;
b. For corporations - 5% of taxable
income before contributions. (Sec.
34 H [1], NIRC)

ACADEMICS COMMITTEE

Pension trust contributions


Applicable only to the employer on
account of its contribution to a private
pension plan for the benefit of its
employees.
Requisites for deductibility:
i. The employer must have established
a Pension or retirement plan to

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PRE-WEEK REVIEWER 2015


LAW ON TAXATION

ii.
iii.
iv.

v.
vi.

provide
for
the
payment
of
reasonable
pensions
to
his
employees
It must be Funded by the employer
The pension plan is Reasonable and
actuarially sound
The deduction is Apportioned in
equal parts over a period of 10
consecutive years beginning with the
year in which the transfer or
payment is made
The payment has Not yet been
allowed as a deduction
The amount contributed must no
longer be subject to the Control and
disposition of the employer

ordinary course of his trade or


business, or
c. property used in the trade or
business (e.g.
buildings
and/or
improvements), of a character which
is subject to the allowance for
depreciation provided in Subsection
(F) of Section 34; or
d. real property used in trade or business
of the taxpayer.
XPN: Real properties acquired by banks
through foreclosure sales are considered
as their ordinary assets.
However,
banks shall not be considered as
habitually engaged in the real estate
business for purposes of determining the
applicable rate of withholding tax imposed
under
Sec.
2.57.2(J)
of
Revenue
Regulations No. 2-98, as amended.

Income from pension plan


a. Not taxable to the employees
b. If a portion of the funds is reverted
back to the employer, said fund
forms part of the income of the
employer during the taxable year of
reversion

Q: May capital asset be reclassified as


ordinary asset?
A: Yes, property initially classified as
capital asset may thereafter be treated as
an ordinary asset if a combination of the
factors indubitably tends to show that the
activity was in furtherance of or in the
course of the taxpayers trade or business.

Deductible Payments to pension


trusts:
a. Employers current liability
amount contributed during the
taxable year shall be treated as an
ordinary and necessary expense
b. Employers liability for past
services 1/10 of the reasonable
amount paid to cover pension
liability applicable to the preceding
10 years
OPTIONAL STANDARD DEDUCTION
TAXPAYERS RAT
BASIS
E
INDIVIDUAL
40%
Gross
sales
or
gross
receipts
CORPORATIO 40%
Gross income (Gross Sales
N
less Cost of Sales)
NON RESIDENT TAXPAYERS
ALLOWED TO USE OSD.

ARE

NOT

Note: The taxpayer must signify his intention


to avail of the OSD in his income tax return
which
Shall be irrevocable for he taxable year for
which the return is made.
CAPITAL GAINS TAXATION
Types of properties
1. Ordinary assets shall refer to all
properties specifically excluded from the
definition of capital assets under Sec.
39(A)(1) of the Code, namely:
a. stock in trade of the taxpayer or
other property of a kind which would
properly be included in the inventory
of the taxpayer if on hand at the
close of the taxable year, or
b. property held by the taxpayer
primarily for sale to customers in the

NOTE: Properties classified as ordinary


assets for being used in business by a
taxpayer engaged in business other than
real estate business are automatically
converted into capital assets upon
showing of proof that the same have not
been used in business for more than two
(2) years prior to the consummation of the
taxable
transactions
involving
said
properties. (Rev. 7-2003)
2. Capital assets - shall refer to all
properties held by a taxpayer, whether or
not connected with his trade or business,
and which are not included among those
considered as ordinary assets under Sec.
39(A)(1) of the Code.
Actual gain v. presumed gain
Actual Gain
Presumed Gain
The excess of the The gain presumed
selling price over to
have
been
the
cost
of realized from the
property, whether sale or exchange or
ordinary or capital other disposition of
assets
not capital assets (real
otherwise subject property) located in
to 6% CGT.
the
Philippines
which is subject to
capital gains tax of
6% based on the
gross selling price
or
zonal
value/current
fair
market
value,

ACADEMICS COMMITTEE

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LAW ON TAXATION
whichever
higher.

is

TAXATION OF GAINS DERIVED FROM


SALE,
EXCHANGE
OR
OTHER
DISPOSITION
OF
REAL
PROPERTY
CLASSIFIED AS CAPITAL ASSETS THAT
ARE LOCATED IN THE PHILIPPINES
By:
1.
2.
3.
4.
5.

Individual Citizen
Resident Alien
NRA-ETB
NRA-NeTB
Special Aliens:

Note: if sold to the government, the


corporation has no option to choose between
the two alternatives.
By Foreign Corporation, (resident or nonresident)
To be taxed as if the gains are from ordinary
assets. Rationale: No provisions under Sec. 28
C (rates on income tax on foreign corporation
similar to Sec. 27 D5.
EXEMPTIONS
TO
CAPITAL
GAINS
TAXATION OF REAL PROPERTY: Sale of
Principal Residence

Taxation: 6% final tax imposed upon


presumed capital gains which is the actual
selling price, current fair market value in the
BIR
zonal
valuation
or
provincial/city
assessors value, whichever is HIGHER.
Note: The seller is the one who is liable to pay
the CGT.
IF SOLD TO THE GOVERNMENT or any
political subdivisions or GOCC,
The taxpayer has the option to choose
between:
1.) The 6% final tax on presumed gain;
OR
2.) Rates for Ordinary Income
By : Domestic Corporations:
Same as to rule for an individual (6% final tax
on presumed capital gains). However, only
LANDS & BUILDINGS are subject to capital
gains taxation.
All other capital assets that are real property
are treated for tax purposes as ordinary
assets.
The National Internal Revenue Code of 1997
treats the sale of land and buildings, and the
sale
of
machineries
and
equipment,
differently.
Domestic
corporations
are
imposed a 6% capital gains tax only on the
presumed gain realized from the sale of lands
and/or buildings. The National Internal
Revenue Code of 1997 does not impose the
6% capital gains tax on the gains realized
from the sale of machineries and equipment.
Therefore, only the presumed gain from the
sale of corporations land and/or building may
be subjected to the 6% capital gains tax. The
income from the sale of a corporations
machineries and equipment is subject to the
provisions on normal corporate income tax.
(SMI-ED Philippines Technology, Inc., v.
Commissioner of Internal Revenue, G.R. No.
175410, November 12, 2014)

Presumed gains realized from disposition of


their PRINCIPAL RESIDENCE by natural
persons, provided:
a. The proceeds of which are fully utilized
in acquiring/constructing a new principal
residence
b. The historical cost/adjusted basis of the
real property sold shall be carried over
to the new principal residence built or
acquired.
c. The BIR shall have been notified by the
taxpayer within 30 days from date of
sale or disposition.
d. Such exemption can only be availed of
once every 10 years.
e. If there is no full utilization of the
proceeds, the portion of the gains
presumed to have been realized shall be
subject to CGT.
Note:
This exemption applies to all individual
persons, citizens or alien, provided they
are residents. It is not applicable to
estate or trust and to non-residents.
IN FORECLOSURE OF PROPERTY:
CGT shall not be paid unless there is no
redemption made within the redemption
period, if such exist.
Sale made by REAL ESTATE DEVELOPER,
LESSOR OR those engaged in the REAL
ESTATE BUSINESS is not subject to CGT but to
Ordinary Income tax.
CGT IS APPLICABLE IN PACTO DE RETRO
PAYMENT, IN KIND IS COVERED by OTHER
DISPOSITION
SHARES OF STOCKS NOT traded in the
stock exchange
Subject to 5% on net capital gains not over
100,000
And 10% for any amount in excess of
100,000.
All of the transactions during the taxable year
shall be consolidated; hence, the totality of
transactions is applicable.

ACADEMICS COMMITTEE

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LAW ON TAXATION
Shares of Stock Listed and Traded
through the Local Stock Exchange other
than the sale by a dealer of securities
Shall be subject to a stock transaction tax at
the rate of 1/2 of 1% based on gross
selling price or gross value in money
which shall be assumed and paid by the seller
or transferor through the remittance of the
stock transaction tax by the seller or
transferors broker.
Gross selling price - the total amount of
money or its equivalent which the purchaser
pays the seller as consideration for the shares
of stock.
OTHER PERSONAL PROPERTY classified
as Capital Assets
Capital gains are included in gross income for
income tax purposes.
Capital gains are reported in the income tax
return as gross income for income tax
purposes.
The gains or losses shall be subject to holding
period(not applicable to corporations), after
which the net gain is to be included as part of
the ordinary income to be reported in the
income tax return and subjected to scheduler
tax rate.
In the case of a taxpayer other than a
corporation, the holding period shall be
taken into account for the taxation of other
personal property (aside from real property
and shares of stocks), the gain or loss shall be
recognized in the following percentages of
gain or loss:
1. 100% if the capital asset has been held
for more than 12months; and
2. 50% if the capital asset has been held
for more than 12 months.

NET CAPITAL
LOSS CARRY
OVER (NELCO)

As to source
Arises from capital
transactions
meaning involving
capital asset

Note: Rules with regard to NELCO.


1. NELCO is allowed only to individuals,
including estates and trusts.
2. The net loss carry-over shall not exceed the
net income for the year sustained and is
deductible only for the succeeding year.
3. The capital assets must not be real property
or stocks listed and traded in the stock
exchange.
4. Capital asset must be held for not more
than 12 months.

Arises from ordinary


transactions
meaning involving
ordinary asset

As to who can avail


Can be availed of
by
individual
taxpayer only

Can be availed of
by individual and
corporate taxpayer

As to period of carry-over
May be carried
over only in the
next
succeeding
taxable year

Allows carry-over of
operating loss in 3
succeeding taxable
years or in case of
mining companies 5
years

Republic Act No.10653 as clarified by


Revenue Regulation 3-2015
The threshold amount of P82,000 shall
apply to the 13th-month pay and other
benefits which covers only the following:
1. Thirteenth-month pay equivalent to
the mandatory one month basic salary
of officials and employees of the
government, (whether national or
local), including government-owned or
-controlled corporations, and or private
offices received after the 12th-month
pay; and
2. Other benefits, such as Christmas
bonus, productivity-incentive bonus,
loyalty award, gifts in cash or in kind
and other benefits of similar nature
actually received by officials and
employees of both government and
private offices.

NET LOSS CARRY OVER


If any taxpayer, other than a corporation,
sustains in any taxable year a net capital
loss, such loss (in an amount not in excess of
the net income for such year) shall be treated
in the succeeding taxable year as a loss from
the sale or exchange of a capital asset held
for not more than 12 months. (Sec. 39 (D),
NIRC)

NET OPERATING
LOSS CARRY OVER
(NOLCO)

In no case shall the exemption apply to other


compensation received by an employee under
an employer employee relationship, such as
basic salary and other allowances.
What kinds of income-earners
included under the exemption?

are

The exclusion from gross income is not


applicable to self-employed individuals and
income generated from business
What is the cover period of the new
amendment?
The amount of P82,000.00 shall apply to the
13th month pay and other benefits paid or

ACADEMICS COMMITTEE

20

PRE-WEEK REVIEWER 2015


LAW ON TAXATION
accrued beginning January 1, 2015. For
benefits received last year, the applicable
threshold amount would still be the old
amount of P30,000.
What happens if the employee works for
another company within the year?
If the employee whose employment was
terminated is subsequently employed by
another employer before the close of the
calendar year, the employee is required to
furnish the new employer the accomplished
BIR form issued by the previous employer for

the appropriate withholding tax computation


of the employees regular compensation and
subsequent year-end adjustment, if any.
Does Congress need to pass a new law
to increase the cap again?
The law provides that the President has the
authority to adjust the threshold amount
every three years stated to its present value
using the Consumer Price Index (CPI) to be
published by the National Statistics Office
(NSO).

ACADEMICS COMMITTEE

21

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