A2015 - Salvador - Tax 1 Reviewer
A2015 - Salvador - Tax 1 Reviewer
TAX 1 REVIEWER
*Not enforced
PASSIVE INCOME RC/ NRC/ RA NRA ETB NRA NETB DC RFC NRFC
Interest from any 20% -- -- 20% 20%
bank deposit and (Normal tax (25%)
other monetary rates)
benefit from deposit
2.Cinematograph
ic films
Prizes and Winnings 20% 20% -- --
Residence principle
A. Rates of Income on Individual Citizen and Individual Resident Alien of the
o Resident alien - income from sources within the Philippines
PHL
Residence is within the Philippines but is not a citizen. He
isn’t a mere transient or sojourner is a resident of the
Philippines for income tax purposes Section 24. Income Tax Rates
1. Income Tax is imposed on:
Source principle a. Resident Citizens – on all taxable income derived for each taxable year
o Alien - income from sources within the Philippines from all sources within AND without the PHL
Transient - This excludes (XPN): Passive income (subsection B), capital gains from
o Non-resident alien - income from sources within the Philippines sales of shares of stock not traded in Stock Exchange (C), and capital
Not a resident of the Philippines and not a citizen thereof gains from sale of real property (D)
Engaged in trade or business in the Philippines –
aggregate period of stay in the Philippines is
more than 180 days during any calendar year Who are citizens (RR2 Sec3):
o Taxed on his income from sources 1. Citizens of PHL at the time of adoption of the 1987 Consti
within the Philippines at the graduated 2. Those whose fathers and mothers are citizens of the PHL
income tax rates of 5%-32% 3. Those born before the adoption of the 1973 Consti became effective AND who
o Passive investment incomes shall be elected PHL citizenship upon reaching majority
subject to 20% final tax 4. Naturalized according to law
Not engaged in trade or business in the
Philippines depending on the length of his stay 1985 BIR decision
in the Philippines Who is a resident: Stay must be two years or more
o His compensation, income, business or
professional income, capital gain, Section 24. Income Tax Rates
passive investment income and other 1. Income Tax is imposed on:
income from sources within the b. Non-resident citizens (including OFWs) – all income derived for each
Philippines is taxed at the flat rate of taxable year from all sources WITHIN the PHL only (XPN: B, C, D)
25%
o Capital gains from sale or exchange of
shares of stocks in a domestic Who are non-residents (Sec22)
corporation and from real property
1. A citizen who establishes to the satisfaction of the Commissioner the fact of his
shall be subject to capital gains tax or
physical presence abroad with a definite intention to reside therein
stick transaction tax
2. A citizen of the PHL who leaves the PHL during the taxable year to reside
Corporations
o Domestic - worldwide income and income from sources within the 2
Those underlined are the kind of taxpayers
Philippines 3
(Cielo’s Part)
o Foreign - income from sources within the Philippines
2. Cash and/ or property dividends final tax of 10% from January 1, 2000
Other provisos:
From Jan. 1, 1998 – 6%; From Jan. 1, 1999 – 8%
If earning forms part of income as of Dec. 31, 1997, this is EXEMPT.
Married individuals shall compute their individual income tax
SEPARATELY. If the source of income cannot be identified
between them, it shall be divided equally between the spouses. NB: Dividend is a corporate profit set aside, declared, and ordered by the directors
to be paid to stockholders on demand or at fixed time. Until they are declared, they
Minimum wage earners shall be EXEMPT from paying income tax.
belong to the corp and liable for the payment of its debts. (Cf stock dividend –
This exemption includes the holiday pay, OT, night shift
dividend payable in reserve or increase of additional stock of a corp as evidenced by
differential.
a certificate of stock, not cash)
1. In General
e. Capital Gains from sale of Shares of Stock not traded in the stock - Who is a NRA? A NRA shall come to PHL and stay for an aggregate
exchange – this applies to NET capital gains from the sale, barter, period of more than 180 days during any calendar year
exchange or other disposition of shares of stock in a domestic corp - RR2 Sec6: An alien who acquired residence in PHL continues to be a
which are NOT disposed thru the stock exchange resident until he abandons his home and actually depart from PHL
- RR2 Sec8: Engaged in trade or business means performance of
If not over 100k 5% personal services within PHL and implies a regular place for
On any amount in excess of 100k 10% transactions and does not include casual places where transactions are
NB: NET capital gains is used here, hence, the capital losses may be deducted. made
Different rules govern if stocks are traded in the stock exchange.
2. Cash and or Property dividends / Interests / Royalties / Prizes 20%
This applies to:
a. Dividends from a domestic corp, joint stock company, insurance or
f. Capital gains from sale of Real Property final tax of 6% based mutual fund company, regional operating headquarters of a
on gross selling price (GSP) or fair market value (FMV) whichever multinational corp (MNC)
is higher b. Share in the distributable net income of a partnership (except
- this applies to properties located in PHL, for disposition/ sale general professional partnership)
(including pacto de retro or other conditional sales) made by c. Joint account, joint venture taxable as a corp or association
individuals (including estates and trusts) d. Interests
- If sale is to the gov’t or other political subdivisions, agencies, GOCCs e. Royalties of any form (except for books and other literary works,
the taxpayer may choose to use the graduated tax schedule (in A.2) musical composition which will be taxed for 10%)
f. Prizes (except those 10k or less)
XPN: Capital gains from sale of principal residence is EXEMPT from tax IF: g. Other winnings (except PCSO and Lotto)
1. Made by natural persons and the proceeds is fully utilized in acquiring XPN:
or constructing a new principal residence a. Cinematographic films and similar works – Sec. 28
2. Acquisition/construction made within 18 calendar months from the b. Long term deposit and investments – EXEMPT (unless pre-
date of sale or disposition terminated, see rules on Sec. 24)
3. Provided (PVD): the historical cost or adjusted basis of the real
property sold is carried over to the new principal residence 3. Capital gains for stocks not traded in the stock exchange and sale of
4. PVD: the CIR is notified within 30 days from sale thru a prescribed real property– same rules with Sec. 24
return of his intention to avail of the exemption
5. PVD: this exemption can be availed only once every 10 years B. Nonresident Alien NOT engaged in trade or business within PHL 25%
6. PVD: IF there is no full utilization of the proceeds, the remaining (uniform) tax rate for the entire income received from all sources within
portion will be subject to tax (again based on GSP/ FMV) PHL
- But for capital gains from sale of stocks and real property same with
NB: How to compute #6: Sec 24
Unutilized portion of GSP of old residence x GSP/FMV x 6%
GSP of old residence
C. (D/E) Special Aliens 15% for the gross income received as salaries, etc.
1. Aliens employed by regional or area headquarters and regional
H: The SC upheld the constitutionality of the law. The tax deduction scheme is not
meant to give the petitioners a full reimbursement of the discount, but it is a
sufficient form of just compensation. In any case, the State has a power to impose a
burden upon private establishments to partly subsidize the promotion of health and
welfare of a special group of citizens, in this case, the senior citizens.
a. In general
4
(Kaye’s Part)
14 | Chan, Gono, de Chavez, Manalo
Sec. 27 NIRC - Rates of Income tax on Domestic Corporations Resident A foreign corporation engaged Income from within the
Foreign in trade or business within the Philippines
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-
Philippines.
five percent (35%) is hereby imposed upon the taxable income derived during each
Example: Tiger Airways
taxable year from all sources within and without the Philippines by every
Non-resident A foreign corporation not Income from within the
corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
Foreign engaged in trade or business Philippines
corporation, organized in, or existing under the laws of the Philippines:
within the Philippines.
Provided, That effective January 1, 1998, the rate of income tax shall be thirty- Example: Cathay Pacific
four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be
Tax Regimes for Domestic and Resident Foreign Corporations:
thirty-two percent (32%).
1. Regular Corporate Income Tax (RCIT)
a. This is the general tax regime (sometimes called Normal Tax)
Sec 28 NIRC - Rates of Income Tax on Foreign Corporations. Tax Base Tax Rate
(A) Tax on Resident Foreign Corporations. Domestic Worldwide Income 35% - Nov 1, 2005
(1) In General. - Except as otherwise provided in this Code, a corporation to Dec 31, 2008
organized, authorized, or existing under the laws of any foreign country, Resident Foreign Income within PH 30% - January 1,
engaged in trade or business within the Philippines, shall be subject to an 2009 to present
income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the
Philippines:Provided, That effective January 1, 1998, the rate of income tax 2. Optional Gross Income Tax (GIT)
shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be a. Requisites:
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the i. Authorized by the President of the PH upon
rate shall be thirty-two percent (32%). xxx recommendation of the Sec of Finance
1. Conditions for grant of authority:
(B) Tax on Nonresident Foreign Corporation. a. Tax effort ratio of 20% of GNP
(1) In General. - Except as otherwise provided in this Code, a foreign b. Income tax collection/Total revenues =
corporation not engaged in trade or business in the Philippines shall pay a 40%
tax equal to thirty-five percent (35%) of the gross income received during c. VAT tax effort of 4% of GNP
each taxable year from all sources within the Philippines, such as interests, d. Consolidated Public Sector Financial
dividends, rents, royalties, salaries, premiums (except reinsurance Position/GNP=0.9%
premiums), annuities, emoluments or other fixed or determinable annual, ii. Corporation has the following ratio:
periodic or casual gains, profits and income, and capital gains, except capital 1. Cost of Sales/Gross Receipts = 55% (or more)
gains subject to tax under subparagraphs (C) and (d): Provided, That effective b. Once elected, irrevocable for 3 consecutive years
1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%); and, effective 3. Minimum Corporate Income Tax (MCIT)
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
Xxx 4. Tax on Passive Income of Domestic and RFCs:
Classification Definition Taxable Income Income Tax Base Proportion Rate
Domestic Created or organized in the Income from within and Interest (on any Capital employed in the 20% Final Tax
Philippines or under its laws without the Philippines currency or bank Philippines
Example: Philippine Airlines (worldwide) deposit and yield or
Where? Originating from the Philippines Where? Originating from the Philippines to the final destination
o Regardless of:
How? In a continuous and uninterrupted flight The place of sale OR
Payments of the passage or freight
documents
Conditions: Irrespective of:
o Place of payment of the ticket
or
o Passage document
Part of GPB when the ff. concurs: BOAC v. Commissioner
o Tickets revalidated, exchanged,
and/or indorsed to another Facts: British Overseas Airways Corporation (BOAC) is an offline international air
carrier. Since it was not granted a CPCN to operate in the Philippines, it did not carry
5
passengers and/or cargo to and from the Philippines. During the period covered by
(Kimmie’s Part)
17 | Chan, Gono, de Chavez, Manalo
the assessment, BOAC maintained a general sales agent in the Philippines not of a contract/charter for rent or hire relating to a particular airplane.
temporary character – this was responsible for selling BOAC tickets covering Originating from the Philippines
passengers and cargoes. Passengers, excess baggage, cargo, and/or mail ORIGINALLY COMMENCE their
flight from any Philippine port to any other port or point outside the Philippines
Held: BOAC is a foreign corporation doing business in the Philippines. The source of (IN OUT)
income is the property, activity, or service that produced the income. For the source Chartered flights originally commencing their flights from any Philippine port
of income to be considered as coming from the Philippines, it is sufficient that the to any foreign port (IN OUT)
income is derived from activity within the Philippines. In BOAC’s case, the sale of Chartered flights originally commencing their flight from any foreign port (OUT
tickets in the Philippines is the activity that produces the income. The tickets STAY > 48hrs prior to embarkation)
exchanged hands here and payments for fares were also made here in Philippines Whose stay is for MORE THAN 48 hours (x > 48 hrs.) prior to embarkation
currency. The Court ruled that the situs of the source of payments is the Philippines. EXCEPT where flight of airplane from same airline company failed to
The flow of wealth proceeded from and occurred within the Philippine territory, depart within 48 hrs. due to force majeure
enjoying the protection accorded by the Philippine government. A transportation Passenger, excess baggage, cargo, mail originally commencing flight from
ticket is not a mere piece of paper. When issued by a common carrier, it constitutes foreign port (OUT IN)
the contract between the ticket-holder and the carrier. The test of taxability is the Alights or discharged in any Philippine port
source, and the source of income is that activity which produced the income. The Boards or is loaded on another aircraft of same airline company
word “source” conveys one essential idea, that origin of the income is the General Rule: Flight from Philippines to any foreign port = considered NOT
Philippines. ORIGINATING from the Philippines
Exception: When intervening period between arrival and departure
RR 15-2002 (20 May 2002) Implementing Gross Philippine Billings Tax on EXCEEDS 48 hrs.
International Carriers Exception to exception: Failure to depart within 48 hours is due to reasons
Definition of Terms beyond his control (e.g. force majeure or when only next available flight
International air carrier leaves beyond 48 hours.
Foreign airline corporation doing business in the Philippines Condition: If the 2nd aircraft belongs to a different airline, flight from
Has landing rights in any Philippine port Philippines to any foreign port = considered ORIGINATING from the
To perform international air transportation services/activities or flight Philippines, regardless of intervening period between arrival and
operations departure from Philippines
Anywhere in the world Continuous and Uninterrupted Flight: Flight in carrier of SAME airline
Off-line carrier: An international air carrier having NO flight operations to and From moment a passenger, excess baggage, cargo, or mail is lifted from the
from the Philippines Philippines up to point of final destination
On-line carrier: An international air carrier having or maintaining flight operations When NOT continuous and uninterrupted: if transshipment takes place at any
to and from the Philippines port outside the Philippines or another aircraft belonging to a different airline
Off-line flights: Flight operations carried out or maintained by an international air Place of Final Destination: Place of final disembarkation designated or agreed
carrier between ports or points upon by the parties in a contract of air transportation
OUTSIDE the territorial jurisdiction of the Philippines Transient Passengers: Passenger who originated from outside the Philippines
Without touching a port or point in the Philippines towards a destination also outside the Philippines but stops in the Philippines for
EXCEPTION: when in distress or due to force majeure a period either:
On-line flights: Flight operations carried out or maintained by an international air For a period of either:
carrier between ports or points Less than 48 hours OR
IN the territorial jurisdiction of the Philippines and More than 48 hours, if delay is due to force majeure or reasons beyond his
Any port or point outside the Philippines control
Chartered flight: Flight operation which includes operations between ports or In BOTH cases, passenger boarded an airplane of same airline bound to
points in the Philippines (includes block charter) and ports and points outside the place of final destination
Philippines, placed under the custody and control of a charterer by a Foreign Airline Companies WITHOUT flights starting from or passing through the
6
Sec. 28(A)(3)(a) United Airline Inc. v. CIR
7
Sec. 118 (A)
19 | Chan, Gono, de Chavez, Manalo
the government owes him an amount equal to or greater than the tax being
Facts: United Airlines is a foreign corporation organized and existing under the "' collected. The collection of a tax cannot await the results of a lawsuit against the
laws of the State of Delaware, United States of America. It is licensed to establish and government.
operate a branch in the Philippines and to "open an office as an off-line carrier. The
SEC License of petitioner was amended, allowing it to act as an "on-line carrier of
persons, property and mail between the United States and the Philippines" so it RA 10378, (23 July 2012): Reciprocal Exemption for GPB Tax
discontinued its passenger flights. Petitioner allegedly continued to pay tax at the Who? International carriers doing business in the Philippines
reduced rate of 1 Yz%, pursuant to Article 9 (1) of the Convention Between the
Government of the Republic of the Philippines and the Government of the United Benefit? May avail of a preferential rate or exemption from the tax imposed
States of America with Respect to Income Taxes (hereafter "RPUS Tax Treaty") on on their gross revenue
revenues from tickets/passage documents sold in the Philippines covering
passenger/cargo flights originating outside of the Philippines. Basis? Applicable tax treaty; or
International agreement to which the Philippines is a
Held: Petitioner cannot be made liable to pay the income tax on Gross Philippine signatory
Billings since its carriage of persons, excess baggage, cargo and mail does not On the basis of reciprocity – home country of international
originate from the Philippines in a continuous and uninterrupted flight. carrier grants income tax exemption to Philippine carriers
Nevertheless, considering the nature of its business being duly licensed to engage in
trade or business in the Philippines as an off-line carrier and appointing a General iv. Non-resident Owner of Vessels:
Sales Agent to manage its passenger and cargo services in the country, petitioner is
still liable for payment of its income taxes as a resident foreign corporation doing Sec. 28 (B)(3)
business in the Philippines. Considering that petitioner is a resident foreign A non-resident owner or lessor of vessel shall be subject to a 4½% tax of gross
corporation doing business in the Philippines, it shall be subject to an income tax rentals, lease or charter fees from leases or charters to Filipino citizens or
equivalent to 32% of the taxable income derived from its sale of tickets here in the corporations, as approved by the Maritime Industry Authority.
Philippines. However, in view of the existence of the RP-US Tax Treaty, the
applicable tax rate is reduced.
v. Non-resident Lessor of Aircraft, Machineries, and other Equipment:
South African Airways v. CIR
Sec. 28 (B)(4)
Facts: Petitioner South African Airways is a foreign corporation organized and Rentals, charters and other fees derived by a nonresident lessor of aircraft,
existing under and by virtue of the laws of the Republic of South Africa. In the machineries and other equipment shall be subject to a 7½% tax of gross rentals or
Philippines, it is an internal air carrier having no landing rights in the country. fees.
Petitioner has a general sales agent in the Philippines, Aerotel Limited Corporation
(Aerotel). Aerotel sells passage documents for compensation or commission for
petitioner’s off-line flights for the carriage of passengers and cargo between ports or vi. Foreign Currency Deposit System/ Offshore Banking Units
points outside the territorial jurisdiction of the Philippines. Petitioner is not
registered with the SEC and not licensed to do business in the Philippines. RR 10-76: Taxation of Offshore Banks and Foreign Currency Deposit Units
Offshore Conduct of banking transactions in currencies involving the
Held: (a) An international air carrier maintains flights to and from the Philippines, it
Banking receipt of funds principally from external sources and
shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
utilization of such funds
international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the
Offshore A branch, subsidiary or affiliate of a foreign banking
rate of 32% of such income.
Banking Unit corporation which is duly authorized as a separate accounting
(b) There can be no off-setting of taxes against the claims that the taxpayer may
(OBU) unit, to transact offshore banking business in the Philippines.
have against the government. A person cannot refuse to pay a tax on the ground that
viii. Enterprises Registered under Bases Convention and Development Act of 1992 and
Presidential Decree 87 Philippine Economic Zone Act of 1995
Petroleum Operations – Searching for and obtaining petroleum within the
Philippines through drilling and pressure or suction or the like, and all other Clarification of coverage of 5% Preferential Rate by RR 20-2002 October 14,
operations incidental thereto. 2002, as amended by RR 2-2005, February 8, 2005 amending RR 1-95 and RR
Includes transportation, storage, handling and sale of 16-99
petroleum so obtained
EXCLUSIONS:
1. Transportation of petroleum outside the
Philippines
2. Processing or refining at a refinery
3. Any transactions in the products so refined
TAX TREATMENT: The contractor shall be liable for Philippine income tax on
income derived from its petroleum operations under its contract of service.
8
Petroleum Board reimburses the contractor for all operating expenses not exceeding 70%
Taxable net income = (Gross income – Deductions) of the gross proceeds from production in any year. Provided, if operating expenses exceeds
COMPUTATION 70% of gross proceeds from production from any year, the unrecorded expenses shall be
Gross income includes: recovered from the operations of succeeding years.
22 | Chan, Gono, de Chavez, Manalo
Coverage: Income earned from registered activities by enterprises registered with vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and
Subic Bay Metropolitan Authority (SBMA), Clark Development Authority (CDA), or usage for Congress to legislate upon
Philippine Economic Zone Authority (PEZA)
Tax Treatment: x. Clark Development Tax Exemption:
1. Income by registered enterprise in SBMA, CDA, or PEZA:
a. Registered activities – taxed according to specified terms of Coconut Refiner’s Association et. al. v. Ruben Torres
registration
i. 5% preferential tax rate Facts: RA 7227 was enacted converting Clark, among others, into a special economic
ii. Income tax holiday zone. Ramos issued EO No. 80 declared that Clark shall have all the applicable
iii. Regular income tax rate incentives granted to SBMA. Thus, Board Resolution No. 93-05-034 was passed
b. Not related to registered activities – subject to regular internal allowing the tax and duty-free sale at retail of consumer goods imported via Clark
revenue taxes for consumption outside the Clark Special Economic Zone (CSEZ).
i. Interest on Philippine currency bank deposits – 20% final
Held: EO 80 and BR ARE INVALID for constituting executive legislation. CSEZ is
income tax
excluded from the tax and duty-free incentives provided under RA 7227.
ii. Foreign currency deposits – 7.5%
iii. Capital gains tax on sale of shares of stock
In this case, while Section 12 of Republic Act No. 7227 expressly provides for the
1. Shares listed – ½% of stock transaction tax
grant of incentives to the SSEZ, it fails to make any similar grant in favor of other
2. Shares not listed
economic zones, including the CSEZ.
a. If net gains is LESS THAN P100,000 = 5% capital
gains tax Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof
b. If net gains is MORE THAN P100,000 = 10% capital should be categorically and unmistakably expressed from the language of the
gains tax statute. Consequently, in the absence of any express grant of tax and duty-free
privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to
uphold the questioned portions of EO No. 80 and BCDA Board Resolution No. 93-05-
John Hay People’s Alternative Coalition v. Victor Lim 034, which both pertain to the CSEZ.
Facts: RA 7227 sets out the policy of the government to accelerate the sound and
balanced conversion into alternative productive uses of the former military bases
under the 1947 Phil-US MBA, namely, the Clark and Subic military reservations as
well as their extensions including Camp John Hay. Subic economic Zone was granted
with incentives ranging from tax and duty-free importations, exemptions of
businesses from local and national taxes, etc. By virtue of RA 7227, Ramos issued
Proclamation No. 420, which established a special economic zone on a portion of xi. RA 9400, Restores Privileges to Clark and John Hay; RA 9399 Grants Tax Amnesty to
Camp John Hay – vesting national and local tax exemption and other incentives to locators of Clark and John Hay
the John Hay special economic zone.
RA 9400
Held: Proclamation No. 420 is UNCONSTITUTIONAL. Tax exemptions, investment
incentives and other benefits were only granted to Subic Special Economic Zone by
Sec. 12, RA 7227. There is no express extension of the aforesaid benefits to other
SEZs still to be created at the time via presidential proclamation. The deliberations
of Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges
accorded it under the law. • The challenged grant of tax exemption would
circumvent the Constitution’s imposition that a law granting any tax exemption
must have the concurrence of a majority of all the members of Congress. In the same
P 65.00 -- dividends remittable ISSUE: WON Wander Philippines is entitled to the preferential rate of 15%
- 9.75 -- dividend tax withheld at reduced rate withholding tax on dividends declared and remitted to its parent corporation, Glaro.
P 55.25 -- dividends actually remitted to P&G USA
HELD:YES
Dividends actually remitted by P&G Phil = P 55.25 Wander is a withholding agent of Glaro according to Section 53 of the NIRC and
---------------------------------- ------------- x P35 = P29.75 therefore entitled to claim the reimbursement. The ration for this is that the
Amount of accumulated P 65.00 profits earned Philippine counterpart of Glaro which is a Swiss Company.
Switzerland does not impose any income tax on dividends received by Swiss
P35 is the income tax paid. corporation from corporations domiciled in foreign countries which in this case is
Glaro.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778 tells us that the
corporate income tax ‘deemed paid’ by the parent company. Since dividends received from a domestic corporation liable to tax shall be 15% of the
P29.75 is much higher than P13, Sec 902 US Tax Code complies dividends received. This is subject to the condition that the country in which the
with the requirements of sec 24 NIRC. (I did not understand why non-resident foreign corporation is domiciled shall allow a credit against the tax due
these were divided and multiplied. Point is, requirements were from the non-resident foreign corporation taxes deemed to have been paid in the
met) Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) dividends.
In order to determine whether profits are accumulated for the Banks and other non-bank financial intermediaries;
reasonable needs of the business as to avoid the imposition of Insurance companies;
the improperly accumulated earnings tax, the controlling Publicly-held corporations;
intention of the taxpayer is that which is manifested at the Taxable partnerships;
time of accumulation, not subsequently declared intentions General professional partnerships;
which are merely the product of afterthought. Non- taxable joint ventures; and
A speculative and indefinite purpose will not suffice. Enterprises duly registered with the Philippine Economic Zone
The mere recognition of a future problem or the Authority (PEZA) under R.A. 7916, and enterprises registered
discussion of possible and alternative solutions is not pursuant to the Bases Conversion and Development Act of 1992 under
sufficient. R.A. 7227, as well as other enterprises duly registered under special
Definiteness of plan/s coupled with action/s taken economic zones declared by law which enjoy payment of special tax
towards its consummation are essential. rate on their registered operations or activities in lieu of other taxes,
national or local.
The following constitute accumulation of earnings for the reasonable needs of the
business: What are closely held corporations under IAE?
o Allowance for the increase in the accumulation of earnings up to At least fifty percent (50%) in value of the outstanding capital stock or at
100% of the paid-up capital of the corporation as of Balance Sheet least fifty percent (50%) of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more
32 | Chan, Gono, de Chavez, Manalo
than twenty (20) individuals. income subject to final tax
Domestic corporations not falling under the aforesaid definition are,
therefore, publicly-held corporations. the amount of net operating loss carry-over (NOLCO) deducted
TAXABLE INCOME
LESS: income tax paid/payable for the taxable year
HOW TO DETERMINE IF CLOSELY HELD CORPORATION BASED ON STOCK dividends actually or constructively paid/issued from the
OWNERSHIP: applicable year’s taxable income
amount reserved for the reasonable needs of the business as
Stock Not Owned by Individuals defined in these Regulations emanating from the covered year’s
o Stock owned directly or indirectly by or for a corporation, taxable income.
partnership, estate or trust shall be considered as being owned
proportionately by its shareholders, partners or beneficiaries. Improperly Accumulated Taxable Income
o Family and Partnership Ownership. – An individual shall be MULTIPLY
considered as owning the stock owned, directly or indirectly, by or BY: 10%
for his family, or by or for his partner. Improperly Accumulated Earnings Tax
‘family of an individual’ includes his brothers or sisters
(whether by whole or half-blood), spouse, ancestors and For purposes of determining the source of earnings or profits declared or
lineal descendants. distributed from accumulated income for each taxable year, the dividends shall be
o Option to Acquire Stocks. - If any person has an option to acquire deemed to have been paid out of the most recently accumulated profits or surplus
stock, such stock shall be considered as owned by such person. and shall constitute a part of the annual income of the distributee for the year in
an option to acquire such an option and each one of a which received
series of option shall be considered as an option to
acquire such stock. Period for Payment of Dividend/Payment of IAET
o Constructive Ownership as Actual Ownership.-Stock o The dividends must be declared and paid or issued not later than
constructively owned by reason of the application of paragraph one year following the close of the taxable year, otherwise, the
(1) or (3) hereof shall, for purposes of applying paragraph (1) or IAET, if any, should be paid within fifteen (15) days thereafter.
(2), be treated as actually owned by such person; but stock
constructively owned by the individual by reason of the Holding or investment company - a corporation having practically no activities
application of paragraph (2) hereof shall not be treated as owned except holding property, and collecting the income therefrom or investing the
by him for purposes of again applying such paragraph in order to same.
make another the constructive owner of such stock.
Once the profit has been subjected to IAET, the same shall no longer be The following are prima facie instances of accumulation of profits beyond the
subjected to IAET in later years even if not declared as dividend. reasonable needs of a business and indicative of purpose to avoid income tax upon
Notwithstanding the imposition of the IAET, profits which have been shareholders:
subjected to IAET, when finally declared as dividends, shall nevertheless be o Investment of substantial earnings and profits of the corporation
subject to tax on dividends imposed under the Tax Code of 1997 except in in unrelated business or in stock or securities of unrelated
those instances where the recipient is not subject thereto. business;
o Investment in bonds and other long-term securities;
o Accumulation of earnings in excess of 100% of paid-up capital, not
Tax Base of Improperly Accumulated Earnings Tax
otherwise intended for the reasonable needs of the business as
defined in these Regulations.
ADD: income exempt from tax
income excluded from gross income
CYANAMID PHILIPPINES, INC.
Thus, in cases where the fringe benefits entail joint benefits to the
employer and employee, the portion which shall be subject to the fringe
benefits tax and the guidelines for the valuation of fringe benefits are
RR 3-98 / [SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS (A)] defined under these rules and regulations.
Coverage
Guidelines for the valuation of fringe benefits [SEC. 2.33. SPECIAL TREATMENT
These Regulations shall cover only those fringe benefits given or OF FRINGE BENEFITS (A)]
furnished to managerial or supervisory employees and not to the rank and Unless otherwise provided in these regulations, the valuation of fringe
file benefits shall be as follows:
o The term, "RANK AND FILE EMPLOYEES" means all o (1) If the fringe benefit is granted in money, or is directly paid for
employees who are holding neither managerial nor by the employer - the value is the amount granted or paid for.
supervisory position. The Labor Code of the Philippines, as o (2) If the fringe benefit is granted or furnished by the
An organization of a purely local character is one whose business activities are 1. Partnership
confined to a particular community, place, or district, irrespective, however, of
42 | Chan, Gono, de Chavez, Manalo
Section 26 may inure to the benefit of any private shareholder or individual,
General Professional Partnership (Sec 26) – NOT SUBJECT to income tax as a and in general, all facts relating to its operations which affect its right
corporation to exemption
- Persons engaging in business as partners shall be liable for - To such affidavit should be attached a copy of the charter or articles of
income tax in their separate and individual capacities incorporation, the by-laws of the organization, and the latest financial
- For their distributive share, the income of the partnership is statement showing the assets, liabilities, receipts, and disbursement of the
computed in the same manner as a corporation. Each partner organization.
shall report as gross income his share, actually or - Upon receipt of the affidavit and other papers by the CIR, the organization will
constructively received, in the net income of the partnership. be informed whether or not it is exempt. When an organization has established
its right to exemption, it need not thereafter make and file a return of income.
However, the organization should file on or before April 15 of each year, an
a. Professional partnership of Real Estate Brokers – EXEMPT from annual information return under oath, stating its gross income and expenses
income tax (Ruling 294-88) incurred during the preceding year, and a certificate showing that there has not
been any substantial change in its By-Laws, Articles of Incorporation, manner of
2. Co-ownership operation and activities as well as sources and disposition of income. (As
- In Obillos v. CIR (supra), the sale by the co-owner siblings of amended by Revenue Regulations No. 7-64, approved November 25, 1964.)
their property is not considered as a taxable partnership. The
transaction is a result of their decision to dissolve the co-
ownership, the profits derived therein merely an incident of
such sale transaction. Sinco v. CIR (1956)
11
(Kaye’s Part)
46 | Chan, Gono, de Chavez, Manalo
(5) Income Exempt under Treaty interest on deposits in banks in the Philippines by foreign governments,
Income of any kind, to the extent required by any treaty obligation financing institutions owned, controlled, or enjoying refinancing from
binding upon the Government of the Philippines. foreign governments, and international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions
(6) Retirement Benefits, Pensions, Gratuities, etc. (Requisites)
(c) Prizes and awards made primarily in recognition of religious,
A. Retirement benefits received under Republic Act No. 7641 charitable, scientific, educational, artistic, literary, or civic achievement
In accordance with a reasonable private benefit plan maintained (d) Prizes and Awards in Sports Competition
by the employer
o A pension, gratuity, stock bonus or profit-sharing plan (e) 13th Month Pay and Other Benefits
maintained by an employer for the benefit of some or all (f) GSIS, SSS, Medicare and Other Contributions
of his officials or employees, wherein contributions are (g) Gains from the Sale of Bonds, Debentures or other Certificate of
made by such employer for the officials or employees, or Indebtedness
both, for the purpose of distributing to such officials and
(h) Gains from Redemption of Shares in Mutual Fund
employees the earnings and principal of the fund thus
accumulated
o Said plan that at no time shall any part of the corpus or RR 2-1940 (Provisions relating to Gross Income)
income of the fund be used for, or be diverted to, any
SECTION 39. What gross income includes In general, income is the gain derived
purpose other than for the exclusive benefit of the said
from capital, from labor, or from both combined, provided it be understood to
officials and employees.
include profit gained through a sale or conversion of capital assets.
The retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than fifty Profit of citizens, resident aliens, or domestic corporations derived from
(50) years of age at the time of his retirement sales in foreign commerce must be included in their gross income.
The benefits granted under this subparagraph shall be availed of May be in the form of cash or of property.
by an official or employee only once. SECTION 40. Compensation for personal services
B. Separation Pay because of death sickness or other physical When taxable?
disability or for any cause beyond the control of the said official or o Amount received is ordinarily income for the taxable year of its
employee. determination, if the return is rendered on the accrual basis; or
C. Social security benefits, retirement gratuities, pensions and other o The taxable year in which received, if the return is rendered on a
similar benefits received by resident or nonresident citizens or aliens receipts and disbursements basis
who come to reside permanently in the Philippines o Commissions paid salesman, compensation for services on the
D. Payments of benefits due or to become due to any person residing in basis of a percentage of profits, commissions on insurance
the Philippines under the laws of the United States administered by the premiums, tips, and pensions or retiring allowances are income to
United States Veterans Administration. the recipients; as are also marriage fees, baptismal offerings, sums
paid for saying masses for the dead, and other contributions
E. Benefits received from or enjoyed under the Social Security System
received by a clergyman, evangelists, or religious worker for
F. Benefits received from the GSIS, including retirement gratuity services rendered.
received by government officials and employees.
SECTION 41. Compensation paid other than in cash
Fair market value of the thing is the amount to be included as income
(7) Miscellaneous Items If rendered at a stipulated price such price will be presumed to be the fair
(a) Income Derived by Foreign Government - Derived from investments in value of the compensation received
the Philippines in loans, stocks, bonds or other domestic securities, or from In stock is to be treated as if the corporation sold the stock for its market
"Long-term" contracts means building, installation, or construction Annuities paid by religious, charitable, and educational corporations under
contracts covering a period in excess of one year. Persons whose income is an annuity contract are subject to tax to the extent that the aggregate
derived in whole or in part from such contracts may, as to such income, amount of the payments to the annuitant exceeds the amounts paid by him
prepare their returns upon the following bases: as consideration for the contract.
o An annuity charged upon devised land is taxable to a donee-
(a) Percentage of completion annuitant, whether paid by the devisee out of the rents of the land
(b) May be reported in the taxable year in which the contract is finally or from other sources.
completed o The devisee is not required to return as gross income the amount
SECTION 45. Gross income of farmers of rent paid to the annuitant, and he is not entitled to deduct from
his gross income any sums paid to the annuitant
If cash basis is employed in accounting and no inventory is kept,
Amounts received by an insured as a return of premiums paid by him
report:
under life insurance, endowment, or annuity contracts, such as the so-
(1) the amount of cash or the value of merchandise or other property called "dividends" of a mutual insurance company, which may be credited
received from the sale of live stock and produce against the current premium, are not subject to tax.
(2) the profit from the sale of any live stock or other items which were Distributions on paid-up policies which are made out of earnings of the
purchased insurance company subject to tax are in the nature of corporate dividends
(3) gross income from all other sources. and should be included in the taxable income of the individual, without any
credit for the amount of tax paid by the corporation at source.
Reporting on the accrual basis
o All live stock raised or purchased for sale shall be included in SECTION 49. Improvements by lessees. — When buildings are erected or
the inventory at their proper valuation determined in improvements made by a lessee in pursuance of an agreement with the lessor, and
accordance with the method authorized and adopted for the such buildings or improvements are not subject to removal by the lessee, the
purpose. Also, live stock acquired for drafts, breeding, or lessor may at his option report the income therefrom upon either of the following
dairy purposes and not for sale may be included in the bases;
General Rule: The interest period shall commence at the date the b. Sec. 74, RR-2
indebtedness arises
Exception: SECTION 74. Rentals
o With respect to indebtedness arising in the ordinary course of Where a leasehold is acquired for business purposes for a specified sum, the
business out of sales, leases, or supply of goods and services purchaser may take as a deduction in his return an aliquot part of such sum each
[generally considered as trade accounts receivables or payables] year, based on the number of years the lease has to run. Taxes paid by a tenant to or
Interest period shall not commence if the taxpayer is able to for a landlord for business property are additional rent and constitute a deductible
establish that the normal trade practice in a given industry is to item to the tenant and taxable income to the landlord, the amount of the tax being
allow balances in the case of similar transactions with unrelated deductible by the latter. The cost borne by a lessee in erecting buildings or making
parties, to remain outstanding for a longer period without permanent improvements on ground of which he is lessee is held to be a capital
charging interest. investment and not deductible as a business expense. In order to return to such
o Determining period for outstanding balance payments or taxpayer his investment of capital, an annual deduction may be made from gross
credits shall be applied against the earliest balance outstanding. income of an amount equal to the cost of such improvements divided by the number
The taxpayer may, in accordance with an agreement, apply such payments of years remaining of the term of lease, and such deduction shall be in lieu of a
or credits in some other order in its books only after establishing that the deduction for depreciation. If the remainder of the term of lease is greater than the
arrangement is customary for parties in that particular business. probable life of the buildings erected, or of the improvements made, this deduction
shall take the form of an allowance for depreciation.
CIR v. Filinvest
RENTALS
“No imputation of interest increase on intercompany advances” o Leasehold is acquired for business purposes for a specified sum
o Deductions:
Facts: Filinvest Development Corporation (FDC) extended advances in favor of its Aliquot part of lease amount each year based on number
affiliates and supported the same with instructional letters and cash and journal of years of lease
vouchers. BIR assessed FDC for deficiency income tax by imputing an “arm’s length” Taxes paid by tenant to or for a landlord for business
interest rate on its advances to affiliates. property constitutes additional rent
As to tenant – deductible item
Held: Despite the seemingly broad power of the CIR to distribute, apportion and
As to landlord – taxable income
allocate gross income under Section 50 of the Tax Code, the same does not include
Cost of improvements divided by number of years
the power to impute theoretical interests even with regard to controlled taxpayers’
remaining of term of lease
transactions. This is true even if the CIR is able to prove that interest expense (on its
In lieu of deduction for depreciation or allowance for
own loans) was in fact claimed by the lending entity.
depreciation
c. Notes:
The term in the definition of gross income that income “from whatever source
derived” is covered, it still requires that there must be actual or at least probable
receipt or realization of the item of gross income sought to be apportioned, Lease of personal property: Rental income on the lease of personal
property located in the Philippines and paid to a non-resident taxpayer
distributed, or allocated.
shall be taxed as follows:
I. INCOME UNDER LEASE AGREEMENT (Sec. 49, RR 2)
Non-Resident Corporation Non-Resident Alien
1. Rent – Refers to earnings derived from leasing real estate as well as Vessel 4.5% 25%
personal property. It also in includes all other obligations assumed to be Aircraft, machineries and 7.5% 25%
57 | Chan, Gono, de Chavez, Manalo
other Equipment NOTE: Income recognition for income tax purposes should follow income
Other Assets 30% 25% recognition for accounting purposes.
Scenarios
a. Situation 1: Lease is terminated, lessor comes into possession or
control of the property before the original termination date SEC 250 RR2
i. Lessor receives additional income for the year Dividends
ii. Lease is terminated to the extent of the value of such Comprise any distribution whether in cash or other property
buildings or improvements when he became entitled to In the ordinary course of business, even though extraordinary in amount
possession exceeds the amount already reported as Made by a domestic or resident foreign corporation, joint-stock company,
income on account of the erection of such building or partnership, joint account (cuentas en participacion), association, or
improvement insurance company to the shareholders or members out of its earnings or
iii. EFFECT: No appreciation of value due to causes other profits accumulated since March 1, 1913.
than the premature termination of the lease shall be Although interest on certain Government bonds and other similar obligations is not
included taxable when received by a corporation, upon amalgamation with the other funds of
b. Situation 2: The building or improvement is destroyed before the the corporation, such income loses its identity and when distributed to
expiration of the lease shareholders, is taxable to the same extent as other dividend.
i. Lessor is entitled to deduction when destruction takes Depending on the kinds of taxpayers
place A taxable distribution made by a corporation to individual stockholders or
ii. Amount reported – salvage value** members
**NOTE: To the extent not compensated by insurance o Included in the gross income of the distributees when the cash of
other property is unqualifiedly made subject to their demand.
Dividends, in cash or other property received by an individual
13
(Jamie’s Part)
F: MANTRASCO had capital stock divided between Reese and the three respondents. R: Stock dividends" are not "income," and the same cannot be taxed under that
Reese died. MANTRASCO had no sufficient money to buy his shares so the three provision of Act No. 2833 which provides for a tax upon income.
respondents became its trustees. These shares were considered as stock dividend of
MATRASCO and was fully paid by MANTRASCO thus the trust agreement was When a corporation or company issues "stock dividends" it shows that the
terminated. Upon examination of the books of MANTRASCO by the BIR, it was company's accumulated profits have been capitalized, instead of
disclosed that the three respondents failed to declare the said stock dividends as distributed to the stockholders or retained as surplus available for
part of their taxable income. BIR examiners concluded that the distribution of distribution, in money or in kind, should opportunity offer.
Reese's shares as stock dividends was in effect a distribution of the "asset or The stockholder has received nothing but a representation of an interest in
property of the corporation as may be gleaned from the payment of cash for the the property of the corporation and, as a matter of fact, he may never
redemption of said stock and distributing the same as stock dividend." receive anything, depending upon the final outcome of the business of the
corporation.
61 | Chan, Gono, de Chavez, Manalo
A stock dividend, when declared, is merely a certificate of stock which the same interest in the same corporation being represented after the
evidences the interest of the stockholder in the increased capital of the distribution by more shares of precisely the same character, and
corporation. a stock dividend where there either has been a change of corporate
There is a clear distinction between a cash dividend and a stock dividend. identity or a change in the nature of the shares issued as dividends
The one is a disbursement to the stockholder of accumulated earnings, and whereby the proportional interest of the shareholders after the
the corporation parts irrevocably with all interest therein; the other distribution is essentially different from his former interests.
involves no disbursement by the corporation; the corporation parts with When is it taxable?
nothing to its stockholder. o A stock dividend constitutes income if it gives the shareholder
an interest different from that which his former stock
holdings represented. (SEC 252 RR2)
MEASURE OF INCOME IN CASH AND PROPERTY DIVIDEND It gives the shareholder a greater proportional
interest in the corporation after its distribution (de
Cash: The measure of the income is the amount of the cash received Leon)
Property: The measure of income is the fair market value of the
property received at the time of receipt or distribution
i. MEASURE OF INCOME
iii. STOCK DIVIDEND
SEC 253 RR2
Proportionate test Sale of stock received as dividends
o A stock dividend representing the transfer of surplus to o Stock issued by a corporation, as a dividend, does not constitute taxable
capital account is not subject to income tax. (SEC 252 RR2) income to a stockholder in such corporation
o Some notes from de Leon But gain may be derived or loss sustained by the stockholder, whether
Stock dividends represent capital and do not individual or corporate, from the sale of such stock, which gain or loss
constitute income to its recipient. The mere issuance will be treated as arising from the sale or exchange of a capital asset.
thereof is not yet subject to income tax as they are The amount of gain derived or loss sustained from the sale of such
nothing but an enrichment through increase in value stock, or from the sale of the stack with respect to which it is issued,
of capital investment. shall be determined in accordance with the following rules
As capital, the stock dividends postpone the (a) Where the stock issued as dividend is all or substantially the
realization of profits because the fund represented same character or preference as the stock upon which the stock
by the new stock has been transferred from surplus dividend is paid
to capital and no longer available for actual o The cost of each share (or when acquired prior to March 1,
distribution. 1913, the fair market value as of such date) will be the
Stock dividends issued by a corporation are quotient of the cost (or such fair market value) of the old
considered unrealized gain, and cannot be subjected shares of stock divided by the total number of the old and
to income tax until that gain has been realized not new shares.
subject to income tax (b) Where the stock issued as a dividend is in whole or in part
of a character or preference materially different from the
a. WHEN TAXABLE stock upon which the stock dividend is paid
o The cost (and when acquired prior to March 1, 1913, the
SEC 252 RR2
fair market value as of such date) of the old shares of
The distinction between a stock dividend which does not, and one which stock shall be divided between such old stock and the
does, constitute income taxable to the shareholder is the distinction new stock, in proportion, as nearly as may be, to the
between a stock dividend which respective value of each class of stock, old and new, at the
works no change in the corporate entity time the new shares of stock are issued, and the cost (or
F: Manila Wine Merchants, Ltd., (HK Co.) sold its company to Manila Wine v. ESSENTIALLY EQUIVALENT TO DISTRIBUTION
Merchants, Inc., a Philippine corporation, (PH Co.). As a result of the sale of its OF TAXABLE DIVIDENDS
business and assets to PH Co., a surplus was realized and the HK Co. distributed this
surplus to the shareholders. Manila Wine Merchants, Ltd. Paid Philippine income tax The basic principle for the taxation of distributions in liquidation,
had been paid by HK Co. on the said surplus from which said distributions were complete or partial, is that they are treated as a sale or exchange rather
made. At a special general meeting of the shareholders of Manila Wine Merchants, than as ordinary dividends even though the liquidating distributions
Ltd, the stockholders by resolution directed that the company be voluntarily include earnings and profits
liquidated and its capital distributed among the stockholders. Wise & Co., Inc. is Liquidating distributions are the proceeds
one of the shareholders of Manila Wine Merchants, Ltd and the former was taxed
for the shares it received.
CIR V CA & CTA & ANSCOR
ISSUES/HELD:
1. WON the amounts received by plaintiffs and on which the taxes in question were FACTS:
assessed and collected are ordinary or liquidating dividends. (LIQUIDATING Don Andres Soriano formed the corporation ANSCOR
DIVIDENDS) ANSCOR's authorized capital stock was increased to P2,500,000.00 divided
2. WON liquidating dividends are taxable income. YES. The amounts distributed in into 25,000 common shares with the same par value of the additional
the liquidation of a corporation shall be treated as payments in exchange for stock 15,000 shares, only 10,000 was issued which were all subscribed by Don
or shares, and any gain or profit realized thereby shall be taxed to the distributed as Andres, after the other stockholders waived in favor of the former their
other gains or profits, which was then subject to "normal tax." pre-emptive rights to subscribe to the new issues. This increased his
subscription to 14,963 common shares.
RATIO: Don Andres died. A day after, ANSCOR increased its capital stock to
The ordinary connotation of liquidating dividend involves the distribution P20M and in 1966 further increased it to P30M. In the same year
of assets by a corporation to its stockholders upon dissolution. The (December 1966), stock dividends worth 46,290 and 46,287 shares were
14
(Cielo’s Part)
a. TAXABLE: If the tax paid is a deductible tax refund, or credit F: An expropriation proceeding was commenced against Sps. Gutierrez. After the
Example: percentage taxes (except VAT and percetange tax on sale), court ruled in favor of the Republic, they were paid. CIR assessed a tax deficiency for
excise tax and professional tax the amount they received from the government.
b. NOT TAXABLE: If the tax paid is not deductible as tax refund or credit
thereof not taxable H: Amount is taxable. The acquisition by the government of a private property thru
i. Income tax eminent domain after just compensation is embraced within the meaning of the
ii. Estate tax term “sale or disposition of property” which is included in the computation of gross
iii. Income tax in Title III income.
iv. VAT
c. Income from tax refund = to the extent of the income tax benefit of said
deduction
d. The tax refund shall be reported as income shall be reported as income in
the year it was received if cash method (accounting method) L. TRANSFER PRICE REGULATIONS
It must be reported in the year it was ordered if accrual basis (BIR
Ruling 84) (RR2-2013)
Background: Recall the case of CIR v. Filinvest on the issue of transactions
4. Damage Recovery between related enterprises i.e. a mother company and its affiliates, or among
a. Taxable affiliates within the same group of companies. The purpose of this regulation is to
i. Compensation for loss of profits or income ensure that the a transaction among these related enterprises (i.e. the controlled
ii. In infringement suits, recoveries of lost profits transaction) is consistent with the arm’s length pricing principle
iii. Damages recovered from a breach of contract It means that the controlled transaction must be the same or at par with an
iv. Exemplary damages, not being a return of lost capital uncontrolled transaction (i.e. transaction between independent enterprises). A
b. NOT taxable comparable analysis between these two transactions will be conducted. If the CIR
i. Compensation for damage to property, injury to person or loss finds that the controlled transaction between the related enterprises is anomalous
of life or may have been used to evade payment of taxes (e.g. loan with a lower interest
ii. Compensation for lost capital than commercial rate), the CIR can allocate or distribute gross income or
iii. Moral damages which is purely compensatory in nature deductions to reflect the income and taxes due from the controlled transactions.
To ensure that the controlled transaction adopts the arm’s length pricing
principle, various transfer pricing methodologies are employed.
5. Prizes and Winnings
1. Resale Price Method (RPM) – the focus is on the gross profit margin
a. In excess of 10k and winnings (except Lotto and PCSO) derived within the
realized by the reseller (a related enterprise) which resold the product to
PHL 20%
an independent party.
b. For NRA 25%
- This is a good method for distribution companies since there is
c. Cash prizes for tournaments when such is the profession (Pacquiao?)
seldom any need to infuse new investment for further development
normal tax rate in Sec 24a
of the product and the gross profit margin will be determined easily
d. Cash prizes by foreign players with tax treaties if the activities are within
(cf manufacturing industries)
PHL as NRA ETB so 30% (?)
2. Itemized Deductions
15
(Kaye’s Part)
69 | Chan, Gono, de Chavez, Manalo
representation expenses which the CIR disallowed because they are not considered
B. EXPENSES IN GENERAL ordinary and necessary.
1. Requisites for Deductibility H: This case adds to the statutory requirements that an expense must be ordinary
and necessary. In this case the court said that the expense must also meet the test of
Ordinary and necessary reasonableness of amount. It also defined the following terms:
Substantiated by adequate proof
o No deduction from gross income shall be allowed unless the Ordinary – expenses which are normal in relation to the business of the
taxpayer shall substantiate with sufficient evidence, such as taxpayer and surrounding the circumstances
official receipts or other adequate records: Necessary – where the expenditure is appropriate and helpful in the
the amount of the expense being deducted development of the taxpayer’s business or that the same is proper for the
the direct connection or relation of the expense being purpose of realizing a profit or minimizing loss
deducted to the development, management, operation
and/or conduct of the trade, business or profession of the 2. Compensation for Personal Services
taxpayer.
Sec 34 NIRC
Not contrary to law, morals, public order or public policy
o Bribes, Kickbacks and Other Similar Payments. - No deduction A reasonable allowance for salaries, wages, and other forms of compensation for
from gross income shall be allowed under Subsection (A) hereof personal services actually rendered, including the grossed-up monetary value of
for any payment made, directly or indirectly, to an official or fringe benefit furnished or granted by the employer to the employee: Provided, That
employee of the national government, or to an official or employee the final tax imposed under Section 33 hereof has been paid.
of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or
KUENZLE & STREIF, INC VS CIR
employee or representative of a foreign government, or to a
private corporation, general professional partnership, or a similar F: CIR disallowed as expenses payments to certain officials of the petitioner
entity, if the payment constitutes a bribe or kickback. company in the form of bonuses. According to the CIR, the expenses are
unreasonable for because they are in excess of the respective salaries of the
a. Ordinary and Necessary
recipients and thus, unreasonable.
RR-2, Sec 65
H: The test of reasonableness applied is wrong. That it exceeds the salary of the
Business expenses deductible from gross income include the ordinary and recipient does not necessarily make it unreasonable. TEST:
necessary expenditures directly connected with or pertaining to the taxpayer's The bonus is for compensation
trade or business. For personal service actually rendered
Bonus + salary if measured as against the service rendered is
commensurate (reasonable)
o To be reasonable, ALL CIRCUMSTANCES must be taken into
Sec 34 NIRC
account
There shall be allowed as deduction from gross income all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to, the development, management, operation and/or 3. Travelling/Transportation Expenses
conduct of the trade, business or exercise of a profession. Sec 34 NIRC
A reasonable allowance for travel expenses, here and abroad, while away from
VISAYAN CEBU TERMINAL CO. VS COLLECTOR home in the pursuit of trade, business or profession.
F: Petitioner is organized for the purpose of handling arrastre operations in Cebu for
which it was awarded contract by the BOC. Petitioner claimed as deductions RR-2, Sec 66
Travel Expenses as ordinarily understood, include transportation expenses and
70 | Chan, Gono, de Chavez, Manalo
meals and lodging. If the trip is undertaken for other than business purposes, the RR-2, Sec 68
transportation expenses are personal expenses and not deductible. If the trip is Incidental repairs which neither materially add to the value of the property
solely on business, the reasonable and necessary traveling expenses become nor appreciably prolong its life, but keep it in an ordinarily efficient
business expenses and thus deductible. operating condition, may be deducted as expense, provided the plant or
(a) If, then, an individual, whose business requires him to travel receives a property account is not increased by the amount of such expenditure.
salary as full compensation for his services, without reimbursement for Repairs in the nature of replacement, to the extent that they arrest
traveling expenses, or is employed on a commission basis with no expense deterioration and appreciably prolong the life of the property should be
allowance, his traveling expenses, including the entire amount expended charged against the depreciation reserves if such account is kept.
far meals and lodging, are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may
deduct such expenses. 6. Expenses under Lease Agreements
(c) If an individual receives a salary and also an allowance for meals and Sec 34 NIRC
lodging, as for example, a per diem allowance in lieu of subsistence, the A reasonable allowance for rentals and/or other payments which are required as a
amount of the allowance should be included in gross income and the cost of condition for the continued use or possession, for purposes of the trade, business or
such meals and lodging may be deducted therefrom. profession, of property to which the taxpayer has not taken or is not taking title or
Only such expenses as are reasonable and necessary in the conduct of the in which he has no equity other than that of a lessee, user or possessor.
business and directly attributable to it may be deducted.
Substantiation requirement (must show):
RR-2, Sec 74 Rentals.
(1) the nature of the business in which he is engaged
Leasehold is acquired for business purposes for a specified sum, the
(2) the number of days away from home during the taxable year on purchaser may take as a deduction in his return an aliquot part of such sum
account of business each year, based on the number of years the lease has to run.
(3) the total amount of expenses incident to meals and lodging while Taxes paid by a tenant to or for a landlord for business property
absent from home and business during the taxable year o deductible item to the tenant
(4) the total amount of other expenses incident to travel and claimed as o taxable income to the landlord
a deduction. Cost borne by a lessee in erecting buildings or making permanent
improvements -capital investment of lessee and not deductible as a
business expense.
4. Cost of Materials o An annual deduction may be made from gross income of an
RR-2, Sec 67 amount equal to the cost of such improvements divided by the
Materials and supplies - only to the amount that they are number of years remaining of the term of lease (just like
actually consumed and used in operation during the year for which the depreciation)
return is made.
Incidental materials or supplies on hand for which no record of
consumption is kept or of which physical inventories at the beginning and 7. Expenses for Professionals
end of the year are not taken - the total cost of such supplies and materials
as were purchased during the year for which the return is made, provided RR-2, Sec 69
the net income is clearly reflected by this method. Cost of supplies used by him in the practice of his profession
Expenses paid in the operation and repair of transportation equipment
used in making professional calls
Dues to professional societies and subscriptions to professional journals
5. Repairs
71 | Chan, Gono, de Chavez, Manalo
Rent paid for office rooms Transportation equipment even when wholly used in carrying on farm
Utilities (fuel, light, water, telephone, etc.) operations
Salaries of office assistants If a farm is operated for recreation or pleasure and not on a commercial
Amounts currently expended for books, furnitures, and professional instruments basis, and if the expenses incurred in connection with the farm are in
and equipment, the useful life of which is short, may be deducted. But amounts excess of the receipt therefrom, the entire receipts from the sale of
expended for books, furniture, and professional instruments and equipment of a products may be ignored in rendering a return of income, and the expenses
permanent character are not allowable as deductions. incurred, being regarded as personal expenses, will not constitute
allowable deduction.
Non deductible:
The cost of farm machinery, equipment, and farm buildings representing RR 10-2002 Ceiling on EAR expenses covers:
capital investment. Individuals engaged in business, including taxable estates and trusts
Development of farms, orchards, and ranches, prior to the time when the Individuals engaged in the practice of profession
productive state is reached Domestic Corporations
Amounts expended in purchasing work, breeding or dairy animals may be Resident Foreign corporations
depreciated unless such animals are included in an inventory
ii. ILLUSTRATION
Assume:
2011 Taxable Net Income from all Sources P 400,000 2. ILLUSTRATION
Country G Net Income 100,000 Assume:
Country H Net Income 80,000 2011 Taxable Net Income from all Sources P 400,000
Tax paid/incurred: Philippines 132,000 Country G Net Income 100,000
Country G 35,000 Country H Net Income 80,000
Country H 25,000 Tax paid/incurred: Philippines 132,000
Country G 35,000
Country H 25,000
Solution – Per Country Limit:
Tax Credit
Country G (100/400 x 132,000) P 33,000
Actually Paid to Country G 35,000 P 32,000
Country H (80/400 x 132,000) 26,400 Solution – Worldwide Limit:
Actually Paid to Country H 25,000 25,000 Income from outside PH [180/400 x 132,000] P 59,400
Tax credit allowed under Per Country Limit 57,000 Total Foreign Income Taxes Paid 60,000
The result after applying the formula above is compared to the tax actually paid Tax Credit Allowed under Worldwide Limit P 59,400
for each foreign country. The lower of the two amounts for each foreign country The result after applying the formula is compared to the tax actually paid in total to
will be added to get the total tax credit allowed under Per country limit foreign countries. The lower of the two amounts will be added to get the total tax credit
allowed under Worldwide Limit.
b) [Worldwide Limit] The total amount of the credit shall not exceed o Compare the tax credit allowed under
the same proportion of the tax against which such credit is taken, The lower of the two amounts is
which the taxpayer’s taxable income from sources without the the final allowable tax credit. In
Philippines taxable bears to his entire taxable income for the same Per country limit this case, the amount computed
taxable year Worldwide limit under Per Country Limit is
This applied where the taxpayer derives income from lower. Thus, it becomes the final
more than one foreign country allowable tax credit.
1. FORMULA NOTE: If there is only one country, both limits will yield the same
a. Worldwide Limit answer.
o PROCEDURE to get TAX CREDIT ALLOWABLE:
( )( ) 1. Use formula for Per Country Limit
2. Resulting amount compared to actual tax paid to
foreign country
3. Lower amount = final allowable tax credit
b. Tax Credit o Year in Which Credit is Taken:
Held: While Section 30 allows business expenses to be deducted, it does not allow
fines and penalties to be deducted. Deductions from gross income are matters of
legislative grace- those not expressly granted by Congress are withheld. Moreover, SEC 24 D (1) NIRC
when acts are condemned by law and their commission is made punishable by fines Losses actually sustained during the taxable year and not compensated for by
of forfeitures, to allow them to deduced from the wrongdoer’s gross income, reduces insurance or other forms of indemnity shall be allowed as deductions:
and defeats the prescribes punishment. (a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or profession, if the loss
NOTE: To be deductible, an expense must be:
arises from fires, storms, shipwreck, or other casualties, or from robbery,
(a) Ordinary and necessary; theft or embezzlement.
(b) Paid or incurred within the taxable year; and In the case of a non-resident alien individual or foreign corporation
(c) Paid or incurred in carrying on a business The losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when
E. LOSSES19 such losses are not compensated for by insurance or other forms of indemnity.
RATIO:
SECTION 95 RR2
Losses by non-resident alien and foreign corporations Losses in Mati Lumber - Deductible. These losses represent the shares of
Allowed only losses sustained in business or trade conducted within the stock petitioner acquired from Mati. These are deductible on the ground
Philippines that the lumber company had ceased operations and became insolvent in
Losses of property within the Philippines arising from fires, storms, that year. The CIR was incorrect in arguing that since the company still
shipwreck, or other casualty and from robbery, theft, or embezzlement owned a sawmill and some equipment, the shares of stock still had value.
Losses actually sustained in transactions entered into for profit in the The proper assessment would be to treat as income for the year in which
Philippines, although not connected with their trade or business, not petitioner gets the proceeds from the liquidation of those assets.
compensated by insurance or otherwise. Losses or bad debts in Palawan Manganese Mines Inc - Not Deductible.
Not compensated for by insurance or otherwise. These losses represent part of the loans extended by the petitioner to its
100% owned subsidiary. Petitioner cannot properly claim as a loss the
But some accounts are allowed to be deducted. In one account, the counsel of
G found that there is no property of the debtor that can be attached. In 4 accounts,
F. BAD DEBTS20 the debts involved are of smaller amounts and continuous failure to pay despite
numerous demands show inability to pay. In another 3 accounts, despite
What is a Bad Debt: bombardment of letter of demands (17 letters etc), the debtors failed to pay.
Sec. 34 (E)(1) of the NIRC: Sir: there must be a judicial demand for the debt up to execution which must be
Bad debts are debts due to the taxpayer which are: returned unsatisfied. However, in Goodrich, the court was liberal in allowing the
debts because of the immateriality of amounts, a bankrupt debtor or various
demands. This is the most abused deduction.
As provided by RR5-99, Sec. 2:
Bad debts are those resulting from the worthlessness or uncollectivity, in whole or RR 5-99
in part, of amounts due the taxpayer by others, arising from money lent or from Requisites for Deductibility (RR5-99):
uncollectible amounts of income from goods sold or services rendered. (a) There must be an existing indebtedness due to the taxpayer that is valid
and demandable
(b) The same must be connected with the taxpayer’s trade, business and
practice of profession
(c) It must not be entered into by related parties in Sec 36B
20
(Cielo’s Part) (d) It must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year
86 | Chan, Gono, de Chavez, Manalo
(e) It must be actually ascertained to be worthless 3. Bad debts between related parties (Sec36B)
(a) Between members of a family
(b) Between and individual and corporation, wherein more than 50% in
value of the outstanding stock is owned by the individual
2. Tax Benefit Rule (c) Between two corporations, wherein more than 50% in value of the
Basis: Recovery of bad debts previously allowed as deduction in the preceding years outstanding stock is owned by the individual
shall be considered part of the gross income in the year of recovery to the extent of (d) Between grantor and fiduciary of any trust
the income tax benefit of said deduction. (Sec 34E1) (e) Between fiduciaries of two different trust if the same person is the
grantor of both
Situations (Sec4, RR5-99): (f) Between fiduciary and beneficiary of the same trust
Sir changed the facts: what if you recovered the 170k, then payment of
130k was made later what you should report is the entire 130k! 5. Debt or Equity?
B. NO TAX BENEFIT: If the taxpayer did not benefit from the deduction of NB: Partnership case!
the benefit because it did not result in any deduction (i.e. operating at a
loss), subsequent recovery shall be treated as mere return of capital F: Philex Mining entered into an agreement with Baguio Gold Mining Company
which is not a realized income. denominated as “Power of Attorney”. Among the terms of the agreement is that
Example: The 10k bad debt was written off together with other expenses, Philex will be the Manager of the mining project, that Philex may infuse capital and
all deductions amount to 50k but the income is only 40k so that the net loss property to the project, and that Philex as manager will be entitled to 50% of the net
is 10k. When the 10k is recovered, it is a mere return of capital and not profit. The project incurred losses. For its annual income tax return, Philex deducted
taxable. an amount of 112M as loss on settlement of receivables from Baguio Gold or bad
debts. BIR disallowed the deduction.
C. If the bad debt was disallowed, subsequent collection will NOT BE
TAXABLE. H: Deductions are disallowed those are not debts but equity.
Ratio for this deduction: REPLACEMENT (2) Non-resident aliens engaged in trade or business and resident-foreign
corporations
Summary of Sec. 34 (F)(1,4,5,6): Depreciation: - 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
conducted by them in the Philippines shall be permitted only when such
Persons entitled to depreciation allowance:
property is located within the Philippines.
(1) Resident citizens and resident aliens – there shall be allowed as a
deduction, a reasonable allowance for the exhaustion and wear and tear
(including for obsolescence) of property used in trade and business.
(a) In general
1. Depreciation Base
1. If the taxpayer OWNS the property and has a capital investment
therein, he may claim depreciation.
Zamora v. CIR (1963)
2. If the property is held by one person FOR LIFE with remainder to
another person, the deduction shall be computed as if the life F: CIR disallowed the 3.5% rate of depreciation claimed by Mariano Zamora of the
tenant is the absolute owner of the property. Bay View Hotel Building. The CIR and the CTA granted only 2.5% as rate using the
3. If the property is HELD IN TRUST, the deduction shall be so-called Bulletin F, a publication on depreciation of the US Federal Internal
apportioned between the income beneficiaries and the trustee in Revenue Service. Zamora claims that the rate he used was based on three factors:
accordance with the trust, or, in the absence of the trust
agreement, on the basis of the trust income allowable to each. (a) The property is in the Ermita District that is now becoming a
commercial district
(b) Depreciation of properties used in petroleum services: (b) There is no room for improvement
1. In respect to all properties directly related to production of (c) The changing modes of architecture, styles of furniture and decorative
petroleum initially placed in service in taxable year under the designs
straight line or double declining balance method of depreciation H: 2.5% rate affirmed
(at the option of the contractor). If the double declining is chosen,
it may be changed to straight line at a subsequent date. NOTE: the Those factors are already considered in the 2.5% rate. As regards the
usual life of these properties shall be ten years or such shorter life Bulletin F, the Court admitted that it has no binding force but it has a strong
as may be permitted by the CIR.
2. Methods of Depreciation
It must be based on a REASONABLE ALLOWANCE: B. Declining balance method – this method uses a rate (usually 1.5 or 2 times
the straight linerate) to the declining book value of the asset
- It shall include, but not limited to, an allowance computed in accordance - The rate that may be used is 20% which is double declining; 10% may also
with rules and regulations prescribed by the SoFinance, upon the be used as ordinary declining
recommendation of the CIR based on the methods to be discussed infra
- The taxpayer and the CIR may enter into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any Formula: Depreciation Rate is
property (based on the rules prescribed by the SoFinance) this will be
binding upon the taxpayer and the national government UNLESS there are 1 x 2 (or1.5)
facts and circumstances not taken into consideration when the agreement
was forged. The burden of proving such facts and circumstances shall rest Estimated Useful Life
upon the property who wants to modify the useful life or rate.
- PVD: the taxpayer can adopt its own useful life and depreciation rate on Formula for the Depreciation expense:
any depreciable asset if there is no written objection on the part of the
CIR, such will be binding! Book value x Rate = Depreciation expense
Methods:
A. Straight-line method – the total depreciation is spread over the useful life
of the asset Illustration: A machine costing 10k is to be depreciated for 5 years, compute the
- Salvage value is the value of the property at the end of its useful life depreciation expense:
usually 10% of the value is used
- How do you determine the useful life the number of years when you can Rate: 1 = 10%
use the property. BIR used the Bulletin F as reference for useful life (see
Annex A of RR19-86 for the listings). Other list which you can use is ADR or 10
Asset Depreciation Rates.
A machine amounting to 10k has an estimated useful life of 5 years with no Formula: Annual Depreciation Rate is
salvage value at the end of 5 years.
89 | Chan, Gono, de Chavez, Manalo
E. Unit of Production method
Remaining useful life
X Depreciable Cost
Sum of the years [n(n+1)]/2 Sir: What methods do you advise?
(1) In case of higher return business SYD will give the highest amount during
the first year
Illustration: (2) If the corp is at a loss use straight line because the amount at first years
would be smaller
A machine costing 10k is to be depreciated for 5 years, salvage value is 1000 (or
10% of the cost) compute the depreciation expense:
3. Depreciation rates
RUL / [5(6)/2] RUL / 15 A. Bulletin F – but this was made in the 40s (discussed in the case of
Zamora)
Year Rate Remaining Book Depreciation Remaining B. Annex A of RR 19-86
Value Expense Book value C. Asset Depreciation Rate
for ff year
1 5/15 9000 (10k less 3000 (5/15 6,000
salvage value of multiplied to 4. Limitations on depreciation deduction on motor vehicles not exceeding
1000) 9k) 2.4Million
2 4/15 6000 1,600 4,400 Rules on depreciation:
3 3/15 4,400 880 3520
4 2/15 3520 469.3 3050 (a) Only one vehicle for land is allowed for the use of an official or
employee, the value of which should not exceed 2,400,000
5 1/15
(b) No depreciation shall be allowed for yachts, helicopters, airplanes and
other land or aircrafts which exceed 2.4M
Other method that you can use: Effect: some companies just lease and claim rental expenses
D. Working Hours Method – the total working hours of the machine until its
retirement is estimanted and a charge per hour is determined under the
following formulas:
H. DEPLETION21
Formula: Depreciation Charge per hour is
(Sec 34 NIRC (G)) Depletion of Oil and Gas Wells and Mines
Cost (or other basis)
(1) In General. - a reasonable allowance for depletion or amortization computed in
Less scrap value (if any)
accordance with the cost-depletion method
Estimated Useful Life in hours When the allowance for depletion shall equal the capital invested no
further allowance shall be granted
Formula for the Annual Depreciation: After production in commercial quantities has commenced, intangible
exploration and development drilling costs:
No of hours asset was used X Depreciation charge per hour
21
Kaye’s Part
90 | Chan, Gono, de Chavez, Manalo
(a) For non-producing wells and/or mines: deductible in the year o 'Exploration expenditures' – expenditures paid or incurred for the
incurred purpose of ascertaining the existence, location, extent or quality of
(b) For producing wells and/or mines (at the election of the any deposit of ore or other mineral, and paid or incurred before
taxpayer): the beginning of the development stage of the mine or deposit.
o 'Development expenditures' – expenditures paid or incurred
i. shall be deductible in full in the year paid or incurred;
during the development stage of the mine or other natural
OR
deposits. The development stage of a mine or other natural
ii. may be capitalized and amortized deposit shall begin at the time when deposits of ore or other
'Intangible costs in petroleum operations' – any cost incurred in petroleum minerals are shown to exist in sufficient commercial quantity and
operations which in itself has: quality and shall end upon commencement of actual commercial
o No salvage value AND extraction.
o Incidental to and necessary for the drilling of wells and (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
preparation of wells for the production of petroleum individual or Foreign Corporation
o Note: Costs that pertain to the acquisition or improvement of
Allowance for depletion of oil and gas wells or mines under paragraph 1
property of a character subject to the allowance for depreciation
shall be authorized only in respect to oil and gas wells or mines located
are not included.
within the Philippines.
Any intangible exploration, drilling and development expenses allowed as a
deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion. I. PENSION TRUST
(2) Election to Deduct Exploration and Development Expenditures (RR-2, Sec 118) Payments to employees' pension trusts.
The taxpayer may at his option deduct exploration and development An employer who adopts or has adopted a reasonable pension plan, actuarially
expenditures accumulated as cost or adjusted basis for cost depletion as of sound, and who establishes, or has established, and maintains a pension trust for
date of prospecting, as well as exploration and development expenditures the payment of reasonable pensions to his employees shall be allowed to deduct
paid or incurred during the taxable year amount deductible shall not from gross income reasonable amounts paid to such trust:
exceed twenty-five percent (25%) of the net income from mining (a) If the plan contemplates the payment to the trust, in advance of the time
operations computed without the benefit of any tax incentives under when pensions are granted, of amounts to provide for future pensions payments,
existing laws. then (1) reasonable amounts paid to the trust during the taxable year
o The election by the taxpayer to deduct the exploration and representing the pension liability applicable to such year, determined in
development expenditures is irrevocable and shall be binding in accordance with the plan, shall be allowed as a deduction for such year as an
succeeding taxable years. ordinary and necessary business expense, and in addition (2) one-tenth of a
o The actual exploration and development expenditures minus reasonable amount transferred or paid to the trust during the taxable year to
twenty-five percent (25%) of the net income from mining shall be cover in whole or in part the pension liability applicable to the years prior to the
carried forward to the succeeding years until fully deducted. taxable year, or so transferred or paid to place the trust on a sound financial basis,
'Net income from mining operations' – gross income from operations less shall be allowed as a deduction for the taxable year and for each of the nine
'allowable deductions' which are necessary or related to mining operations. succeeding taxable years.
'Allowable deductions' – shall include:
o mining, milling and marketing expenses (b) If the plan does not contemplate the payment to the trust, in advance of the
o depreciation of properties directly used in the mining operations time when pensions are granted, of amounts to provide for future pension
payments, then (1) reasonable amounts paid to the trust during the taxable year
(but not to expenditures for the acquisition or improvement of
property which is subject to an allowance for depreciation) representing the present value of the expected future payments in respect of
pensions granted to employees retired during the taxable year shall be allowed as
In no case shall this deduction apply with respect to amounts paid or
deduction for such year as an ordinary and necessary business expense, and in
incurred for the exploration and development of oil and gas.
In this case, the expense cannot be considered as an ordinary expense. The expense
was intended to promote and protect the reputation of the company since it was
doing a public offer. Efforts to establish reputation are akin to acquisition of capital
assets and, therefore, expenses related thereto are not business expense deductible
outright.
Sir Says: The expense in this case is akin to expenditure for goodwill which is not
amortizable. (Querendum) How then can the company recover the expense? (I tried
to research on this and I found that the company can annually test the goodwill for
impairment. If the reputation has been tarnished, goodwill will probably be
impaired and the impairment is deductible as an expense for both financial
accounting and taxation purposes.)
4. Ordinary Loss [Sec. 22 (Z): Any loss from the sale or exchange of
property which is not a capital asset. Any loss from the sale or B. DETERMINATION OF GAIN OR LOSS FROM TRANSFER OF PROPERTY (Section
exchange of property which is treated or considered as ordinary loss 40, Section 136-143, RR2)
D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax
Property Subject of the Tax- free Exchange. Clearance (TCL)
The substituted basis as defined in Section 40(C)(5) of the Tax Code shall be the The CAR/TCL for the real property or share of stock/unit of
basis for determining gain or loss on a subsequent sale or disposition of property participation/interest involved in the exchange shall be issued by the
subject of the tax-free exchange. Revenue District Officer/Authorized Internal Revenue Officer on the basis
of the certification or ruling to be issued in triplicate
107 | Chan, Gono, de Chavez, Manalo
The CAR/TCL to be issued shall specify that the transaction involved is a The amount of income derived or loss sustained from a tax-free exchange of
tax-free exchange under Section 40(C)(2), the date of exchange; and the property is the difference between the market value at the time of the exchange of
substituted basis of the properties as stated in the certification or ruling the property received in exchange and the original cost, or the adjusted cost basis,
issued by the BIR of the property exchanged to the transferor. The cost basis to the transferee of the
property exchanged for stocks shall be the same as it would be in the hands of the
transferor.
4. Cost Or Basis In Tax-Free Exchanges23
General – gain or loss shall be recognized in every sale or exchange of Tax Basis (lifted from Mamalateo)
property o Tax basis in a qualified tax-free exchange of property for computing
the gain on the sale of the assets received by the corporation - the
SECTION 40 C (2), NIRC original/historical cost of the property given in exchange of the shares
The entire amount of the gain or loss, as the case may be, shall be recognized of stock
except in the following cases o Tax basis in a qualified tax-free exchange of for computing the gain on
o Sales or exchanges resulting in non-recognition of gains or losses the sale of the assets received by the corporation on the sale of the
Exchange solely in kind in legitimate mergers or consolidation shares of stock received by the stockholders in exchange of the assets –
includes: the original/historical cost of the property given in exchange of the
Exchange solely in kind in legitimate mergers or shares of stock
consolidations includes: o In a qualified merger the tax basis for computing capital gains on the
o Between the corporation which are parties sale of the assets received by the surviving corporation from the
to the mergers or consolidation (property absorbed corporation – the original/historical cost of the assets when
for stocks) still in the hands of the absorbed corporation
o Between a stockholder of a corporation o In a qualified merger the tax basis for computing capital gains on the
party to a merger or consolidation and the sale of the shares of stock received by the stockholders from the
other party corporation (stock for stock) surviving corporation - the acquisition/historical cost of assets
o A security holder of a corporation, which is referred to the surviving corporation
a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
o No gain or loss shall also be recognized if property is transferred to a RR 18-2001 GUIDELINES ON MONITORING, BASIS OF PROPERTY IN TAX-FREE
corporation by a person in exchange for stock or unit of participation EXCHANGES
in such a corporation of which as a result of such exchange said person, No gain or loss shall also be recognized if property is transferred to a corporation
alone or together with others, not exceeding four (4) persons, gains by a person in exchange for stock or unit of participation in such corporation of
control of said corporation which as a result of such exchange, said person, alone or together with together,
Stocks issued for services shall not be considered as issued in not exceeding 4 persons, gains control of said corporation
return for property. Note that there are five people here
Rationale: They want to encourage proprietorships to incorporate so that
they can be open to the public if the public wants to invest, and so they can
be easily monitored.
SEC 141 RR2
Substituted Basis of Stock or Securities Received by the Transferor.
23 The substituted basis of the stock or securities received by the transferor
Jamie’s Part
108 | Chan, Gono, de Chavez, Manalo
on a tax-free exchange shall be as follows: The adjusted basis of (a) to (d) above, if the acquisition cost of the property
is increased by the amount of improvements that materially add to the
The original basis of the property, stock or securities to be transferred value of the property or appreciably prolong its life less accumulated
(money received, if any + the fair market value of the other property depreciation.
- received, if any) The substituted basis, if the property was acquired in a previous taxfree
+ (the amount treated as dividend of the shareholder, if any + the amount of exchange under Section 40(C)(2) of the Tax Code of 1997
any gain that was recognized on the exchange, if any
Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of
Property Subject of the Tax-free Exchange.
The substituted basis as defined in Section 40(C)(5) of the Tax Code of
1997, and implemented in Section 2.A and 2.B above, shall be the basis for
However, the property received as 'boot' shall have as basis its fair market value. determining gain or loss on a subsequent sale or disposition of property
Boot - refers to the money received and other property subject of the tax-free exchange
received in excess of the stock or securities received by the
transferor on a tax-free exchange. Requirements for Parties to a Tax-free Exchange of Property for Shares under
o If the transferee of property assumes as part of the consideration to Section 40(C)(2) of the Tax Code of 1997 who are Applying for Confirmation That
the transferor a liability of the transferor or acquires from the latter The Transaction is Indeed a Tax-free Exchange
property subject to a liability A sworn certification on the basis of the property to be transferred
o such assumption or acquisition (in the amount of the liability) shall, for pursuant to such exchange. The basis of each real property/share of stock
purposes of computing the substituted basis, be treated as money or other property transferred must be itemized in the certification in order
received by the transferor on the exchange. to enable the BIR to determine the basis for subsequent disposition and to
o If the transferor receives several kinds of stock or securities, the make it possible for the Register of Deeds or the corporate secretary, as the
Commissioner is authorized to allocate the basis among the several case may be, to annotate the information on such basis for each
classes of stocks or securities. property/share of stock on the reverse side of the Transfer Certificate of
Title/Condominium Certificate of Title of the real property involved, or of
Substituted Basis of the Transferred Property in the Hands of the Transferee. Certificate of Stock. The sworn declaration must be executed by the
the original basis in the hands of the transferor transferor himself, or in case the transferor is a juridical entity, by an
official with rank of no less than the Chief Financial Officer or his
+ the amount of the gain recognized to the transferor on the transfer
equivalent. The Commissioner of Internal Revenue is authorized to
prescribe the form in which such sworn declaration shall appear.
Certified true copies of the Transfer Certificates of Title and/or
The Original Basis of Property to be Transferred
Condominium Certificates of Title of the real properties to be transferred;
The cost of the property, if acquired by purchase on or after March 1, 1913;
Certified true copies of the corresponding latest Tax Declaration of the real
The fair market price or value as of the moment of death of the decedent, if
properties to be transferred. It is understood that any improvement is
acquired by inheritance;
separately declared and therefore, covered by a Tax Declaration distinct
The basis in the hands of the donor or the last preceding owner by whom
from the Tax Declaration on the land. Further, if the tax declaration was
the property was not acquired by gift, if the property was acquired by
issued three (3) or more years prior to the exchange transaction, the
donation.
Transferor shall include in the certification by the local government unit's
If the basis, however, is greater than the fair market value of the property
Assessor that such tax declaration is the latest tax declaration covering the
at the time of donation, then, for purposes of determining loss, the basis
real property;
shall be such fair market value; or,
(d) Certified true copies of the certificates of stocks evidencing shares of
The amount paid by the transferee for the property, if the property was
stock to be transferred; and
acquired for less than an adequate consideration in money or money's
Certified true copy of the inventory of other property/ies to be transferred.
worth.
No certification/ruling will be issued by the Bureau of Internal Revenue
The CAR/TCL for the real property or share of stock/unit of 6. Business Purpose
participation/interest involved in the exchange shall be issued by the
Revenue District Officer (RDO) or by the Authorized Internal Revenue Gregory v. Helvering, 293 U.S. 465
Officer (AIRO), on the basis of the certification-ruling issued by the
Commissioner or his duly authorized representative to the effect that the Gregory owned two companies – United Mortgage Company and Averill
transaction qualifies as a tax-free exchange or corporate reorganization Corporation. Gregory asked United Mortgage to turn over all its Monitor
under Section 40(C)(2) of the Tax Code of 1997. Stick to Averille. Gregory owned 100% of United, which no longer owned
The necessary proof of payment of appropriate documentary stamp taxes Monitor shares, and 100% of Averill, which only owned 1,000 shares of
must also be presented. Monitor. Gregory dissolved Averill and had all its assets — the 1,000
The CAR/TCL to be issued shall specify, among others, that the transaction Monitor shares — distributed to herself. She sold the 1,000 shares to a
involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of third party for $133,333.33, but claiming cost of $57,325.45, she claimed
1997; the date of exchange; the original or adjusted basis as represented by that she should be taxed on a capital net gain on $76,007.88 (instead of 86k
the taxpayer, and substituted basis of the properties as stated in the = 133k – 57k).
certification or ruling issued by the Bureau of Internal Revenue. On her 1928 Federal income tax return, Gregory treated the transaction
(from United to Averill to herself) as a tax-free corporate reorganization
under section 112 of the Revenue Act of 1928, the tax statute applicable at
that time. Indeed, the legal form of this set of transactions arguably
appeared to qualify under the literal language of the statute.
Commissioner of Internal Revenue argued that in terms of economic
substance there really was no “business reorganization” — that Mrs.
Gregory, who controlled all three corporations, was simply following a
legal form to make it appear to be a reorganization — so that she could
5. Assumption of Liability in Tax free Exchanges dispose of the Monitor shares without having to pay a substantial income
tax on the gain that otherwise would have been deemed to have been
SECTION 40 C (4), NIRC realized.
Assumption of Liability
If the taxpayer, in connection with the exchanges described in the foregoing ISSUE/HELD
SEC 131 RR-2 (Treatment of loss on wash sales) SECTION 24, NIRC
Capital Gains from Sale of Real Property
Where more than one loss is claimed to have been sustained within the taxable
o A final tax of six percent (6%)
year from the sale or other disposition of stock or securities
o Based on the gross selling price or current fair market value as
o The provisions of wash sales shall be applied to the losses in the order
determined in accordance with Section 6(E) of this Code, whichever is
in which the stock or securities the disposition of which resulted in the
higher
respective losses were disposed of (beginning with the earliest
o Imposed upon capital gains presumed to have been realized from the
disposition).
sale, exchange, or other disposition of real property located in the
o If the order of disposition of stock or securities disposed of at a loss on
Philippines, classified as capital assets, including pacto de retro sales
the same day cannot be determined
and other forms of conditional sales, by individuals, including estates
The stock or securities will be considered to have been
and trusts
disposed of in the order in which they were originally
o The tax liability, if any, on gains from sales or other dispositions of real
acquired (beginning with earliest acquisition).
property to the government or any of its political subdivisions or
Where the amount of stock or securities are acquired within the sixty-one-day
agencies or to government-owned or -controlled corporations shall be
period is less than the amount of stock or securities sold or otherwise disposed
determined either under Section 24(A) or under this Subsection, at the
of
option of the taxpayer;
o The particular shares of stock or securities the loss from the sale or
Exception
other disposition of which is not deductible shall be those with which
o Capital gains presumed to have been realized from the sale or
the stock or securities acquired are matched according to the following
disposition of their principal residence by natural persons the
rule:
proceeds of which is fully utilized in acquiring or constructing a new
The stock or securities acquired will be matched in
principal residence within eighteen (18) calendar months from the
accordance with the order of their acquisition (beginning with
date of sale or disposition shall be exempt from the capital gains tax
the earliest acquisition) with an equal number of shares of
imposed under this Subsection
stock, or securities sold or otherwise disposed of.
o Requisites:
Where the amount of stock or securities acquired within the sixty-one-day
the proceeds of which is fully utilized in acquiring or
period is not less than the amount of stock or securities sold or otherwise
constructing a new principal residence within eighteen (18)
No. of days labor is performed in PHL (x) Total Compensation e. Gain on Sale of Real Property - gains, profits and income from the
received = Income from PHL sources sale of real property located in the Philippines; and
f. Gain on Sale of Personal Property
Total no. of days labor was performed GR: profits and income from the sale of personal property is
treated as derived entirely from the country where it is sold
RAMO 4-86 – Audit guidelines in the Allocation of Home Office 4. Income from sources partly within or without the PHL
Overhead Expenses
- NOTE that it will be difficult to determine the amount which the head
office is allocating to its branches, so the ff guidelines should be Special rules are provided by RR2-40:
followed. a. Income derived from foreign steamship companies whose vessels touch PHL
- Audit Procedures: ports and other services rendered partly within and without PHL 2.5% of
o Provide a detailed examination of functions performed by the GPB
Head office and the branch b. Income from sale of personal property produced in whole or in part by the
o The functions must be determined and listed. They should taxpayer within and sold outside PHL; or produced in whole or in part by the
also be analyzed taxpayer outside and sold within PHL
- In general, the deduction should meet these tests:
o RELEVANCE are the expenses necessary to the local
branch? 5. Definition of Royalties
o REASONABLE are the charges ordinary? Keep in mind the
arm’s length principle in transactions Philamlife v. CTA, CIR
- As to deductions that cannot be definitely allocated:
o Provide a breakdown of the expenses that the head office is F: Philamlife entered into a contract with foreign corporation AIRCO (later to
pro-rating
become AIGI), a Bermuda-based reinsurance company. Under the contract, AIRCO
o Basis of pro-ration
will perform services for Philamwlife including Investment, Underwriting and
Marketing, Education and Training, Personnel, and Accounting/Auditing. In 1979,
RAMO 1-95 – Audit guidelines for PHL branches soliciting orders, service CIR gave P a tax credit for allegedly erroneous payment of withholding tax at source
contracts and other activities on remittances to AIGI. This was later cancelled by CIR so P was assessed with a
For solicitation and trading activities:
Worldwide operating sales to the PHL (x) Worldwide sales (x) rate
123 | Chan, Gono, de Chavez, Manalo
deficiency withholding tax. The issue now is whether the compensation for the From a local By a resident Income Graduated income tax
management services performed abroad by AIGI should be taxed in PHL. owner individual owner rates
of copyright
H: YES. Based on Sec37 of the old code, the definition of royalties include the supply By a domestic corp Income 32% final tax
of scientific, technical or commercial knowledge or info, the supply of any assistance owner
as a means of enabling the application or enjoyment of any property or right, and From a Non-resident alien Income If engaged in trade or
foreign individual business, the same as a
technical advice, assistance or services. It is clear from this definition that the
licensor resident individual
management services should be considered as income from services within the PHL owner
under royalties. AIRCO, being a non-resident foreign corp not engaged in trade or Foreign Income 32%
business here shall pay a 35% tax of its income within PHL. corporation Subject to existing tax
(resident or non- treaties
6. Effect of turnkey projects resident)
If a person sues in one year on a pecuniary claim or for property, and money or (RR-2 Sec 167)
property is recovered on judgment in a later year, in come is realized in that year,
assuming that it would have been income in the earlier year if the received It is recognized that no uniform method of accounting can be prescribed for all
(example: patent infringement) taxpayers, and the law contemplates that each taxpayer shall adopt such forms
and systems of accounting as are in his judgment best suited to his purpose. Each
taxpayer is required by law to make a return of his true income. He must,
therefore, maintain such accounting records as will enable him to do so. An
(RR-2, Sec 52) approved standard method of accounting which reflects the taxpayer’s income
may be adopted.
Income constructively received – Income which is credited to the account of or set
apart for a taxpayer and which may be draw upon by him at any time is subject to Essential considerations:
tax for the year during which so credited or set apart, although not then actually
reduced to possession. In all cases in which production, purchase or sale of merchandise of any
Must have been credited without any substantial limitation or restriction as kind is an income producing factor inventories of merchandise on hand
to the time or manner of payment or payment is not subject to condition (finished, work in process, raw materials and supplies) should be taken at
A book of entry, if made, should indicate an absolute transfer the beginning and end of the year and used in computing the net income of
If income is not credited but only set apart, it must be unqualifiedly subject the year
to the demand of the taxpayer Expenditures should be properly classifed as between capital (amortized)
Examples of constructive receipt (RR-2, Sec 53): and income (expensed outright)
F: The company used the accrual basis of accounting method for its income.
However, in its expenses, it failed to declare the share of Benguet Corporation in the (Sec 48 NIRC)
“accounts receivable.” Such share is the amount due to Benguet Corporation for its Income from long-term contracts.
o 'Long-term contracts’ – building, installation or construction contracts
service to the company as mine operator. Their agreement is that the compensation
covering a period in excess of one (1) year.
of Benguet will be 50% of gross profit that is the actual receipts less actual o Persons whose gross income is derived in whole or in part from such
disbursements. What the company does is to deduct such share in the A/R upon contracts shall report such income upon the basis of percentage of
actual receipt of the A/R and upon actual payment to Benguet (on a cash & carry completion. The return should be accompanied by a return certificate of
basis). CIR questioned this method of accounting. architects or engineers showing the percentage of completion during the
taxable year of the entire work performed under contract. There should be
H:The company was not in fact using a hybrid method but was consistent with the deducted from such gross income all expenditures made during the taxable
use of accrual basis of accounting method. Since Benguet’s share is only on based on year on account of the contract, account being taken of the material and
supplies on hand at the beginning and end of the taxable period for use in
payments actually received, it cannot share on the company’s Accounts Receivable.
connection with the work under the contract but not yet so applied. If upon
The amount due to Benguet is determined upon actual receipt of such accounts and completion of a contract, it is found that the taxable net income arising
only then will the company incur a liability to pay Benguet. Therefore, the company thereunder has not been clearly reflected for any year or years, the
properly deducts the compensation to Benguet when there is obligation to pay, that Commissioner may permit or require an amended return.
is, upon actual receipt of the payment.
(Sec 46 NIRC) Sales of Dealers in Personal Property – a person who regularly sells or
If a taxpayer, other than an individual, changes his accounting period from fiscal otherwise disposes of personal property on the instalment plan may return
year to calendar year, from calendar year to fiscal year, or from one fiscal year to as income therefrom in any taxable year that proportion of the instalment
another, the net income shall, with the approval of the Commissioner, be computed payments actually received in that year, which the gross profit realized or
on the basis of such new accounting period, subject to the provisions of Section 47. to be realized when payment is completed, bears to the total contract price.
Formula:
Gross Profit
(Sec 47 NIRC) X Instalment paid = Amount reportable as Income
Contract Price
Final or Adjustment Returns for a Period of Less than Twelve (12) Months. –
Returns for Short Period Resulting from Change of Accounting Period
Sales of Realty and Casual Sales of Personality (same formula)
3 SCENARIOS: a) Casual sale or other casual disposition of personal property (other
than property of a kind which would properly be included in the
Changes from calendar year to fiscal year separate final or adjustment inventory of the taxpayer if on hand at the close of the taxable
return shall be made for the period between the close of the last calendar year) for a selling price exceeding One thousand pesos (P1,000)
Net Worth Method H: The Collector may base his assessment on documents other than the taxpayer’s
accounts and records when the taxpayer’s books DO NOT REFLECT the correct
PEREZ VS CTA (May 30, 1958)
income. Reyes in this case already underscored the dispute as to the correct value of
F: CIR assessed Perez for deficiency income taxes and surcharges. In arriving at the the inventories (he himself caused the suspicion on the part of the CIR as to the
amount of assessment, the CIR used the “net worth technique.” The net worth correct valuation of inventory when he cannot say for sure whether it was recorded
technique considers the increase in the value of the taxpayer’s capital (excluding at cost or at dealer’s price).
nontaxable income and adding back nondeductible expenses). Perez contests the
Tax Evasion vs Tax Avoidance
validity of the method employed.
In theory, tax avoidance has often been defined as an attempt to minimize the
H: The net worth method is a valid formula adopted by the Philippine tax
payment or altogether eliminate tax liability by lawful means. Meanwhile tax
authorities from the US. It may be used in this jurisdiction provided the
evasion refers to the elimination or reductions of one's correct and proper tax by
requirements are met. According to US jurisprudence, the theory of the method is
fraudulent means. The consequence of each case is also clear. The former is not
that during the tax period, the aggregate nondeductible expenses plus any increase
criminally punishable while the latter is criminally punishable.
in the net worth unaccounted for constitutes taxable income. It is not asserted as an
accounting method but merely an evidence of income. In practice, however, the distinctions become mere academic discussions rather
than real.
Requirements for applicability:
For example, when the BIR asks for a valid business purpose whenever a taxpayer
1. Establishment with reasonable certainty of an opening net worth to serve
enters into a transaction which has the effect of reducing tax liability, the taxpayer
as a starting point (referring to Capital, Beginning)
2. The net worth increase must be attributable to taxable income (BOF is on has to come up with a valid reason which must be acceptable to the BIR. An honest
the taxpayer) not satisfied in this case because taxpayer failed to adduce answer from the taxpayer that the transaction was for purposes of tax avoidance
explanations of the items. will not be acceptable. The BIR will impose the higher tax rate in its assessment, as
FORMULA:
well as the corresponding interests and penalties. In reality, therefore, tax avoidance
Increase in Net Worth xxx per se is not considered by the BIR as a valid reason.
Add:
Nondeductible Expenses xxx
Deduct:
Nontaxable Income (xxx) CIR vs BENIGNO TODA (September 14, 2004)
Taxable Income xxx
F: Cibeles Insurance authorized Toda, (its president) to sell the Cibeles Building and
Increase in Net Worth = Capital, Beginning – Capital, Year
the 2 parcels of land it stood on for at least P90M. Toda sold the property to
End
Altonaga for P100M. Altonaga sold the property to Royal Match for P200M. For the
sale to Royal Match, Altonaga paid individual capital gains tax worth P10M. Cibeles
Capital = Assets – Liabilities
Insurance filed its corporate annual income tax return a gain from the sale of the
The term 'in the discretion of the grantor' means in the discretion of the grantor,
either alone or in conjunction with any person not having a substantial adverse
4. Computation and Payment interest in the disposition of the part of the income in question.
Sec. 60 (C) (1) Sec. 64 is designed to prevent the taxpayer from escaping the progressive
GENERAL RULE: The tax shall be computed upon the taxable income of the estate or tax rates on individuals by the trust device where he retains control over
trust and shall be paid by the fiduciary the trust income
EXCEPTIONS:
1. Revocable trusts [Section 63] 6. Consolidation of Income of Two or More Trusts
2. Income for the benefit of grantor [Section 64]
Sec. 60 (C) (2)
GENERAL RULE: In case of two or more trusts
Revocable Trusts the creator of the trust in each instance is the same person
Revocable Trusts [Sec. 63] beneficiary in each instance is the same
Where at any time the power to revest in the grantor title to any part of the corpus The taxable income of all the trusts shall be consolidated and the tax provided in
of the trust is vested this Section computed on such consolidated income
(1) in the grantor either alone or in conjunction with any person not having a Such proportion of said tax shall be assessed and collected from each
substantial adverse interest in the disposition of such part of the corpus or the trustee which the taxable income of the trust administered by him bears to
income therefrom, or the consolidated income of the several trusts.
(2) in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom EXCEPTION: [Sec. 215, RR2]
The income of such part of the trust shall be included in computing the taxable
income of the grantor. Where a person creates two or more trusts in favor of the same beneficiary
appointing two or more trustees, the latter should each make a separate return for
each trust but in such case the CIR will consolidate the net incomes of the different
5. INCOME FOR BENEFIT OF GRANTOR trusts and compute the tax on such consolidated income, allowing only one
absolute exemption of 1,800.
COMPUTATION OF TAX
(Sec. 60 (C), NIRC)
Basis: The tax is computed upon the taxable income of the estate or trust
Rates: The same rates for individuals under Sec. 24 (A)
Personal Exemption: P20,000
Taxable Year: Calendar year
"In case the taxpayer elects and is qualified to report the gain by installments under
Section 49 of this Code, the tax due from each installment payment shall be paid
e. Where to Pay within (30) days from the receipt of such payments.
No registration of any document transferring real property shall be effected by the
Sec. 56 Register of Deeds unless the Commissioner or his duly authorized representative
The total amount of tax shall be paid by the person subject thereto at the time the has certified that such transfer has been reported, and the tax herein imposed, if
return is filed. any, has been paid.
When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation may elect to pay the tax in two (2) equal installments:
1. First installment paid at the time the return is filed g. Quarterly Declaration of Income Tax (Sec. 74)
2. Second installment paid on or before July 15 following the close of the Declaration of Income Tax for Individuals, Sec. 74
calendar year. General Rule: Every individual subject to income tax under Sections 24 and 25(A)
If any installment is not paid on or before the date fixed for its payment, the whole of this Title, who is receiving self-employment income, whether it constitutes the
amount of the tax unpaid becomes due and payable, together with the delinquency sole source of his income or in combination with salaries, wages and other fixed or
penalties. determinable income, shall make and file a declaration of his estimated income for
the current taxable year on or before April 15 of the same taxable year.
f. Capital Gains on Shares of Stocks and Real Estate Self-employment income consists of the earnings derived by the individual from the
practice of profession or conduct of trade or business carried on by him as a sole
Sec. 51 (C) and Sec. 56 (A)(3) proprietor or by a partnership of which he is a member.
FILING A RETURN – Individuals subject to tax on capital gains Nonresident Filipino citizens, with respect to income from without the
(a) From the sale or exchange of shares of stock not traded thru a local stock Philippines, and nonresident aliens not engaged in trade or business in the
exchange as prescribed under Section 24(c) shall file a return within Philippines, are not required to render a declaration of estimated income
thirty (30) days after each transaction and a final consolidated return on tax.
or before April 15 of each year covering all stock transactions of the The declaration shall contain such pertinent information as the Secretary
preceding taxable year; and of Finance, upon recommendation of the Commissioner, may, by rules and
(b) From the sale or disposition of real property under Section 24(D) shall file regulations prescribe. An individual may make amendments of a
a return within thirty (30) days following each sale or other disposition. declaration filed during the taxable year under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed Commissioner.
under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on Exception: Except as otherwise provided in this Section
the date the return prescribed therefor is filed by the person liable thereto:
Provided, That if the seller submits proof of his intention to avail himself of the Estimated tax: the amount which the individual declared as income tax in his final
benefit of exemption of capital gains under existing special laws, no such payments adjusted and annual income tax return for the preceding taxable year minus the sum
shall be required : Provided, further, That in case of failure to qualify for exemption of the credits allowed under this Title against the said tax. If, during the current
under such special laws and implementing rules and regulations, the tax due on the taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall
gains realized from the original transaction shall immediately become due and file an amended declaration during any interval of installment payment dates.
payable, subject to the penalties prescribed under applicable provisions of this
Code: Provided, finally, That if the seller, having paid the tax, submits such proof of Return and Payment of Estimated Income Tax by Individuals. - The amount of
intent within six (6) months from the registration of the document transferring the estimated income as defined above with respect to which a declaration is required
shall be paid in four (4) installments.
136 | Chan, Gono, de Chavez, Manalo
First installment paid at the time of the declaration returns, only one return for the taxable year shall be filed by either spouse to
Second installment August 15 of current year cover the income of the spouse, which return shall be signed by the husband and
Third installment November 15 of current year wife unless it is physically impossible to do so, in which case signature of one of
Fourth installment paid on or before April 15 of the following calendar the spouse would suffice.”
year when the final adjusted income tax return is due to be filed.
10% Income Payment Subject to Creditable Withholding Tax and Rates Prescribed
Those given to an informer where the Thereon
offender has offered to compromise the Tax basis: items of income payments to persons residing in the Philippines
violation of law committed by him and (A) Professional fees, talent fees, etc., for services rendered by individuals —
his offer has been accepted by the On the gross professional, promotional and talent fees or any other form of
Commissioner and collected from the remuneration for the services of the following individuals
offender. Those individually engaged in the practice of 10%
The amount of reward shall be professions or callings: lawyers; certified public
equivalent to ten percent (10%) of the accountants; doctors of medicine; architects; civil,
revenues, surcharges or fees recovered electrical, chemical, mechanical, structural, industrial,
and/or fine or penalty imposed and mining, sanitary, metallurgical and geodetic
collected or one million pesos engineers; marine surveyors; doctors of veterinary
(P1,000,000.00) per case whichever is science; dentist; professional appraisers;
lower. connoisseurs of tobacco; actuaries; and interior
The reward shall be paid under the rules decorators;
and regulations issued by the Secretary Professional entertainers such as but not limited to 15% if the professional
of Finance, upon the recommendation of actors and actresses, singers and emcees; entertainer's gross
the Commissioner. However, such income for the current
person shall not be entitled to a reward, year exceeds P720,000
should no revenue, surcharges or fees be and 10% if otherwise
actually recovered or collected nor shall Professional athletes including basketball players, 15% if the professional
apply to a case already pending or pelotaris and jockeys; entertainer's gross
previously investigated or examined by income for the current
(B) Professional fees, talent fees, etc. for services of taxable juridical persons (E) Income payments to certain contractors
Professional fees, talent fees, etc. for services of taxable juridical persons 10% Income payments to certain contractors29 2%
29
(C) Rentals (1) General engineering contractors — Those whose principal contracting business in
On gross rental for the continued use or possession of real property used 5% connection with fixed works requiring specialized engineering knowledge and skill including the
following divisions or subjects:
in business which the payor or obligor has not taken or is not taking title,
or in which he has no equity (a) Reclamation works;
On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) 10% (b) Railroads;
per payment for the continued use or possession of personal property (c) Highways, streets and roads;
used in business which the payor or obligor has not taken or is not taking (d) Tunnels;
(e) Airports and airways;
title, or in which he has no equity which include, but not limited to the (f) Waste reduction plants;
following: land transport equipment, water transport equipment, air (g) Bridges, overpasses, underpasses and other similar works;
transport equipment, industrial equipment, commercial equipment, (h) Pipelines and other systems for the transmission of petroleum and other liquid or
gaseous substances;
148 | Chan, Gono, de Chavez, Manalo
On income distributed to the beneficiaries of estates and trust as 15% withholding tax and tax exempt income
determined under Sec. 60 of the Code, except such income subject to final
(i) Land leveling; (G) Income payments to certain brokers and agents.
(j) Excavating; On gross commissions of customs, insurance, real estate and commercial 10%
(k) Trenching; brokers and fees of agents of professional entertainers
(l) Paving; and
(m) Surfacing work.
(2) General Building contractors — Those whose principal contracting business is in connection (H) Income payments to partners of general professional partnerships.
with any structure built, for the support, shelter and enclosure of persons, animals, chattels, or Income payments made periodically or at the end of the 10% if gross income
movable property of any kind, requiring in its construction the use of more than two unrelated
building trades or crafts, or to do or superintend the whole or any part thereto. Such structure
taxable year by a general professional partnership to the does not exceed
includes sewers and sewerage disposal plants and systems, parks, playgrounds, and other partners, such as drawings, advances, sharings, 720,000 else 15%
recreational works, refineries, chemical plants and similar industrial plants requiring specialized allowances, stipends, etc.
engineering knowledge and skills, powerhouse, power plants and other utility plants and
installation, mines and metallurgical plants, cement and concrete works in connection with the
above-mentioned fixed works.
(3) Specialty Contractors — Those whose operations pertain to the performance of construction (I) Professional fees paid to medical practitioners.
work requiring special skill and whose principal contracting business involves the use of Any amount collected for and paid to medical practitioners 10% if gross
specialized building trades or crafts. (includes doctors of medicine, doctors of veterinary science income does not
(4) Other contractors — and dentists) by hospitals and clinics or paid directly to the exceed 720,000
medical practitioners by patients who were admitted and else 15%
(a) Filling, demolition and salvage work contractors and operators of mine drilling
apparatus; confined to such hospitals or clinics
(b) Operators of dockyards; Note: The withholding tax herein prescribed shall not apply whenever there is
(c) Persons engaged in the installation of water system, and gas or electric light, heat or proof that no professional fee has in fact been charged by the medical practitioner
power; and paid by his patient.
(d) Operators of stevedoring, warehousing or forwarding establishments;
(e) Transportation contractors which include common carriers for the carriage of goods
and merchandise of whatever kind by land, air or water, where the gross payments by the (J) Gross selling price or total amount of consideration or its equivalent paid
payor to the same payee amounts to at least two thousand pesos (P2,000) per month,
to the seller/owner for the sale, exchange or transfer of .
regardless of the number of shipments during the month;
(f) Printers, bookbinders, lithographers and publishers except those principally engaged Gross selling price or total amount of consideration or its equivalent paid to the
in the publication or printing of any newspaper, magazine, review or bulletin which seller/owner for the sale, exchange or transfer of Real property, other than capital
appears at regular intervals, with fixed prices for subscription and sale; assets, sold by an individual, corporation, estate, trust, trust fund or pension fund
(g) Messengerial, janitorial, private detective and/or security agencies, credit and/or and the seller/transferor is habitually engaged in the real estate business in
collection agencies and other business agencies;
accordance with the following schedule
(h) Advertising agencies, exclusive of gross payments to media;
(i) Independent producers of television, radio and stage performances or shows; Those which are exempt from a withholding Exempt
(j) Independent producers of "jingles"; tax at source as prescribed in Sec. 2.57.5 of
(k) Labor recruiting agencies these regulations
(l) Persons engaged in the installation of elevators, central air conditioning units, With a selling price of five hundred thousand 1.5%
computer machines and other equipment and machineries and the maintenance services
thereon;
pesos (P500,000.00) or less
(m) Persons engaged in the sale of computer services, computer programmers, With a selling price of more than five hundred 3.0%
software/program developer/designer, internet service providers, web page designing, thousand pesos (P500,000.00) but not more
computer data processing, conversion or base services and other computer related than two million pesos (P2,000,000.00)
activities; (n) Persons engaged in landscaping services;
(o) Persons engaged in the collection and disposal of garbage;
(p) TV and radio station operators on sale of TV and radio airtime; and With selling price of more than two million pesos 5.0%
(q) TV and radio blocktimers on sale of TV and radio commercial spots. (P2,000,000.00)
149 | Chan, Gono, de Chavez, Manalo
Note: A seller/transferor must show proof of registration with HLURB or HUDCC Goods - tangible personal property. It does not include intangible personal
to be considered as habitually engaged in the real estate business. property as well as real property.
Real property, other than capital asset, by an individual, estate, trust, 7.5% Local suppliers of goods - a supplier from whom any of the top five thousand
trust fund or pension fund or by a corporation who is not habitually (5,000) corporations, as determined by the Commissioner, regularly makes its
engaged in the real estate business purchases of goods. As a general rule, this term does not include a casual purchase
Notes: of goods, that is, purchases made from non-regular suppliers and oftentimes
Gross selling price - the consideration stated in the sales document or the fair involving single purchases. However, a single purchase which involves one
market value determined in accordance with Section 6 (E) of the Code, as hundred thousand pesos (P100,000.00) or more shall be subject to a withholding
amended, whichever is higher. In an exchange, the fair market value of the tax.
property received in exchange, as determined in the Income Tax Regulations shall A corporation shall not be considered a withholding agent for purposes of this
be used. Section, unless such corporation has been determined and duly notified in writing
Where the consideration or part thereof is payable on installment, no withholding by the Commissioner that it has been selected as one of the top five thousand
of tax is required to be made on the periodic installment payments where the (5,000) corporations.
buyer is an individual not engaged in trade or business. In such a case, the The withholding agent shall submit on a semestral basis a list of its regular
applicable rate of tax based on the entire consideration shall be withheld on the suppliers of goods to the Revenue District Office (RDO) having jurisdiction over
last installment or installments to be paid to the seller. the withholding agent's principal place of business on or before July 31 and
However, if the buyer is engaged in trade or business, whether a corporation or January 31 of each year.
otherwise, the tax shall be deducted and withheld by the buyer on every
installment.
(N) Income payments by government.
Income payments, except any single purchase 1% supplier 2%
which is P10,000 and below, which are made of goods supplier of
(K) Additional income payments to government personnel from importers, by a government office, national or local, or
shipping and airline companies, or their agents. their attached agencies or bodies, and
On gross additional payments by importers, shipping and airline 15% government-owned or controlled corporations,
companies, or their agents to government personnel for overtime on their purchases of goods from local
services as authorized by law suppliers
Note: For this purpose, the importers, shipping and airline companies or their Income payments made to suppliers of 1% except for income
agents, shall be the withholding agents of the Government; agricultural products payments made to casual
agricultural suppliers where
the annual gross purchases
(L) Certain income payments made by credit card companies therefrom do not exceed
On the gross amounts paid by any credit card company in the Philippines 1% 20,000
to any business entity, whether a natural or juridical person, representing Note: A government-owned or controlled corporation which is listed as one of the
the sales of goods/services made by the aforesaid business entity to top five thousand (5,000) corporations shall withhold the tax in its capacity as a
cardholders government-owned or controlled corporation rather than as one of the top five
thousand (5,000) corporations.
(M) Income payments made by the top five thousand (5,000) corporations. Commissions of independent and exclusive 10%
Income payments made by any of the top five thousand (5,000) 1% distributors, medical/technical and sales
corporations, as determined by the Commissioner, to their local supplier representatives, and marketing agents of multi-
of goods level marketing companies. — On gross
Notes: commissions paid by multi-level marketing
F: Respondent SC Johnson and Sons PHL (Respondent)was granted the right to use
the trademarks, patens and technology of SC Johnson USA. In 1993, it claimed for a F. WITHHOLDING TAX ON WAGES31
refund for overpayment of 25% withholding tax on royalty payments. Respondent
CHAPTER XIII - WITHHOLDING ON WAGES
claims that the RP0US tax treaty should apply which would entitle it to 10%
withholding tax only pursuant to the RP-US tax treaty’s “most favoured nation Nature of Withholding Tax on Wages
clause”. Under this clause, the taxpayer (respondent) is allowed to apply the more It is a method of collecting the income tax on wages/compensation at
favourable tax treatment under a treaty between PHL and another country (in this source upon receipt of the income.
case the RP-West Germany Tax treaty) “under similar circumstances”. If the taxpayer is an individual, the net income shall be computed on the
basis of the calendar year. Thus, all forms of taxable compensation income
H: Respondent is not entitled to 10% tax rate on royalties. are income received and not in the year earned (BIR Ruling 346-88)
It applies to all employed individuals whether citizens or aliens, deriving
The most favoured nation clause does not apply. The RP-Germany treaty requires income from compensation for services rendered in the Philippines
that there should be matching credit (i.e. 20% of the gross amount of royalties paid) The employer is constituted as the withholding agent of the tax due on the
between Germany and PHL in order that the preferential rate of 10% will apply. taxable compensation of the employee
Applying this tax crediting reqt to RP and US, the treaty does not contain a similar
(SEC. 78 NIRC)
crediting, hence, the 10% preferential rate cannot apply.
Definitions. - As used in this Chapter:
Quarterly Returns and Payments of Taxes Withheld
RMC 46-2002
30 31
Cielo’s Part Kaye’s Part
154 | Chan, Gono, de Chavez, Manalo
o Taxes deducted and withheld under Section 57 by withholding Quarterly Returns and Payments of Taxes Withheld
agents are covered by a return and paid to, except in cases where o Taxes deducted and withheld under Section 57 by withholding
the Commissioner otherwise permits, an authorized Treasurer of agents are covered by a return and paid to, except in cases where
the city or municipality where the withholding agent has his legal the Commissioner otherwise permits, an authorized Treasurer of
residence or principal place of business, or where the withholding the city or municipality where the withholding agent has his legal
agent is a corporation, where the principal office is located. residence or principal place of business, or where the withholding
What are these taxes deducted and withheld under agent is a corporation, where the principal office is located.
Section 57? What are these taxes deducted and withheld under
Compensation income Section 57?
Income payments subject to the creditable Compensation income
withholding taxes; and Income payments subject to the creditable
Income subject to final withholding taxes shall withholding taxes; and
be covered by a return and paid as provided Income subject to final withholding taxes shall
o The taxes deducted and withheld by the withholding agent shall be covered by a return and paid as provided
be held as a special fund in trust for the government until paid to o The taxes deducted and withheld by the withholding agent shall
the collecting officers. be held as a special fund in trust for the government until paid to
the collecting officers.
o Period for filing and payment
FINAL WITHHOLDING TAX o Period for filing and payment
The return for final withholding tax shall be filed FINAL WITHHOLDING TAX
and the payment made within twenty-five (25) The return for final withholding tax shall be filed
days from the close of each calendar quarter and the payment made within twenty-five (25)
CREDITABLE WITHHOLDING TAX days from the close of each calendar quarter
The return for creditable withholding taxes shall CREDITABLE WITHHOLDING TAX
be filed and the payment made not later than the The return for creditable withholding taxes shall
last day of the month following the close of the be filed and the payment made not later than the
quarter during which withholding was made: last day of the month following the close of the
The Commissioner, with the approval of the quarter during which withholding was made:
Secretary of Finance, may require these The Commissioner, with the approval of the
withholding agents to pay or deposit the taxes Secretary of Finance, may require these
deducted or withheld at more frequent intervals withholding agents to pay or deposit the taxes
when necessary to protect the interest of the deducted or withheld at more frequent intervals
government. when necessary to protect the interest of the
Statement of Income Payments Made and Taxes Withheld government.
Every withholding agent required to deduct and withhold taxes under Section 57 Statement of Income Payments Made and Taxes Withheld
shall o Every withholding agent required to deduct and withhold taxes
under Section 57 shall
Who is an employee?
An individual performing services under an ER-EE relationship
Covers all EEs, including officers and EEs, whether elected or appointed, of
the Government of the EEs or any of its political subdivision, or any agency
or instrumentality
(SEC 79) NIRC (1) In General. - Unless otherwise provided by this Chapter, the personal
and additional exemptions applicable under this Chapter shall be
Income Tax Collected at Source
determined in accordance with the main provisions of this Title.
(A) Requirement of Withholding. - Every employer making payment of wages shall
(2) Exemption Certificate. -
deduct and withhold upon such wages a tax determined in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon
(a) When to File. - On or before the date of commencement of employment
recommendation of the Commissioner: Provided, however, That no withholding of a
with an employer, the employee shall furnish the employer with a signed
tax shall be required where the total compensation income of an individual does not
withholding exemption certificate relating to the personal and additional
exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month,
exemptions to which he is entitled.
whichever is higher.
(b) Change of Status. - In case of change of status of an employee as a result
(B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this
of which he would be entitled to a lesser or greater amount of exemption,
Chapter, fails to deduct and withhold the tax as required under this Chapter, and
the employee shall, within ten (10) days from such change, file with the
thereafter the tax against which such tax may be credited is paid, the tax so required
employer a new withholding exemption certificate reflecting the change.
to be deducted and withheld shall not be collected from the employer; but this
(F) Husband and Wife. - When a husband and wife each are recipients of wages, (Sec 81 NIRC)
whether from the same or from different employers, taxes to be withheld shall be Filing of Return and Payment of Taxes Withheld.
determined on the following bases: Except as the Commissioner otherwise permits, taxes deducted and withheld by the
(1) The husband shall be deemed the head of the family and proper employer on wages of employees shall be covered by a return and paid to an
claimant of the additional exemption in respect to any dependent children, authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city
unless he explicitly waives his right in favor of his wife in the withholding or municipality where the employer has his legal residence or principal place of
exemption certificate. business, or in case the employer is a corporation, where the principal office is
(2) Taxes shall be withheld from the wages of the wife in accordance with located.
the schedule for zero exemption of the withholding tax table prescribed in The return shall be filed and the payment made within twenty-five (25) days from
Subsection (D)(2)(d) hereof. the close of each calendar quarter: Provided, however, That the Commissioner may,
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in with the approval of the Secretary of Finance, require the employers to pay or
trade or business in the Philippines shall be subject to the provisions of this Chapter. deposit the taxes deducted and withheld at more frequent intervals, in cases where
(H) Year-end Adjustment. - On or before the end of the calendar year but prior to such requirement is deemed necessary to protect the interest of the Government.
the payment of the compensation for the last payroll period, the employer shall
determine the tax due from each employee on taxable compensation income for the The taxes deducted and withheld by employers shall be held in a special fund in
entire taxable year in accordance with Section 24(A). The difference between the tax trust for the Government until the same are paid to the said collecting officers]
due from the employee for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his salary in December of the Requirements for Withholding
current calendar year or refunded to the employee not later than January 25 of the Every employer must withhold from compensation paid, an amount
succeeding year. computed in accordance with existing regulations
Compensation income of the following shall not be subject to withholding
tax:
(Sec 80 NIRC) (RR 2-98 as amended by Section 2 of RR 1-06)
Liability for Tax.
157 | Chan, Gono, de Chavez, Manalo
o Individuals that do not exceed the statutory minimum wage of the adequacy and capacity of the country’s tax administration to comply with its
5,000 per month (60,000 a year), whichever is higher commitments under existing international conventions or agreements on tax
o Employees of the government of the Philippines with salary matters.
grades of 1 to 3 Government shall comply with or commit to internationally-agreed tax
The foregoing individuals whose compensation income is not subject to standards required for the exchange of tax information with its tax treaty
withholding tax shall remain liable for income taxes and shall continue to partners
file their annual income tax returns and pay income taxes due thereon, if o to help combat international tax evasion and avoidance
any, not later than April 15 of the year immediately following the taxable o to help address tax concerns that affect international trade and
year investment.
Government shall adopt measures and procedures to enhance cooperation
with countries in the efficient collection of taxes, consistent with the
G. WITHHOLDING TAX BY GOVERNMENT international understanding to ensure payment of taxes due to respective
taxing jurisdictions
See previous section (Government and its agencies and instrumentalities shall also
withhold tax) Sec. 3. Authority of the Commissioner of Internal Revenue to Inquire into Bank
Deposit Accounts and Related Information Held by Financial Institutions.
H. E-COMMERCE TAXATION o Commissioner is authorized to inquire about:
Decedent to determine his gross estate
(RMC 44-2005) Any taxpayer who has filed an application for compromise of
Payments made by the end-user to local subsidiaries, resellers, distributors of his tax liability under Sec. 204 (A) (2) by reason of financial
resellers for the purchase of copyrighted articles are business income which is incapacity to pay his tax liability
subject to 32% Income Tax, based on the net taxable income of a domestic Taxpayer’s financial position demonstrates a clear
corporation. inability to pay the tax assessed
When making payments to the local subsidiaries, resellers, distributors of WAIVER
resellers, the end-user shall withhold 2% Income Tax of the gross amount of the o Application not considered unless he waives
payments creditable against the taxable income of the local subsidiaries, reseller in writing his privilege under the Foreign
or distributors, provided that the end-user is any of the following persons Currency Deposit Act, or other general or
required to withhold such tax: special laws
a) A juridical person, whether or not engaged in trade or business o Such waiver shall constitute the authority of
b) An individual, with respect to payments made in connection with his the Commissioner to inquire into bank
trade or business; or deposits of taxpayer
c) A government office including a government-owned or controlled A specific taxpayer or taxpayers subject of a request for the
corporation, a provincial, city, or municipal government. supply of tax information from a foreign tax authority
pursuant to an international convention or agreement on tax
matters to which Philippines is a signatory or party
J. TAX TREATY (US-RP Tax Treaty) [RA 10021]32 o PROVIDED that the information obtained from
banks and other financial may be used by BIR
Also known as the “Exchange of Information on Tax Matters Act of 2009” for tax assessment, verification, audit and
enforcement purposes
Sec. 2. Policy – To promote and pursue a tax environment that contributes in o In case of request from a foreign tax authority
sustaining a favourable international investment climate and instills confidence in for tax information held by banks and financial
institutions, the exchange of information shall be
done in a secure manner to ensure
32
Kimmie’s part confidentiality
158 | Chan, Gono, de Chavez, Manalo
o The Commissioner shall provide the tax 8. A statement that the
information obtained from banks and financial requesting foreign tax
institutions: authority has exhausted all
PREMISE: There must be a convention means available in its own
or agreement between the Philippines territory to obtain the
and the other country information, except those that
WHEN? Upon request of the foreign tax would give rise to
authority disproportionate difficulties.
REQUISITES: Requesting authority PURPOSE: to demonstrate the
must provide the ff.: foreseeable relevance of the
1. Identity of the person under information to the request
examination or investigation o Commissioner shall forward the information as promptly as possible to the
2. Statement of information requesting foreign tax authority. Commissioner shall confirm receipt of a
sought and its nature request in writing to the requesting tax authority and shall notify the latter
3. The form said foreign tax of deficiencies in the request, if any, within sixty (60) days from the receipt
authority prefers to receive of the request.
the information o If the Commissioner is unable to obtain and provide the information within
4. Tax purpose the information is ninety (90) days from the receipt of the request, due to obstacles
sought encountered in furnishing the information or when the bank or financial
5. Grounds for believing that the institution refuses to furnish the information, he shall immediately inform
information requested is held the requesting tax authority of the same, explaining the nature of the
in the Philippines or is in the obstacles encountered or the reasons of refusal.
possession or control of a o Foreign tax authority: the tax authority or tax administration of the
person within the jurisdiction requesting State under the tax treaty or convention to which the
of the Philippines Philippines is a signatory or a party of.
6. To the extent known, the name
and address of any person Sec. 4. Allowing a Foreign Tax Authority to Income Tax Returns of Taxpayers in the
believed to be in possession of Philippines. –
the requested information Income tax returns of specific taxpayers subject of a request for exchange
7. A Statement that the request is of information by a foreign tax authority pursuant to an international
in conformity with the law and convention or agreement on tax matters to which the Philippines is a
administrative practices of the signatory or a party of, shall be open to inspection upon the order of the
said foreign tax authority, such President if the Philippines under rules and regulations as may be
that if the requested prescribed by the Secretary of Finance, upon recommendation of the
information was within the Commissioner.
jurisdiction of the said foreign
tax authority then it would be Sec. 5. Authority of the Commissioner of Internal Revenue to Supply Information to a
able to obtain the information Foreign Tax Authority Which is at his Disposal. –
under its law or in the normal o Unlawful Divulgence of Information
course of administrative General Rule: Any officer or employee of BIR who divulges to
practice and that it is any person or makes known
conformity with a convention HOW? Any other manner than may be provided by
or international agreement; law information regarding
and WHAT? the business, income, or estate of any
159 | Chan, Gono, de Chavez, Manalo
taxpayer, the secrets, operation, style or work, or
apparatus of
WHO? any manufacturer or producer, or confidential
information regarding the business of any taxpayer
WHOM LIABLE? Peson whose knowledge of the
information was acquired by him in the discharge of
his official duties
Upon conviction for each act or omission, be
punished by a fine of not less than (P50,000) but not
more than (P100,000), or suffer imprisonment of not
less than two (2) years but not more than five (5)
years, or both.
EXCEPTION: Except as provided in Sections 6(F) and 71 of
NIRC and Section 26 of Republic Act No. 6388
Sec. 6. Willful Refusal to Supply Information. - Any officer, owner, agent, manager,
director or officer-in -charge of any bank or financial institution within the purview
of this Act who, being required in writing by the Commissioner, willfully, refuses to
supply the required information shall be punished by a fine of not less than Fifty
thousand pesos (50,000) but not more than One hundred thousand pesos
(P100,000) , or suffer imprisonment of not less than two (2) years but not more
than five (5) years, or both.
33 B.
The tax reviewer group apologizes if we were not able to provide for an answer
key. According to Professor Salvador’s class last year, he patterned some of his
questions in the finals according to the 2010 Bar Questions he made. I think it will What are the conditions that must be complied with before the Court of Tax Appeals
be best to know what he thinks are the topics that are bar-worthy. Please note may suspend the collection of national internal revenue taxes? (3%)
that we have omitted those questions which fall under the coverage of Taxation
Law 2. Lastly, we apologize for not being able to provide answers
161 | Chan, Gono, de Chavez, Manalo
C. from his father
XYZ Shipping Corporation is a branch of an international shipping line with voyages Car which is being used by his brother in Cavite 500,000
between Manila and the West Coast of the U.S. The company’s vessels load and
Proceeds of life insurance where he named his estate as
unload cargoes at the Port of Manila, albeit it does not have a branch or sales office irrevocable beneficiary 1,000,000
in Manila. All the bills of lading and invoices are issued by the branch office in
Makati which is also the company’s principal office. Household furnitures and appliances 1,000,000
The following year, the City Assessor issued an assessment against A for non- The compulsory heirs of Don Sebastian approach you and seek your assistance in
payment of real property taxes. the settlement of his estate for which they have agreed to the above-stated
professional fees. Specifically, they request you to explain and discuss with them the
Is the assessor justified in assessing A’s deficiency real property taxes? Explain. following questions. You oblige:
(3%)
a. What are the properties and interests that should be included in the
E. computation of the gross estate of the decedent? Explain. (2.5%)
b. What is the net taxable estate of the decedent? Explain. (2.5%)
Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died c. When is the due date for filing and payment of the applicable tax return
intestate on November 15, 2009. He left the following properties and interests: and tax? Are these dates extendible? If so, under what conditions or
requirements? (2.5%)
d. If X, one of the compulsory heirs, renounces his share in the inheritance in
P
favor of the other co-heirs, is there any tax implication of X’s renunciation?
House and lot (family home) in Pasig 800,000
What about the other coheirs? (2.5%)
Vacation house and lot in Florida, USA 1,500,000
F.
Agricultural land in Naic, Cavite which he inherited 2,000,000
A wants to file a claim for casualty loss. Explain the legal basis of your tax advice.
(3%)
G.
In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-
based corporation which owns a chain of Filipino restaurants in the West Coast,
U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with
respect to a non-resident alien like Caruso.
a. What will be your advice to Caruso in order to lessen the impact of possible
double taxation on the same income? (3%)
b. Would your answer in A. be the same if Caruso became a U.S. immigrant in
2008 and had become a non-resident Filipino citizen? Explain the
difference in treatment for Philippine income tax purposes. (3%)
H.
ABC, a domestic corporation, entered into a software license agreement with XYZ, a
non-resident foreign corporation based in the U.S. Under the agreement which the
parties forged in the U.S., XYZ granted ABC the right to use a computer system
program and to avail of technical know-how relative to such program. In
consideration for such rights, ABC agreed to pay 5% of the revenues it receives from
customers who will use and apply the program in the Philippines.
(2) Anne Lapada, a student activist, wants to impugn the validity of a tax on text (C) It shall pay 5% tax on the first P100,000.00 of the P200,000.00 and
messages. Aside from claiming that the law adversely affects her since she sends 10% tax on the remaining P100,000.00.
messages by text, what may she allege that would strengthen her claim to the right
to file a taxpayer’s suit? (D) It shall pay a tax of one-half of 1% of the P2 million gross sales.
(A) That she is entitled to the return of the taxes collected from her in case (6) Which theory in taxation states that without taxes, a government would be
the court nullifies the tax measure. paralyzed for lack of power to activate and operate it, resulting in its destruction?
(B) That tax money is being extracted and spent in violation of the (A) Power to destroy theory
constitutionally guaranteed right to freedom of communication.
(B) Lifeblood theory
(C) That she is filing the case in behalf of a substantial number of taxpayers.
(C) Sumptuary theory
(D) That text messages are an important part of the lives of the people she
represents.
(D) Symbiotic doctrine
(3) There is no taxable income until such income is recognized. Taxable income is
(7) The spouses Helena and Federico wanted to donate a parcel of land to their son
recognized when the
Dondon who is getting married in December, 2011. The parcel of land has a zonal
valuation of P420,000.00. What is the most efficient mode of donating the property?
(A) taxpayer fails to include the income in his income tax return.
(A) The spouses should first donate in 2011 a portion of the property
(B) income has been actually received in money or its equivalent. valued at P20,000.00 then spread the P400,000.00 equally for 2012, 2013,
2014 and 2015.
(C) income has been received, either actually or constructively.
(B) Spread the donation over a period of 5 years by the spouses donating
(D) transaction that is the source of the income is consummated. P100,000.00 each year from 2011 to 2015.
(4) Keyrand, Inc., a Philippine corporation, sold through the local stock exchange (C) The spouses should each donate a P110,000.00 portion of the value of
10,000 PLDT shares that it bought 2 years ago. Keyrand sold the shares for P2 the property in 2011 then each should donate P100,000.00 in 2012.
million and realized a net gain of P200,000.00. How shall it pay tax on the
transaction? (D) The spouses should each donate a P100,000.00 portion of the value of
the property in 2011, and another P100,000.00 each in 2012. Then, in
(A) It shall declare a P2 million gross income in its income tax return, 2013, Helena should donate the remaining P20,000.00.
deducting its cost of acquisition as an expense.
(9) Double taxation in its general sense means taxing the same subject twice during
the same taxing period. In this sense, double taxation
34
The underlined letters are the correct answers. The numbering is not chronological as
those omitted fall under Taxation Law 2 (A) violates substantive due process.
164 | Chan, Gono, de Chavez, Manalo
(B) does not violate substantive due process. (A) P20 billion.
(D) does not violate the right to equal protection. (C) P100 billion.
(10) The payor of passive income subject to final tax is required to withhold the tax (D) P85 billion.
from the payment due the recipient. The withholding of the tax has the effect of
(13) Anktryd, Inc., bought a parcel of land in 2009 for P7 million as part of its
(A) a final settlement of the tax liability on the income. inventory of real properties. In 2010, it sold the land for P12 million which was its
zonal valuation. In the same year, it incurred a loss of P6 million for selling another
(B) a credit from the recipient's income tax liability. parcel of land in its inventory. These were the only transactions it had in its real
estate business. Which of the following is the applicable tax treatment?
(C) consummating the transaction resulting in an income.
(A) Anktryd shall be subject to a tax of 6% of P12 million.
(D) a deduction in the recipient's income tax return.
(B) Anktryd could deduct its P6 million loss from its P5 million gain.
(11) Guidant Resources Corporation, a corporation registered in Norway, has a 50
MW electric power plant in San Jose, Batangas. Aside from Guidant's income from its (C) Anktryd's gain of P5 million shall be subject to the holding period.
power plant, which among the following is considered as part of its income from
sources within the Philippines? (D) Anktryd's P6 million loss could not be deducted from its P5 million
gain.
(A) Gains from the sale to an Ilocos Norte power plant of generators bought
from the United States. (14) Aplets Corporation is registered under the laws of the Virgin Islands. It has
extensive operations in Southeast Asia. In the Philippines, Its products are imported
(B) Interests earned on its dollar deposits in a Philippine bank under the and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR
Expanded Foreign Currency Deposit System. compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets
net income derived from its exports to Kim. Is the BIR correct?
(C) Dividends from a two-year old Norwegian subsidiary with operations in
Zambia but derives 60% of its gross income from the Philippines. (A) Yes. Aplets is a non-resident foreign corporation engaged in trade or
business in the Philippines.
(D) Royalties from the use in Brazil of generator sets designed in the
Philippines by its engineers. (B) No. The tax should have been computed on the basis of gross revenues
and not net income.
(12) Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in
China valued at P80 billion and in the Philippines assets valued at P20 billion. For (C) No. Aplets is a non-resident foreign corporation not engaged in trade or
Philippine estate tax purposes the allowable deductions for expenses, losses, business in the Philippines.
indebtedness, and taxes, property previously taxed, transfers for public use, and the
share of his surviving spouse in their conjugal partnership amounted to P15 billion. (D) Yes. Aplets is doing business in the Philippines through its exclusive
Tong's gross estate for Philippine estate tax purposes is distributor Kim's Trading. Inc.
(A) Yes, since the accumulated amounts are reasonable for operations in
(C) taxable only if earned by a citizen.
relation to what it usually needed annually.
(B) P500,000.00.
(16) The actual effort exerted by the government to effect the exaction of what is
due from the taxpayer is known as
(C) P350,000.00.
(A) assessment.
(D) P600,000.00.
(B) levy.
(20) Exempted from donor’s taxation are gifts made
(C) payment.
(A) for the use of the barangay.
(D) collection.
(B) in consideration of marriage.
(17) Although the power of taxation is basically legislative in character, it is NOT the
function of Congress to (C) to a school which is a stock corporation.
(A) fix with certainty the amount of taxes. (D) to a for-profit government corporation.
(B) collect the tax levied under the law. (21) Federico, a Filipino citizen, migrated to the United States some six years ago
and got a permanent resident status or green card. He should pay his Philippine
income taxes on
(C) identify who should collect the tax.
(A) the gains derived from the sale in California, U.S.A. of jewelry he
(D) determine who should be subject to the tax.
purchased in the Philippines.
(D) dividends received from a two year old foreign corporation whose (26) Ka Pedring Matibag, a sole proprietor, buys and sells "kumot at kulambo" both
gross income was derived solely from Philippine sources. of which are subject to value-added tax. Since he is using the calendar year as his
taxable year, his taxable quarters end on the last day of March, June, September, and
(23) A corporation may change its taxable year to calendar or fiscal year in filing its December. When should Ka Pedring file the VAT quarterly return for his gross sales
annual income tax return, provided or receipts for the period of June 1 to September 30?
(A) it seeks prior BIR approval of its proposed change in accounting period. (A) Within 25 days from September 30
(B) it simultaneously seeks BIR approval of its new accounting period. (B) Within 45 days from September 30
(C) it should change its accounting period two years prior to changing its (C) Within 15 days from September 30
taxable year.
(D) Within 30 days from September 30
(D) its constitution and by-laws authorizes the change.
(28) Don Fortunato, a widower, died in May, 2011. In his will, he left his estate of
(24) What is the rule on the taxability of income that a government educational P100 million to his four children. He named his compadre, Don Epitacio, to be the
institution derives from its school operations? Such income is administrator of the estate. When the BIR sent a demand letter to Don Epitacio for
the payment of the estate tax, he refused to pay claiming that he did not benefit from
(A) subject to 10% tax on its net taxable income as if it is a proprietary the estate, he not being an heir. Forthwith, he resigned as administrator. As a result
educational institution. of the resignation, who may be held liable for the payment of the estate tax?
(B) Exempt from income taxation if it is actually, directly, and exclusively (A) Don Epitacio since the tax became due prior to his resignation.
used for educational purposes.
(B) The eldest child who would be reimbursed by the others.
(C) subject to the ordinary income tax rates with respect to incomes
derived from educational activities. (C) All the four children, the tax to be divided equally among them.
(D) Exempt from income taxation in the same manner as government- (D) The person designated by the will as the one liable.
owned and controlled corporations.
(31) Alain Descartes, a French citizen permanently residing in the Philippines,
(25) Which among the following reduces the gross estate (not the net estate) of a received several items during the taxable year. Which among the following is NOT
citizen of the Philippines for purposes of estate taxation? subject to Philippine income taxation?
(A) Transfers for public use (A) Consultancy fees received for designing a computer program and
installing the same in the Shanghai facility of a Chinese firm.
167 | Chan, Gono, de Chavez, Manalo
(B) Interests from his deposits in a local bank of foreign currency earned (B) sixty days from the appointment of an administrator.
abroad converted to Philippine pesos.
(C) six months from the time he died on July 31, 2011.
(C) Dividends received from an American corporation which derived 60%
of its annual gross receipts from Philippine sources for the past 7 years. (D) sixty days from the time he died on July 31, 2011.
(D) Gains derived from the sale of his condominium unit located in The (38) Income from dealings in property (real, personal, or mixed) is the gain or loss
Fort, Taguig City to another resident alien. derived
(32) Income is considered realized for tax purposes when (A) only from the cash sales of property.
(A) it is recognized as revenue under accounting standards even if the law (B) from cash and gratuitous receipts of property.
does not do so.
(C) from sale and lease of property.
(B) the taxpayer retires from the business without approval from the BIR.
(D) only from the sale of property.
(C) the taxpayer has been paid and has received in cash or near cash the
taxable income.
(39) In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch
(D) the earning process is complete or virtually complete and an exchange for P500,000.00. Tonette derives income from the exercise of her profession as a
has taken place. licensed CPA. In October 2009, Tonette sold her diamond ring, bracelet, and
necklace for only P1.25 million incurring a loss of P250,000.00. She used the P1.25
(35) Which among the following taxpayers is required to use only the calendar year million to buy a solo diamond ring in November 2009 which she sold for P1.5
for tax purposes? million in September 2010. Tonette had no other transaction in jewelry in 2010.
Which among the following describes the tax implications arising from the above
(A) Partnership exclusively for the design of government infrastructure transactions?
projects considered as practice of civil engineering.
(A) Tonette may deduct his 2009 loss only from her 2009 professional
(B) Joint-stock company formed for the purpose of undertaking income.
construction projects.
(B) Tonette may carry over and deduct her 2009 loss only from her 2010
(C) Business partnership engaged in energy operations under a service gain.
contract with the government.
(C) Tonette may carry over and deduct her 2009 loss from her 2010
(D) Joint account (cuentas en participacion) engaged in the trading of professional income as well as from her gain.
mineral ores.
(D) Tonette may not deduct her 2009 loss from both her 2010 professional
(37) Gerardo died on July 31, 2011. His estate tax return should be filed within income and her gain.
(A) six months from filing of the notice of death. (41) Real property owned by the national government is exempt from real property
taxation unless the national government
168 | Chan, Gono, de Chavez, Manalo
(A) transfers it for the use of a local government unit. (48) Zygomite Minerals, Inc., a corporation registered and holding office in
Australia, not operating in the Philippines, may be subject to Philippine income
(B) leases the real property to a business establishment. taxation on
(C) gratuitously allows its use for educational purposes by a school (A) gains it derived from sale in Australia of an ore crusher it bought from
established for profit. the Philippines with the proceeds converted to pesos.
(D) sells the property to a government-owned non-profit corporation. (B) gains it derived from sale in Australia of shares of stock of Philex
Mining Corporation, a Philippine corporation.
(42) Dondon and Helena were legally separated. They had six minor children, all
qualified to be claimed as additional exemptions for income tax purposes. The court (C) dividends earned from investment in a foreign corporation that derived
awarded custody of two of the children to Dondon and three to Helena, with Dondon 40% of its gross income from Philippine sources.
directed to provide full financial support for them as well. The court awarded the
6th child to Dondon's father with Dondon also providing full financial support. (D) interests derived from its dollar deposits in a Philippine bank under the
Assuming that only Dondon is gainfully employed while Helena is not, for how many Expanded Foreign Currency Deposit System.
children could Dondon claim additional exemptions when he files his income tax
return? (51) Celia donated P110,000.00 to her friend Victoria who was getting married.
Celia gave no other gift during the calendar year. What is the donor's tax implication
(A) Six children. on Celia’s donation?
(B) Five children. (A) The P100,000.00 portion of the donation is exempt since given in
consideration of marriage.
(C) Three children.
(B) A P10,000.00 portion of the donation is exempt being a donation in
(D) Two children. consideration of marriage.
(43) Political campaign contributions are NOT deductible from gross income (C) Celia shall pay a 30% donor's tax on the P110,000.00 donation.
(A) if they are not reported to the Commission on Elections. (D) The P100,000.00 portion of the donation is exempt under the rate
schedule for donor's tax.
(B) if the candidate supported wins the election because of possible
corruption. (52) Levox Corporation wanted to donate P5 million as prize money for the world
professional billiard championship to be held in the Philippines. Since the Billiard
Sports Confederation of the Philippines does not recognize the event, it was held
(C) since they do not help earn the income from which they are to be
under the auspices of the International Professional Billiards Association, Inc. Is
deducted.
Levox subject to the donor's tax on its donation?
(D) since such amounts are not considered as income of the candidate to
(A) No, so long as the donated money goes directly to the winners and not
whom given.
through the association.
(C) No, because it is donated as prize for an international competition (A) net operating loss.
under the billiards association.
(B) ordinary loss.
(D) Yes, but only that part that exceeds the first P100,000.00 of total Levox
donations for the calendar year. (C) net deductible loss.
(55) A non-stock, non-profit school always had cash flow problems, resulting in (D) NOLCO.
failure to recruit well-trained administrative personnel to effectively manage the
school. In 2010, Don Leon donated P100 million pesos to the school, provided the
(65) Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010
money shall be used solely for paying the salaries, wages, and benefits of
and continued to live and engage in business in the Philippines. He went on a tour of
administrative personnel. The donation represents less than 10% of Don Leon's
Southeast Asia from August 1 to November 5, 2010. He returned to the Philippines
taxable income for the year. Is he subject to donor's taxes?
on November 6, 2010 and stayed until April 15, 2011 when he returned to France.
He earned during his stay in the Philippines a gross income of P3 million from his
(A) No, since the donation is actually, directly, and exclusively used for investments in the country. For the year 2010, Pierre’s taxable status is that of
educational purposes.
(A) a non-resident alien not engaged in trade or business in the Philippines.
(B) Yes, because the donation is to be wholly used for administration
purposes.
(B) a non-resident alien engaged in trade or business in the Philippines.
(C) Yes, since he did not obtain the requisite NGO certification before he
(C) a resident alien not engaged in trade or business in the Philippines.
made the donation.
(D) where the beneficiary was not the one who took out the endowment (C) No, but it may be subject to income taxation on the rents it receives.
contract.
(D) Yes, since the leased portion is not actually, directly, and exclusively
used for educational purposes.
170 | Chan, Gono, de Chavez, Manalo
(73) Which among the following concepts of taxation is the basis for the situs of
income taxation?
(75) The head priest of the religious sect Tres Personas Solo Dios, as the corporation
sole, rented out a 5,000 sq. m. lot registered in its name for use as school site of a
school organized for profit. The sect used the rentals for the support and upkeep of
its priests. The rented lot is
(A) not exempt from real property taxes because the user is organized for
profit.
(B) exempt from real property taxes since it is actually, directly, and
exclusively used for religious purposes.
(C) not exempt from real property taxes since it is the rents, not the land,
that is used for religious purposes.
(D) exempt from real property taxes since it is actually, directly, and
exclusively used for educational purposes.
a. A law that allows taxes to be paid either in cash or in kind is valid. VII
b. When the financial position of the taxpayer demonstrates a clear inability
to pay the tax, the Commissioner of Internal Revenue may validly Kenya International Airlines (KIA) is a foreign corporation, organized under the
compromise the tax liability. laws of Kenya. It is not licensed to do business in the Philippines. Its commercial
c. The doctrine of equitable recoupment allows a taxpayer whose claim for airplanes do not operate within Philippine territory, or service passengers
refund has prescribed to offset tax liabilities with his claim of overpayment. embarking from Philippine airports. The firm is represented in the Philippines by its
d. A law imposing a tax on income of religious institutions derived from the general agent, Philippine Airlines (PAL), a Philippine corporation.
sale of religious articles is valid.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA
III airplanes outside the Philippines. The total sales of airline tickets transacted by PAL
for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue
Melissa inherited from her father a 300-square-meter lot. At the time of her father's assessed KIA deficiency income taxes at the rate of 35% on its taxable income,
death on March 14, 1995, the property was valued at P720,000.00. On February 28, finding that KIA's airline ticket sales constituted income derived from sources
1996, to defray the cost of the medical expenses of her sick son, she sold the lot for within the Philippines.
P600,000.00, on cash basis. The prevailing market value of the property at the time
of the sale was P3,000.00 per square meter. KIA filed a protest on the ground that the P2,968,156.00 should be considered as
income derived exclusively from sources outside the Philippines since KIA only
a. Is Melissa liable to pay capital gains tax on the transaction? If so, how much serviced passengers outside Philippine territory.
and why? If not, why not? (4%)
Is the position of KIA tenable? Reasons. (4%)
VII
X
Kenya International Airlines (KIA) is a foreign corporation, organized under the
laws of Kenya. It is not licensed to do business in the Philippines. Its commercial ABCD Corporation (ABCD) is a domestic corporation with individual and corporate
airplanes do not operate within Philippine territory, or service passengers shareholders who are residents of the United States. For the 2 nd quarter of 1983,
embarking from Philippine airports. The firm is represented in the Philippines by its these U.S.-based individual and corporate stockholders received cash dividends
general agent, Philippine Airlines (PAL), a Philippine corporation. from the corporation. The corresponding withholding tax on dividend income ---
30% for individual and 35% for corporate non-resident stockholders --- was
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA deducted at source and remitted to the BIR.
airplanes outside the Philippines. The total sales of airline tickets transacted by PAL
for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue On May 15, 1984, ABCD filed with the Commissioner of Iternal Revenue a formal
assessed KIA deficiency income taxes at the rate of 35% on its taxable income, claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld
at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD
172 | Chan, Gono, de Chavez, Manalo
asserted that it overpaid the withholding tax due on the cash dividends given to its services rendered in 2007, the law firm billed the corporation only in 2008. The
non-resident stockholders in the U.S. The Commissioner denied the claim. corporation duly paid.
On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) YYY Corporation claimed this expense as a deduction from gross income in its 2008
reiterating its demand for refund. return, because the exact amount of the expense was determined only in 2008. Is
YYY's claim of deduction proper? Reasons. (4%)
a. Does ABCD Corporation have the legal personality to file the refund on
behalf of its non-resident stockholders? Why or why not? (3%) XIII
b. Is the contention of ABCD Corporation correct? Why or why not? (3%)
In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair
market value (FMV) of the painting at the time of the purchase was P1-million. Yuri
paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last
PART II will and testament, Xavier bequeathed the painting, already worth P1.5-million, to
his only son, Zandro. The will also granted Zandro the power to appoint his wife,
Wilma, as successor to the painting in the event of Zandro's death. Zandro died in
XI
2007, and Wilma succeeded to the property.
Raffy and Wena, husband and wife, are both employed by XXX Corporation. After
a. Should the painting be included in the gross estate of Xavier in 2001 and
office hours, they jointly manage a coffee shop at the ground floor of their house.
thus, be subject to estate tax? Explain. (3%)
The coffee shop is registered in the name of both spouses. Which of the following is
b. Should the painting be included in the gross estate of Zandro in 2007 and
the correct way to prepare their income tax return? Write the letter only. DO NOT
thus, be subject to estate tax? Explain. (3%)
EXPLAIN YOUR ANSWER. (2%)
c. May a vanishing deduction be allowed in either or both of the estates?
Explain. (3%)
a. Raffy will declare as his income the salaries of both spouses, while Wena
will declare the income from the coffee shop.
XIX
b. Wena will declare the combined compensation income of the spouses, and
Raffy will declare the income from the coffee shop.
c. All the income will be declared by Raffy alone, because only one Johnny transferred a valuable 10-door commercial apartment to a designated
consolidated return is required to be filed by the spouses. trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as
d. Raffy will declare his own compensation income and Wena will declare the sole beneficiary. The trustee is instructed to distribute the yearly rentals
hers. The income from the coffee shop shall be equally divided between amounting to P720,000.00. The trustee consults you if she has to pay the annual
them. Each spouse shall be taxed separately on their corresponding taxable income tax on the rentals received from the commercial apartment.
income to be covered by one consolidated return for the spouses.
e. Raffy will declare his own compensation income and Wena will declare a. What advice will you give the trustee? Explain. (3%)
hers. The income from the coffee shop shall be equally divided between b. Will your advice be the same if the trustee is directed to accumulate the
them. Raffy will file one income tax return to cover all the income of both rental income and distribute the same only when the beneficiary reaches
spouses, and the tax is computed on the aggregate taxable income of the the age of majority? Why or why not? (3%)
spouses.
XX
XII
Masarap Food Corporation (MFC) incurred substantial advertising expenses in
YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to order to protect its brand franchise for one of its line products. In its income tax
defend the corporation's title over a property used in the business. For the legal
173 | Chan, Gono, de Chavez, Manalo
return, MFC included the advertising expense as deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)
II While driving his car to Baquio last month, Pedro Asuncion, together with his wife
Assunta, and only son Jaime, met an accident that caused the instantaneous death of
Jose Cerna, Filipino citizen, married to Maria Cerna, died in a vehicular accident in Jaime. The following day, Assunta also died in the hospital. The spouses and their
NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare son had the following assets and liabilities at the time of death :
agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million,
which was subject to matter of a Joint Venture Agreement about to be implemented
Assunta Jaime
with Star Land Corporation ( SLC ), a well-known real estate development company.
Exclusive Conjugal Exclusive
He bought the said real property for P2 million fifty years ago. On January 5,2008,
the administrator of the estate and SLC jointly announced their big plans to start
conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-
class residential and commercial centers. As a result, the prices of real properties in Cash P10,000,000.00 P1,200,00.00
the locality have doubled. The administrator of the Estate of Jose Cernan filed the Cars P2,000,000.00 500,000.00
estate tax return on January 9, 2008, by including in the gross estate the real
property at P2 million. After 9 months, the BIR issued deficiency estate tax Land 5,000,000.00 2,000,000.00
assessment, by valuing the real property at P40 million. A ) Is the BIR correct in
valuing the real property at P40 million? Explain. ( 3% ) B ) If you disagree, what is Residential House 4,000,000.00
the correct value to used for estate tax purposes? Explain. ( 3% )
Mortgage Payable 2,500,000.00
V Funeral Expenses 300,000.00
Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of
P1 million. Said property has been leased to MAS Corporation, a domestic a. Is the Estate of Jaime Asuncion liable for estate tax? Explain. ( 4% )
corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. b. Is vanishing deduction applicable to the Estate of Assunta Asuncion?
In October 2007, EIP Corporation, a real estate developer, expressed its desire to Explain ( 4% )
buy the Makati property at its fair market value P300 million, payable as follows :
(a) P60 million down payment; and (b) balance, payable equally in twenty four (24)
175 | Chan, Gono, de Chavez, Manalo
X July 1, 2007 to December 31, 2007 P 15,000,000.
John McDonald, a U.S. Citizen residing in Makati City, bought shares of stock of a
domestic corporation whose shares are listed and traded in the Philippine Stock Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for
Exchange at the price of P2 million Yesterday, he sold the shares of stock through income tax purpose, it paid its 2% business tax for fiscal year ending June 30, 2007
his favorite Makati stockbroker at a gain of P200,000. based on gross dales of P15 million. However, the Quezon City Treasurer assessed
the corporation for deficiency business tax for 2007 based on gross sales of P25
a. Is John McDonald subject to Philippine Income Tax on the sale of his shares million alleging that local business taxes shall be computed based on calendar year.
through his stockbroker? Is he liable for any other tax? Explain. ( 3% )
b. If John McDonald deriectly sold the shares to his best friend, who is another a. Is the position of the city treasurer tenable? Explain. (3%)
U.S. Citizen residing in Makati, at a gain of P200,000. Is he liable for b. May the deficiency business tax be paid in installments without surcharge
Philippine Income Tax? If so, what is the ntax base and rate? ( 3% ) and interest? Explain. (3%)
XI XIV
Pedro Manalo, A Filipino citizen residing in Makati City, owns a vacation house and Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners
lot in San Francisco, California, U.S.A, which he acquired in 2000 for P15 million. On of a residential house and lot in Quezon City. After the recent wedding of their son,
January 10, 2006 he sold said real property to Juan Mayaman, another Filipino Mario, to Maria, the spouses donated said real property to them. At the time of
citizen residing in Quezon City, for P20 million. On February 9, 2006 Manalo filed donation, the real property has a fair market value of P2 million.
the capital gains tax return and paid P1.2 million representing 6% capital gain tax.
Since Manalo did not derive any ordinary income, no income tax returnn was filed a. Are Mario and Maria subject to income tax the value of the real property
by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed donated to them? Explain. (4%)
Manalo for deficiency income tax computed as follows: P5 million ( P20 million less b. b) Are Jose and Clara subject to donor's tax? If so, how much is the taxable
P 15 million ) x 35% = P1.75 million, without the capital gains tax paid being gift of each spouse and what rate shall be applied to the gift? Explain. (4%)
allowed as tax credit. Manalo consulted a real estate broker who said that the P1.2
million capital gains tax should be credited from P1.75 million deficiency income XV
tax.
In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the
a. Is the BIR officer's tax assessment correct? Explain. ( 3% ) Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in
b. If you were hired by Manalo as his tax consultant, what advice would you Hong Kong while Judy lives and works in Manila. During the year, the bank paid
give him to protect his interest? Explain. ( 3% ) interest income of P10,000 on the peso deposit and USS1,000 on the dollar deposit.
The bank withheld final income tax equivalent to 20% of the entire interest income
XIII and remitted the same to the BIR.
MNO Corporation was organized on July 1, 2006, to engage in trading of school a. Are the interest incomes on the bank deposits of spouses Renato and Judy
supplies, with principal place of business in Cubao, Quezon City. Its book of account Garcia subject to income tax? Explain. (4%)
and income statement showing gross sales as follows: b. Is the bank correct in withholding the 20% final tax on the entire interest
income? Explain. (3%)
July 1, 2006 to December 31, 2006 P 5,0000,000.