TAXATION REVIEW

Jisryl H. Raz, CPA

Reviewer
 GOVERNMENT

POLICE TAXATION EMINENT

POWER POWER DOMAIN
POWER
Comparisons
POLICE TAXATION EMINENT DOMAIN
Power to MAKE and Power to ENFORCE Power to TAKE private
IMPLEMENT laws for the contribution to raise property for public use
general welfare government funds with just compensation
Broader in application Plenary, comprehensive, Merely to take private
and supreme BUT NOT property
ABSOLUTE
Property is taken or Money is taken to support Property is taken for
destroyed to promote the government public use
general welfare
Cannot be delegated, if Can be expressly Can be expressly
delegated, it should be to delegated delegated
the legislative department
of the LGU (e.g. to make
ordinances)
Comparisons
POLICE TAXATION EMINENT DOMAIN
Limited to the cost of Generally, NO limit on No imposition as to
regulation, license and amount amount, instead, it is the
other necessary expense Government which is to
compensate the property
taken.
Relatively FREE from Subject to Constitutional Superior to and may
Constitutional limitations and Inherent limitations override Constitutional
impairment provision
Superior to Non- Inferior to Non-Impairment
Impairment Clause Clause
TAXATION: Concepts

Purpose To raise revenue

To regulate (inflation, economic and social stability,
social control, etc.)
To compensate the benefits provided by the
government to the people

Basis Principle of Necessity

Reciprocal Duties
Objects Persons: natural (individual) and juridical (partnership
and corporations)
Properties: Tangible and Intangible, Real and Personal
Excise : Transaction (VAT, OPTs), Privilege and Right
(Donation, Estate, Excise taxes, etc.) and Interest
TAXATION: Concepts
LIMITATIONS TO TAXATION POWER
Inherent Limitations (PENTI)
Public Purpose
Exemption of the government
Non-delegation of taxation power
Territoriality
International Comity
Constitutional Limitations (DEN PURE)
Due process of law
Equal protection of law
Non-impairment of contracts
Non-imprisonment for non-payment of
Poll tax
Uniformity and equality
Exemption from Real property taxes of
charitable institutions, churches,
parsonages, mosques, and non-profit
cemeteries, etc.
Exemption from income taxes, real
estate taxes and custom duties of non-
stock, non-profit educational
institutions, subject to 30% rule.
TAXATION SYSTEM
Protection

CONFLICT
GOVERNMENT --------------- PEOPLE
REMEDIES

- Computation of Taxes
- Filing of Returns
- Assessment and
Collection

Tax
 NATIONAL INTERNAL REVENUE TAXES

Income Transfer Business

Taxes Taxes Taxes

Tabular
Gratuitous Onerous
(Individual)

Mortis
Corporate
Causa VAT

Passive Gifts Percentage

Taxes

CGT
Excise
Income Taxation: Individual
Gross Income Computation
Classification Components of Gross Income Applicable Tax Rates
of Individuals
Resident and Compensation, Business, Passive Incomes not Tabular
Citizen subjected to FWT and Capital Gains not Final taxes
subjected to CGT, wherever may be derived Capital Gains Taxes
Non-resident Same items above however only those Tabular
Citizen derived within. Moreover, interest income Final taxes
from FCDS shall be exempted from tax. Capital Gains Taxes
Resident Alien Same above, except only those derived within Tabular
the Philippines. Final taxes
Capital Gains Taxes
Non-resident Same items above however only those Tabular
Alien ETB derived within. Moreover, interest income Final taxes
from FCDS shall be exempted from tax. Capital Gains Taxes
Non-resident All incomes derived within shall be subjected 25% of the Gross
Alien NETB to one tax rate only, except those capital Income
gains. Capital Gains taxes
Income Taxation: Individual
Exclusions from Gross Income
Holiday pay, Overtime pay, Night shift differential, and Hazard pay
(HONsHa) earned by MWE
13th Month Pay, Bonuses and Other benefits (de minimis) not
exceeding PhP 82,000.
De Minimis not exceeding their statutory limits
Proceeds of life insurance paid to the heirs upon death of the
insured
Retirement benefits under RA 7641
Separation pay paid to the employee for causes beyond the control
of said employee
SSS, GSIS, PhilHealth and Pag-IbIG contributions and union dues.
Etc.
Income Taxation: Individual
Allowable Deductions
General Rule: Expenses to be deductible should be
ORDINARY and NECESSARY for the business, and
must be SUBSTANTIATED.
Exception: Optional Standard deduction may be
claimed without substantiation. Take note:
1. RESIDENTS (RC and RA) and CITIZENS (RC and
NRC) can claim OSD. NRAETB and NRANETB
cannot claim OSD.
2. DOMESTIC and RESIDENT FOREIGN
corporations can claim OSD.
Itemized Deductions:
General Business Expenses (salaries and wages, supplies and
repairs, operating expenses, rentals, advertising, travelling expense,
insurance premiums against fire, EAR)
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion
Charitable and other contribution
Research and Development
Pension Trust
Premiums payments on health and/or hospitalization insurance
General Business Expenses
Salaries: all remuneration, including wages and
other forms of compensation for services actually
rendered plus the grossed-up monetary value of
fringe benefits granted by the employer to the
employee. Provided, a withholding tax should be
imposed (FBT or Wtax) so that the salary may be
claimed as deduction.
Materials and Supplies: cost of these expense
when actually consumed.
Travelling: any expenses incurred for
transportation and allowances provided they are
incurred solely for carrying on the trade,
business or profession.
 Rent Expense

LESSEE LESSOR

ACCRUAL BASIS Rent is deductible when Rent is taxable when

INCURRED. RECEIVED.
CASH BASIS Rent is deductible when Rent is taxable when
INCURRED and PAID.* RECEIVED.**

*In cash basis, advance payments are not

deductible unless incurred.
**In cash basis, advance payments constitute a
taxable income the year received, irrespective of
the period earned.
 Representation: entertainment, amusement
and recreation (EAR)
Subject to a limit of % of net sales if the taxpayer
is engaged in selling of goods; and 1% of the net
revenue if the taxpayer is engaged in selling
services.
If the taxpayer is engaged in both selling of goods
and services, the total actual EAR shall be
allocated using the net sales or net revenue times
the total of net sales and net revenue subject to
the limits provided above.
 Interest: must meet the requisites for
deductibility before can be claimed as
deduction
Subject to a limit, that is total interest less 33% of
total interest income (grossed-up) subjected to
final tax.
The interest shall be deductible in full only if (1)
there is no interest income subjected to final tax
(20%) or (2) the interest expense is paid to the
government.
 Taxes: may be claimed as deduction if they are
not national Internal revenue taxes such as:
Income
transfer taxes
claimed as tax credit
percentage tax other than the 3% PT
VAT
Taxes not related to trade
Special assessment tax, surcharges and
compromise penalty
 Bad Debts: must be ascertained worthless
(actual not estimated) and the corresponding
receivable should have been written off within
the taxable year.
Amount deductible should be the actual amount
EXCLUSIVE of interest.
If the amount claimed as bad debt exceeds the
current income, the excess loss shall be carried
over for the next three years.
If the amount is recovered or received
subsequently, the amount recovered shall be
taxable in full in the year it was recovered.
 Depreciation: must be based on a reasonable
allocation of the cost of capital asset using the
methods recommended by the CIR.
If the asset is used in PETROLEUM Operations,
properties DIRECTLY used in the production of
petroleum shall be depreciated over 10 years or
shorter as provided by the CIR. All properties not
directly used in the production of petroleum shall be
depreciated under straight-line method over 5 years.
If the asset is used in MINING Operations, ALL
properties shall be depreciated:
a. At a normal rate if the expected life is not more than
10 years.
b. Over years between 5 and the expected life if the
expected life is more than 10.
 Exploration and Development Expenditures:
INTANGIBLE exploration, drilling and development
allowed as deduction in computing taxable
income during the year shall not be considered in
computing the adjusted cost basis.
Exploration and development costs, OTHER than
the intangible exploration, drilling and
development may be:
Computed as part of the adjusted basis for depletion
(COST OF GOODS SOLD); or
Deduction to compute taxable income from mining
operations (OPERATING EXPENSE)
 If the taxpayer choose the second option, it
shall be subject to the following limits:
Amount claimed as deduction for the year shall
NOT exceed 25% of the net income from mining
operations without the benefit of any tax
incentives under existing laws.
The total actual amount of exploration and
development costs less the 25% limit above shall
be carried through succeeding years until fully
deducted.
 Capital Expenses of a PEI: maybe capitalized
subject to depreciation or deducted at full.
Contributions: Maybe subjected to limitations or
deducted at full:
Charitable contributions made by an individual shall
be subject to a limit of 10% of his taxable income
before deducting the contributions.
Charitable contributions made by a corporation shall
be subject to a limit of 5% of its taxable income before
deducting the contributions.
Charitable contributions made by either of the two
taxpayers above to the government for the use of its
priority program shall be deductible at full. Priority
programs are: education, health, youth and sports
development, human settlements, science and culture
and economic development.
Income Taxation: Individual
Personal Exemptions
Personal exemptions are only given to individuals
whether RC, NRC, RA and NRAETB subject to
reciprocity rule.
RC, NRC and RA may claim a basic personal
exemption of PhP 50,000 regardless of the status.
NRAETB can only claim basic personal exemption
if there is a reciprocity between Philippine laws
and the laws of his country where he resides.
However, the BPE cannot exceed Php 50,000, but
may be lower instead.
 RC, NRC and RA may claim an additional
personal exemption of Php 25,000 for every
qualified dependent CHILD, but not exceeding
four children, PROVIDED that the child is:
Not more than 21 years old
Living with the taxpayer
Depending upon the taxpayer at least plus 1 for
his living.

NRAETB CANNOT claim additional personal

exemption.
Income Taxation: Individual
SSS, PhilHealth, Pag-IBIG & PHHI
Aside from the allowable deductions and
personal exemptions, an individual taxpayer
may also deduct from his gross income SSS,
Philhealth, Pag-IBIG and PHHI contributions.
Provided, that in the case of PHHI, the total
family income shall not exceed PhP 250,000
per year and the total claimable amount shall
not exceed PhP 2,400 per year.
Income Taxation: Individual
Special Taxpayers
Any Filipino or Foreign individual employed,
either holding a managerial or supervisory
position, or a rank-and-file, in any of the
following:
a. Offshore Banking Units (OBUs)
b. Regional Area Headquarter or Regional
Operating Headquarter of a multinational
company
c. Petroleum contractor or subcontractor
Income Taxation: Individual
Special Taxpayers
A special taxpayer, generally, shall be taxed at 15% of
his total GROSS COMPENSATION INCOME. Thus, he
cannot claim personal exemptions. However:
a. If a special taxpayer is a Filipino, he may opt to be
taxed at 15% final tax or using the tabular tax if his
gross compensation income is at least P 975,000.
b. Aliens are only taxed at 15%.
c. All other income
d. shall be taxed according to pertinent provisions of
NIRC.
Income Taxation: Net Operating Loss
Carry-Over
When the total allowable deductions for any
taxable year EXCEEDS the total gross income, the
net loss shall be carried over to the next three (3)
years following the year when the net loss is
incurred.
Provided, that for mines other than oil and gas
wells, any net operating loss incurred in any of
the first ten (10) years may be carried over as
deduction from taxable income for the next five
(5) years immediately following such year when
the loss is incurred.
Income Taxation: Optional Standard
Deduction
Individuals engaged in business or practice of profession,
in lieu of itemized deductions, may opt to claim OSD
which is 40% of his gross sales or gross receipts (actual
discounts and actual sales returns being deducted in
determining gross sales or gross receipts). This option is
NOT available to non-resident aliens.

Corporations may also claim OSD which is 40% of their

gross income (net sales less cost of goods) in lieu of
itemized deduction.
 Pro forma Computation
RC NRC RA NRAETB NRANETB
Gross Income:
Business Income
Compensation Income
Passive Income not subjected to FT
Capital gains net of Capital losses,
not subjected to CGT
Total Gross Income GI x 25%
Less: Allowable Deductions
Personal Exemptions Only BPE,
subject to
Reciprocity
SSS, GSIS, PhilHealth, PHHI, etc.
Income Taxation: Individual
Fringe Benefits
If given to rank-and-file employee, fringe benefits shall constitute
gross income subject to tabular tax rate (5-32%) and PhP 82,000
limit. Moreover, it shall be claimed as a deductible expense
INCLUDED in the salary on the part of the employer.
If given to an employee holding a managerial or supervisory
position, it shall be subject to fringe benefit tax, as follows:
RC, NRC, RA, NRAETB 32%
NRANETB 25%
Special Taxpayer
a. OBUs 15%
b. ROH and RAH of a 15%
multinational company
c. Petroleum contractors and 15%
subcontractors
Summary: Monetary Valuation of
Fringe Benefits
FRINGE BENEFITS GIVEN MONETARY VALUE
Real Property, where the ownership is The total FMV or cost exclusive of
transferred to the employee interest, whichever is applicable.
Real Property, where the ownership is FMV or cost, whichever is applicable,
maintained by the employer (USUFRUCT) divided by 20 years divided by 2
Personal Property, where the ownership is The total FMV or cost exclusive of
transferred to the employee interest, whichever is applicable.
Personal property, where the ownership is FMV or cost, whichever is applicable,
maintained by the employer (USUFRUCT) divided by 5 years divided by 2
Real or Personal property, where the The actual cash given
purchase price is partially shouldered by
the employer
Yacht FMV or cost, whichever is applicable,
divided by 20 years
Aircraft not subject to FBT
Tax Treatment and Computation
To Managerial and
To Rank-and-File
Supervisory

De Minimis subject to De Minimis subject to

statutory limits statutory limits
Add: Add:
Benefits other than Benefits other than
de minimis de minimis

Total Benefits shall be subject to Total Benefits shall be grossed-up

PhP 82,000 limit according to classification (32%, 25% or

15%).
Income Taxation: Corporation
Shall include partnerships, except GPP, domestic and
foreign corporations, joint ventures, joint accounts, stock
corporations and insurance companies.
In the computation of GROSS INCOME, the same rule shall
be observed as in the case of an individual taxpayer, except
that a corporation has no compensation income and does
not have winnings and prizes.
In the computation of ALLOWABLE DEDUCTIONS, the same
ruling shall be observed as in the case of an individual,
except those specific items which has a different statutory
ceilings.
Shall be taxed at 30%.
No Personal exemptions.
Income Taxation: Minimum Corporate
Income Tax
Domestic and resident foreign corporations
shall be taxed at 2% (MCIT) based on their
gross income (net sales minus cost of goods
sold) if:
a. It has been in the fourth year of operation;
and
b. It incurred a zero taxable income or net loss;
or
c. The normal tax is lesser than the MCIT.
Income Taxation: Minimum Corporate
Income Tax
The MCIT shall be carried over and credited
against the normal tax for the next three (3)
years following the taxable year where the
corporation is taxed at MCIT.
Provided, that if the corporation is still taxed at
MCIT following such year, the previous MCIT shall
be DEFERRED and cannot be credited against the
years MCIT.
The three-year carry-over provision shall be
counted continually regardless whether the
corporation pays MCIT or NCIT.
Income Taxation: Dealings in Property
ORDINARY ASSETS CAPITAL ASSETS
1. Held for trade (stocks, inventories, etc.) All items not included as ordinary assets
shall be construed as capital assets.
2. Real properties acquired by real estate
dealers or developers (for resale)
3. Properties USED in business subject to
DEPRECIATION
4. Real Properties USED in trade or
business (investment property for lease)
Income Taxation: Dealings in Property
ORDINARY ASSETS
1. Sale of ordinary asset may arise
to either an ordinary gain or an
ordinary loss which SHALL BE
included or deductible from the
GROSS INCOME.
2. Excess of ordinary loss SHALL BE
deductible against CAPITAL GAINS
CAPITAL ASSETS
1. Sale of capital asset may arise to either capital
gain or capital loss. HOWEVER, in case of REAL
PROPERTY HELD AS CAPITAL ASSET, the selling
price of such or the FMV whichever is higher
shall be subject to 6% CGT. Personal properties
held as capital asset cannot be subjected to CGT.
2. Capital gains or capital losses SHALL BE
subject to holding period if held as in case of an
individual taxpayer. NO HOLDING PERIOD shall
be available for a corporation.
3. Excess capital gains over capital losses SHALL
BE INCLUDED in the computation of gross
income.
4. Excess capital losses over capital gains
CANNOT BE deducted from ordinary gains.
Comparison
ORDINARY ASSETS CAPITAL ASSETS

Real properties held

ORDINARY GAINS CAPITAL GAINS
as capital asset, 6%
LESS
Stocks not traded
ORDINARY LOSSES CAPITAL LOSSES shall be subject to
5-10% CGT
Net OG is added to Gross Income
Net OL is deducted from CG
Net CG is added to Gross Income
Net CL cannot be deducted from OG
Income Taxation: Passive Income
Those derived outside the Philippines shall
not be subjected to Final Tax, but included in
the computation of Gross income.
Those derived within the Philippines shall be
subjected to Final Tax as follows:
 PASSIVE INCOME APPLICABLE FINAL TAX RATE
Interest, Royalties, Prizes /Winnings, EXCEPT RC, NRC 20%
PRIZES not exceeding PhP 10,000 RA 20%
NRAETB 20%
NRANETB 25%
Royalties- books, literary and musical RC, NRC 10%
RA 10%
NRAETB 10%
NRANETB 25%
Interest from FCDS RC, RA 7.5%
NRC, NRA - exempt-
Dividends
a. Cash and Property Dividends, if received by an RC, NRC, RA 10%
individual from a DOMESTIC CORP. NRAETB 20%
NRANETB 25%

If received by an individual from FOREIGN CORP. RC, NRC, RA, NRAETB 5-32%
If received by DOMESTIC from FOREIGN CORP. NRANETB 25%
30%
If received by DOMESTIC from DOMESTIC
- exempt -
If given by a DOMESTIC to:
a. RFC -exempt-
b. NRFC 15% or 30%
Winnings in PCSO Lotto -exempt-
Capital Gains on Stocks, traded of 1% of the selling price
Capital Gains on Stocks, not traded 5-10%
Stock Dividends -exempt-
Interest on a any transactions other than Added to gross income
deposit on banks
Gratuitous Transfers: Estate Taxation
Gross Estate
RC NRC RA NRA