The Tax Aspect of The Tax Aspect of Educational Educational InstitutionInstitution

By:By:

Dr. Ruperto P. Somera, Ph, D., CPADr. Ruperto P. Somera, Ph, D., CPATax Consultant, Professor/LecturerTax Consultant, Professor/LecturerFormer Member, Board of Former Member, Board of AccountancyAccountancyFormer Director, Bureau of Internal Former Director, Bureau of Internal RevenueRevenueFellow Tax ManagementFellow Tax Management

Kinds of Educational Kinds of Educational InstitutionsInstitutions

1. Proprietary Educational Institutions

2. Non-stock, Non-Profit Educational Institutions

A Proprietary educational A Proprietary educational institution is any private school institution is any private school maintained and administered maintained and administered by private individuals or groups by private individuals or groups with an issued permit to with an issued permit to operate from the Department operate from the Department of Education, Culture and of Education, Culture and Sports (DECS), or the Sports (DECS), or the Commission on Higher Commission on Higher Education (CHED), or the Education (CHED), or the Technical Educational and Technical Educational and Skills Development Authority Skills Development Authority (TESDA)(TESDA)

Proprietary Educational Proprietary Educational InstitutionsInstitutionsProprietary Education Institutions

– Proprietary educational institutions shall pay a tax often percent (10%) on their income. Provided, that if the gross income from unrelated trade, business or other activity fifty percent (50%) of the total gross income derived by such educational tax should be 30% on the net income.

Kinds of Income Tax Kinds of Income Tax ExemptionExemptionExpress income tax exemptionsIntentional income tax

exemptions

It could be express or implies immunity, to particular persons or corporations, or to persons or corporations of a particular class.

CONSTITUTIONAL EXEMPTION: ARTICLE XIV Sec 4 (3):“SECTION 4(3) All revenues and assets of non-stock, non-profit education institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.

Art. XIV Sec. 4 par. (4)Art. XIV Sec. 4 par. (4) – – “Subject to “Subject to conditions prescribed by law all grants, conditions prescribed by law all grants, endowments, donations or contributions endowments, donations or contributions used actually, directly and exclusively for used actually, directly and exclusively for educational purposes shall be exempt educational purposes shall be exempt from tax.”from tax.”

Proprietary educational institutions including those cooperatively organized may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestments.

Tax Exemptions Granted to Non-Tax Exemptions Granted to Non-Stock, Non-Profit Educational Stock, Non-Profit Educational InstitutionsInstitutionsAll revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties.

Department Order No.Department Order No.137-87 (DOF137-87 (DOF))

Non-stock,non-profit educational institutions are exempt from tax on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational.

They shall, however, be They shall, however, be subject subject to internal revenue taxes on to internal revenue taxes on income from trade, business or income from trade, business or other activity the conduct to other activity the conduct to which is not related to the which is not related to the exercise or performance by such exercise or performance by such educational institution of its educational institution of its educational purpose or function.educational purpose or function.

DECS ORDER NO. 137-87DECS ORDER NO. 137-87The implementing regulations of DECS Order No. 137-87 dated December 16, 19871.The exemption granted refers to internal revenue taxes and customs duties imposed by the National Government on all revenues and assets of non-stock, non-profit educational institutions.2.The exemption is not only limited to revenues and assets derived from strictly school operations like income from tuition and other miscellaneous fees such as matriculation, library, ROTC, etc., but also extends to incidental income derived from canteen, bookstore and dormitory facilities.

3. In this case, however, of incidental income, the facilities mentioned must not only be owned and operated by school itself but such facilities must be located inside the school campus. Canteens operated by mere concessionaries are taxable.

4. Income which is unrelated to school operations like income from money market placements are taxable.

5. The use of the school’s income or assets must be in consonance with the purposes for which the school is created; in short, the use must be school-related like the grant of scholarship, faculty equipment, establishment of professional chairs, etc.

Their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposed and an educational institution, are exempt from the 20% final tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27 (D) (1) of the Tax Code of 1997.

DECS Recognition vs DECS Recognition vs Government PermitGovernment Permit

DECS RECOGNITION is permanent, no need to renew, while

GOVERNMENT PERMIT is temporary this is the reason why some schools

Income TaxIncome TaxIs a tax all yearly profits arising

from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits. Income tax is a direct tax on actual or presumed income (gross or net) of a taxpayer received, accrued, or realized during the taxable year.

PROPRIETARY EDUCATIONALPROPRIETARY EDUCATIONALINSTITUTIONS INSTITUTIONS – Proprietary – Proprietary educational institutions pay on Income educational institutions pay on Income tax of ten percent (10%) on their tax of ten percent (10%) on their taxable net income taxable net income exceptexcept:: Interests from deposits/deposit Interests from deposits/deposit

substitute/trust funds/royaltiessubstitute/trust funds/royalties * 20% (peso) * 20% (peso) * 7.5 (under the Expanded FCD * 7.5 (under the Expanded FCD

system)system)

LIMITATIONS:LIMITATIONS:- if the - if the gross income gross income from the from the unrelated trade, business or other unrelated trade, business or other activity activity exceeds fifty (50%)exceeds fifty (50%) of of the total gross income derived by the total gross income derived by such educational institutions from such educational institutions from all sources, the tax to be applied all sources, the tax to be applied and used shall be 35% on the and used shall be 35% on the entire taxable income.entire taxable income.

Income from School Income from School ActivitiesActivities1.Related School

Income2.Unrelated School

Income

Related School IncomeRelated School IncomeA. Related School Activities1. Tuition Fee2. Registration Fee3. Laboratory Fee4. Entrance Fee5. Identification Card Fee6. Comprehensive Examination Fee7. Internet Fee8. Practicum Fee9. Internship Fee10. Graduation Fee

11. Medical and Dental Fee11. Medical and Dental Fee12. Proceeds from School Uniforms12. Proceeds from School Uniforms13. Proceeds from Yearbook13. Proceeds from Yearbook14. Proceeds from Field Trip14. Proceeds from Field Trip15. Retreat Fee15. Retreat Fee16. Canteen Operation16. Canteen Operation17. School Bus Operation17. School Bus Operation18. Bookstore Operation18. Bookstore Operation19. Dormitory Operation19. Dormitory Operation20. Other Related Income20. Other Related Income

Unrelated trade, business Unrelated trade, business or other Incomeor other Income – any – any trade, business or other trade, business or other activity, the conduct of which activity, the conduct of which is not substantially related to is not substantially related to the exercise or performance the exercise or performance by such educational by such educational institutions.institutions.

UNRELATED SCHOOL INCOMEUNRELATED SCHOOL INCOME

1. Lease of Properties2. Lease of Gym, Auditorium, Football field and other related facilities3. Printing Press Operation4. Parking Fee5. Consultancy Fee6. Commission from Group Life and Accident Insurance Policies procured by the school for the students and employees

7. Sales of Stickers, gifts, souvenirs 7. Sales of Stickers, gifts, souvenirs andand other items donations other items donations8. Donations8. Donations9. Investments in shares of stocks9. Investments in shares of stocks10. Money market placements10. Money market placements11. Catering Services11. Catering Services12. Other unrelated income12. Other unrelated income

Non-Stock, Non-Profit Non-Stock, Non-Profit Educational InstitutionsEducational Institutions

The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly and exclusively for educational purposes.

Revenues derived from assets used in the operation of cafeterias / canteens and bookstore are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.

They shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposed or functions (Sec. 2, Finance Department Order No. 137-87, as amended by Finance Department Order No. 92-88), i.e., rental payment from their building/premises.

Unlike non-stock, non-profit corporation, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed under Section 25 (D) (1) of the Tax Code of 1997, subject to compliance with that as a tax-exempt educational institution, they shall on annual basis submit to the Revenue District Office concerned an annual information return and duly audited financial statement together with the following:

i. Certification from the depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 ½% tax on interest income under the expanded foreign currency deposit system imposed by Section 27 (D)(1) of the Tax Code of 1997.

ii. Certification of actual utilization of the said income; and

iii. Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets on or before the 14th day of the fourth month following the end of its taxable year (Sec. 3, Finance Department Order No. 137-87)

Withholding TaxWithholding Tax

The exemption does not cover withholding taxes as an educational they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997.

Government Educational Government Educational InstitutionInstitutionUP (Act No. 1870, as amended) is subject to 20% final tax. Other government educational institutions are likewise subject thereto. Reason: Income from properties, real or personal or from any their activities conducted fro profit, regardless of the disposition made of such income shall be subject to tax (BIR Ruling 21-90, 28 February 1990)

REVENUE REVENUE REGULATIONS REGULATIONS NO. 5-2012NO. 5-2012

Binding effect of rulings issued prior to Tax Reform Act of 1997

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All rulings issued prior to January 1, 1998 shall no longer have any binding effect. Consequently, these rulings cannot be invoked as basis for any current business transaction/s. Neither can these rulings be used as basis for securing legal tax opinions/rulings.

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BOOKEEPINGBOOKEEPING RULES RULESANDANDREGULATIONS OF REGULATIONS OF EDUCATIONAL EDUCATIONAL INSTITUTIONINSTITUTION

REGISTRATION REQUIREMENTSREGISTRATION REQUIREMENTS

Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer:

- Within ten (10) days from date of employment or- On or before the commencement of business or- Before payment of any tax due or- Upon filing of a return statement or declaration.

DATA NEEDED FOR THE REGISTATIONDATA NEEDED FOR THE REGISTATION

The registration shall contain 1) the taxpayer’s name and TIN 2) style of Business 3) place of business

A person maintaining a head office branch or facility shall register with the Revenue District Officers having jurisdiction over the head office, branch or facility.

ANNUAL REGISTRATION FEEANNUAL REGISTRATION FEE

Five hundred pesos (P500) for every separate or distinct establishment or place of business, including facility types where sales transaction occur, shall be paid upon registration and every year thereafter on or before the last day of January:

KEEPING OF BOOKS OF KEEPING OF BOOKS OF ACCOUNTSACCOUNTS

1. Corporation,companies, partnership or persons are required to keep books of accounts.

2. Quarterly sales, earnings receipts do not exceed P50,000 use SIMPLIFIED Set of Bookkeeping Records

KEEPING OF BOOKS OF KEEPING OF BOOKS OF ACCOUNTSACCOUNTS

3. Quarterly sales, earning receipts exceed P50,000 Journals and Ledger.

4. Corporations, partnerships or persons whose gross quarterly sales, earnings, receipts exceed P150,000 shall have their Books of Accounts audited by independents Certified Public Accountants.

PRESERVATION OF BOOKS OFPRESERVATION OF BOOKS OFACCOUNTS AND OTHER ACCOUNTS AND OTHER ACCOUNTING RECORDSACCOUNTING RECORDS

All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships or persons, shall be preserved for a period of three (3) years beginning from the last entry in each book.

PRINTING RECEIPTS OFPRINTING RECEIPTS OFCOMMERCIAL OR SALES COMMERCIAL OR SALES INVOICESINVOICES

All persons who are engaged in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or commercial invoices before a printer can print the same.

PRINTING OF RECEIPTS OR PRINTING OF RECEIPTS OR COMMERCIAL OR SALES COMMERCIAL OR SALES INVOICESINVOICES

No authority to print receipts or sales or commercial invoices shall be granted unless the receipts or invoices to be printed are serially numbered and shall show, among other things, the name, business style, Taxpayer Identification Number (TIN) and business address of the person or entity.

PENALTYPENALTY

For failure to issue a receipt or invoices shall be fine P1,000 but not more than P50,000 and imprisonment of not less than 2 years but not more than than 4 years upon conviction for every violation.

VIOLATIONS RELATED TO THE VIOLATIONS RELATED TO THE PRINTING OF RECEIPTS OR PRINTING OF RECEIPTS OR INVOICESINVOICES

Any person who commits any of these acts enumerated there under shall be fined not less than P1,000 but not more P50,000 and imprisonment of not less than two years but not more than four (4) years.

REVENUE REVENUE MEMORANDUM MEMORANDUM CIRCULAR NO. 69-2009CIRCULAR NO. 69-2009

Mandatory Enrollment to and Availment of the Electronic Filing Payment System (eFPS) Facility for Selected Taxpayers

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1. Large taxpayers pursuant to Revenue Regulations (RR) No. 2-2002;

2. All Government bidders pursuant to RR No. 3-2005

3. Corporations with paid-up capital stock of Ten Million Pesos (P10,000,000.00) pursuant to RR No. 10-2007

4. Corporations with complete computerized system pursuant to RR No. 10-2007

5. Taxpayers belonging to the list of the Top 20,000 Private Corporations under Section 2.57.2(M) of RR No. 2-98, as last amended by RR No. 14-2008, in relation to RR No. 5-2004; and

6. Taxpayers belonging to the Top 5,000 Individual

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INCOME TAXDEDUCTIONS FROM GROSS INCOMEa. The itemized deductiona. The itemized deductionb. The optional standard deductionb. The optional standard deductionc. The special deductions and in special c. The special deductions and in special laws like the BOI law (E.O. 226) laws like the BOI law (E.O. 226)

Deductions from Gross Deductions from Gross IncomeIncomeDeductions are items or amounts which the law allows to be deducted from the gross income.

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Time for availing deductions

A taxpayer has the right to deduct all authorize expense for the taxable year. He can not deduct them from the income of the next or any succeeding year.

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Kinds of deductions

1. Deductions from compensation income of individual taxpayers.

2. Deductions from business and / or professional income of individual taxpayers.

3. Deductions from corporate income.4. Special deductions.

BUSINESS EXPENSESBUSINESS EXPENSES1. It must be ordinary and necessary;2. It must be paid or incurred during the

taxable year;3. It must be paid on incurred in carrying on

or which are directly attributable to the development, management, operation and/or conduct of trade, business or exercise of profession;

4. It must be supported by adequate invoices or receipts;

5. The tax required to be withheld on the expense paid or payable. 47

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A. Connected with the taxpayer’s trade or business (business related deductions).

1. Expenses2. Interest3. Taxes4. Losses 5. Bad Debts6. Depreciation 7. Research and Development8. Contributions to pension trusts

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B. Not connected with the taxpayer’s trade of business (non-business deductions).

10. Charitable and other contributions

11. Optional standard deduction

12. Premium payment on health and/or hospitalization insurance.

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ITEMIZED DEDUCTION

There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession including a reasonable allowance for salaries, travel, rental and entertainment expenses.

Requisites for deductibilityThe expense must be ordinary and

necessary. There is no hard and fast rule on the matter.It depends upon particular facts such as, the type of business (custom), intention of the taxpayer, time, place and prevailing circumstances. The Supreme Court has never attempted to define with precision the terms ordinary and necessary.

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GUIDING PRINCIPLESGUIDING PRINCIPLES

Ordinary, when it is normal (common or usual) in relation to the business of the taxpayer and the surrounding circumstances.

Necessary, where it is appropriate and helpful in the development of the taxpayer’s business. It is intended to realize a profit or to minimize a loss (Visayan Cebu Terminal Co. V. Collector, CTA Case No. 28, 29 June 1957). 52

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Expenses are considered “ordinary and necessary” if they are directly attributable to development, management, operation, and or conduct of the trade or business of the taxpayer, or in the exercise of the taxpayer’s profession.

The expenses must be incurred in trade or business carried on by the taxpayer – This means that the same is not incurred in the trade or business of another.

The expenses must be substantiated by proof

• Receipts are the best proof. Burden of proof lies upon the taxpayer.

• Even if no records/receipts are available, the oral testimony of a CPA, if not contradicted by the government is sufficient (Basilan Estates v. Com., G.R. No. L22494, 5 September 1967).

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Paid or incurred during the taxable year• Cash basis method – deducts

expenses in the year in which they are paid.

• Accrual basis method – recognizes expenses in the year they accrue.

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Seller of services:

Gross receipts x x xLess Sales discounts (x

x) Cost of services (x x)Gross Income x x

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Gross receipts means amounts actually or constructively received during the taxable year. However, for taxpayers engaged as seller of services but employing the accrual basis of accounting for their income, the term gross receipts shall mean amounts earned as gross revenue during the taxable year.

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Cost of services means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including:1)Salaries and employee benefits of personnel, consultants and specialists directly rendering the services, and2)Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.Provided, however, that “cost of services” shall not include interest expense except in the case of banks and other financial institutions.

Expenses Must be Expenses Must be ReasonableReasonable1. A reasonable allowance for

salaries, wages and other forms of compensation for personal services actually rendered

2. A reasonable allowance for travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession

Expenses Must be Expenses Must be ReasonableReasonable3. A reasonable allowance for

rentals and/or other payments4. A reasonable allowance for

entertainment, amusement and recreation expenses during taxable year

The expenses must not be The expenses must not be contrary to public policy, contrary to public policy, such as:such as:BRIBES, KICKBACKS AND OTHER

PAYMENTS MADE DIRECTLY OR INDIRECTLY TO AN OFFICIAL OR EMPLOYEE OR THE NATIONAL OR LOCAL GOVERNMENT

BRIBES OR KICKBACKS PAID TO A PRIVATE CORPORATION, GENERAL PROFESSIONAL PARTNERSHIP, OR SIMILAR ENTITY

Representation ExpensesRepresentation Expenses

Refers to expenses incurred by a taxpayer in connection with the conduct of his trade, business or exercise of profession, in entertaining, providing amusement and recreation

Requisites of Deductibility of Requisites of Deductibility of “Entertainment, Amusement “Entertainment, Amusement and Recreation Expenses”and Recreation Expenses”It must be paid or incurred during

the taxable year;It must be:

◦Directly connected to the development Management and operation of the trade, business or profession of the taxpayer; or

◦Directly related to or in furtherance of the conduct of his or its trade, business or exercise or a profession;

Requisites of Deductibility of Requisites of Deductibility of “Entertainment, Amusement “Entertainment, Amusement and Recreation Expenses”and Recreation Expenses”It must not be contrary to law,

morals, good customs, public policy or public order;

It must be duly substantiated by adequate proof

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CEILING ON ENTERTAINMENT, AMUSEMENT, AND RECREATION EXPENSE

Actual entertainment, amusement and recreation expenses paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed ½ of 1% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1% of net revenue (I.e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

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APPORTIONMENT FORMULA:

NET SALES/NET REVENUE X ACTUAL EXPENSETOTAL NET SALES AND NET REVENUE

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ILLUSTRATION:

ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000, respectively. The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.

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*Appointment FormulaSales of Goods (P200,000 x 0.50%)Sales of Services (P100,000 x 1%)

**Maximum Percentage CeilingSale of Goods (P200,000 x 0.50%)Sale of Services (P100,000 x 1%)

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INTEREST EXPENSEREQUISITES for DEDUCTABILITY

A. These must be an indebtedness;B. There should be an interest expense

paid or incurred upon such indebtedness;

C. The indebtedness must be that of the taxpayer;

D. The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession;

E. The interest expense must have been paid or incurred during the taxable year;

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F. The interest must have been stipulated in writing;

G. The interest must be legally due;H. The interest payment

arrangement must not between related taxpayers;

I. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.

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INTERESTIn GeneralThe amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer profession, trade or business shall be allowed as deduction from gross income: Provided, however, that the taxpayer’s otherwise allowable deduction for interest expense shall be reduced by an amount equal to the 33%of the interest income subjected to final tax:

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Example:

Assume that a taxpayer incurred in 2010, interest expense amounting to P100,000. This is “OTHERWISE ALLOWABLE DEDUCTION FOR INTEREST EXPENSE” but it will be reduced by an amount equal to the prescribed percentage of interest income subjected to the final tax. Thus, if in 2010, the taxpayer received P60,000 interest income on which the final tax was withheld and remitted to the BIR by the payor of such income, then the deductible amount of interest will be computed as follows:

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Total interest expense ……P100,000Less: 33% of P60,000 …… 19,800AMOUNT DEDUCTIBLE …… P 80,20

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TAXESAll taxes are deductible except:

1. Income2. Estate Tax3. Energy Tax4. Special Assessment Tax5. Value Added Tax6. Amnesty Tax7. 10% Penalty Tax on undue

accountabilities of profit8. Penalty (25% surcharge, 50%

surcharge compensation payment)

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LOSSESRequisites for the deductibility of a loss.1. The loss must be incurred in trade,

profession, or business of the taxpayer, or any transaction entered into for profit;

2. It must be actually sustained within the taxable year;

3. It must be evidenced by a closed and completed transaction;

4. It must not be compensated for by insurance or other form of indemnity; and

5. The taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement.

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Requirement for the substantiation of a loss.

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should com,ply with the following substantiation requirements:

1. A sworn declaration of loss must be filed within the period prescribed; and2. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss

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Bad Debts – The requisites for deductibility of bad debts are:

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;2. The same must be connected with the taxpayer’s trade, business or practice of profession;3. The same must not be sustained in transaction entered into between related parties;

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4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

5. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

* Debt is charged-off within the taxable year. Partial writing-off is not allowed, it must be charged-off in full or not at all. (Fernandez Hermanos. Inc. vs. Comm.2DCRA552)

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DEPRECIATION

Requisites that must concur the deduction or Depreciation from Gross Income• The allowance for depreciation must be reasonable;• It must be for property used in the trade or business;• It must be charged off during the taxable year; and• A statement on the allowance must be attached to the return.

Expenses Allowable to Private Educational Institutions – In addition to the expenses allowable as deductions a private education institution may at its option elect their: (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation.

RESEARCH AND DEVELOPMENT EXPENDITURES

Methods of treating research and developmentThe Taxpayer has the option to treat research and development expenditures under one of the following two methods

1. Currently deductible as ordinary and necessary expense

• Research or Development expenditures paid or incurred by a taxpayer during the taxable year in connection with his trade, business or profession and are not chargeable to capital account may be deducted as expenses

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2. Treatment as deferred expenses• Deferred expenses are allowable as deduction ratably over a period of no less than 60 consecutive months beginning with the month in which the taxpayer first realizes benefits from the expenditures.

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CHARITABLE AND OTHER CONTRIBUTION

Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations.

The limitation is 10% for individual and 5% for corporations, of the taxable income derived from trade, business or profession. 83

CONTRIBUTION DEDUCTIBLE IN FULL1. Donation to the Government2. Donation to Certain Foreign Institutions or International Organizations3. Donation to Accredited Nongovernment organization

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ITEMS NOT DEDUCTIBLE1. Personal, living or family expenses;2. Any amount paid out for new building or

for permanent improvements, or betterment made to increase the value of any property or estate;

3. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or

4. Premiums paid on any life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate.

REVENUE REGULATION REVENUE REGULATION

NO. 2-2011NO. 2-2011

Filing of Income Tax Return and/or Annual Information Return by Individuals, including Estates and Trusts

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RETIREMENT PLAN• Benefit received as a result of

voluntary resignation are taxable. Reason: It is a cause within the control of the said official or employee.

• The exemption holds regardless of the employee’s age and length of service.

• The law does not require that the exclusion be enjoyed once.

• Separation of employee due to dissolution of a law firm is cause the control of said employee.

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• Compulsory retirement – caused beyond the control of the employee.

• Terminal leave pay is excluded from gross income. Compulsory retirement may be considered as a cause beyond the control of the said official employee. Consequently, the amount received by way of commutation of his accumulated leave credits as a result thereof falls within the enumerated exclusion from gross income.

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RETIREMENT/PENSION PLANRETIREMENT/PENSION PLAN1. Employer must have established a

pension plan2. Pension plan must reasonable or

actuarially sound3. Funded by the employeer and employee4. Amount contributed by the employer

must not be subject to his control5. Payment has not been allowable as

deduction before6. Apportioned over a period of ten (10)

consecutive years beginning with the year in which the transfer in payment was made.

Requisites of a reasonable Requisites of a reasonable retirement benefit planretirement benefit plan1. It must be a definite written program

setting forth all provisions essential for qualifications;

2. It must be permanent and continuing program unless sooner terminated by virtue of a valid business reason;

3. It must cover at least 70% of all officials and employees.

4. It must provide for the non-diversion of the corpus.

5. It must not provide for discrimination in contributions or benefits in favor of officials and employees who are officers, shareholders, supervisors or highly compensated officers;

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Private retirement benefit Private retirement benefit planplan

Under Republic Act No. 4917, retirement benefits received by employees of private firms in accordance with a reasonable private benefit plan maintained by the employer are exempt from all taxes, provided that the retiring employees has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of his retirement.

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RETIREMENT BENEFITS, PENSIONS, RETIREMENT BENEFITS, PENSIONS, GRATUITIESGRATUITIES

• Retirement benefits received by officials and employees of private firms, individuals or corporations.

• Reasonable private plan maintained by the employer duly approved by the BIR for exclusive benefit of the members-employees;

• Retiring official or employee who has rendered at least 10 years of service;

• At least 50 years of age at the time of the retirement;

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• The benefit of exclusion shall be availed of only once.

• Even if the member has attained 50 years of age with at least ten years of service, if the employee-member is still on active employment with the company.

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Separation benefits due to death, sickness or other physical disability or for any cause beyond the control of the said official or employees

• Any amount received from an employer as result of separation from service due to sickness is exempt from all taxes.

• Separation benefits paid to retrenched employees as a consequence of either the sale of the entire business to another corporation or the cessation of the employer’s business are exempt from income tax.

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Imposition of Improperly Imposition of Improperly Accumulated Earnings TaxAccumulated Earnings Tax

A. In General – In addition to other taxes imposed, there is hereby imposed for each taxable year on the improperly accumulate taxable income of each corporation, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

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Corporations not subject to Corporations not subject to IAETIAET

•Banks and other non-bank financial intermediaries;•Insurance companies;•Publicly-held corporations;•Taxable partnerships;•General professional partnerships;•Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under R.A. No. 7916, and enterprises registered pursuant to the Bases Convertion and Development Act of 1992 under R.A. No. 7227.

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PERSON REQUIRED TO PERSON REQUIRED TO DEDUCT & WITHHOLDDEDUCT & WITHHOLD

a. In general, any juridical person, whether or not engaged in trade or business;

b. b. an individual, with respect to payments made in connection with his trade or business.

c. c. All government offices including government owned or controlled corporation, as well as provincial, city, municipal governments and barangays.

98

Types of Withholding Types of Withholding TaxesTaxes

Withholding Tax on Gross CompensationExpanded or Creditable Withholding Tax

◦ Service Income◦ Purchases of goods

Final Withholding Tax (Passive Investment Income)◦ Interest, Dividends, Royalties, Prizes, Winnings

and Capital GainWithholding Tax on Government Money Payment

◦ Income Tax◦ VAT◦ Percentage Tax

Quarterly Withholding Tax◦ Individual Engage in Business or Profession◦ Corporation

99

Duties & Obligations of a Duties & Obligations of a Withholding AgentWithholding Agent To register To deduct and withhold To remit the tax withheld To file withholding tax

returns To issue withholding tax

certificate

Time of WithholdingTime of Withholding

A. Ordinarily, the obligation of the payor to deduct and withhold arises:

◦ at the time an income payment is paid or payable.

◦ income payment is accrued or recorded as an expense or asset, whichever is applicable in the payor’s books, whichever is comes first.

The Term “payable” refers to the date the obligation becomes due, demandable or legally enforceable

100

Time of WithholdingTime of Withholding

B. When income is not yet paid or payable but has been recorded as an expense or asset, whichever is applicable, in the payor’s books:

◦ Last month of the return period in which the same is claimed as an expense or amortized for tax purpose

101

Time of WithholdingTime of Withholding

Withholding tax on compensationCompensation actually orConstructive paid

Constructively paid when it credited to the account of or set apart for an employee so that it may de drawn upon by him at ay time although not then actually reduced to possession

Types of Withholding Types of Withholding TaxesTaxes

Withholding Tax on Gross CompensationExpanded or Creditable Withholding Tax

◦ Service Income◦ Purchases of goods

Final Withholding Tax (Passive Investment Income)◦ Interest, Dividends, Royalties, Prizes, Winnings

and Capital GainWithholding Tax on Government Money Payment

◦ Income Tax◦ VAT◦ Percentage Tax

Quarterly Withholding Tax◦ Individual Engage in Business or Profession◦ Corporation

103

Gross Compensation Gross Compensation IncomeIncomeSalaries & WagesOvertime PayEmergency PayLoyalty PayDirector’s Pay

104

Gross Compensation Gross Compensation IncomeIncomeAllowances

◦Representation & Transportation◦Cost of Living◦Clothing◦Housing◦Medical◦Meal◦Laundry◦Others

105

Gross Compensation Gross Compensation IncomeIncome

Vacation LeaveBonus/Incentives

◦Christmas Bonus◦Incentive Pay◦Productivity Bonus◦Anniversary Bonus

CommissionProfit Sharing

106

Tax Due = Tax WithheldTax Due = Tax Withheld

Tax Payer A B C

Income Tax

(Jan. to Dec.) 30,000 30,000 30,000

Less Tax

Withheld (Jan. to Nov.) 28,000 33,000 30,000

Withholding Tax for December

Refund Jan. 202,000

None

None

3,000

None

None

107

Example:

R.A. 9504 R.A. 9504 Minimum Wage Tax Minimum Wage Tax ExemptionExemption Revenue Revenue Regulations No. 10-Regulations No. 10-20082008July 8, 2008July 8, 2008

R.A. 9504 R.A. 9504 Minimum Wage Tax Minimum Wage Tax ExemptionExemption Revenue Revenue Regulations No. 10-Regulations No. 10-20082008July 8, 2008July 8, 2008

108

109

The minimum wage earners as defines in this Code shall be exempt from the payment of income tax on their taxable income: provided, further, that the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

110

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise be covered by the above exemption. Provided, however, that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000.00, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and, consequently, from withholding tax.

111

MWEs receiving other income, such as income from the conduct of trade, business, or practice of profession, except income subject to final tax, in addition to compensation income are not exempted from income tax on their entire income earned during the taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt from withholding tax.

112

The following shall be considered as “de minimis” benefits not subject to income tax, hence, not subject to withholding tax on compensation income of both managerial and rank and file employees:

a. Monetized unused vacation leave credits of employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees;

b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester of P125 per month;

DE MINIMIS

113

c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to not more than P1,500.00;

d. Uniforms and clothing allowance not exceeding P5,000.00 per annum;

e. Actual yearly medical benefits not exceeding P10,000.00 per annum;

f. Laundry allowance not exceeding P300.00 per month;

114

g. Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees;

115

h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum;

i. Daily meal allowance for overtime work not exceeding twenty five percent (25%) of the basic minimum wage.

116

The amount of “de minimis” benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of ‘other benefits’ excluded from gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of the ‘de minimis’ benefits over their respective ceilings prescribed by these regulations shall be considered as part of ‘other benefits’ and the employee receiving it will be subject to tax only on the excess over the P30,000.00 ceiling.

117

Any amount given by the employer as benefits to its employees, whether classified as “de minimis” benefits or fringe benefits, shall constitute as deductible expense upon such employer.

Final Withholding Final Withholding TaxTax

InterestDividendPrizesWinningRoyaltyCapital Gain

118

DividendsDividends

Cash and/or Property Dividends – 10%

A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual (except a general professional partnership)

10% beginning January 2, 2000

119

Capital Gain Tax on sale of Shares of Stock

Capital gains forms ales etc. of UNLISTED shares –

Not over P100,000

Over P100,0005%

10%

• Capital gains from sale of LISTED & TRADE shares –

½ of 1% of gross selling price

same

120

121

Final Withholding Final Withholding TaxTax

InterestDividendPrizesWinningRoyaltyCapital Gain

Withholding Tax on Lease Withholding Tax on Lease of Propertiesof Properties

1. Real properties – Five percent (5%)

2. Personal properties – On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00)

Withholding Taxes Income Withholding Taxes Income payments to certain contractors payments to certain contractors – two percent (2%)– two percent (2%)

Computer services, computer programmers, software/program developer/designer-internet service providers, web page designing, computer data processing, conversion or base services and other computer related activities;

Annual information Return (BIR Form 1604CF/1604E) including the Alphabetical List of Employees and Income Recipient

•10 or less number of employees or payees•Manual submission – 3 copies of 604CF/1604E + alphalist of employees and income payees.•Diskette submission – ten (10) or more number of employees or payees who are recipient of income payments subject to creditable and final withholding tax, are required to submit 3.5 inch floppy disk

REVENUE REGULATIONS REVENUE REGULATIONS NO. 2-2006NO. 2-2006

Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns with Claimed Tax Credits

Mandatory SubmissionMandatory Submission

• Summary Alphalist of Withholding Agents/Payors of Income Payments subjected to Creditable Withholding Tax at Source (SAWT) submitted by the payee-recipient of income.

• Monthly Alphalist of Payees (MAP) Annex “B” is a consolidated alphalist of income earners from whom taxes have been withheld by the payor of income

Mandatory SubmissionMandatory SubmissionPersons required to submit Summary Alphalist

of Withholding Agents of Income Payments subjected to Withholding Taxes (SAWT)

• SAWT in hard copy as attachment to the required tax return.

• Submit SAWT electronically in a 3.5 inch floppy diskette.

• All taxpayers required to file the EFPS, regardless of the number of withholding agents/payor of income, are strictly required to attached the electronic copy of the SAWT to the electronic return

Mandatory SubmissionMandatory SubmissionPersons required to submit Monthly Alphalist

of Payees (MAP)

• All withholding agents enumerated under Sections 2.57.3,4.114,5.116 of Revenue Regulations No. 2-98, not more than ten (10) income payees-income per return.

• Have more than ten (10) income payees-income recipient per return.

• All taxpayers remitting taxes withheld thru the EFPS.

Mandatory SubmissionMandatory SubmissionReturns required to be filed with SAWT and

Certificate Tax Withheld at Source

• Individual Quarterly Income Tax Return• Individual Annual Income Tax Return• Individual Annual Income Tax Return for Compensation

income Earners (for those required to file an ITR)• Corporate Quarterly Income Tax Return• Corporate Annual Income Tax Return• Quarterly VAT Return• Monthly VAT Declaration• Monthly Percentage Tax Return• Percentage Tax Return under Special Laws

Mandatory SubmissionMandatory SubmissionReturns required to be filled with MAP

• Monthly Remittance Return of Creditable Income Taxes Withheld (Expanded Withholding Tax)

• Monthly Remittance Return of Final Taxes Withheld• Monthly Remittance Return of Value Added Tax

and Other Percentage Taxes (Under RAs1051, 4649, 8241 and 8424)

CWT BEING CLAIMED AS CWT BEING CLAIMED AS CREDITCREDIT(income tax, VAT, percentage tax)(income tax, VAT, percentage tax)

1. Quarterly and annual income tax returns (Forms 1700, Q,1700, 1701Q, 1701, 1702Q and 1702

2. Monthly and quarterly VAT returns (Forms 2550Q and 2550M)

3. Monthly percentage tax returns (Form 2551)

4. Percentage tax return order special laws (Form 2553)

MAP (Monthly Alphalist of MAP (Monthly Alphalist of Payees)Payees)

Reporting CWT or FWT withheld on Income Payees

1.Monthly return of creditable income taxes withheld (Form 1601E)2.Monthly return of final income taxes withheld (Form 1601F)3.Monthly return of VAT and other percentage taxes withheld (Form 1600)

FORMATFORMATUp to 10withholding agents or incomepayees

In hard copy

Taxpayers with more than 10withholding agents or incomepayees

In 3.5 diskette or CD inside a sealed letter envelope, in excel or own extract programs validated through the BIR validation module; or using the BIR date entry module

EFPS fillers In electronic form attached to electronic return

PenaltiesPenaltiesP1,000 – for each failure to file the required alphalist nut not to exceed P25,000 in a year on all such failures

The penalty does not exempt the taxpayer from the required submission of the documents

FRINGEFRINGEBENEFIT TAXBENEFIT TAX

135

136

Rank and File Employees - means all employees who are holding neither managerial or supervisory position.

Managerial Employees - is one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees.

137

Special Treatment of Fringe Benefit

• Imposition of a final tax of32% effective Jan. 1,2000 and

thereafter

• Basis of ComputationGrossed-up monetary value of fringe benefit furnished or granted to the employee by the employer, whether an individual or a corporation.

138

FRINGE BENEFIT, DEFINED

Fringe benefit means any good, service or other benefit granted in cash or in kind by an employer to an individual employee (except rank and file employees) such as, but not limited to the ff:

1. Housing2. Expense Account3. Vehicle of any kind4. Household personnel5. Interest in loan at less than market rate

139

FRINGE BENEFIT, DEFINED

6. Membership fees, dues and other expenses born by the employer for the employee in social and athletic clubs

7. Expenses for foreign travel8. Holiday and vacation expenses9. Educational assistance to employee or his dependent10.Life or health insurance and other non-life insurance

premiums.

VAT - TAXATIONVAT - TAXATION

Categories of Categories of exemptionsexemptions

1. Exempt persons – the seller or the buyer is not liable to value added tax; or

2. Exempt transactions – transactions in certain goods, properties or services, which are not subject to value added tax, even if such goods, properties or services are sold by a VAT registered person, and regardless of the annual gross sales or receipts derived therefrom.

VAT-Exempt TransactionsVAT-Exempt TransactionsEducational services rendered by private educational institutions duly accredited by the Department of Education (DepED), the Commission on Higher Education (CHED) and the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational institutions;

VAT on Importation of VAT on Importation of GoodsGoodsIn general – VAT is imposed on

goods brought into the Philippines, whether for use in business or not.

Applicability and payment – The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody

Sales, transfer or exchange of imported goods by tax-exempt persons.

DOCUMENTARY DOCUMENTARY STAMP TAXSTAMP TAX

Revenue Regulations No. Revenue Regulations No. 7-20097-2009Implementing the Electronic Documentary Stamp Tax System System to Replace the Documentary Stamp Tax Electronic Imprinting Machine

Any taxpayer belonging to the following industries is mandated to use the web-based eDST System in the payment/remittance of its/his/her DST liabilities and the affixture of the prescribed documentary stamp on taxable documents, except those expressly exempted by the Commissioner of Internal revenue, on meritorious grounds

Educational institution, in respect to the issuance of taxable certificates such as Diploma, Transcript of Records and other documents taxable as certificates

DOCUMENTARY STAMPSDOCUMENTARY STAMPS

Section 188: STAMP TAX ON CERTIFICATES

Amount : P15.00Examples : Certificate of Diploma

Transcript of Records Other Certificates Issues

R.A. No. 9243, An Act Rationalizing the provision of the Documentary Stamp Tax of the National Internal Revenue Code.

New Rate of DST on Original issue of shares stocks.

The rate of DST on the original issue of shares of stock was revised from One Peso and fifty centavos (P1.50) on each Two Hundred Pesos (P200) to “One pesos (P1.00) on each Two Hundred Pesos (P200) or fractional part thereof, of the par value, of such shares of stock.

In all cases where the issued shares are with par value, the basis of the DST shall be the par value thereof. For shares of stock without par value, the basis shall be the actual consideration for the shares of stock. However, in the case where shares of stocks without par value are issued as stock dividends, the basis of the DST shall be the actual value represented by each share.

New Rate of DST on all debt New Rate of DST on all debt instrumentsinstruments

All such debt instruments are now subject to DST of “One Peso (P1.00) on each two hundred pesos (P200). Or fractional part thereof, of the issue price of any such debt instrument, from the previous varying rates of one peso and fifty centavos (1.50) on each two hundred pesos (P200).

DST on Domestic Bills of Exchange DST on Domestic Bills of Exchange or Draftsor Drafts

Stamp Tax on all Bills of Exchange or Drafts on all bills of exchange (between points within the Philippines) or grafts, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face, value of any such bill of exchange or draft.

Stamp TAX on Lease and Stamp TAX on Lease and other Hiring Agreementsother Hiring Agreements

Three pesos (P3.00) fees the first Two thousand pesos (P2,000) or fractional part thereof and on additional One pesos (P1.00) fee every One thousand pesos P1,000 or fractional part thereof

Thank YouThank You

and and

May GOD Bless YouMay GOD Bless You

in all the days of in all the days of your life.your life.

Thank YouThank You

and and

May GOD Bless YouMay GOD Bless You

in all the days of in all the days of your life.your life.