TAX Finals Reviewer

8/3/2019 TAX Finals Reviewer

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Note on Dividends (CIR v CA)

- IF A CORPORATIO CANCELS OR REDEEMS STOCK ISSUED AS A DIVIDENDAT SUCH TIME AND IN SUCH MANNER AS TO MAKE THE DISTRIBUTION

AND CANCELLATION OR REDEMPTION OF THE STOCK IN WHOLE OR IN

PART, essentially equivalent to the distribution of a taxable dividend, the

amount so distributed in redemption or cancellation for the stock shall

be considered taxable income

Stock dividends dividends declared by the corporation declaring it

Cash dividends dividends paid in form of Cash

Property dividends in form of property (e.g dividends declared from other

company)

Liquidating dividendsdividend, not ordinary coz its not declared as corporation

is still a going concern

This will give rise to a gain and not a dividend income subject toglobal system

Taxed NOT as a dividend. Gain will be from the perspective of ashare holder


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9. Annuities amount payable yearly or at regular intervals for certainperiod

The term may refer to the right to receive such annuities, orto the agreement/contract whereby in return for capital

consisting of money or other property given by the

annuitant (one entitled to receive the benefits), the

recipient binds himself to pay the stipulated annuity

10. Prizes and Winnings20% - final withholding tax citizen, resident alien, non-resident alien engaged in

business in Phils

25%- non-resident alien not engaged in business in Philippines

32% - corporations

Prizes and awards made primarily in recognition of religious, charitable scientific,

educational artistic, literary or civic achievement are excluded from gross income

only if

a. the recipient was selected without any action on his partb. recipient is not required to render substantial future services as a

condition for receiving the award

Also not included

1. Prizes amounting to 10,000 or less included in gross income2. PCSO and lotto winnings11. Pensions12. Partners distributive share

This is taxable13. Income from any source whatever

i. Forgiveness of debt The cancellation of indebtedness may amount to payment

of income, gift, capital transaction depending on the

circumstances

If the individual performs services for a creditor who, inconsideration thereof, cancels the debt, the debtor realizes

income to that amount (i.e. now converted into

compensation for his services)

If the creditor, desiring to benefit the debtor, cancels thedebt without any consideration, the amount of the debt is a

gift.

Think: the condonation of indebtedness for a considerationconstitutes INCOME from any source whatever

ii. Gain from sale of treasury stocks the receipt by a corporation of thesubscription price of shares of its capital stock upon their original

issuance does not give rise to a taxable gain or loss

If however the corporation deals in its own shares as it might inthe shares of another corporation, the resulting gain (or loss) is

to be computed in the same manner as though the corporation

were dealing in the shares of another.

Treasury stocks

iii. Income of a corporation in liquidation and liquidating dividend treated as sale or exchange rather than as ordinary dividends

Ordinary dividendmade in the ordinary course of business with the intent to

maintain the corporation as a going concern. Such dividends are a recurring return

on stock

Liquidating dividendcorporation is winding up its business. Such dividends are

payment for the surrender and relinquishment of stockholders interest

Liquidating dividend (payments for surrender) are taxable income

GUTIERREZ V COLLECTOR

W/N proceeds from expropriation proceedings are taxable YES The acquisition by the government of private properties through eminent

domain, said properties being justly compensated, is embraced within

the meaning of the term sale or disposition of property and the proceeds

derived therefrom is subject to income tax as a capital gain

income from any source whatever includes gains contemplated here.SEC 50 and 54 REV REG 2

50 if a corporation to which a stockholder is indebted forgives the debt transaction has the effect of dividend payment

Income of a corporation in liquidation and liquidating dividend


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treated as a sale or exchange rather than as ordinary dividends the stocks owned by the stockholder are the property disposed of and

the liquidating distributions are regarded as the proceeds of the sale

WISE V MEER

HK Company was liquidated and its capital distributed among itsstockholders

the amounts received were liquidating dividends (meaning corporation iswinding up to its business; such dividends are payment for the surrender

and relinquishment of the stockholders interest.

They are taxable income under SEC 25A of ACT 2833 BIR RULING NO 039-2002 Nov 11, 2002

the gain from the surrender of shares treated as a sale or exchangeshall be subject to the ORDINARY income tax rates depending on

the status of the shareholder. Any gain or profit realized thereby

shall be taxed to the distribute as other gains or profits.

iv. Creation of a corporate sinking fundSec 54, Rev Reg 2

If a corporation, in order to secure payment of its bonds or otherindebtedness, places property in trust or sets aside certain amounts in a

sinking fund under the control of a trustee who may be authorized to

INVEST and REINVEST such amounts from time to time

o The property or fund thus set aside by the corporation and heldin trust by the trustee is an ASSET

o Any gain arising from it is income of the corporation and shall beincluded as such in its annual return.

v. Receipt of tax credit or refundincluded in ITR If a taxpayer receives a tax credit certificate or refund for

erroneously paid tax which was claimed as a deduction from his

gross income that resulted in a lower taxable income or a higher net

operating loss that was carried over to the succeeding taxable year,

he realizes income that must be included in his income tax return in

the year of receipt

However this principle does not apply to credits or refunds oferroneously paid income tax, estate tax, donors tax, value added

tax and special assessments since they are not deductible from

gross income


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a. Exclusion from Gross Income32 (B)

1. Life Insurance proceeds of life insurance policies paid to the heirs orbeneficiaries upon death of insured, whether in a single sum or

otherwise, but if such amounts are held by the insurer under an

agreement to pay interest thereon, the interest payments shall beincluded in gross income

2. Amounts received by insured as return of premiumamount receivedby insured as a return of premiums paid by him under life insurance,

endowment, or annuity contracts, either during the term or at the

maturity of term mentioned in the contract or upon surrender of the

contract

3. Gifts, bequests and devises (except income derived from these) valueof property acquired by gift, bequest, devise or descent

4. Compensation for injuries/sickness includes amount of damagesreceived

5. Income exempt under treatytreaty binding upon Phil govt6. Retirement benefits, pensions, gratuities7. Miscellaneous items

i. Income derived by foreign governmentii. Income derived by a government or its political subdivisions

iii. Prizes and awardsiv. Prizes and awards in sports competitionv. 13th month pay and other benefitsvi. GSIS, SSS, Medicare and other contributions

vii. Gains from sale of bonds, debentures or other certificate ofindebtedness

viii. Gain from redemption of shares in mutual fundb. Exempt Corporations

Sec 30

1. labor, agricultural or horticultural organization not organized principallyfor profit

2. mutual savings bank

3. beneficiary society4. cemetery company owned and operated exclusively for the benefit of its

members

5. nonstick corporation or association organized and operated exclusivelyfor religious,

6. business league, chamber of commerce or board of trade7. civic league or organization8.

nonstick and nonprofit educational institution9. government educational institutions

10. farmers or other mutual typhoon or fire insurance company11. farmers fruit growers or like association

Commissioner v YMCA

YMCA is a welfare, education and charitable non-profit corporation.YMCA derived income from rentals of real property owned by it subject

to income tax

Income from the property of the organization is taxable, regardless ofhow that income is used whether for profit or for lofty non-profit

purposes

The rental income cant be exempted on the ground that said income isnot collected for profit but is merely incidental to its operation. The law

DOES NOT make a distinction.

Tax exemptions are construed strictly against the taxpayer. YMCA is exempt from payment of property taxes only but NOT INCOME

taxes because it is not an education institution devoting its income solely

for educational purposes.

c. Deductions from Gross IncomeSec 34

Except for taxpayers earning compensation income arising from personal services

rendered under an ee-er relationship where no deductions shall be allowed underthis Section other than Sub (M) hereof, incomputing taxable income subject to

income tax under

Sec 24 (A) Income Tax Rate: Rates of Income Tax on Individual Citizen and

Individual Resident Alien of the Philippines

25 (A) Tax on Nonresident Alien Individual

26 Tax on liability of members of general professional partnership

27(A) Rates of Income Tax on Domestic Corporations

(B) Proprietary Educational Institutions and Hospitals

(C) Government-owned or controlled Corporations, Agencies or Instrumentalities

28 (A)(1) Tax on Resident Foreign Corporations


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there shall be allowed the following deductions from gross income: (see

deductions)

note: only those types enumerated above can avail of allowable deductions

WESTERN MINOLCO V COMMISSIONER

Western is a domestic corporation, which is authorized to borrow moneyand issue commercial papers. It borrowed from financial institutions andpaid the corresponding 35% transaction tax.

It is now seeking refund of an amount representing money markettransaction taxes that it paid. Transaction is classified under the Revenue

Code as business tax.

PD1154 expressly states that the transaction tax shall be allowed as adeductible item for the purposes of determining the borrowers taxable

income. Western now contends it is a business tax which is deductible

HELD: THIS is an INCOME TAX. Its location in the tax code does notnecessarily determine its nature.

The transaction tax is imposed on interest income from commercialpapers issued in the primary money market. Being a tax on interest, it is a

tax on income.

He who claims a deduction must point to the specific provision of thestatute authorizing it, and he must be able to prove that he is entitled to

it.

GR: Deductions are strictly construed against the taxpayer claiming themand it is incumbent upon the taxpayer to establish a clear right to tax

exemption.

Tax exemptions are looked upon with disfavor.COMMISSIONER OF CUSTOMS V PHILIPPINE ACTEYLENE

Special import tax - Phil Acetylene claims exemption because it isconsidered as engaged in an industry which is exempt from the paymentof the tax in question. (engaged in the packaging of liquefied petroleum

gas)

NOT EXEMPT from special import tax. To be entitled to exemption, theindustry concerned, in connection with the activity for which the

importation is made, must be engaged in some productive enterprise,

not merely packaging an already finished product to facilitate its

transportation.

Legislative intent of the law confine the meaning of the term industryto activities that PRODUCE or CREATE or MANUFACTURE

COMMISSIONER V AROLDUS CARPENTRY

Arnoldus Carpentry engaged in trading and dealing in cabinet products.They are sold locally and exported abroad.

Claims tax exemption on its gross export sales because the shop is amanufacturer

YES. EXEMPT. It sells goods which it keeps in stock and not services. It isentitled to the exemption. Under Sec 202(e) of the NIRC, articles shipped

or exported by the manufacturer are NOT subject to percentage tax onsales.

If there is an express mention or if the taxpayer falls within the purviewof the exemption by clear legislative intent, then the rule on strict

construction will not apply.

BPI v TRINIDAD

BPI contends that PNB is a similar type to it and it is operated undersimilar conditions. BPI then claims that since the taxes upon the

circulation of PNB were not collected , it was entitled to the same

BPI NOT EXEMPT. Exemption claimed merely on the ground that anotherperson situated in the same circumstance has not been required to pay

or has not paid similar taxes is unjustifiable.

Unless otherwise exempt, BPI comes under the terms and provisions ofthe law.

The fact that one person may not have paid or been required to pay histaxes does not exempt another from the payment of his legal taxes, or

legally entitle him to a refund of any taxes which he has paid.

Itemized Deductions

1. ExpensesOrdinary expense payment which is normal in relation to the business of thetaxpayer and the surrounding circumstances

Necessary expense expenditure is appropriate or helpful in the development of

the taxpayers business or that the same is proper for the purpose of realizing a

profit or minimizing a loss e.g. compensation expenses/ compensation for

personal services

Requirements for deductibility

1. must be ordinary or necessary expense2. paid/incurred within the taxable year


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3. directly attributable to the development management, operation,conduct of the trade, business or exercise of profession

4. supported by adequate invoices/receipts5. not contrary to law, public policy, or morals6. tax required to be payable withheld on expense shown to be remitted

to BIR

Notes1. Christmas bonuses are deductible if intended as additional compensation2. Includes commission expenses, compensation for personal services3. Compensation may be paid in money or in some medium other than

money such as stocks, bonds or other forms of property

Alhambra Cigar v CIR

whenever a controversy arises on the deductibility, for purposes ofincome tax, of certain items for alleged compensation of officers of the

taxpayer, 2 questions become material

o have personal services been actually rendered by said officers?o If yes, what is the reasonable allowance?

Aguinaldo Industries v Collector

To allow officers to receive additional compensation although a companysuffered losses from operation through their inefficiency or negligence,

as long as the profits from the sale of its capital investments are more

than its losses from operation, would be violation of the purposes of

bonuses and additional compensation.

CIR v Smith Kline and French Overseas

Where an expense is clearly related to the production of Philippinederived income or to Philippine operations (salaries of personnel, rental

of office building in the Philippines), that expense can be deducted fromthe gross income acquired in the Philippines without resorting to

apportionment.

The overhead expenses incurred by the parent company in connectionwith finance, administration and research and development, all of which

directly benefit its branches all over the world, including the Philippines,

fall under a different categorythese are items which cant be definitely

allocated or identified with the operations of the Philippine branch.

A company can claim as its deductible share a ratable part of suchexpenses based upon the ratio of the local branchs gross income to the

total gross income, worldwide of multinational corporation.

Hospital de San Juan de Dios v CIR

The interest and dividends received by the petitioner were merelyactivity, which is the operation of its hospital and nursing schools.

Petitioners activities do not come within the purview of carrying trade orbusiness. The principle of allocating expenses is grounded on the premise

that the taxable income was derived from carrying on a trade or business

as distinguished from mere receipt of interest and dividends from ones

investments The word business in its ordinary and common use means human efforts

which have for their end living or reward.

Sec 120 Rev Reg No 2. (Capital Expenditures)

No deduction from gross income may be made for any amounts paid outfor new buildings or for permanent improvements or betterments made

to increase the value of the taxpayers property

Or for any amount expended in restoring property or in making goodsthe exhaustion thereof for which an allowance for depreciation

expended for securing a copyright and plates

In the case of a corporation, expenses for organization, such asincorporation fees, attys fees and accountants charges are ordinary

capital expenditures, but where such expenditures are limited to purely

incidental expenses, a taxpayer may charge such items against income in

the year in which they are incurred.

BIR Ruling No. 102-07

Pre-operating expenses of a corporation are considered capitalexpenditures and ARE NOT deductible as capital expenditures

The expenses may be treated as deferred expenses and deducted forover a period of not less than 60 months beginning with the f irst month

the corporation is actively in business.

The start-up expenditures include amounts paid or incurred before andin anticipation of, the start of the business in an activity for profit or the

production of income.

Tax holiday not subject to income tax, deductions are useless

Why does the corporation want the capital expenditure?

To capitalize Defer expense declaration to maximize deductions (amortize) AMORTIZATION


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Section 68, Rev. Reg No. 2 (REPAIRS )

The cost of incidental repairs neither materially add to thevalue of the property nor appreciably prolong its life but keep it

in an ordinarily efficient operating condition may be deducted as

expense

Must not prolong lifeSection 5, Rev Reg No. 10-2002 (Ceiling on Entertainment, Amusement,Recreation Expense)

Deduction shall not exceed .5% of net sales (gross sales salesreturns/allowances and sales discounts) for taxpayers engaged in sale of

goods or properties or 1% of net revenue (gross revenue discounts) for

taxpayers engaged in sale of services, including exercise of profession

and use or lease of properties

.5% for sale of goods

1% for sale of services

APPORTIONMENT FORMULA

[Net sales or Net revenue/Total Net sales and Net Revenue] x actual expense

Republic v MERALCO

Income tax isnt included in the operating expenses Income tax is imposed on an individual or entity as a form of excise tax or

a tax on the privilege of earning income.

Income tax payments of a public utility are not expenses whichcontribute to or are incurred in connection with the production of profit

of a public utility

CIR v ISABELA Corporation

1985 incurred but not determinable services 1986 billed and paid must be ordinary and necessary, paid or incurred during the taxable year paid and incurred in carrying on with the business, evidenced by receipts taxpayer couldnt dictate

o cash method time paymento accrual method time accrued/incurred (income accrues when

come or liability becomes fixed and determinable in amount)

The requisite that it must have been paid or incurred during the taxableyear is further qualified by Section 45 of the National Internal Revenue

Code (NIRC) which states that: "[t]he deduction provided for in this Title

shall be taken for the taxable year in which paid or accrued or paid or

incurred, dependent upon the method of accounting upon the basis of

which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules fordetermining when and how to report income and deductions. In the

instant case, the accounting method used by ICC is the accrual method.

Revenue Audit Memorandum Order No. 1-2000, provides that under theaccrual method of accounting, expenses not being claimed as deductionsby a taxpayer in the current year when they are incurred cannot be

claimed as deduction from income for the succeeding year. Thus, a

taxpayer who is authorized to deduct certain expenses and other

allowable deductions for the current year but failed to do so cannot

deduct the same for the next year

The accrual method relies upon the taxpayers right to receive amountsor its obligation to pay them, in opposition to actual receipt or payment,

which characterizes the cash method of accounting. Amounts of income

accrue where the right to receive them become fixed, where there is

created an enforceable liability. Similarly, liabilities are accrued when

fixed and determinable in amount, without regard to indeterminacy

merely of time of payment.

For a taxpayer using the accrual method, the determinative question is,when do the facts present themselves in such a manner that the

taxpayer must recognize income or expense? The accrual of income and

expense is permitted when the all-events test has been met. This test

requires: (1) fixing of a right to income or liability to pay; and (2) the

availability of the reasonable accurate determination of such income or

liability.

The amount of liability does not have to be determined exactly; it mustbe determined with "reasonable accuracy." Accordingly, the term

"reasonable accuracy" implies something less than an exact or

completely accurate amount. The propriety of an accrual must be judged by the facts that a taxpayer

knew, or could reasonably be expected to have known, at the closing of

its books for the taxable year. Accrual method of accounting presents

largely a question of fact; such that the taxpayer bears the burden of

proof of establishing the accrual of an item of income or deduction

2. Interests the amount of interest paid or incurred within a taxable year on

indebtedness in connection with the taxpayers profession, trade or

business shall be allowed as deduction from gross income; provided that

the taxpayers otherwise allowable deduction for interest expense shall


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be reduced by an amount equal to the following percentages of the

interest income subjected to final tax

41% - beginning Jan 1, 1998 39% - beginning Jan 1, 1999 38% - beginning Jan 1, 2000 Exceptions: No deduction shall be allowed in respect of

interest under the succeeding subparagraphs

i. If within the taxable year, an individual taxpayerreporting income on the cash basis, incurs anindebtedness on which an interest is paid in

advance through discount or otherwise: Provided,

that if the indebtedness is payable in periodic

amortizations, the amount of interest which

corresponds to the amount of the principal

amortized or paid during the year shall be allowed

as deduction in such taxable year

ii. If both the taxpayer and the person to whom thepayment has been made or is to be made are

persons under 36 (B)

a. there shall be a llowed an additionalexemption of 25,000 for each dependent

not exceeding four.

b. The additional exemption for dependentsshall be claimed by only one spouses in the

case of married individuals

iii. If the indebtedness is incurred to financepetroleum exploration

Optional Treatment of Interest Expense at the option ofthe taxpayer, interest incurred to acquire property used in

trade business or exercise of a profession may be allowedas a deduction or treat2ed as a capital expenditure

Requirements for deductibility

1. Indebtedness2. Of a taxpayer3. Legally due, in writing4. Incurred/paid during taxable year5. Indebtedness connected with taxpayers business6. Interest payment arrangement must not be between related taxpayers

a. 36(B)additional exemption for dependents of 25,000 for eachdependent

7. not disallowed by law8. amount of interest deducted from gross income does not exceed limit

Example:

A parent corporation Interestexp/inc

Borrowed

(for working capital) 1,000,000 5% interest 50,000 (expense)

Invested in bonds 500,000 10% interest 50,000 (income)

Lent amount to affiliate 100,000 10% interest 10,000 (income)

- - interest income not subject to final tax, straight loan

How much interest expense is deductible?

50,000 (50,000x.33) = 33,500

final withholding if deposits made in bank

if lending is part of its main course of business - global

1. check if theres income subject to final tax2. get the aggregate and multiply to 33%

3. Taxes taxes paid or incurred within the taxable year in connection with the

taxpayers profession, trade or business shall be allowed as deductions

except:

a. Philippine income taxb. Foreign income taxc. Estate and donors taxesd. Special assessments on real property and e. Electric energy consumption tax under BP36

Requirements for deductibility of taxes

1. Payment must be for taxes2. Taxes are imposed by law3. Paid or accrued during the taxable year4. Not specifically excluded by law from being deducted


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4. Losseslosses actually sustained during the taxable year and notcompensated for by insurance or other forms of indemnity shall be

allowed as deductions:

a. if incurred in trade, profession or businessb. of property connected with the trade, business or profession, if

the loss arises from fires, storms, shipwreck or other casualties

or from robbery, theft or embezzlement

Requirements for deductibility of Losses

1. loss must be that of taxpayer2. loss is actually sustained and charged of within the taxable year3. the loss is evidenced by a closed and completed transaction4. loss is not claimed as deduction for estate tax purposes5. loss is not compensated for by insurance or otherwise6. loss must be connected with his trade, business or profession7. casualty loss reported to BIR within 45 days of occurrence

Priscilla Estate v CTA

Priscilla claimed a refund for overpaid income tax in 1950. This increasedloss represents the sale of a lot and building.

w/n the removal of one of the buildings of Priscilla estate may bededucted from its gross income YES

The value of the demolished building should not be deducted from grossincome but added to the cost of the building replacing it because its

demolition or removal was to make way for the erection of another in its

place.

since the building was not compensated for by insurance or otherwise,its loss should be charged off as deduction from gross income.

NET OPERATING LOSS CARRY OVER (NOLCO) 34 (D) (3)

3 CONSECUTIVE YEARS then et operating loss of the business orenterprise for any taxable year immediately preceding the current

taxable year which had not been previously offset as a deduction from

gross income shall be carried over as a deduction from gross income for

the next 3 consecutive TAXABLE years immediately following the year of

such loss.

However, any met loss incurred in a taxable year during which thetaxpayer was exempt from tax shall not be allowed as a deduction under

this subsection

There shall be no substantial change in the ownership fo the business orenterprise

Net operating loss the excess of allowable deduction over Gross income of the

business in a taxable year

Example

A Corp 2001 2002 2003 2004

GI 1,500,000 5,000,000 500,00 6,000,000

AD 2,000,000 4,800,000 2,000,000 4,500,000

(500,000) 200,000 (1,500,000) 1,500,000- 500,000 - 300,000

XXXXXX 1,200,000

(300,000) - 1,500,000

(300,000)

TAXABLE INCOME=0

NOLCO

- In an upstream merger, NOLCO will always be preserved- If there are substantial changes in ownership, must retain 75% or more

for loss to still be attributable (mergers, consolidation, combination)

- FIFO methodNOLCO can be lost MORE EXAMPLES


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5. Bad debtsRequisites

1. An existing indebtedness due to the taxpayer which must be valid andlegally demandable

2. Same must be connected with the taxpayers trade, business or practiceof profession

3. Same must NOT be sustained in a transaction entered into betweenrelated parties under 36 B

a. Between members of a family (siblings, spouses, linealdescendants and ancestors)

b. Between individual and a corporation more than fifty percent invalue of the outstanding stock of which is owned, directly or

indirectly by or for such individual (except: distribs in

liquidation)

c. Between 2 corporations more than 50% in value of theoutstanding stock of each of which is owned directly Same

exception.

d. Between the fiduciary of a trust and the fiduciary of anothertrust if the same person is a grantor with respect of each trust

e. Between a fiduciary of a trust and a beneficiary of such trust4. Same must be totally charged off the books of accounts of the taxpayer

as of the end of the taxable year

5. Actually ascertained to be worthless and uncollectible as of the end ofthe taxable year

6. Depreciation - gradual diminution in the useful valueRequirements

1. Allowance must be reasonable2. Must be for property arising out of its use in the trade or business or out

of its not eing used temporarily during the year3. Charged off during the taxable year from the taxpayers books of

accounts

4. Statement on the allowance must be attached to the return7. Depletion same

8. Charitable and other contributions34 (H): Contributions or gifts actually paid or made within the taxable year to, or

for the use of the Government of the Philippines or any of its agencies or any

political subdivision thereof EXCLUSIVELY for public purpose, or to accredited

domestic corporations or associations organized and operated exclusively for

religious, charitable, scientific, youth and sports development, cultural or

educational purposesin accordance with the rules and regulations promulgated

by the Secretary of Finance, upon recommendation of the Commissioner, no part

of the net income of which inures to the benefit of any stockholder or individual in

an amount not in excess of 10 percent in the case of an individual and five percent

in the case of a corporation, of the taxpayers TAXABLE income derived from trade,

business, or profession as computed without the benefit of this and the following

subparagraphs

Deductible in Full

1. donations to the government2. donations to certain foreign institutions or IO3. donations to ACCREDITED Non-government Organizations (nonprofit

domestic)

Requirements

1. the charitable contribution must ACTUALLY be paid or made to thePhilippine Government or any political subdivision exclusively for public

purposes, or any of the accredited domestic corporation or association

specified in the tax code.

2. Made within the taxable year3. Not exceed 10% or 5% of the taxpayers (indiv and corp respectively)

before charitable contributions

4. Must be evidenced by adequate receipts or records5. Amount based on acquisition cost of property

Note: partially deductible if not accredited

9. Research and development- chargeable to capital account but not to property of a character which is

subject to depreciation or depletion

10. Pensions Trusts- apportioned in equal parts over a period of ten years- not been allowed as deductions yet- an employer establishing or maintaining a pension trust to provide for

the payment of reasonable pensions to his employees shall be allowed as

a deduction


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11. Additional requisites for deductibility of certain payments- show that the tax required to e deducted and withheld therefrom has

been paid to the BIR

Filinvest Case

for their to be payment in interests, these should be written, stipulated

non-interest bearing advances no interest 34C optional Base for deductions individuals sales, gross, receipts

o Corporation gross incomeOptional Standard Deduction

OSD are a privilege which certain individual taxpayers may enjoy in lieuof itemized deductions

Those who avail of OSD do so because of the convenience of not havingto keep and maintain receipts of invoices

34(L)

In lieu of the deductions allowed under the preceding subsections, anindividual subject to tax under Sec 24, other than a nonresident alien,

may elect a standard deduction in an amount not exceeding 40% of his

gross sales or gross receipts, as the case may be

CORPORATION (domestic and foreign) it may elect a standarddeduction in an amount not exceeding 40% of its gross income as defined

in Sec 32 of this code.

Unless the taxpayer signifies in his intention to elect the OSD, he shall beconsidered as having availed himself of the deductions allowed in the

preceding subsections.

SUCH ELECTION shall be IRREVOCABLE for the taxable year for which thereturn is made

o Provided, that an individual who is entitled to and claimed forthe OS shall not be required to submit with his tax return such

financial statements otherwise required under the code

o Provided further, that except when the Commissioner otherwisepermits, the said individual shall keep such records pertaining to

his gross sales or gross receipts, or the said corporation shall

keep such records pertaining to his gross income as defined in

Sec 32 of this Code during the taxable year (32: GI)

Additional Deductions available to individual tax-payers

aa. Premium Payments on health or hospitalization insurance

Sec 34 (M)

Premium Payments on Health and and or/Hospitalization Insurance of an

Individual Taxpayer.

Amount of premiums must not exceed 2,400 per family or 200 a monthpaid during the taxable year for health and or hospitalization insurance

taken by the taxpayer for himself including his family allowed as

deduction from gross income

Provided, that said family has a gross income of NOT MORE THAN250,000 for the taxable year

Provided final that in the case of married taxpayers, only the spouseclaiming the additional exemption for dependents shall be entitled this

deduction.

bb. Personal exemptions

Sec 35 (A)

There shall be allowed a basic personal exemption amounting to 50,000for each individual taxpayer

In case of married individual where only one of the spouses is derivinggross income, only such spouse shall be allowed the personal exemption.

(B) For Dependents

25,000 for each dependent not exceeding 4 claimed by only one spouse in the case of married individuals legally separated spouses additional exemptions may be claimed only

by the spouse who has custody of the child or children

provided that the total amount of additional exemptions that may beclaimed by both shall not exceed the maximum additional exemptionsherein allowed.

Dependent legitimate, illegitimate, legally adopted child chieflydependent upon and living with the taxpayer if such dependent is not

more than 21 years of age, unmarried and not gainfully employed or if

such dependent, regardless of age, is incapable of self-support because

of mental or physical defect

(C) Change of Status

remarried and additional kids corresponding additional exemption

if taxpayer dies estate can claim

If the spouse or any of the dependent dies or if any of such dependentsmarries, becomes 21 or becomes gainfully employed during the taxable


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year, the taxpayer may still claim the same exemptions as if the spouse

or any of the dependents died, or as if such dependents married, became

21 or became gainfully employed at the close of such year

(D) Personal Exemption ALLOWABLE TO NON-RESIDENT ALIEN INDIVIDUAL

A non-resident alien individual engaged in trade, business or in theexercise of a profession in the Philippines shall be entitled to a personal

exemption in the amount equal to the exemptions allowed in the income

tax law in the country of which he is a subject or citizen, to citizens of the

Philippines not residing in such country, not to exceed the amount fixed

in this section as exemption for citizens or residents

o Provided that said nonresident alien should file a true andaccurate return of the total income received by him from all

sources in the Philippines

d. Items not deductibleSection 36

(A) General Rule: In computing net income, no deduction shall in any case beallowed in respect to

1. Personal living or family expenses2. Any amount paid out for new buildings or for permanent improvements,

or betterments made to increase the value of any property or estate

This subsection shall not apply to intangible drilling and development

costs incurred in petroleum operations which are deductible under

Subsection G1 of 34 - -

3. any amount expended in restoring property or in making good theexhaustion thereof for which an allowance is or has been made4. premiums paid on any life insurance policy covering the life of any officer

or employee, or of any person financially interested in any trade or

business carried on by the taxpayer, individual, corporate, when the

taxpayer is directly or indirectly a beneficiary under such policy.

See also: 34 (C) Taxes as deductions for gross income

Tax Credit and Capital Losses

(B) Losses from Sales or Exchange of Property

In computing net income, no deduction shall in any case be allowed in respect of

losses from sales or exchanges of property directly or indirectly

3. between members of a family4. except in the case of distributions in liquidation, between an individual and a

corporation more than 50% in value of the outstanding stock of which is

owned, directly or indirectly by or for such individual

5. except in the case of distributions in liquidation, between 2 corporationsmore than 50% in value of the outstanding stock of each of which is owned,

directly or indirectly, by or for the same individual, if either one of such

corporations, with respect to the taxable year of the corporation preceding

the date of the sale or exchange was, under the law applicable to such

taxable year, a personal holding company or a foreign personal holding

company

6. between the grantor and a fiduciary of any trust7. between the fiduciary of a trust and the fiduciary of another trust if the same

person is a grantor with respect to each trust

8. between a fiduciary of a trust and a beneficiary of such trust

e. Income and deductions of insurancecompanies


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TAX BASE AND TAX RATES


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Remember: TAX IS INTEGRATIVE!

1. Individual Income Tax Payersa. Citizen and resident alien

i. Global ratesSec 24 (A)

Taxable income other than income under Sec 24 (B, C, D)

(1) an income tax is hereby imposed(a) On the taxable income defined in Sec 31 (TAXABLE INCOME) of this Code,

other than income subject to tax under Subsection (B) rate on certain

passive income (C) cash and or property dividends (D) capital gains from

sale of shares of stock nottraded in the stock exchange, of this Section,

derived for each taxable year from all sources within and without the

Philippines by every individual citizen of the Philippines residing therein;

(b) By an individual citizen who is residing outside of the Philippinesincluding overseas contract workers (income OUTSIDE of Phils)

(c) From all sources within the Philippines by an individual alien who is aresident of the Philippines(2) Rates of Tax on Taxable Income of Individuals

NOT over 10,000 5%

Over 10 30 500+10% of the excess over 10k

Over 30 70 2,500+15% of the excess over 30k

Over 70 140k 8,500 +20% of the excess of 70k

Over 140 250k 22,500+25% of the excess over 140k

Over 250 500k 50,000+30% of the excess of 250k

Over 500k 125,000+32% of the excess of 500k

For married individuals, the husband and wife, subject to the provision of Sec 51

(D) hereof, shall compute separately their individual income tax based on their

respective total taxable income

Provided, that if any income cannot be definitely attributed to or identified as

income exclusively earned or realized by either of the spouses, the same shall be

divided equally between the spouses for the purpose of determining their

respective taxable income.

Provided minimum wage earners as defined in Sec 22 (HH) of this Codeshall be exempt from the payment of income tax on their taxable income

Provided further, that the holiday pay, overtime pay, night shiftdifferential pay and hazard pay received by such minimum wage earners

shall likewise be exempt from income tax.

See also: Sec 127 (D) COMMON PROVISIONS

Any gain derived from the sale, barter, exchange, or other disposition ofshare of stock under this Sec shall be exempt from the tax imposed in Sec

24 (C), 27 (D) (2), 28 (A)(8)(c), and 28 (B) (5) (c) of this Code and from the

regular individual or corporate income tax.

Tax paid under this Section shall NOT be deductible for incomeii. Schedular rates

*Final tax sole and only tax, no need to include in income tax return. No longer returnable

a) Interest, royalties, prizes and other winningsSec 24 (B) (1)

INTEREST = Final tax: 20%

ROYALTIES = Final tax: 20% books, musical compositions = 10%

PRIZES =Final tax: ordinary income ???

WINNINGS = Final tax: 20%

EFCDS =Final tax: 7 % A final tax at the rate of 20% is imposed upon the amount of interest from any

currency bank deposit and yield or any other monetary benefit from deposit

substitutes and from trust funds and similarly arrangements

Royalties except on books as well as other literary works and musicalcompositions, which shall be imposed a final tax of 10%

Prizes MORE THAN 10K shall be subject to tax Other winnings except PHIL CHARITY SWEEPSTAKES and LOTTO Provided however, that interest income received by an individual taxpayer

(except nonresident individual) from a depository bank under the expanded

foreign currency deposit system shall be subject to a final income tax at the rate

of 7 % of such interest income

Interest income from LONG-TERM deposit OR INVESTMENT in the form ofsavings, common or individual trust funds, deposit, substitutes, investmentmanagement accounts and other investments evidenced by certificates in such

form prescribed by the BSP shall be exempt from the tax imposed under this

Subsection

o Should the holder of the certificate pre-terminate the deposit orinvestment before the fifth year, a final tax shall be imposed on the

entire income and shall be deducted and withheld by the depository

bank from the proceeds of the long-term deposit or investment

certificate based on the remaining maturity thereof

Four years to less than 5 years 5% Three years to less than 4 years 12% Less than 3 yearssz 20%


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b) cash and property dividendsSec 24 (B) (2)

Final tax at the following rates shall be imposed upon the cash and/orproperty dividends actually or constructively received by an individual

from a domestic corporation or from a joint stock company, insurance or

mutual fund companies and regional operating headquarters of

multinational companies,

or on the share of an individual in the distributable net income after taxof a partnership (except GPP) of which he is a partner, or on the share of

an individual in the net income after tax of an association, a joint account

or a joint venture or consortium taxable as a corporation of which he is a

member or co-venture

o 10% beginning Jan 1, 2000o provided that the tax on dividends shall apply only on income

earned on or after Jan 1, 1998

o Income forming part of retained earnings as of Dec 31, 1997shall not, even if declared or distributed on or after Jan 1, 1998

be subject to this tax

c) capital gains from sale of shares of stock not traded in the stock exchangeSec 24 (C)

The provisions of Section 39 (B) notwithstanding, a final tax at the rates

prescribed below is hereby imposed upon the net capital gains realized during the

taxable year from the sale, barter, exchange or other disposition of shares of stock

in a DOMESTIC CORPORATION, except shares sold, or disposed of through the

stock exchange

Not over 100,000 5%

On any amount in excess of 100,000 10%

d) capital gains from sale ofreal propertyGeneral: the provisions of Sec 39(B) (percentage taken into account), a final tax of

6% based on the gross selling price or current fair market value as determined in

accordance with Sec 6E of this Code, whichever is higher, is hereby imposed upon

capital gains presumed to have been realized from the sale, exchange or other

disposition of real property located in the Philippines, classified as capital assets,

including pacto de retro sales and other forms of conditional sales, by individuals,

including estates and trusts

Provided that the tax liability, if any, on gains from sales or other

dispositions of real property to the government or any of its political subdivisions

or agencies or to government-owned or controlled corporations shall be

determined either under 24(A) or under this subsection, at the option of the

taxpayer.

TAX BASE: gross, not gain.

Exception: NO NEED TO PAY CAPITAL GAINS TAX

1. sale or disposition of their principal residence by natural persons2. proceeds of the sale are fully utilized in acquiring or construction a

new principal residence within 18 calendar months from the date of

sale or disposition

3. the commissioner shall have been duly notified 30 days from thedate of sale through a prescribed return of intention to avail of the

tax exemption

4. deposit is made of the 6% capital gain tax otherwise due, under anescrow agreement between the taxpayer and the BIR that the same

shall be released to the taxpayer when the proceeds of the sale shall

have been utilized as intended

5. AVAILED: once every 10 yearsIf there is NO FULL UTILIZATION of the proceeds of the sale or disposition, the

portion of the gain presumed to have been realized from the sale or disposition

shall be subject to capital gains tax.

The GSP or FMV at the time of sale, whichever is higher shall be multiplied by a

fraction which the unutilized amount bears to the GROSS SELLING PRICE in order

to determine the taxable portion

Alternative Taxation

In the case of a sale or other disposition of real property to thegovernment or any of its political subdivisions or agencies or to the

government-owned or controlled corporations, the tax shall be either theyear-end tax of the individual (capital gain to be included in the

computation of income subject to scheduler rates) or the capital gain tax

of 6% at the option of the taxpayer.


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b. Non-resident alien individuali. Non-resident alien engaged in trade or business in the

Philippines

1. Global RatesSection 25 (A) (1)

(A) Non-resident alien engaged in trade or business within the Philippines(General): A non-resident alien individual engaged in trade or business in the

Philippines shall be subject to an income tax in the same manner as an individual

citizen and a resident alien individual, on taxable income received from all sources

within the Philippines.

A nonresident alien individual who shall come to the Philippines and stay therein

for an aggregate period of more than 180 days during any calendar year shall be

deemed a non-resident alien DOING BUSINESS in the Philippines.

2. Schedular Ratesa) Dividends (cash or property)b) Share in the distributable net income of a partnershipc) Interestsd) Royalties (in any form)e) Prizes (should be more than 10k)f) Other winningsg) Capital gains from sale of shares of stock NOT traded in the stock exchangeh) Capital gains from sale of real property Subject to an income tax of 20% on the total amount thereof Royalties on musical compositions, books, literary works shall be subject

to a final tax of 10%

Same as resident alien, citizensii. Non-resident alien NOT engaged in trade or business

in the PhilippinesQuestion: How about someone assigned in HQ?

1. Global RateSec 25 (B)

25% of such income capital gains 5/10 percent capital gains from sale of real property 6%

2. Schedular RatesSec 25 (B)

a) capital gains from sale of shares of stock NOT traded in the stock exchangei. 5 or 10%

b) capital gains from sale of real propertyi. 6% on GSP/FMV

iii. Alien individual employed by regional or area headquarters of multinationalcompanies

Salaries, wages, annuities, compensation, remuneration, and otheremoluments, honoraria, allowances - - tax equal to 15% of such gross

income

Same tax treatment shall apply to Filipinos employed and occupying thesame position as those of aliens employed by these multinational

companies

Multinational company a foreign firm or entity engaged in internationaltrade with affiliates or subsidiaries or branch offices in the Asia-PacificRegion and other foreign markets

iv. Alien individual employed by offshore banking units

15%

v. Alien individual employed by petroleum service contractor and sub-contractor 15%

c. Members of GPPnot a separate taxable entity (individual partners are taxed) Persons engaging in business as partners in a GPP shall be liable for

income tax only in their SEPARATE and INDIVIDUAL CAPACITIES

For purposes of computing the distributive share of the partners, the netincome of the partnership shall be computed in the same manner as a

corporation

Included in gross income


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2. Corporate Taxpayersa. Domestic corporations

i. Global RateSec 27 (A) (B) (C)

30% imposed upon the taxable income derived during the taxable yearfrom ALL SOURCES within and without the Philippines

provided further that the President, upon reco of the Sec of Finance, mayallow corporations the option to be taxed at 15% of Gross income after

the ff conditions have been satisfied

1. tax effort ration of 20% of GNP2. ratio of 40% of income tax collection to total

tax revenues

3. vat tax effort of 4% of GNP4. .9 ration of the CPSFP to GNP

the option to be taxed on GI shall be available ONLY to firms whose ratioof cost of sales to gross sales or receipts from all sources does not exceed

55%

election shall be irrevocable for 3 consecutive yearsGross Income all derived from business

Gross sales Sales return discounts allowances COGSCost of Goods sold

All business expenses directly incurred to produce the merchandise tobring them to their present location and use

(B) Proprietary Educational Institutions and Hospitalso Nonprofit 10% on taxable income except Do Gross income unrelated to trade and business exceed 50% ofthe total gross income, taxed at 30%o Accredited by either DECS CHED OR TESDA

(C) Government-owned or controlled Corporations, Agencies orInstrumentalities

ii. Schedular Rate1. certain interest from deposit and yield or any other monetary benefit

from deposit substitutes, trust funds and similar arrangements

a. 20% upon the amount of interest on currency bank deposit andyield

b. EFCD interest income -7%2. capital gains from sale of shares of stock (not traded in the stock

exchange)

a. not over 100k 5%b. amount in excess of 100k 10%

3. capital gains from sale of real propertya. 6% on the gain to have been realized on the saleb. based on the gross selling price or fair market value whichever is

higher

iii. Minimum Corporate Income Tax (MCIT)Sec 27 (E)

2% of the gross income as of the end of the taxable year is imposed on acorporation taxable under this title beginning on the 4

thtaxable year

immediately following the year in which such corporation commenced its

business operations, when the minimum income tax > tax computed

under (A) for the taxable year

there will only be MICT if theres gross income (even though theres noloss)

Example

Sales 100,000COGS 20,000

Gross Income 80,000 x 2% (or MCIT) = 1,600

Expenses 30,000

50,000

Tax x .3

Tax Due 15,000

*pay the greater amount


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b. Resident Foreign Corporationi. Global Rate

Sec 28 (A)

30% of the taxable income derived from all sources within the Philippines if fiscal period the income and expenses for the fiscal year shall be

deemed to have been earned and spent equally for each month of the

period

(corporate income tax rates shall be applied on the amount computed bymultiplying the number of months covered by the new rate within the

fiscal year by the taxable income of the corporation for the period,

divided by 12)

provided however, that a resident foreign corporation shall be grantedthe option to be taxed at 15% on gross income under the same

conditions provided above

ii. MCITSec 28 (A) (2)

2% of gross income

iii. Schedular RatesSec 28 (A) (7)

1. certain interest from deposit and yield or any other monetary benefitfrom deposit substitutes, trust funds and similar arrangements

20%2. income derived under the expanded foreign currency deposit system

7%3. capital gains from sale of shares of stock not traded in the stock

exchange

not over 100k 5% on any amount in excess of 100k 10%

4. intercorporate dividends (shall not be subject to final tax) dividends received by a resident foreign corporation

from a domestic corporation liable to tax under this

code shall not be subject to tax under this title

iv. International carrierSec 28 (A) (3)

An international carrier doing business in the Philippines shall pay a taxof 2 % on its gross Philippine Billings

o INTERNATIONAL AIR CARRIER. GPB amount of gross revenuederived from carriage of persons, excess baggage, cargo and

mail

o originating from the Philippines in a continuous anduninterrupted flight

o Irrespective of the place of sale or issue and the place ofpayment

o Provided that tickets revalidated, exchanged and/or indorsed toanother international airline form part of GPB if the passenger

boards a plane in a port or point in the Philippines

o Provided further, that for a flight which originates from thePhilippines, but transshipment of passenger takes place at any

port outside the Philippines on another airline, only the aliquot

portion of the cost of the ticket corresponding to the leg flown

from the Philippines to the point of transshipment shall formpart of GPB.

o INTERNATIONAL SHIPPING. GPB means gross revenue whetherfor passenger, cargo or mail originating from the Philippines up

to final destination regardless of the place of sale or payments

of the passage or freight documents.

v. offshore banking units 28A41. foreign currency to domestic 10%2. other than this, exempt

vi. tax on branch profit remittances 28A5vii. regional or area headquarters and regional operating

headquarters of multinational companies 28A6

c. Non-resident foreign corporationi. Global Rate 28B1 30%ii. Schedular Rates 28B5

1. interest on foreign loans 20%


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a. loan denominated by a foreign currency lent by foreign toresident

2. intercorporate dividends final withholding tax 15%a. if the recipient is a resident foreign corp = exemptb. if its a non-resident foreign = its subject to taxc. subject to the condition that the country in which the corp is

domiciled shall allow a credit against the tax due from the

nonresident foreign corp taxes deemed to have been paid in

the Phils equal to 15%

d. which represents the diff between the regular income tax of30% and the 15%

3. capital gains from sale of shares of stock not traded in the stockexchange

a. not over 100k 5%b. over 100k 10%

iii. Non-resident cinemtographic film owner, lessor or distributor28B2

iv. Nonresident owner or lessor of vessels chartered by Phil nationals v. Non resident owner or lessor of aircraft


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F. Improperly accumulated earnings tax

Only corporations are held liable for IAE Sec 29

(A) General

There is hereby imposed for each taxable year on the improperlyaccumulated taxable income of each corporation described in Subsec B

hereof, an improperly accumulated earnings tax equal to 10% of the

improperly accumulated taxable income

(D) Tax on Corporations Subject to IAEGeneral: the IAET imposed in the preceding section shall apply to every

corporation formed or availed for the purpose of avoiding the income tax with

respect to its SH or the SH of any other corporation by permitting earnings and

profits to accumulate instead of being divided or distributed

Exceptions

1. publicly-held corporations2. banks and other non-bank financial intermediaries3. insurance companies4. includes partnerships as per REV REG

(E) Evidence for purpose to Avoid Income TaxThe fact that any corporation is a mere holding company or investment company

shall be prima facie evidence of a purpose to avoid the tax upon its shareholders

or members.

The fact that the earnings or profits of a corporation are permitted to accumulatebeyond the reasonable needs of the business shall be determinative of the

purpose to avoid the tax upon its shareholders or members unless the

corporation, by the clear preponderance of evidence, shall prove to the contrary.

(F) Improperly Accumulated Taxable IncomeImproperly accumulated taxable income means income adjusted by

1. income exempt from tax2. income excluded from gross income3. income subject to final tax

4. amount of NOLCO deductedreduced by the sum of

1. dividends actually or constructively paid2. income tax paid for the taxable year

provided that for corporations using the calendar year basis, the accumulated

earnings tax shall not apply on improperly accumulated income as of Dec 1997.

In the case of corporations adopting the fiscal year accounting period, the

improperly accumulated income not subject to this tax shall be reckoned as of the

end of the month comprising the 12 month period of fiscal 1997-98

Reasonable needs of the business includes the reasonably anticipated needs of

the business

Example2010

Taxable Income 100,000 Taxable Income 100,000

Tax exempt income 50,000 Tax Exempt 50,000Dividends 20,000 Total Income 150,000

Owners Equity Less: Income Tax 30,000 (100k x .3)

Common 10,000 Net income 120,000 (Retained E)

Additional Paid-in 10,000 Retained Earnings OE = Tax base

Retained Earnings 0 120,000 20,000= 100,000 - IATI

100,000 x .1 = 10,000 = tax due

* thus the 90,000 (100-10k) must be declared as dividends

*you can declare dividends up to retained earnings

* accumulating beyond paid-up capital is prima facie evidence that theres IAE

*Establish that the money NOT DECLARED as dividends will be used for business

Paid in Capital Total capital infused in company

Rev Reg- changed paid-in capital PAR only from capital at par + additional

Effect of declaring stock dividends1. reduces retained earnings transfer to capital2. increases shield from IAE

Par value basis for DST but then defense v IAET is diluted

If you issue at a premium, DST is at par

Revenue Regulations No 2-2001


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CIR v Antonio Tuason

Corporation did not involve itself in the development of subdivisions butmerely subdivided its own lots and sold them for bigger profits. It derived

its income mostly from interest, dividends and rental realized from the

sale of realty. Alleged investments were also not proven

The touchstone of liability is the purpose behind the accumulation of theincome and not the consequences of the accumulation. Thus, if the

failure to pay dividends were for the purpose of using the undistributed

earnings and profits for the reasonable needs of the business, that

purpose would not fall within the interdiction of the statute

Manila Wine Merchants v CIR

An accumulation of earnings or profits is unreasonable if it is notrequired for the purpose of the business, considering all the

circumstances of the case.

In order to determine whether profits are accumulated for thereasonable needs of the business as to avoid the surtax upon

shareholders.

The controlling intention of the taxpayer is that which is manifested atthe time of accumulation not subsequently declared intentions which aremerely the product of afterthought

A speculative and indefinite purpose will not sufficeImmediacy test

Reasonable needs of the business means the immediate needs of thebusiness

If the corporation id not prove an immediate need for the accumulationof the earnings and profit, the accumulation was not for the reasonable

needs of the business and the penalty would apply

In this case, the treasury bonds were in no way related to the petitioenrsbusiness of importing and selling wines and whisky and thus construed asINVESTMENT beyond the reasonable needs of the business

Basilan Estates v CIR

Although the fund was intended to go to future projects, it is shown inthe record that the fund reverted to the general fund

Such reversion gave the government the occasion to consider such fortax purposes

The controlling intention of the taxpayer is that which is manifested atthe time of the accumulation not subsequently declared intentions which

are merely the product of afterthought.

The reversion gave the government the occasion to consider such for taxpurposes. The controlling intention of the taxpayer is that which is

manifested at the time of accumulation not subsequently declared

intentions

G. Tax-free Exchanges

Section 40 (C) Exchange of Property

1. GR: Except as herein provided, upon the sale or exchange of property,the entire amount of the gain or loss, as the case may be shall be

recognized

2. E: Non gain or loss shall be recognized if in pursuance of a plan of mergeror consolidation

a. A corporation, which is a party to a merger or consolidation,exchanges solely for stock in a corporation, which is a party to

the merger or consolidation

b. A shareholder exchanges stock in a corporation, which is a partyto the merger or consolidation, solely for the stock of another

corporation also a party to the merger or consolidationc. A security holder of a corporation, which is a party to the

merger or consolidation exchanges his securities in such

corporation solely for stock or securities in another corporation,

a party to the merger or consolidation

No gain or loss shall also be recognized if property is transferred to a corporation

by a person in exchange for stock or unit of participation in such a corporation of

which as a result of such exchange said person, alone or together with others, not

exceeding 4 persons, gains control of said corporation

Provided, that stocks issued for service shall not be considered as issued in returnfor property


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H. Accounting methods and periods and filing of income tax returns

1) ACCOUNTING METHODSa) IN GENERAL

Sec 43

GR: the taxable income shall be computed upon the basis of the taxpayers annual

accounting period (fiscal or calendar year)

if no such method of accounting has been so employed, or if the methodemployed does not clearly reflect the income, the computation shall be

made in accordance with such method as in the opinion of the

Commissioner clearly reflects the income

if the taxpayer has no annual accounting period, or does not keep books,or if the taxpayer is an individual, the taxable income shall be computed

on the basis of the calendar year

Sec 48 accounting for long-term contracts

Sec 49: Installment basis a person who regularly sells or disposes of pp on the installment plan

may return as income therefrom in any taxable year that proportion of

the installment payments actually received in that year, which the gross

profit realized or to be realized when payment is completed, bears to the

total contract price.

(D) change from accrual to installment basis: if a taxpayer entitled to thebenefits of A elects for any taxable year to report his taxable income on

the installment basis, then in computing his income for the year of

change or any subsequent year, amounts actually received during any

such year on account of sales or other dispositions of property made in

any prior year shall NOT be excluded

b) METHODS OF ACCOUNTING AUTHORIZED UNDER THE TAX CODE

1) Cash2) Accrual3) Installment4) Percentage of Completion for Construction5) Crop Year Basis (for agricultural)2) Accounting periods depends on accounting method. Recognize

revenue when received/accrued

Sec 44 Period in which Items of gross income included

The amount of all items of gross income shall be included in the grossincome for the taxable year in which received by the taxpayer, unless,

under methods of accounting permitted, any such amounts are to be

properly accounted for as of a different period

in the case of the death of a taxpayer, there shall be included incomputing taxable income for the taxable period in which falls the date

of his death, amounts accrued up to the date of his death if not

otherwise properly includible in respect of such period or a prior period

Sec 45 Period for which Deductions and Credits Taken

the deductions provided for in this title shall be taken for the taxableyear in which paid or accrued or paid or incurred dependent upon the

method of accounting upon the basis of which the net income is

computed, the deductions should be taken as of a different period.

Sec 46. Change of Accounting Period

if a taxpayer, other than an individual, changes his accounting periodfrom fiscal year to calendar year, from calendar year to fiscal year, orfrom one fiscal year to another, the net income shall, with the approval

of the commissioner, be computed on the basis of such NEW accounting

period (subject to Sec 47)

Sec 47: Final or Adjustment returns for a Period of Less than 12 Months

(A) Returns for Short Period Resulting from Change of Accounting Periodo If a taxpayer, other than an individual, with the approval of the

Commissioner, changes the basis of computing net income from

fiscal year to calendar year, a separate final or adjustment

return shall be made for the period between the close of the lastfiscal year for which return was made and the following

December 31.

o If the change is from calendar year to fiscal year, a separatefinal or adjustment return shall be made for the period between

the close of the last calendar year for which return was made

and the date designated as the close of the fiscal year.

o If the change is from one fiscal year to another fiscal year, aseparate final or adjustment return shall be made for the period

between the close of the former fiscal year and the date

designated as the close of the new fiscal year


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(E) Return of Parent to Include Income of Childreno The income of unmarried minors derived from property

received from a living parent shall be included in the return of

the parent

o except (1) when the donors tax has been paid on such propertyor (2) when the transfer of such property Is exempt from

donors tax

(F) Persons Under Disabilityo If the taxpayer is unable to make his own return, the return may

be made by his duly authorized agent or representative or by

the guardian or other person charged with the care of his

person or property, the principal and his representative or

guardian assuming the responsibility of making the return and

incurring penalties provided for erroneous, false or fraudulent

returns

(G) signature presumed correct prima facie evidenceSec 52: Corporation Returns

(A) Requirements Every corporation subject to the tax imposed, EXCEPT foreign

corporations NOT engaged in trade or business in the Philippines

Shall render, IN DUPLICATE, a true and accurate quarterly income taxreturn and final or adjustment return

Filed by the pres, vp, or other principal officerExample: Corporate Returns (Sec 52)

QUARTERLY Q1 Q2 Q3 Q4

Gross Income 500,000 500,000 500,000 200,000

Allowable Deduc 300,000 600,000 400,000 100,000

Taxable Income 200,000 (100,000) 100,000 100,000

Q1 200,000 Q1&2 100,000 Q1-3 200,000

100,000 200,000 300,000

Tax Rate x .3 x .3 x .3 x .3

Tax Payable 60,000 30,000 60,000 90,000

Less Tax Paid (60,000) (60,000) (60,000)

Tax Due (30,000) 0 30,000Check Q1-3 Q1-4

1,500,000 1,700,000

1,300,000 1,400,000

200,00.00 300,000

x .3 x .3

60,000 - 90,000 = 30,000 = tax due!!!

*but then you already paid 60,000 first quarter

c. Returns of Receives, TRUSTEES IN BANKRUPTCY, assignees, Sec 54

d. Returns of general Professional partnership SEC 55

Every general partnership shall file, in duplicate, a return of its income,except income exempt under 32 (B) of this title, setting forth the items of

gross income and of deductions allowed by this title, and the names,

taxpayer identification numbers, addresses and shares of each of the

partners.

Sec 56. Payment and Assessment of Income Tax

General

The total amount of tax imposed by this title shall be paid by the person subject

thereto at the time the return is filed

Deficiency amount by which the tax imposed by this title exceeds the amount

shown as the tax by the taxpayer upon his return

but the amount so shown on the return shall be increased by theamounts previously assessed (or collected without assessment) as a

deficiency and decreased by the amount previously abated, credited,

returned or otherwise repaid in respect of such tax


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Sec 57. Withholding of tax at sources

(A) Withholding of Final Tax on Certain Incomes Subject to rules and regulations of the Secretary of Finance may

promulgate, upon the recommendation of the Commissioner, requiring

the filing of income tax return by certain income payees, the tax imposed

or prescribed by

1. 24 (B) (1) Interests, royalties, Prizes and Other Winnings2. 24 (B) (2) Cash and or Property Dividends3. 24 (C) Capital Gains from Sale of Shares of Stock not Traded in Stock Exchange4. 24 (D) (1) Capital Gains from Sale of Real Property5. 25 (A) (2) TAX ON NON-RESIDENT ALIEN INDIVIDUALS: Cash and or Property

Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or

Mutual Fund Company

6. 25 (A) (3) Capital Gains7. 25 (B) Non Resident Alien Individual Not Engaged in Trade or Business Within

the Philippines

8. 25 (C) Alien Individual Employed by R/AHQ and Regional Operating HQ9. 25 (D) offshore banking units10.

25 (E) petroleum service contractor11. 27 (D) (1) domestic corporation: interest from deposits and yield or any othermonetary benefit from deposit substitutes and from trust funds

12. 27 (D) (2) capital gains from the sale of shares of stock NOT traded in SE13. 27 (D) (3) tax on income derived under the expanded currency deposit system14. 27 (D) (5) capital gains realized from the sale, exchange or disposition of lands15. 28 (A) (4) offshore banking units16. 28 (A) (5) tax on branch profits remittances17. 28 (A) (7) (a) tax on certain incomes received by a resident foreign corp18. 28 (A) (7) (b)19. 28 (A) (7) (c)20. 28 (B) (1) tax on nonresident foreign corporation21. 28 (B) (2) non resident cinematographic film owner22. 28 (B) (3)non resident owner or lessor of vessels23. 28 (B) (4) owner lessor of aircraft24. 28 (B) (5) (a) income received by a non resident foreign corp: interest on foreign

loans

25. 28 (B) (5) (b) intercorporate dividends26. 28 (B) (5) (c) capital gains from sale of shares of stock27. 33 special treatment of fringe benefits28. 382

of this code on specified items of income shall be withheld by payor-corporation

and/or person and paid in the same manner and subject to the same conditions as

provided in Sec 58 of this code.

Sec 76. Fiscal Adjustment Return

Every corporation liable to tax under Sec 27 shall file a final adjustment returncovering the total taxable income for the preceding calendar or fiscal year.

If the sum of the quarterly tax payments made during t he said taxable year ISNOT EQUAL to the total tax due on the entire taxable income of that year, the

corporation shall either

o Pay the balance of tax still due ORo Carry-over the excess credit ORo Be credited or refunded with the excess amount paid

In case the corporation is entitled to a tax credit or refund of the excessestimated quarterly income taxes paid, the excess amount shown on its FINAL

ADJUSTMENT RETURN may be carried over and credited against the estimated

quarterly income tax liabilities for the taxable quarters of the succeeding taxable

years.

Once the option to carry over and apply the excess quarterly income taxagainst income tax due for the taxable quarters of the succeeding taxable

years had been made

o Such option shall be considered IRREVOCABLE for that taxableyear

o And no application for cash refund or issuance f a tax creditcertificate shall be allowed

Systra Phil v CIR

a corporation entitled to a tax credit or refund of the excess estimatedquarterly income taxes paid has 2 options:

to carry over the excess credit apply for the issuance of a tax credit certificate claim a cash refund IRREVOCABILITY RULEthe corporation must signify in its annual

corporate adjustment return its intention either to carry over the excess

credit or to claim a refund

These remedies are in the alternative & the choice of 1 precludes theother. The rule prevents a taxpayer from claiming 2x the excess

quarterly taxes paid

NOT CUMULATIVE The excess tax credits may be carried over and credited against the

estimated quarterly income tax liabilities for the taxable quarters of the

succeeding taxable years UNTIL FULLY UTILIZED

Once the carry over option was made, actually or constructively, itbecame forever irrevocable regardless of whether the excess tax credits

were actually or fully utilized


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British Traders Insurance Co v CIR

from the reinsurance treaties it is clear that he activities were to beperformed in the Philippines

the taxability of a foreign corporations income depends upon the locusof the activity, property or service giving rise thereto

the income tax law does not require as a condition sine qua non theconduct of business in the Philippines in order that foreign corporations

may thereunder be taxed on their income

it is sufficient that such income is derived from an activity within thePhilippines

place of activity, not place of business, is controlling. Since an activitymay consist of only a single transaction whereas business implies a

continuity of transactions. It follows the source of an income can be

activity performed outside ones place of business

precisely, our legislators adopted the administration device ofwithholding corresponding income tax at the source of income tax

the fax that a foreign corporation does not engage in business here andhas no local office or agent is the very reason why its income is subject to

withholding tax

CIR v Malayan Insurance Company

in the event that the taxpayer in this case is finally found liable fordeficiency tax on its incomes from the Philippines, the government would

have no way of collecting what is still due from the said taxpayer which is

a foreign corporation not engaged in trade or business and without office

or place of business in the Philippines.

CIR v P&G

domestic corporation declared dividends payable to parent corporation(foreign, non-resident) domestic corporation now claims refund.

Who is the taxpayer? Under section 53 (c) of the NIRC, the withholding agent who is required

to deduct and withhold tax is made personally liable for such tax and

indeed is indemnified against any claims and demands which the

stockholder might wish to make in questioning the amount of payments

effected by the withholding agent in accordance with the provisions of

the NIRC

The withholding agent, domestic corporation is directly andindependently liable for the correct amount of the tax that should be

withheld from the dividend remittances.

The withholding agent is subject to and liable for deficiency, assessments,surcharges and penalties should the amount of the tax withheld be finally

found to be less than the amount that should have been withheld under

law.

Withholding agent agent of the government and the taxpayer Thus a proper party to file Government cant go after withholding agent NIRC only requires that the US shall allow P&G USA a deemed paid tax

credit

Gibbs v CIR

CIR assessed Gibbs with deficiency income tax. Gibbs claimed for arefund fund.

A taxpayer who contributes to the withholding tax system, does so notreally to deposit an amount to the CIR but in truth, to perform and

extinguish his tax obligation for the the year concerned.

In other words, he is paying his tax liabilities for that year Consequently, a taxpayer whose income is withheld at the source will be

deemed to have paid his tax liability when the same falls due at the end

of the tax year

It is from this latter date them, or when the tax liability falls due that the2-year prescriptive period starts to run

It is of no consequence whatever a claim or refund or credit against theamount withheld at the source may hav e been presented and may have

remained unresolved.

2. Returns and payments of taxes withheld at source

Sec 58

Quarterly Returns and Payments of Taxes Withheld

The taxes deducted and withheld by the withholding agent shall be heldas a special fund in trust for the government until paid to the collecting

officer

(C) Income of Recipiento Income upon which any creditable tax is required to be withheld

at source under Section 57 shall be included in the return of its

recipient but the excess of the amount of tax so withheld over

the tax due on his return shall be refunded to him subject to the

provisions of 204.


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Withholding on Wages

Sec 78-83

79 Income tax collected at source


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K. Estates and Trusts

Sec 60 to 66

Documents

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