Professional Documents
Culture Documents
LAW ON TAXATION
INCOME TAX
RA 8294, Tax Reform Act of 1997 (NIRC)
Amended by RA. 9504, RA No. 10653
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
ACADEMICS COMMITTEE
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
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.
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.
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
ACADEMICS COMMITTEE
ACADEMICS COMMITTEE
ACADEMICS COMMITTEE
iii.
ACADEMICS COMMITTEE
supervisory
employees
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.
ACADEMICS COMMITTEE
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.
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
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
and
ACADEMICS COMMITTEE
P
It partakes
family expe
To recover
expenses p
year
Are grant
except
1. NRA
resp
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
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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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;
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
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;
ACADEMICS COMMITTEE
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ii.
iii.
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
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.
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
12
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)
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
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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)
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
14
Losses
on
wash sales of
stocks/securit
ies
Non-deductible
If
worthless securities are
ordinary assets
G.R.
Losses from wash
sale are not deductible
ACADEMICS COMMITTEE
15
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
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.
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.
ACADEMICS COMMITTEE
16
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
17
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
ARE
NOT
ACADEMICS COMMITTEE
18
is
Individual Citizen
Resident Alien
NRA-ETB
NRA-NeTB
Special Aliens:
ACADEMICS COMMITTEE
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NET CAPITAL
LOSS CARRY
OVER (NELCO)
As to source
Arises from capital
transactions
meaning involving
capital asset
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
NET OPERATING
LOSS CARRY OVER
(NOLCO)
are
ACADEMICS COMMITTEE
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ACADEMICS COMMITTEE
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