Tax Law Bar Notes 2012

8/10/2019 Tax Law Bar Notes 2012

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Meness aga

University of CebuCollege of Law

UCLASS Bar OperationsTaxation Law Society

AX LAW

BAR NO ES

2012

by:

Bar Operations 2012: Ace the Bar, Race the Car!

References: Law Textbooks Co!es Reviewers "otes Co#pilations Articles an! $nternet Sources

%or &rivate an! &ersonal Use Only

'a#ero 'acintoOrofeo (aisyRestauro Rut)Rui* S)ar#ine+allecera +irgil+elayo Lovely


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Tax Law Bar Notes University of Cebu College of Law UCLASS Bar Operations: Tax Law Society

TAXATION An in)erent power of t)e State by w)ic)

t)e sovereign raises revenue to !efray t)enecessary expense of t)e govern#ent

TAXES T)e enforce! proportional contributions

fro# persons an! property levie! by t)eState by virtue of its sovereignty for t)esupport of govern#ent an! for publicnee!s,

INHERENT ATTRIBUTE OF SOVEREIGNTY -it)out revenue raise! fro# taxation t)e

govern#ent will not survive resulting in!etri#ent of society,

"o nee! for a constitutional grant before

t)e State can exercise t)e power to tax

LEGISLATIVE IN CHARACTER

Taxes are a grant of t)e people w)o are

taxe! an! t)e grant #ust be #a!e by t)ei##e!iate representatives of t)e people,

SCOPE OF LEGISLATIVE TAXING POWER.&A&/AS012, &ersons property or occupation to be taxe!3, A#ount or rate of t)e tax,4, &urpose for w)ic) taxes s)all be levie! provi!e!

t)ey are for public purposes,5, /et)o! of collection6, Appoint#ent of t)e tax7, Situs of taxation8, 0in! of tax to be collecte!

CHARACTERISTICS OF A SOUND TAX SYSTEM(FAT)2, Fiscal Ad!"ac# $ T)e sources of govern#ent

revenue #ust be sufficient to #eetgovern#ent expen!itures an! ot)er publicnee!s,

3, Ad%i&is'a'i Fasi*ili'# $ Tax laws s)oul!be capable of being effectively enforce!,

4, T+,'ical -"s'ic $ A soun! tax syste##ust be base! on t)e taxpayer9s ability topay,

TAXATION. POLICE POWER / EMINENTDOMAIN. DISTINGUISHED

TAXATION POLICEPOWER

EMINENTDOMAIN

Purpose

Levie! fort)epurposeof raisingrevenue

xercise!to pro#ote&ublic-elfaret)roug)regulations

Taking ofproperty fpublic use

Amountof

Exaction

T)ere is noli#it

Li#ite! tocover t)ecost ofregulationissuanceof t)elicense orsurveillance,

"o exactioCo#pensais pai! by govern#e

BenefitsReceived

"o specialOr !irectbenefitis receive!

"o !irectbenefits arereceive!,damnumAbsqueinjuria;

(irect benResults infor# of


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BASIC THEORIES OF TAXATION

50 Ncssi'# T+,# Taxes procee! upon t)e t)eory t)at t)e

existence of govern#ent is a necessity, $tcannot continue wit)out t)e #eans to payits expenses t)erefore t)e govern#ent)as a rig)t to co#pel all citi*ens an!property wit)in its power to contribute,

60 B&1i's7P,'c'i,& T+,# 8 Rci2,ci'#T+,# (S#%*i,'ic Rla'i,&s+i2)

Accor!ing to t)is t)eory t)e State!e#an!s an! receives taxes fro# t)esub


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on benefit> xceptional bot) as to ti#e an!locality,

TA@ S&C$AL ASSSS/"T

$#pose! on personsproperty an! excises

Levie! only on lan!

&ersonal liabilityattac)es on t)e personassesse! in case ofnon=pay#ent

Cannot be #a!e apersonal liability oft)e person assesse!

"ot base! on anyspecial or !irectbenefit

Base! w)olly on benefit

Levie! an! pai!annually

xceptional bot) as toti#e an! locality

xe#ption grante! $sapplicable.Art)*I, #ec) +.'/01 2onstitution'

xe#ption !oes notapply, ."ote: $fproperty is exe#pt fro#Real &roperty Tax it isSpecialAssess#ent,1

5, D*'%A tax is not a !ebt because it is not anobligation t)at is create! by contractsexpress or i#plie!, A tax is an obligationi#pose! by law,

6, Lic&s F s0 Ta3

L$C"S TA@Basis

&olice power &ower of TaxationPurposeRegulatory To generate revenue

Limitations

Li#ite! to cost of2, $ssuing t)e license3, necessary inspectionor police surveillance

$n)erent an!constitutional li#itations

8, A !ebt !raws interest w)en it is sostipulate! or w)ere t)ere is !efault w)ile atax !oes not !raw interest except onlyw)en !elinuent,

50 PROSPECTIVITY OF TAX LAWS

General Rule: Tax laws are prospective inoperation because t)e nature an! a#ount of t)etax coul! not be foreseen an! un!erstoo! by t)etaxpayer at t)e ti#e t)e transactions w)ic) t)e law

seeks to tax was co#plete!,

Exception:-)ile it is not favore! a statute #aynevert)eless operate retroactively provi!e! it isexpressly !eclare! or is clearly t)e legislativeintent, But a tax law s)oul! not be givenretroactive application w)en it woul! be )ars) an!oppressive,

Bar Operations 2!2: Ace the Bar, Race the Car! "or #rivate an$ #ersonal Use Only 4

L$C"S TA@

/akes t)e business illegal (oes not #ake t)ebusiness illegal

H0 D,c'i&s i& Ta3a'i,&


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60 IMPRESCRIPTIBILITY

As a rule taxes are i#prescriptible as t)ey

are t)e lifebloo! of t)e govern#ent,?owever tax statutes #ay provi!e forstatute of li#itations,

T)e "ational $nternal Revenue Co!e of2DD8 t)e Tariff an! Custo#s Co!e an!t)e Local Eovern#ent Co!e of 2DD2 )aveprovi!e! for prescriptive perio!s for bot)Assess#ent an! Collection of Taxes,

90 DOUBLE TAXATION

Taxing t)e sa#e person .sa#e sub


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b) Credit $ethod %alt)oug) t)e inco#eor capital w)ic) is taxe! in t)e state ofsource is still taxable in t)e state ofresi!ence t)e tax pai! in t)e for#er iscre!ite! against t)e tax levie! in t)elatter, T)e focus )ere is on t)e tax,

M,s' Fa,d Na'i,& Cla"s i& Ta3 Ta'isT)e purpose of t)e #ost favore! nation clause is togrant to t)e contracting party treat#ent not lessfavorable t)an t)at w)ic) )as been or #ay begrante! to t)e F#ost favore!; a#ong ot)ercountries, T)e #ost favore! nation clause isinten!e! to establis) t)e principle of euality ofinternational treat#ent by provi!ing t)at t)eciti*ens or sub


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$t is not necessarily !iscri#inatory so

long as t)e exe#ption )as areasonable foun!ation or rational basis,

Pi&ci2ls G,&i&= Ta3 E3%2'i,&s xe#ptions fro# taxation are )ig)ly

dis"a/ored in law- ?e w)o clai#s t)e exe#ption #ust be able

to


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General Rule:Taxes cannot be t)e sub


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Exception:

N,'; Co#pensation was allowe! in oneexceptional case t)at is t)e case of&omin!o vs) 3ar%itos supra') $n t)e sai!case co#pensation was recogni*e!because bot) t)e clai# of t)e Eovern#entfor in)eritance tax an! t)e clai# of t)eestate for services ren!ere! )ave alrea!ybeco#e over!ue an! !e#an!able an! fullyliui!ate!, %urt)er an a#ount for t)e

clai# of t)e estate )a! alrea!y beenappropriate! by t)e Eovern#ent,

D,c'i& ,1 E!"i'a*l Rc,"2%&' -)ere a clai# for tax refun! or cre!it is

file! beyon! t)e prescriptive perio! it canstill be applie! against ot)er taxes t)at#ay be !ue,

T)is is a case w)ere t)e taxpayer )as a

clai# for refun! but )e was not able to file

a written clai# !ue to lapse of t)eprescription perio! wit)in w)ic) to #ake arefun! is allowe!, Un!er t)is !octrine t)etaxpayer is allowe! to cre!it suc) refun! to)is existing tax liability,

.N,'; Equitab%e recoupment is a%%o8ed on% in

common %a8 countries, not in t"e P"i%ippines)1

0 COMPROMISE

A co#pro#ise is an agree#ent between

two or #ore persons w)o to avoi! alawsuit a#icably settle t)eir !ifferences onsuc) ter#s as t)ey can agree on, Aco#pro#ise by its very nature i#plies#utual agree#ent by t)e parties in regar!to t)e t)ing or sub


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as to per#it t)e taxpayer easily to eva!et)e pay#ent of taxes,

$n case of !oubt tax laws are construe!

strictly against t)e govern#ent an!liberally in favor of t)e taxpayer, Taxesbeing bur!ens are not to be presu#e!

beyon! w)at t)e statute expressly an!clearly !eclares,

C,&s'"c'i,& a&d I&'2'a'i,& ,1 Ta3E3%2'i,&s

Laws granting tax exe#ptions are

construe! strictly against t)e taxpayer an!liberally in favor of t)e govern#ent,.&rinciple of Strictissi#i 'uris1

E3c2'i,&s ', a22lica'i,& ,1 S'ic'issi%i -"is;a1 -)en t)e statute granting exe#ption

provi!es for liberal construction t)ereof>b1 $n case of special taxes relating to special

cases an! affecting only special classes ofpersons>

c1 $f exe#ptions refer to t)e public property>!1 $n cases of exe#ptions grante! to

religious c)aritable an! e!ucationalinstitutions or t)eir property>

e1 $n cases of exe#ptions in favor of t)egovern#ent its political sub!ivisions orinstru#entalities,

INHERENT LIMITATIONS (SPINE)2, Territoriality or Situs of Taxation3, &ublic &urpose of Taxes4, $nternational Co#ity5, "on=!elegability of Taxes6, Tax xe#ption of t)e Eovern#ent

50 SITUS OR TERRITORIALITY(oes t)e place of taxation !epen! on t)e

nature of t)e taxes being i#pose!I

An in)erent #an!ate t)at taxation s)all

only be exercise! on persons properties

an! excises wit)in t)e territory of t)etaxing power

Fac',s ', C,&sid i& D'%i&i&= Si'"s ,1Ta3a'i,&;

21 0in! an! classification of t)e taxes

31 Location of t)e sub0 I&c,% Ta3 $interplay of t)eciti*ens)ip !o#icile source of inco#e?0 E3cis , Piil= Ta3 $ placew)ere t)e sa#e is perfor#e! or t)eprivilege is exercise!


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$n t)e i#position of taxes public purpose is

presu#e!, ?ence w)ere an or!inance !i!

not specifically state t)e purpose for w)ic)t)e tax was to be use! it is presu#e! t)atsai! tax is create! for a public purpose,

90 INTERNATIONAL COMITY States fin! it #utually a!vantageous fort)e#selves to create self=i#pose! restrainson t)eir taxing powers especially wit)reference to t)e properties of foreigngovern#ents wit)in t)eir territorial!o#ain, Reciprocity is t)e root of t)is li#itation

>0 NON7DELEGABILITY OF LEGISLATIVETAXING POWER

N,&7Dl=a*l L=isla'i P,4 2, Selection of property to be taxe!

3, (eter#ination of t)e purpose for w)ic) taxess)all be levie!

4, %ixing t)e rate of taxation, 5, Rules of taxation in general

6, T)e power of taxation is peculiarly an!exclusively legislative,

General Rule: Taxing power #ay not be

!elegate!,

Exceptions: 2, Aut)ority of t)e &resi!ent to fix tariff rates

custo#s !uties etc, .Art)*I, #ec)+ +',2onsti)'

3, (elegation to local govern#ents .Art) =,#ec) 6, 2onsti)'

4, (elegation to a!#inistrative agencies -)at is actually !elegate! is not t)e act

of l#but t)e assss%&'

?0 TAX EXEMPTION OF GOVERNMENT As a #atter of public policy property of

t)e State or any of its political sub!ivision!evote! to govern#ent uses an! purposesare generally exe#pt fro# taxation,

?owever it can also tax itself

.2o%%ector vs) Bisaa 4and Transportation'

CONSTITUTIONAL LIMITATIONS

2, (ue &rocess Clause A,$$$ S,2

3, ual &rotectionClause

A,$$$ S,2

4, Unifor#ity

uitability an!&rogressive of Taxation

A,+$ S,3

5, "on=i#pair#ent of Contracts

A,$$$ S,2

6, "on=i#prison#entfor non=pay#ent of polltax

A,$$$ S,3

7, Origin ofAppropriation Revenuean! Tariff Bills

A,+$ S,35

8, "on=infringe#ent ofReligious %ree!o#An! -ors)ip

A,$$$ S,6

, (elegation of

Legislative Aut)ority tot)e &resi!ent to fixTariff Rates $#portAn! xport Juotas

A, +$ S,3.31

D, xe#ption of&roperty Actually(irectly an! xclusivelyUse! for ReligiousC)aritable an!

A,+$ S,3.41


$t is a general rule t)at t)e legislative iswit)out power to appropriate publicpurpose, $t is t)e essential c)aracter oft)e !irect ob


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!ucational &urpose

2, /a


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inco#e tax was not #a!e pursuant to avali! classification base! on substantial!istinctions an! t)e ot)er reuire#ents ofa reasonable classification by legislativebo!ies so t)at t)e law #ay operate onlyon so#e an! not all wit)out violating t)e

eual protection clause but was #a!eupon &AECOR9s own reuest to beexe#pte!, P"i%ippine Amusement and3amin! 2orporation vs) Bureau ofInterna% Revenue, 3)R) No) /1+:1,$arc" /6, +://'

Taxpayers #ay be classifie! into !ifferent

categories, $t is enoug) t)at t)eclassification #ust rest upon t)esubstantial !istinctions t)at #ake real!ifferences, .Antero $) #ison, 9r) vs)Ruben B) Anc"eta,3)R) No) 4-60;./, 9u%+6, /0;'

Unifor#ity in taxation #eans t)at all

taxable articles or kin!s of property of t)esa#e classes s)all be taxe! at t)e sa#erate, A tax is unifor# w)en it operates wit)t)e sa#e force an! effect in every placew)ere t)e sub


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Congress w)en t)e public interest soreuires,

T)e non=i#pair#ent clause w)ic)

provi!es t)at no law i#pairing t)eobligations of contracts s)all be passe! is

li#ite! in application to laws t)at !erogatefro# prior acts or contracts by enlargingabri!ging or in any #anner c)anging t)eintention of t)e parties, T)ere isi#pair#ent if a subseuent law c)angest)e ter#s of a contract between t)eparties i#poses new con!itions !ispenseswit) t)ose agree! upon or wit)!rawsre#e!ies for t)e enforce#ent of t)e rig)tsof t)e parties, As regar!s franc)isesSection 22 Article @$$ of t)e 2D8Constitution provi!es t)at no franc)ise orrig)t s)all be grante! except un!er t)econ!ition t)at it s)all be sub


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K T)e &resi!ent #ay increase tariff rates asaut)ori*e! by law even for revenuepurposes only,

K T)e constitutional exe#ptionapplies only to property tax, Eifts aresub


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N0 i&ds ,1 Ta3s

CLASSIFICATION OF TAXES

+s to Su


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NATIONAL INTERNAL REVENUE CODE OF5. AS AMENDED

50 I&c,% Ta3 S#s'%sa1 Gl,*al Ta3 S#s'%G .prevailing until

2D21 All ite#s of gross inco#e!e!uctions an! personal an! a!!itionalexe#ptions if any were !eclare! in oneinco#e tax return an! one set of tax rateswere applie! on t)e net taxable inco#e,

b1 Sc+d"la Ta3 S#s'%G .intro!uce! byB& 2461 (ifferent types of inco#e aresubb1 "or#al corporate inco#e tax on

corporations>c1 /ini#u# corporate inco#e tax ./C$T1 on

corporations>!1 Special inco#e tax on certain corporations

.e,g, private e!ucational institutionsforeign currency !eposit units

international carriers1e1 Capital gains tax on sale or exc)ange of

unliste! s)ares of stock .classifie! ascapital asset1 of a !o#estic corporation>

f1 Capital gains tax on sale or exc)ange ofreal property classifie! as capital asset an!locate! in t)e &)ilippines>

g1 %inal wit))ol!ing tax on certain passiveinco#e>

)1 %inal wit))ol!ing tax on inco#e pay#ents#a!e to non=resi!ents .in!ivi!ual orcorporation1>

i1 %ringe benefits tax .%BT1>

k1 $#properly accu#ulate! earnings tax.$AT1

?0 Ta3a*l Pi,da1 Cal&da Pi,dG accounting perio! fro#

'anuary 2 to (ece#ber 42, T)is is allowe!if .21 taxpayer is an in!ivi!ual> .31taxpayer is a corporation> .41 accountingperio! is ot)er t)an fiscal year> .51taxpayer )as no accounting perio!> or .61taxpayer !oes not keep books of accounts,

b1 Fiscal Pi,dG accounting perio! of 23#ont)s en!ing on t)e last !ay of any#ont) ot)er t)an (ece#ber w)ic) is

allowe! only to corporations,c1 S+,' Pi,dG inco#e s)all be co#pute!

on t)e basis of a perio! less t)an 23#ont)s, T)is is applicable in t)e case of:.21 c)ange in accounting perio! fro# fiscalyear to calen!ar year fro# calen!ar yearto fiscal year or fro# one fiscal year toanot)er> .31 final personal inco#e taxreturn of a !ece!ent> .41 inco#e tax


A0 INCOME TAXATION


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return of t)e estate of a !ece!ent> .51newly=organi*e! corporations> an! .61!issolving corporations,


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!ee#e! a Fnon=resi!ent alien !oingbusiness in t)e &)ilippines;,

.v1 N,&7sid&' Ali& N,' E&=a=d i&Tad , B"si&ss i& '+P+ili22i&s

An in!ivi!ual w)ose resi!ence is

outsi!e t)e &)ilippines an! w)o isnot a citi*en t)ereof an! not !oingbusiness t)erein,

.vi1 S2cial Class ,1 I&diid"alE%2l,#s /ini#u# wage earner ./-1 s)all

refer to a worker in t)e privatesector pai! t)e statutory #ini#u#wage or to an e#ployee in t)epublic sector wit) co#pensationinco#e of not #ore t)an t)estatutory #ini#u# wage in t)enon=agricultural sector w)ere)eHs)e is assigne!,

/-s are exe#pt fro# inco#e tax

an! wit))ol!ing tax, T)eexe#ption covers t)e statutory#ini#u# wage )oli!ay payoverti#e pay nig)t s)ift!ifferential pay an! )a*ar! pay,

An e#ployee w)o receives or earns

a!!itional co#pensation suc) asco##issions )onoraria fringebenefits benefits in excess of t)e

allowable statutory a#ount of&4 taxable allowances an!ot)er taxable inco#e ot)er t)ant)e statutory #ini#u# wage)oli!ay pay overti#e pay )a*ar!pay an! nig)t s)ift !ifferential pays)all "OT en


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Trust is a rig)t to t)e property w)et)er

real or personal )el! by one person fort)e benefit of anot)er

f1 C,7,4&s+i2s T)ere is co=owners)ip w)en two or

#ore )eirs in)erit an un!ivi!e!property fro# a !ece!ent,

A co=owners)ip is "OT TA@ABL w)en

t)e activities are li#ite! #erely to t)epreservation of t)e co=owne! propertybut co=owners are liable for inco#e taxin t)eir separate an! in!ivi!ualcapacities,

A co=owners)ip is taxable w)en t)e

inco#e of t)e co=owners)ip is investe!by t)e co=owners in a businesscreating a partners)ip,

0 I&c,% Ta3a'i,&

0 I&c,%

0 G,ss I&c,%

INCOME $ all wealt) t)at flows into t)e taxpayerot)er t)an #ere return of capital actuallyan! constructively receive!,

INCOME TAX $ tax on all yearly profits arisingfro# property profession tra!es of officesor as a tax on a person9s inco#e

e#olu#ents profits an! t)e like

R!"isi's 1, i&c,% ', * 'a3a*l;app%ies on% to NIT'

2, T)ere #ust be gain or profit,3, T)e gain #ust be reali*e! or receive!

actually or constructively,4, T)e gain #ust not be exclu!e! by law

treaty fro# taxation,

K A #ere increase or !ecrease in t)e valueof property is not income or %oss unti% aftert"e actua% disposition of t"e propert inexcess of its ori!ina% cost)

K Suc) increase or !ecrease is #erelytreate! as an unrea%ied increase ordecrease in capita%as t)e case #aybe,

Ts' ,& Ta3a*ili'# ,1 I&c,%2,Fl,4 ,1 Wal'+ Ts' $ T)e !eter#ining factor

for t)e i#position of inco#e tax is w)et)erany gain was !erive! fro# t)e transaction,

3, Rali@a'i,& Ts' $ unless t)e inco#e is!ee#e! Freali*e!; t)ere is no taxableinco#e,

4, Ec,&,%ic7 B&1i' Pi&ci2l $ flow of wealt)reali*e! is taxable only to t)e extent t)att)e taxpayer is econo#ically benefite!,

CAPITAL $ resource of person w)ic) can be use!in pro!ucing goo!s an! services,

INCOME CAPITAL

All wealt) w)ic)flows into t)etaxpayer ot)er t)anas a #ere return ofCapital

%un! or propertyw)ic) can be use!in pro!ucing goo!sor services

%low of -ealt) %un! of propertySource of -ealt) -ealt)

A0 I&diid"als50 Ci'i@&s 2,2 Resi!ent Citi*ens .RC1

N 2,3 "on=Resi!ent Citi*ens ."RC1 2,4 Overseas %ilipino -orkers .O%-1

60 Ali&s +)/ Resident A%iens RA' +)+ Non-Resident A%iens NRA' 2, ngage! in tra!e or business wit)in t)e

&)ilippines ."RATB1 3, "ot engage! in tra!e or business wit)in

t)e &)ilippines ."RA"TB1 +). A%iens emp%oed b7

2, Regional or area )ea!uarters .R?J1an! Regional operating )ea!uarters.RO?J1 of #ultinational corporations3, Offs)ore banking unit .OBU14, &etroleu# service contractors an!subcontractors

B0 CORPORATION)ncludes:

a) &artners)ipsb) 'oint=stock co#paniesc) 'oint accounts cuentas en

participation'd) Associations ore) $nsurance co#panies#ec) ++B'

Excludes:


B0 Classi1ica'i,& ,1 Ta32a#


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a, Eeneral professional &artners)ips>b, 'oint +enture or Consortiu# for#e! for

t)e purpose of un!ertakingconstruction pro6>2, "et $nco#e Tax3, %inal $nco#e Tax4, Eross $nco#e Tax5, $#properly Accu#ulate! arnings Tax6, /ini#u# Corporate $nco#e Tax7, Optional Corporate $nco#e Tax

50 N' I&c,% Ta3/eans gross inco#e less allowable!e!uctions an! or personal exe#ptions

#ection ./, 2TRP'

F,%"la Fa%4,;

FOR INDIVIDUALS

Eross $nco#e

== Allowable (e!uctions an! &ersonal or A!!itional xe#ptions Ta3a*l I&c,% x Tax Rate

Ta3 D"

== Tax Cre!it .if any1 NET TAX DUE

I&c,% Ta3 Lia*ili'# ,1 I&diid"als

T#2 ,1 Ta32a#Ta3a*lWi'+i&

Ta3a*lWi'+,"'

Citi=en

a, Resi!ent Citi*en

b, "on=resi!entCiti*en

c, O%-

+liens

a, Resi!ent Alien

b, "on=resi!ent Alien ngage! in tra!e

or business

-)o co#es

stays in t)e &)ils, foran aggregate perio!of 2 !ays !uringany calen!ar yeardeemed to be aNRAETB'

"ot engage! in

tra!e or business

Ali&s s"*c' ', P1&'ial Ta3 Ra's

General Rule: Aliens e#ploye! by:2, Regional or area )ea!uarters an!

Regional operating )ea!uarters of#ultinational co#panies

3, Offs)ore banking units an!4, &etroleu# service contractors an!

subcontractors are "OT L$ABL for t)epay#ent of net inco#e tax becauset)ey are sub


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"on=resi!ent%oreignCorporations

C,%2&sa'i,& I&c,% $ all re#uneration forservices perfor#e! by an e#ployee for )is

e#ployer un!er an e#ployer=e#ployeerelations)ip unless specifically exclu!e! byt)e Co!e,

Ta3a*l I&c,% (Ot)erwise 0"O-" AS "T$"CO/1 M #eans t)e pertinent ite#s ofgross inco#e specifie! in t)is Co!e lesst)e !e!uctions an!Hor personal an!a!!itional exe#ptions if any aut)ori*e!for suc) types of inco#e by t)is Co!e orot)er special laws,

A0 G,ss I&c,%

G,ss I&c,% means a%% income derived from8"atever source, inc%udin! but not %imited to' t"efo%%o8in! items7

2, Co#pensation for services in w)ateverfro# pai! inclu!ing but not li#ite! tofees salaries wages co##issionsan! si#ilar ite#s>

3, Eross inco#e !erive! fro# t)e con!uctof tra!e or business or t)e exercise ofa profession,

4, Eains !erive! fro# !ealings inproperty>

5, $nterest>6, Rents>7, Royalties>8, (ivi!en!s>, Annuities>D, &ri*es an! winnings>2, &ensions> an!22, &artner9s !istributive s)are fro# t)e

net inco#e of t)e general professionalpartners)ip,

T"e fo%%o8in! c%asses of income are N


23/147


c0 D,%s'ic ', F,i=& C,2,a'i,&s

Resi!ent %oreign Corporations G

xe#pt #ec) +A'1'&'G "onresi!ent %oreign Corporations

G 26P sub


24/147


f, ES$S SSS /e!icare an! Ot)erContributions,

g, Eains fro# t)e Sale of Bon!s(ebentures or ot)er Certificate of$n!ebte!ness .wit) a #aturity of#ore t)an 6 years1

), Eains fro# Re!e#ption of S)aresin /utual %un!,

50 P,cds ,1 Li1 I&s"a&c are exclu!e!If paab%e upon deat" of t"e insuredw)et)er in a single su# or ot)erwise but ifsuc) a#ounts are )el! by t)e insurerun!er an agree#ent to pay interestt)ereon t)e interest pay#ents s)all beinclu!e! in gross inco#e,

60 A%,"&' Rcid B# I&s"d AsR'"& O1 P%i"%

"o !eat) occurs in t)is case> only a

#aturity of t)e ter#, Only t)e a#ount of pre#iu# pai! is

exclu!e!,

90 Gi1's. B!"s's. a&d Diss a!onations because t)ey are given

gratuitously, T)e inco#e receive! by t)e!onee fro# t)e sai! ite#s is exclu!e!, Butt)e inco#e earne! afterwar!s by t)e ite#sis sub0 C,%2&sa'i,& F, I&"is O Sic&ss

R1s ',;a, Any a#ounts receive! by reason o

in


25/147


A, Ter#inal leave benefitsgiven upon retire#ent

2, Eovern#ent #ployee

Cases:In Re7 Att ia%cita A)$) No) 0:-5-:/6#2, )

Refer to flow of wealt)w)ic) are not treate!

as

part of gross inco#e!ue

to> .21 exe#pte! bystatute> .41 not co#ewit)in t)e !efinition ofinco#e

Refer to t)e a#ountsw)ic) t)e law allowsto be subtracte!

fro# gross inco#e inor!er to arrive at netinco#e

&ertain to t)eco#putation of grossinco#e

&ertain to t)eco#putation of t)enet inco#e



26/147


So#et)ing earne! orreceive! by t)etaxpayers w)ic) !o notfor# part of grossinco#e,

So#et)ing spent orpain in earning ofgross inco#e

B0 All,4a*l Dd"c'i,&s (Sc- ;7.

$te#s or a#ounts w)ic) t)e law allows to be

!e!ucte! fro# gross inco#e in or!er toarrive at t)e taxable inco#e,

INDS OF DEDUCTIONS;2, $te#i*e! (e!uctions3, &ersonal an! A!!itional xe#ptions4, Optional Stan!ar! (e!uction5, Special (e!uctions

ALLOWABLE DEDUCTIONS VS0 PERSONALEXEMPTIONS

All,4a*lDd"c'i,&s

Ps,&alE3%2'i,&s

+s To +mount

Eenerally refer toactual expensesincurre! in t)e pursuitof tra!e business orpractice of profession

Arbitrary a#ountsallowe! by law

+s To 'ature

Constitute business

expenses

&ertain to personal

expenses+s To Purpose

nable t)e taxpayerto

recoup )is cost of!oing business

Recoup fro# personalfa#ily an! livingexpenses

+s To Claimants

All taxpayers $n!ivi!ual taxpayers

BASIC PRINCIPLES GOVERNING

DEDUCTIONS2, T)e taxpayer seeking a !e!uction #ust

point to so#e specific provisions of t)estatute aut)ori*ing t)e !e!uction> an!

2. ?e #ust be able to prove t)at )e isentitle! to t)e !e!uction aut)ori*e! orallowe!, At%as 2onso%idated $inin! H&ev) 2orp) vs) 2omm)'

3. Any a#ount pai! or payable w)ic) isot)erwise !e!uctible fro# or taken intoaccount in co#puting gross inco#e or for

w)ic) !epreciation or a#orti*ation #aybe allowe! s)all be allowe! as !e!uctiononly if it is s)own t)at t)e tax reuire! tobe !e!ucte! an! wit))el! t)ere fro# )asbeen pai! to B$R,#ec) .; KG'

Ta32a# 4+, ca&&,' aail ,1 dd"c'i,&s1,% =,ss i&c,%

2, Citi*ens an! resi!ent aliens w)ose inco#e ispurely co#pensation inco#e .except forpre#iu# pay#ents on )ealt) an!Ho)ospitali*ation insurance1>

C,%2&sa'i,& I&c,% Ta32a#spaying t)e net inco#e tax can avail onlyof t)e !e!uction un!er #ection .; $'Lpremium paments on "ea%t" andMor"ospita%iation insurance for "imse%f,inc%udin! "is fami% not to exceed P+,

;:: per fami% or P+:: a mont" paid

durin! t"e taxab%e ear) Provided, T)at t)e sai! fa#ily )as a

gross inco#e of not #ore t)an &36 for t)e taxable year: Provided, %$"ALL t)at in t)e case of

#arrie! taxpayers only t)e spouseclai#ing t)e a!!itional exe#ption fo!epen!ents s)all be entitle! to t)is!e!uction,

3, "on=resi!ent aliens not engage! in tra!e orbusiness in t)e &)ilippines> an!

4, "on=resi!ent foreign corporation

CLASSES OF DEDUCTIONS

2- )ndi/idualsa, -it) gross co#pensation inco#e fro#e#ployer=e#ployee relations)ip only

2, &re#iu# pay#ents on )ealt)an!Hor )ospitali*ation insurance

3, &ersonal exe#ptionsb, Eross inco#e fro# business or practiceof profession

2, Optional Stan!ar! (e!uction.OS(1

3, $te#i*e! !e!uctions4, &re#iu# pay#ents on )ealt)

an!Hor )ospitali*ation insurance5, &ersonal exe#ptions

5- Corporations$te#i*e! !e!uctions

B05 ITEMIED DEDUCTIONS

2, xpenses3, $nterest



27/147


4, Taxes5, Losses6, Ba! (ebts7, (epreciation8, (epletion of Oil an! Eas -ells an!/ines

, C)aritable an! Ot)er ContributionsD, Researc) an! (evelop#ent2, &ension Trust22, &re#iu# &ay#ents on ?ealt) an!Hor?ospitali*ation $nsurance of an $n!ivi!ualTaxpayer

T+ a*, %&'i,&d i'%i@d dd"c'i,&sa

aaila*l ', ALL 'a32a#s EXCEPT;2, "R%C3, "RA"TB

B0505 EXPENSES

Re?uisites to e *eductile:2, Or!inary an! "ecessary xpenses

Or!inary xpenses G nor#al or usual in

t)e line of business"ecessary xpenses G appropriate an!

)elpful in t)e !evelop#ent of taxpayer9sbusiness

3, &ai! or incurre! wit)in t)e taxable year,4, /ust be reasonable5, /ust co#ply wit) substantiation

reuire#ents6, /ust not be contrary to law #orals

public policy or public or!er7, Correspon!ing tax reuire! to be

wit))el! )as been re#itte! to t)e B$R8, (irectly attributable to t)e !evelop#ent

#anage#ent operation an!Hor con!uctof business or exercise of professioninclu!ing t)e following reasonableallowances:

a, %or sa%aries, 8a!es andcompensation, inclu!inggrosse!=up #onetary value offringe benefit provi!e! %Btaxes are pai!,

Aguinal!o Co#pany is engage! t)e

#anufacture of fis)nets, $t sol! a parcelof lan! an! profit was given as bonus toits e#ployees, T)e bonus cannot beconsi!ere! as a !e!uctible salary becauseno service was ren!ere! by t)ee#ployees, T)e bonus given t)eretocannot be consi!ere! as salary orco#pensation because no service was

ren!ere! as suc) it is not !e!uctibleA!uina%do v) #ecurities No) 4-+010:Februar +6 /0+'

b, %or travel )ere an! abroa!w)ile away fro# )o#e in t)e

pursuit of tra!e business orprofession,

c, %or rentals for t)e continue!use of property for purposesof tra!e business oprofession to w)ic) t)etaxpayer )as not or is nottaking title or in w)ic) )e )asno euity ot)er t)an t)at of alessee,

!, %or entertain#ent orecreation connecte! to t)e

tra!e business or professionor !irectly relate! to or infurt)erance of t)e con!uct ot)e business &RO+$(()owever t)at t)e expenseincurre! contrary to law#orals public policy or publicor!er s)all not !e!uctible

'- B- Bribes, ?ic?bac?s and simi%ar pamentss"a%% not be deductib%e)

A#ount constituting as a bribe is not

allowe! as a !e!uction fro# gross inco#eof a corporation, ?owever to t)erecipient govern#ent official t)e sa#econstitutes a taxable inco#e, All inco#efro# legal or illegal sources are taxableabsent any clear provisions of lawexe#pting t)e sa#e, Rut?in v) D#, .;.D#/.:'

CAPITAL EXPENDITURE $ T)ose t)at benefitsnot only t)e current perio! but alsofuture perio!s, It is N


28/147


A Pia' Ed"ca'i,&al I&s'i'"'i,&. forexpen!iture for expansion of sc)oolfacilities ot)erwise consi!ere! as capitalexpen!iture #ay at its option:2, (e!uct t)e expen!iture in t)e yearincurre! .as business expense1> or3, Capitali*e t)e expen!iture an! !e!uctfor !epreciation

B0 50 6 INTEREST

Re?uisites to e *eductile2, Taxpayer is t)e !ebtor,3, (ebt #ust be relate! to t)e business or

profession of t)e taxpayer4, $nterest s)oul! be legally !ue,5, $nterest pai! or accrue! !uring t)e

taxable year,

N, Dd"c'i,& ,& I&'s' E32&s s)all beallowe! in respect of interest un!er t)efollowing:

2, $nterest on transactions #a!e by relate!parties specifie! un!er #ection .5B'.transactions at ar#s=lengt)1> or

3, $f t)e in!ebte!ness is incurre! to financepetroleu# exploration,

4, $nterest is pai! in a!vance t)roug)!iscounting or ot)erwise,

;6A Rule under RR 2;05333 &;;A

e""ecti/e anuary 2! 533>.

T)e 4P .now 44P effective 'anuary 2 3D1rule s)all be applie! to t)e interestreceive! fro# t)e #oney loane! w)en!eposite! in a bank

Examp%e7& 2 #illion loan wit) 3P interest or &3

.t)is a#ount is not yet t)e a#ount to be!e!ucte!1

$f t)e & 2/ is !eposite! in a bank an! earnsinterest t)en t)e interest will be#ultiplie! by 4P .now 44P1 an! t)e

outco#e of sai! euation s)all be!e!ucte! fro# t)e &3

&2 G interest earne! fro# t)e & 2/

& 2

44P& 44

& 3 = 44 & 278 .T"is s"a%%

be t"e a%%o8ab%e deduction'

N,'; T"is %imitation s"a%% app% re!ard%ess of8"et"er or not a tax arbitra!e sc"eme 8asentered into b t"e taxpaer or re!ard%ess of t"edate 8"en t"e interest bearin! %oan and t"e date

8"en t"e investment 8as made for as %on! as,

durin! t"e taxab%e ear, t"ere is an interestexpense incurred on one side and an interestincome earned on t"e ot"er side, 8"ic" interestincome "ad been subjected to fina% 8it""o%din!tax) T"is ru%e s"a%% be observed irrespective oft"e currenc t"e %oan 8as contracted andMor in8"atever currenc t"e investments or deposits8ere made) Revenue Re!u%ations No) /.-+:::'

O2'i,&al Ta'%&' ,1 I&'s' E32&s, At)e option of t)e taxpayer interesincurre! to acuire property use! intra!e business or exercise of aprofession ma be a%%o8ed as a deduction

or treated as a capita% expenditure)

B0 509 TAXESRe?uisites to e *eductile:

2, Relate! to t)e business of t)e taxpayer3, $#pose! by law on an! payable by

taxpayer4, &ai! or incurre! !uring t)e taxable year

Exceptions:2, $nco#e tax,3, $nco#e tax pai! or occurre! to any

foreign country if t)e taxpayer is

clai#ing a tax cre!it for suc) foreign tax,4, state or !onor9s tax,5, Taxes assesse! against local benefits of a

kin! ten!ing to increase t)e value of t)eproperty assesse! .special assess#ent1,

Ta3s W+ic+ Ma# B Clai%d As Ta3 Cdi'2, $nco#e tax sub


29/147


3, $nco#e tax pai! to a foreign country4, $nput tax un!er t)e +AT

Taxes allowe! w)en refun!e! or

cre!ite! s)all be inclu!e! as part ofgross inco#e in t)e year of receipt to t)e

extent of t)e inco#e tax benefit of sai!!e!uction .TA@ B"%$T RUL1,

$n t)e case of a "RATB an! R%C t)e

!e!uctions for taxes s)all be allowe! onlyif an! to t)e extent t)at t)ey areconnecte! wit) t)e inco#e fro# sourceswit)in t)e&)ilippines,

B0 50 > LOSSES

Re?uisites to e *eductile2, Actually sustaine! !uring t)e taxable

year3, "ot co#pensate! by insurance or

ot)erwise4, C)arge! off !uring t)e taxable year5, "ot clai#e! as a !e!uction in an estate

tax return6, &roperty connecte! wit) t)e tra!e or

business if t)e loss arises fro# firesstor#s s)ipwreck or ot)er casualties orfro# robbery t)eft or e#be**le#ent

%or casualty losses t)e taxpayer s)all

notify t)e B$R an! sub#it a Sworn(eclaration of Loss wit)in 56 !ays aftert)e !ate of occurrence of t)e event,Revenue $emorandum


30/147


2, Strai#ht0lineCost= Salvage +aluesti#ate! Life

3, *eclinin# BalanceCost G (epreciation x Ratesti#ate! Life

4, Sum o" the ears di#its &S*."t) &erio! x .Cost=Salvage1

S(

S2cial T#2s ,1 D2cia'i,&2, &etroleu# Operations

(epreciation of all properties !irectly

relate! to pro!uction of petroleu# s)allbe allowe! un!er straig)t=line .SL1 or!eclining balance .(B1 #et)o!/ay s)ift fro# (B to SL #et)o!

Useful life: 2 years or s)orter life as

allowe! by t)e Co##issioner Useful life of property not !irectly

relate! to pro!uction: 6 years un!erstraig)t line #et)o!

3, /ining Operations(epreciation on all properties in #ining

operations ot)er t)an petroleu#operations at t)e nor#al rate if expecte!life is less t)an 2 years,$f expecte! life is #ore t)an 2 years

!epreciation G s)all be any nu#ber ofyears between 6 years an! t)e expecte!life,

4, (epreciation !e!uctible by non=resi!ent aliensengage! in tra!eHbusiness or non=

resi!ent corporationOnly w)en suc) property is locate!in t"e

P"i%ippines)

B0 50 DEPLETION OF OIL AND GAS WELLSAND MINESD2l'i,& $ ex)austion of natural resources as

in #ines oil an! gas wells, T)e naturalresources are calle! Fwasting assets;, Ast)e p)ysical units representing suc)resources are extracte! an! sol! suc)assets #ove towar!s ex)austion

Re?uisites to e *eductile2, /ust be reasonable3, /ust be on property use! in t)e con!uct

of t)e business4, /ust be treate! as an expen!iture for t)e

taxable year5, Applicable only to t)ose taxpayers w)o

are engage! in t)e business involvingnatural resources

Allowe! only to #ining entities owning

econo#ic interest in #ineral !eposits,

Fa'"s;2, $ntangible xploration an! !evelop#en

!rilling cost in petroleu# exploration s)al

be treate! eit)er as:a, Revenue expen!itures> orb, Capital expen!itures

3, T)e total a#ount of !e!uctible foexploration an! !evelop#entexpen!itures s)all not excee! 6P of netinco#e fro# #ining operation, T)eexcess s)all be carrie! forwar! to t)esuccee!ing year until fully !e!ucte!,

B0 50 CHARITABLE AND OTHERCONTRIBUTIONSPa'ial Dd"c'i,&;

2P .in!ivi!ual1 or 6P .corporation1 of t)etaxable inco#e of t)e !onor if #a!e tot)e following !onees:

2, To Eovern#ent of t)e Republic of t)e&)ilippines or any of its agencies Hpolitical sub!ivision t)ereof exclusivelyfor public purposes or

3, Accre!ite! !o#estic corporations oassociations organi*e! an! operate!exclusively for religious c)aritablescientific yout) an! sports !evelop#entcultural or e!ucational purposes or fot)e re)abilitation of veterans or to non=govern#ental organi*ations,

"o part of t)e net inco#e of w)ic) inures

to t)e benefit of any private stock)ol!eror in!ivi!ual,

F"ll Dd"c'i,&;$f #a!e to t)e following:

2, (onations to t)e Eovern#ent, T)e !onation #ust be

exclusively to finance un!ertaking priorityactivities in accor!ance wit)t)e national priority plan !eter#ine! byt)e "(A

3, (onations to Certain %oreign$nstitutions or $nternationaOrgani*ations,4, (onations to Accre!ite!"ongovern#ental Organi*ations,

T)e level of a!#inistrative expense o

w)ic) s)all in no case to excee! 4P oft)e total expenses> an!



31/147


T)e a#ount of any c)aritable contribution

of property ot)er t)an #oney s)all bebase! on t)e acuisition cost of sai!property

Contributions or gifts s)all be allowable

as !e!uction O"L if verifie! un!er rulesan! regulations prescribe! by t)eSecretary of %inance upon

reco##en!ation of t)eCo##issioner,

T)e !e!uction in t)is provision s)all not

be !e!ucte! fro# t)e gross inco#e w)ic)#eans after !e!uction

T)e one t)at can avail of t)is !e!uction is

t)e !onor un!er t)e inco#e taxnot un!er !onor9s tax,

B0 50 0 RESEARCH AND DEVELOPMENT

Re?uisites to e *eductile:W+& Ta'd as Odi&a# a&d Ncssa#E32&ss;

2, &ai! or incurre! by )i# !uring t)etaxable year

3, $ncurre! in connection wit) )is tra!ebusiness or profession,

4, "ot c)argeable to capital account,

Ma# B Ta'd as D1d E32&ss;2, &ai! or incurre! by t)e taxpayer in

connection wit) )is tra!e business or

profession>3, "or treate! as or!inary an! necessaryexpenses

4, C)argeable to capital account but notc)argeable to property of a c)aracterw)ic) is sub


32/147


in!ivi!ual taxpayer .)ea! of fa#ily or#arrie!1 for )i#self and#e#bers of )isfa#ily !uring t)e taxable year,

Re?uisites to e *eductile2, Not to exceed P+,;:: per fami%

or P+:: per mont" pai! !uringt)e taxable year for )ealt) an!Hor)ospitali*ation insurance taken byt)e taxpayer for )i#self inclu!ing)is fa#ily>

3, Sai! fa#ily )as a gross inco#e ofnot #ore t)an &36 for t)etaxable year,

4, $n t)e case of #arrie! taxpayersonly t)e spouse clai#ing t)ea!!itional exe#ption for!epen!ents s)all be entitle! tot)is !e!uction,

T)e in!ivi!ual clai#ing t)is !e!uction

ispure% compensation inco#e earner,

B0 60 PERSONAL EXEMPTIONS FORINDIVIDUAL TAXPAYERS

ALLOWANCE OF PERSONALEXEMPTIONS (SEC0 9?)

.As a#en!e! by Republic Act "o, D651

%or single in!ivi!ual or #arrie!in!ivi!ual b, "ot #ore t)an 32 years of age>c, "ot #arrie!> an!!, "ot gainfully e#ploye! or if suc)

!epen!ent regar!less of age isincapable of self=support becauseof #ental or p)ysical !efect,

3, Senior citi*en w)et)er a relative onot un!er RR "o, 3=D,

)" the taxpayer marries or should ha/e

additional dependent&s. as !efine!above !uring t)e taxable year t)etaxpayer #ay clai# t)e correspon!inga!!itional exe#ptions as t)e case #aybe in full for suc) year,

)" the taxpayer dies !uring t)e taxable year

)is estate #ay still clai# t)e personaan! a!!itional exe#ptions for )i#self an!)is !epen!ent.s1 as if )e !ie! at t)eclose of suc) year,

)" the spouse or any o" the dependentsmarries! ecomes twenty0one &52.

years old or ecomes #ain"ullyemployed !uring t)e taxable year t)etaxpayer #ay still clai# t)e sa#eexe#ptions as if t)e )ouse or any of t)e!epen!ents !ie! or as if suc)!epen!ents #arrie! beca#e gainfullye#ploye! at t)e close of suc) year,



33/147


'ote: In t"e above circumstances, t"at8"ic" a%%o8s a "i!"er amount of persona%exemption s"a%% be t"e rec?onin! point indeterminin! t"e status of t"e taxpaer8it"in a taxab%e period,NRAETBs)all be entitle! to a personal

exe#ption in t)e a#ount eual to t)eexe#ption in t)e inco#e tax law in t)ecountry of w)ic) )e is a sub


34/147


D0 5 EXEMPT CORPORATION WITH SEVERALCONDITIONS

50 G&al P,1ssi,&al Pa'&s+i2R!"isi's 1, E3%2'i,&;

a1 %or#e! by persons for t)e solepurpose of exercising t)eir co##onprofessionb1 "o part of its co#e inco#e is !erive!fro# engaging in any tra!e or business

A Eeneral &rofessional

&artners)ip provi!e! t)at no part of itsinco#e is !erive! fro#engaging in any ot)er tra!e or businessis exe#pt for# corporate

inco#e tax,$f it is comp%ies 8it" t"e above

mentioned conditions,t)en eac) personsengaging in business as partners ina general professional partners)ip areliable for t)e pament of income tax int"eir separate and individua% capacit

$f t)e conditionsset b %a8 are

not met, t)e exe#ption fro# corporateinco#e tax is wit)!rawn an! t)epartners"ip is sub


35/147


2, Labor agricultural or )orticulturalorgani*ation not organi*e! principallyfor profit>

3, /utual savings bank not )aving acapital stock organi*e! an! operate!for #utual purposes an! wit)out

profit>4, A beneficiary society or!er or

association operating for t)eexclusive benefit of #e#bers suc) asa fraternal organi*ation operatingun!er t)e lo!ge syste# or a #utualai! association or a non=stockcorporation organi*e! by e#ployeesprovi!ing for t)e pay#ent of lifesickness acci!ent or ot)er benefitsexclusively to t)e #e#bers of suc)society or!er or association or non=stock corporation or t)eir!epen!ents>

5, Ce#etery co#pany owne! an!operate! exclusively for t)e benefit ofits #e#bers>

6, "on=stock corporation or associationorgani*e! an! operate! exclusivelyfor religious c)aritable scientificat)letic or cultural purposes or fort)e re)abilitation of veterans no partof its net inco#e or asset s)all belongto or inure to t)e benefit of any#e#ber organi*er officer or anyspecific person>

7, Business league c)a#ber of co##erce or boar! of tra!e not

organi*e! for profit an! no part of t)enet inco#e of w)ic) inures to t)ebenefit of any private stock)ol!er orin!ivi!ual9>

8, Civic league or organi*ation notorgani*e! for profit but operate!exclusively for t)e pro#otion of socialwelfare>

, A non=stock an! nonprofite!ucational institution>

D, Eovern#ent e!ucational institution>2, %ar#ers9 or ot)er #utual typ)oon or

fire insurance co#pany #utual !itc)or irrigation co#pany #utual or

cooperative telep)one co#pany orlike organi*ation of a purely localc)aracter t)e inco#e of w)ic)consists solely of assess#ents !uesan! fees collecte! fro# #e#bers fort)e sole purpose of #eeting itsexpenses> an!

22, %ar#ers9 fruit growers9 or likeassociation organi*e! an! operate!

as a sales agent for t)e purpose of#arketing t)e pro!ucts of its#e#bers an! turning back to t)e#t)e procee!s of sales less t)enecessary selling expenses on t)ebasis of t)e uantity of pro!uce

finis)e! by t)e#>

'ote: Not8it"standin! t"e provisions in t"eprecedin! para!rap"s, t"e income of t"efore!oin! or!aniations from an of t"eirproperties, rea% or persona%, or from anof t"eir activities conducted for profitre#ardless o" the disposition made o"

such incomeunder t"is 2ode,

60 Fi&al I&c,% Ta3

General Principles

2, Applicable to all kin!s of inco#etaxpayers wit)out !istinctions,

3, -)ere an inco#e is alrea!y sub


36/147


Wi&&i&=s $ !erive! fro# ga#bling

%or a winning to be passive it is

sufficient t)at is !erive! fro# sourceswit)in t)e &)ilippines,

Exception7 $f t)e winning isobtaine! fro# &CSO or Lotto it s)all beexe#pt fro# %$T

$f t)e interest royalties pri*es an!

ot)er winnings !o not constitute passiveinco#e t)e final inco#e will not applyrat)er t)e net inco#e tax at t)e rate of6=43P

Cas+ A&d8O P,2'# Diid&ds0

Stoc di/idend is "OT sub


37/147


c, &roperty use! in t)e tra!e orbusiness of a c)aracter w)ic) issub

d. Real property use! in tra!e orbusiness of t)e taxpayer, #ection.0 A'/'G

Capital Assets as !efine! in t)e

Tax Co!e is enu#erate!ne!ative%, t)us t)e enu#erations)oul! pertain to or!inary assets,

E3%2'i,& 1,% FIT ,& Ca2i'al Gai&s 1, '+Sal ,1 Rali'#;Re?uisites:

a, T)e real property is t)e principalresi!ence by natural persons,

b, T)e procee!s of w)ic) is fullyutili*e! in acuiring or constructinga new principal resi!ence wit)in 2calen!ar #ont)s fro# t)e !ate ofsale or !isposition

c, T)e )istorical cost or a!


38/147


-innings of &2

or less6P = 43P

"T

&CSO an! lotto winnings xe#pt

d0 Ci&%a',=a2+ic 1il%s a&d si%ila 4,s 36P

0 I&'s' ,& d2,si',#*a&

"&d '+ E32a&ddF,i=& C"&c# D2,si'

S#s'%(EFCDS)

xe#pt

10 L,&= '% d2,si's

$f not preter#inate!

before 6 yearsxe#pt

$f preter#inate!

before 6 years6P 23P or

3P %$T

60 CAPITAL GAINS FROM

SHARES OF STOCS Tra!e! in t)e stock

exc)ange

of 2P&ercentage

tax "on tra!e! in t)e

stock exc)ange6P or 2P

%$T

90 CAPITAL GAINS FROM SALE OF REAL PROPERTY 7P %$T

$f sale was #a!e in favor of

t)e govern#ent tax to bepai! s)all be at t)e option oft)e taxpayer

6P = 43P"T

or 7P %$T

A09 O& N,&sid&'ial Ali& N,' E&=a=d I&Tad O B"si&ss I& T+ P+ili22i&s9Sec- 58 &B."ot sub


39/147


in t)e Asia=&acific Region an! ot)erforeign #arkets,

REVENUE REGULATIONS (RR) NO0 67 ASAMENDED BY RR NO0 56765;

T)e sa#e tax treat#ent is applicable to

alien in!ivi!uals e#ploye! by RA?J an!RO?J of #ultinational co#panies an! to%ilipinos e#ploye! an! occupying t)esa#e positions REAR(LSS of w)et)eror not t)ere is an alien executiveoccupying t)e sa#e position, PR


40/147


Currency (eposit Syste#

60 Ca2i'al Gai&s Ta3 1,%s+as ,1 s',cs

Tra!e! in t)e stock

exc)ange

of 2P&ercentage

tax "ot Tra!e! in t)e stock

exc)ange

of 2P&ercentage

tax

4, $nco#e !erive! un!er t)expan!e! %oreign Currency

(eposit Syste# fro# foreign currency transactions wit) local co##ercial banks .inclu!ing interest inco#e fro# foreign currency loans1

2P %$T

5, $nter=corporate (ivi!en!s .receive! by a !o#estic

corp,1

"ot sub


41/147


banks t)at #ay beaut)ori*e! by BS& to transact

business wit) offs)ore banking units14, Ba&c+ P,1i' R%i''a&c

.base! on t)e total profits

applie! or earne! #arke! for re#ittance1

26P

5, R=i,&al Aa HJs a&d R=i,&al O2a'i&= HJs

Regional or Area ?J xe#ptprovided itcomp%ies8it" #ec)++ &&'

Regional Operating

?J2P

O11s+, Ba&i&=U&i' (OBU)

d2,si',# *a&(DB)

Resi!ent %oreignCorp,

Un!er RR D=D(o#estic corp,Resi!ent %oreign Corp,

Acceptable %oreignCurrency

Un!er RR D=D&)ilippine CurrencyAcceptable %oreignCurrency

F,i=& C"&c# Ta&sac'i,& E3%2' F,%All Ta3s (RA 6>)

2, "on=resi!ents 2, "on=resi!ents

3, Offs)ore bankingunits in

t)e &)ils,

3, Offs)ore bankingunits in t)e &)ils,

4,Local Co##ercialBanks inclu!ingbranc)es of foreignbanks

4, Local Co##ercialbanks inclu!ingbranc)es of foreign

banks

5, (epository banks

Exception: "et inco#e fro# suc) transactions as#ay be specifie! by t)e Secretary of %inance

upon

reco##en!ation by t)e /onetary Boar!Fi&al i&c,% Ta3 ,1 5 1,% F,i=&C"&c#

L,a&s =a&'d ', Rsid&'s E3c2'

2, Offs)ore bankingunits in t)e

&)ils,

2, Offs)ore units in&)ils,

3, LocalCo##ercial Banks$nclu!ing of

3, (epository Banks

branc)es offoreign banks

Any inco#e of nonresi!ents w)et)e

in!ivi!uals or corporations fro#transactions wit) offs)ore banking unitss)all be 3%2' fro# inco#e tax,

Branc) &rofits s)all be t)ose interests

!ivi!en!s rents royalties inclu!ingre#uneration for tec)nical servicessalaries wages pre#iu#s annuitiese#olu#ents or ot)er fixe! o!eter#inable annual perio!ic or casuagains profits inco#e an! capitareceive! by a foreign corporation !uringeac) taxable year fro# all sources wit)int)e &)ilippines w)ic) are effectivelyconnecte! wit) t)e con!uct of its tra!e or

business in t)e &)ilippines,

I&s'a&cs 4+& Ba&c+ P,1i' %i''a&c'a3 d,s &,' a22l#;

2, -)en suc) branc)es of foreign corp, isregistere! wit) &QA

3, -)en t)e inco#e is not effectivelyconnecte! wit) t)e con!uct of its tra!e orbusiness in t)e &)ilippines,

/arubeni Corporation is a foreign

corporation !uly organi*e! an! existing

un!er t)e &)ilippine laws wit) branc)office in $ntra#uros /anila, /arubenCorporation of 'apan )as euityinvest#ent in Atlantic Eulf an! &acific Co.AE&1 of /anila, %or t)e first an! t)ir!uarters of 2D2 AE& !irectly !eclare!an! pai! cas) !ivi!en!s to petitioner an!wit))el! t)e correspon!ing 2P fina!ivi!en! tax an! also wit))el! 26P profitre#ittance tax base! on t)e re#ittablea#ount after !e!ucting t)e finawit))ol!ing tax of 2P respectively,

Iss"; -)et)er or not t)e !ivi!en!s petitioner

receive! fro# AE& are effectivelyconnecte! wit) its con!uct of business int)e &)ilippines as to be consi!ere!branc) profits sub


42/147


separate an! !istinct inco#e taxpayerfro# t)e branc) in t)e &)ilippines, T)erecan be no ot)er logical conclusionconsi!ering t)e un!ispute! fact t)at t)einvest#ent was #a!e for purposespeculiarly ger#ane to t)e con!uct of t)e

corporate affairs of /arubeni 'apan butcertainly not or t)e branc) in t)e&)ilippines, &etitioner )aving #a!e t)isin!epen!ent invest#ent attribute only tot)e )ea! office cannot now clai# t)eincre#ents as or!inary conseuences orits or business in t)e &)ilippines an! availitself of t)e lower rate of 2P, $arubeni2orporation vs) 2ommissioner


43/147


allowable !e!uctions by t)e e#ployerun!er "$T,

Un!er RE4E'E REGL+T)(' '(- 50>6: %B

tax is also i#pose! on %B grante! to:2, "RA"TB G 36P

3, Alien in!ivi!uals an! t)eir %ilipinocounterparts e#ploye! by RA?J an!HorRO?J of #ultinational co#panies OBUs&CSC G 26P

-)ere %B is grante! to a Rank an! %ile

e#ployee %B tax is not applicable, T)ee#ployee s)all be liable for t)e pay#entof net inco#e tax,

FRINGE BENEFITS NOT SUB-ECT TO THEFINAL TAX;

A, %ringe benefits not consi!ere! as gross inco#e=2, $f it is reuire! or necessary to t)ebusiness of e#ployer3, $f it is for t)e convenience ora!vantage of e#ployer

B, %ringe benefit t)at is not taxable un!er Sec,43 .B1 G xclusions fro# Eross $nco#e

C, %ringe benefits not taxable un!er Sec, 44%ringe Benefit Tax:2, %ringe benefit w)ic) are aut)ori*e!an! exe#pte! un!er special laws suc)as t)e 24t) #ont) &ay an! Ot)erBenefits wit) t)e ceiling of &4,,3, Contributions of t)e e#ployer for t)ebenefit of t)e e#ployee to retire#entinsurance an! )ospitali*ation benefitplans>4, Benefits given to t)e rank an! filee#ployees w)et)er grante! un!er acollective bargaining agree#ent ornot> an!5, &e minimis benefits G t)ose facilitiesor privileges furnis)e! to e#ployees t)atare of relatively s#all value an! areoffere! or furnis)e! #erely as a #eans ofpro#oting )ealt) goo!will content#entor efficiency of e#ployees,

*E $)')$)S BENEFITS

T)e following s)all be consi!ere! as F!e #ini#is;benefits not sub


44/147


$n t)e co#putation of gross inco#e tax

exe#ptions an! !e!uctions are notallowe!,

Taxpayers w)o are liable for t)is kin! of tax>

2, "onresi!ent alien not engage! in tra!e orbusiness ."RA"TB1

3, "onresi!ent foreign corporations ."R%C1

G,ss I&c,% Ta3 (GIT) F,%"la

TYPE OF INCOME (,&l# 1,i&c,% 4i'+i&)

RATE

A0 NONRESIDENT ALIENNOT

ENGAGED IN TRADE OR BUSINESS (NRANETB)

50 E&'i i&c,% cid1,% all all s,"cs 4i'+i& '+

P+ili22i&s

36P E$T

60 Ca2i'al =ai&s 1,% s+as,1 s',c

Tra!e! in t)e stock

exc)ange

2H3 of 2P&ercentage

tax "ot tra!e! in t)e

stockexc)ange

6P = 2P%$T

90 Ca2i'al =ai&s 1,% sal ,1al

2,2'#

7P %$T

$f sale was #a!e in

favor of t)e govern#ent rate

s)all be att)e option of t)e

taxpayer

36P E$T or7P

B0 NONRESIDENT FOREIGN CORPORATION (NRFC)

50 N,' &=a=d i& 'ad ,*"si&ss

.all sources wit)in t)e &)ils,except

reinsurance pre#iu#s1

4P E$T

60 Ci&%a',=a2+ic 1il%

,4&. lss, , dis'i*"',

.base! on gross inco#e fro# all sources

wit)in t)e&)ilippines1

36P %$T

90 O4& ,1 lss, ,1ssls

c+a'd *# P+ili22i&&a'i,&als

.base! on gross rentalsfees or

c)arter fees fro# leases orc)arters

approve! by t)e /ariti#e$n!ustry

Aut)ority1

5 P %$T

>0 O4& , lss, ,1aica1'.

%ac+i&is a&d ,'+!"i2%&'

.base! on gross rentals orfees1

8 P %$T

>0 I%2,2l# Acc"%"la'd Ea&i&= Ta3

I%2,2l# Acc"%"la'd Ea&i&=s(IAE) is t)e points of a corporation t)atare per#itte! to accu#ulate instea! obeing !istribute! by a corporation to itss)are)ol!ers for t)e purpose of avoi!ingt)e inco#e tax wit) respect to itss)are)ol!ers or t)e s)are)ol!ers oanot)er corporation,

Rate: 2P of t)e $#properly Accu#ulate!Taxable $nco#e in a!!ition to ot)etaxes1,

Purpose: To !iscourage t)e practice oaccu#ulating corporate earningsH profits

for purpose of avoi!ing t)e pay#ent ofinal inco#e tax on !ivi!en!s,

REVENUE REGULATIONS NO0 6765C,2,a'i,&s C,d B# IAET

General Rule: T)e $A tax s)all apply to:2, (o#estic corporations> an!


GROSS INCOME TAX

Entire IncomeA Exclusion and Income subject to FinalTax (e.g. Passive Income)

Gross Income X Tax Rates

NET INCOME TAX DUE


45/147


3, Corporations w)ic) are classifie! asClosely=?el! Corporations,

T)ose corporations at least fifty percent .6P1

in value of t)e outstan!ing capital stock or atleast fifty percent .6P1 of t)e total co#bine!voting power of all classes of stock entitle! to

vote is owne! !irectly or in!irectly by or for not#ore t)an twenty .31 in!ivi!uals, (o#estic corporations not falling un!er t)e

aforesai! !efinition are t)ereforepublicly=)el! corporations,

Exceptions: T)e sai! tax s)all not apply to:a, &ublicly )el! corporationsb, Banks an! ot)er non=banks %inancial

inter#e!iaries,c, $nsurance co#panies,!, Taxable partners)ips deemed to "ave

actua%% or constructive% received t"etaxab%e income under #ec)1.&'

e, Eeneral professional partners)ipsexemptJ taxab%e a!ainst t"e partners'

f, "on=taxable


46/147


a, $nvest#ent of substantial earnings an!profits of t)e corporation in unre%atedbusiness or in stock or securities ofunrelate! business>

b, $nvest#ent in bon!s an! ot)er long=ter#securities>

c, Accu#ulation of earnings in excess of2P of pai!=up capital not ot)erwiseinten!e! for t)e reasonable nee!s of t)ebusiness as !efine! in t)ese Regulations,

2. T)e fact t)at t)e earnings or profits of acorporation are per#itte! to accu#ulatebeyon! t)e reasonab%e needs of t"ebusiness s)all be !eter#inative of t)epurpose to avoi! t)e tax upon itss)are)ol!ers or #e#bers unless t)ecorporation by t)e clear prepon!eranceof evi!ence s)all prove t)e contrary,

Reasonab%e needs of t"e businessinclu!es t)e

reasonably anticipate! nee!s of t)ebusiness suc) as:a, Allowance for t)e increase in t)eaccu#ulation of earnings up to 2P of t)epai!=up capital of t)e corporation as ofBalance S)eet !ate inclusive of accu#ulations taken fro# ot)er years>b, Reserve for !efinite corporate expansionproc, Reserve! for buil!ing plants oreuip#ent acuisition as approve! by t)eBoar! of (irectors or euivalent bo!y>!, Reserve! for co#pliance wit) any loan

covenant or pre=existing obligationestablis)e! un!er a legiti#ate businessagree#ent>

e, arnings reuire! by law or applicableregulations to be retaine! by t)ecorporation or in respect of w)ic) t)ere islegal pro)ibition against its !istribution>

f, $n t)e case of subsi!iaries of foreigncorporation in t)e &)ilippines allun!istribute! earnings inten!e! orreserve! for invest#ents wit)in t)e&)ilippines as can be proven by corporaterecor!s an!Hor relevant !ocu#entaryevi!ence,

T)e controlling intention of t)e taxpayer is t)atw)ic) is #anifeste! at t)e ti#e of

accu#ulation not subseuently !eclare!intentions w)ic) are #erely t)e pro!uctof aftert)oug)t, A speculative an!in!efinite purpose will not suffice,

(efiniteness of planHs couples wit) actionHs

taken towar!s its consu##ation isessential,

Pi,d 1, Pa#%&' ,1 Diid&d8Pa#%&' ,1IAET

(ivi!en!s #ust be cleare! an!

pai! or issue! not later t)an one yearfollowing t)e

close of t)e taxable year

ot)erwise t)e $AT if any s)oul! bepai! wit)in fifteen

.261 !ays t)ereafter,

?0 Mi&i%"% C,2,a' I&c,% Ta3

A #ini#u# Corporate $nco#e Tax ./C$T1of 3P O% EROSS $"CO/ is i#pose! ona &omestic an! Resident Forei!n2orporation beginning on t)e fourt"taxab%e ear i##e!iately following t)eyear in w)ic) suc) corporationco##ence! its business operations .t)eyear w)en t)e corporation registers wit)

t)e B$R1,

C,a=/C$T is i#pose! on !o#estic an! resi!en

foreign corporations>a, -)enever suc) corporation )as *ero o

negative taxable inco#e> orb, -)enever t)e a#ount of /C$T is greate

t)an t)e nor#al inco#e tax !ue fro#suc) corporation !eter#ine! un!eSection 38A

T)is scenario is possible if t)e corporation

obtaine! too #uc) !e!uction,Li%i'a'i,&s

a, T)e /C$T s)all apply only to !o#estican! resi!ent foreign corporations sub


47/147


T)e excess can be cre!ite! against t)e

nor#al inco#e tax !ue in t)e next 4i##e!iately succee!ing taxable yearsAny a#ount of t)e excess /C$T w)ic)

cannot be cre!ite! against t)e nor#alinco#e tax !ue in t)e next 4=year perio!s)all be forfeite!

Tax Rate: 5A o" #ross income or taxable basepertinent to a tra!ing or #erc)an!isingconcern or a service entity



48/147


Tax Base:Eross $nco#e

2ost of 3oods #o%d #eans allbusiness expenses !irectly incurre! topro!uce t)e #erc)an!ise to bring t)e#

to t)eir present location an! use,

Rli1 1,% MCITT)e Secretary of %inance is aut)ori*e! tosuspen! t)e i#position of t)e /C$T onany corporation w)ic) suffers lossesbecause of:

a, &rolonge! labor !ispute>b, %orce majeureJ orc, Legiti#ate business reverses,

Sustantial losses "rom a prolon#ed laor

dispute 7 losses arising fro# a strikestage! by t)e e#ployees w)ic) laste! for#ore t)an six .71 #ont)s wit)in ataxable perio! an! w)ic) )as cause! t)ete#porary s)ut!own of businessoperations,

Le#itimate usiness re/erses % s)all inclu!e

substantial losses sustaine! !ue to firerobbery t)eft or e#be**le#ent or forot)er econo#ic reason as !eter#ine! byt)e Secretary of %inance,

i&ds ,1 B"si&ssA0 Tadi&= , Mc+a&disi&= C,&c&

Gross )ncome H gross salesH receiptsless sales returns !iscounts an!allowances an! cost of goo!s sol!,

Cost o" Sales H2, $nvoice cost of t)e goo!s sol!>3, $#port !uties>

4, %reig)t in transporting t)e goo!s to t)eplace w)ere t)e goo!s are actually sol!>

5, $nsurance w)ile t)e goo!s are in transit,

B0 Ma&"1ac'"i&=Gross )ncome H gross salesH receipt

less sales returns !iscounts an!allowances an! cost of goo! sol!,Cost o" Sales H All cost pro!uction offinis)e! goo!s suc) as

2, Raw #aterials use!>3, (irect labor>4, /anufacturing over)ea!>5, %reig)t cost>6, $nsurance pre#iu#s>7, Ot)er costs incurre! to bring t)e raw

#aterials to t)e factory or ware)ouse,

C0 Sics

Gross )ncome H Eross receipts less

sales returns allowances !iscounts an!cost of servicesCost o" Ser/ices H All !irect cost an!expenses necessarily incurre! to provi!et)e service reuire! by t)e custo#ersan! clients inclu!ing:

2, Salaries an! e#ployee benefits opersonnel consultants an! specialis!irectly ren!ering t)e service>

3, Cost of facilities !irectly utili*e! inprovi!ing t)e service,

$t s)all &,' i&cl"d i&'s' 32&sexcept for banks an! ot)er financia

institutions,Eross inco#e exclu!es passive inco#e

sub


49/147


2, A tax ratio of 3P of Eross "ational&ro!ucts,

3, A ratio of 5P inco#e tax collection oftotal tax revenues,

4, A +AT tax effort of 5P of E"&,5, A ,DP ration of consoli!ate! public

sector financial position to E"&,

O'+ Fa'"s; Available only to fir#s w)ose ratio of:

Cost of sales V66P Eross sales or receipts fro# all sources

T)e election s)all be irrevocab%e for t)ree

.41 consecutive years,

Ma&i&= ,1 G,ss I&c,%

Q 2ost of 3oods #o%d #eans all businessexpenses !irectly incurre! to pro!uce t)e#erc)an!ise to bring t)e# to t)eirpresent location an! use,

Ca2i'al ass's. =ai&s. a&d l,sssCAPITAL GAINS TAX

50 I&diid"alsa, On sale exc)ange )el! as capital asset of

s)ares of stock of a !o#estic corporationnot liste! :

an! tra!e! t)ru a local stock

b, &roperty )el! by t)e taxpayer pri#arily fosale to custo#ers in t)e or!inary courseof business>

c, &roperty use! in tra!e or business an!sub an!

!, Real property use! in tra!e or business,

3. Ca2i'al Ass's inclu!e all property )el!by t)e taxpayer w)et)er or not

connecte! in tra!e or business but notinclu!ing t)ose enu#erate! above .W21as or!inary assets,

5,


ross *ales*ales Return'iscount and Allo+ances,ost of oods *old

Gross Income

DETERMINATION OF AMOUNT ANDRECOGNITION OF GAIN OR LOSS


50/147


DETERMINATION OF AMOUNT ANDRECOGNITION OF GAIN OR LOSS

C,%2"'a'i,& ,1 Gai& , L,ssCa2i'al Gai& $ T)e gain !erive! fro# t)e sale or

exc)ange of capital assets,

Ca2i'al L,ss $ T)e loss incurre! fro# t)e sale orexc)ange of capital assets,

N' Ca2i'al Gai& $ T)e excess of t)e gains fro#salesHexc)ange of capital assets over t)egains fro# suc) salesHexc)anges,

N' Ca2i'al L,ss $ T)e excess of t)e lossesfro# sales or exc)anges of capital assetsover t)e gains fro# suc) sales orexc)anges

Basis 1, D'%i&i&= Gai& , L,ss

a, &roperty acuire! by 2"c+as $ t)e costt)ereof

b, &roperty acuire! by i&+i'a&c $ fair#arket price or value as of t)e !ate ofacuisition

c, &roperty acuire! by =i1' $ t)e basis s)allbe t)e sa#e as if it woul! be in t)e )an!sof t)e !onor or t)e last prece!ing ownerby w)o# it was not acuire! by giftexcept t)at if suc) basis is greater t)ant)e fair #arket value of t)e property att)e ti#e of t)e gift t)en for t)e purposeof !eter#ining loss t)e basis s)all besuc) fair #arket value

!, &roperty acuire! for less t)an an a!euateconsi!eration in #oney or #oney9s wort)G t)e a#ount pai! by t)e transferee fort)e property,

R!"isi's 1, Rc,=&i'i,& ,1 Ca2i'alGai&8L,ss

2, T)e transaction #ust involve propertyclassifie! as capital asset> an!

3, T)e transaction #ust be a sale orexc)ange or one consi!ere! as euivalentto a sale or exc)ange,

Ta&sac'i,& Rs"l'i&= i& Ta3a*l Gai&s *"'

N,&7Rc,=&i'i,& ,1 L,sss2, Sale or exc)ange between relate!

parties>3, -as) sales by non=!ealers of securities

an! w)en not sub

4, xc)anges not solely in kin! in #ergeran! consoli!ation> an!

5, Sales or exc)anges t)at are not at ar#slengt),

A0 HOLDING PERIOD $f capital asset ot)er t)an real property

is sol! or exc)ange! by an in!ivi!ualtaxpayer only t)e following percentage oft)e gain is sub


51/147


C0 NET CAPITAL LOSS CARRY7OVER RULE $f any in!ivi!ual taxpayer sustains in any

taxable year net capital loss suc) losss)all be treate! in t)e succee!ing taxableyear as a loss fro# t)e sale or exc)ange

of a capital asset )el! for not #ore t)antwelve .231 #ont)s provi!e! t)at t)eloss to be !e!ucte! !oes not excee! t)enet inco#e for suc) year,

T)e loss s)all be carrie! over as a !e!uction

fro# gross inco#e for t)e next 4consecutive taxable years i##e!iatelyfollowing t)e year of suc) loss,

SALE OR EXCHANGE OF CAPITAL ASSETST)e following are consi!ere! as sale orexc)ange of capital assets:

2, Retire#ent of bon!s>3, S)ort sales of property4, %ailure to exercise privilege or option to

buy or sell property>5, Securities beco#ing wort)less>6, (istribution in liui!ation of corporations>7, Rea!21 xc)ange so%e% in ?ind in legiti#ate mer#ers

and consolidationI inclu!es: a1 Between t)e corporations w)ic) are

parties to t)e #erger or consoli!ationpropert for stoc?s'J

b1 Between a stock)ol!er of a corporationparty to a #erger or consoli!ation an!t)e ot)er party corporation stoc? forstoc?'J

c1 Between a security )ol!er of acorporation party to a #erger orconsoli!ation an! t)e ot)er partycorporation securities for securities')

31 Transfer to a controlle! corporation exc)angeof property for stocks resulting in acuisition ofcorporate control by a person alone or toget)erwit) ot)ers not excee!ing four,

Control#eans owners)ip of stocks in acorporation a#ounting to at least 62P of t)etotal voting power of all classes of stocks entitle!to vote,

SALE OR EXCHANGE OF ORDINARY ASSETS Eeneral riles of inco#e taxation apply to

bot) as to t)e gain an! as to t)e loss,

'otes: If it is an ordinar asset, t"e ordinar !ains

and %osses are considered in determinin!income or %oss from trade, business orprofession) #ee #ecs) .+A, .;&'

If it is a capita% asset, determine furt"er

8"et"er or not it is a rea% propert%ocated in t"e P"i%ippines) If it is, t"en itis subject to capita% !ains tax) #ee #ecs)+;&, +1&6' #ee a%so #ecs) +;2, +1&+'If not, t"e capita% !ains and %osses areconsidered in determinin! t"e taxab%eincome) #ec) .0'

CAPITAL GAINS AND LOSSES SHARES OF

STOCST)e taxation of s)ares of stock w)et)eror not liste! an! tra!e! in t)e stockexc)ange is sub3, Corporate taxpayer !o#estic or foreign4, Ot)er taxpayers suc) as estate trust

trust fun!s an! pension a#ong ot)ers,

Ra's ,1 Ta32, S+as ,1 s',c &,' 'add '+,"=+ a l,ca

s',c 3c+a&= $ "et capital gains

receive! !uring t)e taxable year fro#sale exc)ange or transfer s)all be taxe!as follows .on a per transaction basis1:"ot over &2 = 6POver &2 = 2P

3, S+as ,1 s',c lis'd '+,"=+ a l,cas',c 3c+a&= $ Q of 2P of t)e grossselling price of t)e stock,

Exceptions to the Tax21 Eains !erive! by !ealers in securities31 All ot)er gains w)ic) are specifically

exe#pt fro# inco#e tax un!er existinginvest#ent incentives an! ot)er specia

laws,

BIR R"li&= 5>


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-)en no sale is #a!e in t)e stock exc)ange

t)e %/+ s)all be t)e )ig)est selling priceon t)e !ay nearest to t)e !ay of saletransfer or exc)ange,

%or s)ares not liste! in t)e exc)ange t)e %/+

s)all be t)e book value nearest t)evaluation !ate

T)e above rules s)all be use! inco#puting for t)e net capital gainHloss for!isposition of s)ares,

I%2,'a&' Fa'"s2, Sale of s)ares of stock of a !o#estic

corporation liste! an! tra!e! in a localstock exc)ange an! t)at of initial publicoffering s)all be sub

3, Capital losses sustaine! !uring t)e year.not liste! an! tra!e! in a local stockexc)ange1s)all be allowe! as a capitalloss !e!uctible on t)e sa#e taxable yearonly .no carry over1>

4, T)e entire a#ount of capital gain an!capital loss .not liste! an! tra!e! in alocal stock exc)ange1 s)all be consi!ere!wit)out taking into account )ol!ingperio! irrespective of w)o is t)e taxpayer.all 2P1>

5, "on=!e!uctibility of losses on was) sales,

Fili&= a&d Pa#%&' ,1 Ta3

1. Lis'd a&d Tadd i& '+ S',c

E3c+a&= $ T)e stockbroker s)all turnover t)e tax collecte! to t)e B,$,R, wit)int)e five.61 banking !ays fro# t)e !ateof collection,

2. N,' 'add '+,"=+ '+ s',c3c+a&= $$t s)all be pai! by t)e selleron a per transaction basis upon filing oft)e reuire! return wit)in 4 dasfollowing eac) sale or ot)er !isposition ofs)ares of stock,

CAPITAL GAINS AND LOSSES SALE OR

OTHER DISPOSITION OR REAL PROPERTY

COVERAGE;50 I&diid"al Ta32a#s. Es'a' a&d T"s' Sale or exc)ange or ot)er !isposition of

real property consi!ere! as capitalassets,

T)e sai! sale s)all inclu!e Fpacto !e retro

sale; an! ot)er con!itional sale,

60 D,%s'ic a&d Rsid&' F,i=&C,2,a'i,&

Sale or exc)ange or !isposition of lan!s

an!Hor buil!ing w)ic) are not actuallyuse! in

business an! treate! as capital asset,

RATE AND BASIS OF TAXA final tax of 7P is base! on t)e grossselling price or fair #arket value or *onavalue w)ic)ever is )ig)er

Eain or loss is i##aterial t)ere being a

conclusive presu#ption of gain, xe#ption of certain in!ivi!uals fro# t)e

capital gains tax on t)e sale o!isposition of a &rincipal Resi!ence,

CONDITIONS2, Sale or !isposition of t)e ol! principa

resi!ence>3, By &a'"al 2s,&s $ citi*en or resi!en

alien in!ivi!ual taxable un!er Sec,35 oft)e Co!e .!oes not inclu!e an estate or atrust1>

4, T)e procee!s of w)ic) is fully utili*e! in.a1 acuiring or .b1 constructing a newprincipal resi!ence wit)in eig)teen .2calen!ar #ont)s fro# !ate of sale o!isposition>

5, "otify t)e Co##issioner wit)in t)irty.41 !ays fro# t)e !ate of sale o!isposition t)roug) a prescribe! return of)is intention to avail t)e tax exe#ption>

6, Can only be availe! of only once everyten .21 years>

7, T)e )istorical cost or a!


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accor!ance wH suc) #et)o! as t)eopinion of t)e Co##issioner clearlyreflects t)e inco#e

Taxable inco#e is co#pute! based on

ca%endar ear if:2, Accounting perio! is ot)er t)an a fiscal

year,3, Taxpayer )as no accounting perio!,4, Taxpayer !oes not keep books,5, Taxpayer is an in!ivi!ual,

Fiscal #a; accounting perio! of 23

#ont)s en!ing on t)e last !ay of any#ont)s en!ing on t)e last !ay of any#ont) ot)er t)an (ece#ber

Cal&da #a; accounting perio! fro#

'anuary 2 to (ece#ber 42

Cas+ M'+,d $ recognition of inco#e an!expense !epen!ent on inflow or outflowof cas),

Acc"al M'+,d $ #et)o! un!er w)ic) inco#egains an! profits are inclu!e! in grossinco#e w)en earne! w)et)er receive! ornot an! expenses are allowe! as!e!uctions w)en incurre!: alt)oug) notyet pai!, $t is t)e rig)t to receive an! nott)e actual receipt t)at !eter#ines t)einclusion of t)e a#ount in gross inco#e,

Acc,"&'i&= 1, L,&=7T% C,&'ac's&ersons w)ose gross inco#e is !erive! in w)ole

or in part fro# suc) contracts s)all report, suc) inco#e upon t)e basis ofpercentage of co#pletion

Lon#0term Contracts: buil!ing

installation or construction contractscovering a perio! in excess of 2 year,

(e!uctions fro# Eross $nco#e: all

expen!itures #a!e !uring t)e taxableyear on account

being taken of t)e #aterial an!supplies on )an! at t)e beginning an!

en! of t)e taxableperio! for use in connection wit) t)e

work un!er t)e contract but not yet soapplie!,

I&s'all%&' Basis>"en App%icab%e7

2, Sales of !ealers in personnel property3, Sales of realty an! casual sales of

personality,

4, Sales of real property consi!ere! ascapital asset by in!ivi!uals,

5, C)ange fro# accrual to install#ent basis,

All,ca'i,& ,1 I&c,% a&d Dd"c'i,&s Applicable to cases of two or #ore

organi*ations tra!es or business.incorporate! an! organi*e! wit)in t)e&)ilippines1 owne! for controlle! !irectlyor in!irectly by t)e sa#e interest,

E0 Fili&= ,1 Ta3 R'"& a&d Pa#%&' ,1 Ta3

50 W+& a&d W+ ', Fil

Ta3 R'"& $ A report prepare! by t)e taxpayes)owing to t)e internal revenue officersan enu#eration of taxable a#ounts an!!escription of taxable transactions

allowable !e!uctions a#ounts sub4, Resi!ent alien on inco#e !erive! fro#

sources wit)in t)e &)ilippines an!5, "on=resi!ent alien engage! in tra!e o

business or in t)e exercise of professionin t)e

&)ilippines, ."RATB1B, Ta3a*l Es'a' a&d T"s'C, G&al P,1ssi,&al Pa'&s+i2(, C,2,a'i,&

2, "ot exe#pt fro# inco#e tax>3, xe#pt fro# inco#e tax un!er Sec, 4of "$RC but )as not s)own proof oexe#ption,

I&diid"als N,' R!"id ', Fil a& I&c,%Ta3 R'"&;

2, One w)ose gross inco#e (OS "OT@C( )is total personal an! a!!itionaexe#ptions?owever a citi*en of t)e &)ilippines an!

any alien in!ivi!ual engage! in *"si&ssor 2ac'ic ,1 2,1ssi,& wit)in t)e&)ilippines s)all file an inco#e tax returnre!ard%ess of t)e a#ount of grossinco#e>


II0M'+,ds ,1 Acc,"&'i&=

INDIVIDUAL RETURNS


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3, One wit) respect to pure co#pensationinco#e !erive! fro# sources wit)in t)e&)ilippines

E3c2'i,&;

An in!ivi!ual !eriving co#pensationconcurrent% from t8o or more emp%oersat any ti#e !uring t)e taxable year s)allfile an inco#e tax return

4, One w)ose sole inco#e )as beensub


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transaction is #a!e or w)en t)e taxableact occurs,

Basic Pi&ci2ls ,1 '+ Wi'++,ldi&= Ta3S#s'%$t is an a!vance pay#ent of t)e taxes of t)e

receipt of t)e inco#e, T)e tax wit))el! is a tax cre!it against t)e

inco#e tax liability of t)e recipient of t)epay#ent,

On t)e part of t)e wit))ol!ing agent failure to

wit))ol! or un!er wit))ol!ing of t)e taxaffects t)e !e!uctibility of t)e pay#entfro# gross inco#e

&enalties are i#pose! for non=co#pliance wit)

t)e wit))ol!ing tax rules,

Rationale:a, To provi!e t)e taxpayer a

convenient #anner to #eet )isprobable inco#e tax liability,b, To ensure t)e collection of t)e

inco#e tax w)ic) coul! ot)erwisebe lost or substantially re!ucet)roug) failure to file t)ecorrespon!ing returns>

c, To i#prove t)e govern#ent9scas) flow> an!

!, To #ini#i*e tax evasion t)usresulting in a #ore efficient taxcollection

RMC N,0 6676> (A20 56. 6>) $

All returns reuire! to be file! by t)e Taxco!e s)all be prepare! always inconfor#ity wit) t)e provisions of t)e TaxCo!e an! t)e rules an! regulationsissue! i#ple#enting t)e Tax Co!e,

Taxability of inco#e an! !e!uctibility of

expenses s)all be !eter#ine! strictly inaccor!ance wit) t)e provisions of t)e TaxCo!e an! t)e rules an! regulations issue!i#ple#enting t)e sai! Tax Co!e,

$n case of !ifference between t)e

provisions of t)e Tax Co!e an! t)e rulesan! regulations issue! i#ple#enting t)esai! Tax Co!e on t)e one )an! an! t)e

generally accepte! accounting principles.EAA&1 an! t)e generally accepte!au!iting stan!ar!s .EAAS1 on t)e ot)er)an! t)e provisions of t)e Tax Co!e an!t)e rules an! regulations issue!i#ple#enting t)e sai! Tax Co!e s)allprevail,

L=al R!"i%&'s T+a' M"s' B C,%2lid

B# A& I&1,% T, E&'i'l Hi%0T, A R4ad A As F,ll,4s;

2, ?e s)oul! voluntarily file a confi!entiainfor#ation un!er oat) wit) t)e Law(ivision of t)e B$R alleging t)erein t)especific violations constituting frau!>

3, $nfor#ation #ust not yet be in t)epossession of t)e B$R or refer to a cascalrea!y pen!ing or previouslyinvestigate! by t)e B$R>

4, T)e infor#er s)oul! not be a govern#ente#ployee or a relative of a govern#ente#ployee wit)in t)e sixt) !egree oconsanguinity> an!

5, T)e infor#ation #ust result to collectionsof revenues an!Hor fines an! penalties#ec) ++, NIR2'

i&ds ,1 Ta&s1 Ta3s i& '+ P+ili22i&s2, Es'a' Ta3 Taxes levie! on t)e

trans#ission of properties of t)e!ece!ent to )is )eirs,

3, D,&,s Ta3 Taxes levie! on t)etrans#ission of properties fro# a !onorto a !onee,

"ote: Estate and &onors taxes are not taxes ont"e propert because t"eir impositiondoes not rest upon !enera% o8ners"ip buton t"e transfer of t"e propert

4, Ta&s1 Ta3 ,& Ral P,2'# #ec)/.6, 432'

TRANSFER TAX INCOME TAX

Tax on transfer of property Tax on inco#e

Rates are lower6P to 3P = estate tax

3P to 26P or

4P = !onor9s tax

Rates are)ig)er

== 6P to43P

Leaser exe#ptions /oreexe#ptons

A0 Es'a' Ta3

An excise tax on t)e rig)t of trans#itting

property at t)e ti#e of !eat) an! on t)eprivilege t)at a person is given incontrolling to a certain extent t)e!isposition of )is property to take effectupon !eat),


II0 TRANSFER TAXES


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A tax i#pose! upon t)e privilege to

trans#it property at t)e ti#e of !eat)>t)e tax s)oul! not be construe! as a!irect tax on t)e property of t)e !ece!entalt)oug) t)e tax is base! t)ereon,

GROSS ESTATE T)e value of t)e gross estate of t)e

!escent s)all be !eter#ine! by inclu!ingt)e al" a' '+ 'i% ,1 +is da'+ ,1all 2,2'# real or personal tangibleor intangible w)erever situate!>

&RO+$(( )owever T)at in t)e case ofa &,&sid&' ali& dcd&'. only t)at partw)ic) is situated in t"e P"i%ippines s"a%% beinc%uded in "is taxab%e estate)

Lia*l ', Pa# W+& W+a'

A, state &en!ing'u!icialSettle#ent

Taxi#pose!Uponin!ivi!uals

B, $n!ivi!ual &en!ingxtra='u!icialSettle#entw)en only aco=owners)ip isfor#e!


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b, Ta&s1 i& C,&'%2la'i,& ,1 Da'+ $A transfer #otivate! by t)e t)oug)t of!eat) alt)oug) !eat) #ay not bei##inent e,g, !onation mortis causa)

$f a taxpayer execute! a !ee! of

!onation but afterwar!s )e !ie! an! t)e

ti#e of )is !eat) was very near to t)eter#s of t)e execution of t)e !ee! of!onation it is a transfer in conte#plationof !eat) accor!ing to t)e Supre#e Court,&ion vs) Posadas, 3)R) No) 4-.511:,Nov) ; /0.+'

-)en t)e !onor #akes )is will wit)in a

s)ort ti#e of or si#ultaneously wit) t)e#aking of gifts t)e gifts are consi!ere!as )aving been #a!e in conte#plation of!eat), Roces vs) Posadas, 3)R) No) 4-.;0.1, :.M/.M/00.'

This contemplates o" a situation where thetrans"eror! durin# his li"etime:

2, Transfer property in conte#plation of orinten!e! to take effect in possession oren

3, Retains for life or for any perio! w)ic)!oes not in fact an! before )is !eat) t)epossessio

Tax Law Bar Notes 2012

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Transcript of Tax Law Bar Notes 2012