Tax Reviewer Montero.pdf

8/17/2019 Tax Reviewer Montero.pdf

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A. GENERAL PRINCIPLES

Q: How is the lifeblood theory illustrated in applicable tax rules/principles? A: It is illustrated in the prohibition against set-off of taxes and in the rule that prohibits the issuance of an in junction to restrain the collection of taxes. However,the latter admits of an exception which is provided under RA 9282 (CTA law) wherein it is provided that “when in the opinion of the Court the collection may

jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceeding may suspend the said collection and require the taxpayer

either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court”.

For the prohibition against set-off of taxes, note that the payment of taxes with Tax Credit Certificates is valid as this is expressly provided for in Section 204 (C) ofthe Tax Code and this is technically not sett-off.

Other illustrations can be seen in the principle of the presumption of correctness of assessments, the imposition of the MCIT and the withholding tax system.

Q: What can Congress decide on with respect to the coverage of taxes being imposed? A: Congress has the power to select the subject of taxation as well as those that will be exempted. (Lutz vs. Araneta & Gomez vs. Palomar )

Q: What are the non-revenue or SUMPTUARY objectives of taxation? A:

a.) Taxation can strengthen anemic enterprises or provide incentive to greater production through the grant of tax exemptions or the creation of conditionsconducive to their growth.b.) Taxes may be increased in periods of prosperity to curb spending power and halt inflation or lowered in periods of slump to expand business and ward off

depression.c.) Taxes on imports may be increased to protect local industries against foreign competition or decreased to encourage foreign trade.d.) Taxes on imported goods may also be used as a bargaining tool by a country by setting tariff rates first at a relatively high level before trade negotiations

are entered into with another country to enhance its bargaining power.e.) Taxes can discourage certain businesses such as in the case of the high taxes imposed on alcohol and tobacco products.f.) Taxes can also minimize inequity.

Q: How do you distinguish tax from tolls, penalties, special assessments and license?

TAX TOLL TAX LICENSE A demand of sovereignty A demand of proprietorship Enforced contribution assessed Legal compensation orPaid for the support of thegovernment

Paid for the use of another’s property by sovereign authority to defraypublic expenses

Reward of an officer forspecific services

Generally no limit on the Amount of toll depends upon Levied for revenue Imposed for regulationamount of tax that may be the cost of construction or Exercise of taxing power Exercise of police powerimposed maintenance of the public

improvement usedImposed on persons, property,exercise of right or privilege

Imposed on the right toexercise a privilege only

May be imposed only by thegovernment

May be imposed by the governmentor private individuals or entities

Generally no limit on theamount of tax that may beimposed

Amount should be limitedto the necessary expensesof inspection and


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regulationFailure to pay does notnecessarily make an act orbusiness illegal

Failure to pay makes theact of business illegal

TAX SPECIAL ASSESSMENT TAX PENALTY

Levied on persons, property,privileges, acts, etc

Levied only on land Intended to raise revenue Designated to regulateconduct

Personal liability Not a personal liability of the personinvolved, his liability is limited only tothe land involved

May be imposed only by thegovernment

May be imposed by thegovernment or privateindividuals or entities

Based on necessity and benefits Based wholly on benefitsHas general application Exceptional both as to the time and

place

Q: Was the Motor Vehicle Registration FEE (“MVRF”) imposed against Philippine Airlines considered a tax or a regulatory fee? A: The MVRF was considered tax notwithstanding its designation as a fee. The SC upheld the previous decision in the Calalang case and based its ruling on thefact that (1) the legislative intent clearly showed that the imposition was primarily levied as a tax and (2) more importantly, only 1/5 of the amount levied wasreserved for the operating expenses of the collecting agency which is a clear indication that the main purpose of MVRF was for revenue.

Q: Is the royalty fee of P0.50 per liter of fuel deliveries made to customers inside the special economic zone and imposed by Clark DevelopmentCorporation on Chevron a tax or a regulatory measure?

A: It is a REGULATORY FEE. The royalty fee was deemed imposed primarily for regulatory purposes and not for generation of income which is the primaryfeature of a tax levy. The Court mentioned that the oil industry is “greatly imbued with public interest” and that the highly combustible product “poses serious threatto life and property”. It also upheld the reasonable relation between the fee and the regulation sought to be attained given the high volume of fuel entering theCSEZ and the fact that the increasing administrative costs were triggered by security risks arising from possible terrorist strikes. Thus, CDC was authorized toimpose the fee. (Chevron Philippines, Inc. vs. Bases Conversion Development Authority)

Q: How are taxes classified? A:

As to subject matter

a.) Personal – Tax of a fixed amount, imposed on persons within a specified territory, whether citizens or not, without regard to their property or theoccupation or business in which they are engagedb.) Property – Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable methods

of apportionmentc.) Excise – Any tax which does not fall within the classification of a personal or a property tax. It is a charge imposed upon the performance of an act, the

enjoyment of a privilege, or the engaging in an occupation, profession or business. THIS IS WHERE MOST OF THE TAXES UNDER THE TAX CODEFALL UNDER INCLUDING INCOME TAX AND VAT.

As to who bears the burdena.) Direct – Demanded from the person who also shoulders the burden of the tax; the taxpayer is directly or primarily liable, and he cannot shift the burden

to another. Incidence and burden of tax are on the same person. (Example: income tax)


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b.) Indirect – Demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another, falling finally upon theultimate purchaser or consumer. Incidence is on one person but the burden is shifted to another. (Example: VAT)

As to scopea.) National – Tax imposed by the national governmentb.) Local – Tax imposed by municipal corporations or local government units

As to ratea.) Progressive – The rate increases as the tax base of bracket increasesb.) Regressive – The rate decreases as the tax base or bracket increases

Q: What are the basic principles of a sound tax system? A:

a.) Fiscal adequacy – Sources of revenue should be sufficient to meet the demands of public expenditure in order to avoid fiscal deficit. It also means that therevenues should be capable of expanding or contracting annually in response to variations in public expenditures. An example is raising taxes to avoid thecurrent fiscal crisis.

b.) Equality or theoretical justice – This is also called the ability-to-pay principle. The tax burden should be in proportion to the taxpayer’s ability to pay. Anexample is the schedular system of taxation applied in the Philippines.

c.) Administrative Feasibility - Tax laws should be capable of convenient, just and effective administration. An example would be avoiding taxing thegovernment to reduce collection costs and the non-imposition of taxes on very small amounts of benefits given to employees such as coffee, etc. since tomonitor these small amounts would be very difficult administratively.

Q: What are the inherent limitations on the power of taxation? A: public purpose, international comity, non-delegability, exemption of government, territoriality --- PINET

Q: How are international comity and territoriality distinguished from each other? A: International comity is a limitation which states that the property or income of a foreign government may not be taxed by another state whereas territorialitystates that a state may not tax property lying outside its borders or impose a tax upon the exercise of a right or privilege in another state.

Q: Is the rule of not imposing a withholding agent obligation on international organization-employers such as UN, ADB, etc. on their Filipino employeesapplying the limitation of international comity or territoriality?

A: It is applying the limitation of international comity since the Philippine government is according respect to the status of these entities in the internationalcommunity. Please note that only the obligation to withhold by the international organization-employers is not imposed but the taxability of the Filipino employeesmay still exist.

Q: Is the Expanded Value Added Tax Law unconstitutional for embodying a regressive system of taxation? A: Even if the VAT is regressive because it is an indirect tax, it is not prohibited since the Constitution does not prohibit regressive taxes. What it simply provides isthat “Congress shall evolve a progressive system of taxation”, which means that direct taxes are to be preferred and indirect taxes minimized. ( Tolentino vs.Secretary of Finance)

Q: Is the Attrition Act 0f 1935 unconstitutional such that the same violates the rights of the BIR and BOC employees to (1) due process; (2) equalprotection of the laws; and (3) security of tenure.

A: No.(1) Given the clear parameters on revenue targets, rewards, removal levels, etc., R.A. 9335 is complete in all its essential terms and conditions and

contains sufficient standards that negate a claim of undue delegation.


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(2) BOC and BIR are both revenue-generating agencies that are both under the DOF. Such substantial distinction Is germane and related to thepurpose of the law. (BOCEA vs. Teves)

Q: Is the law providing that the 20% senior citizen discount may be claimed only as a tax deduction unconstitutional? A: No. The law is a legitimate exercise of police power which has general welfare for its object. This is despite the cla im of Petitioner that the law has the effect ofimposing upon private entities the burden of partly subsidizing a government program. Even if the current rule does not provide the entities providing discounts apeso for peso reimbursement, no payment of just compensation is warranted for being an exercise of police power and not eminent domain, which is a similarcharacterization for similar rules such as price control laws.

The law has also not been shown to be unreasonable, oppressive or confiscatory and does not necessarily affect companies’ rates of return since (1) not allcustomers are senior citizens; (2) the level of profit margin of the goods and services offered to the public varies; and (3) the entities’ ability to recoup the discountsthrough higher mark-ups or from other products not subject to discounts. ( Manila Memorial Park, Inc. vs, Secretaries of DSWD & DOF )

Q: The YMCA is a non-stock, non-profit institution with religious, charitable and educational objectives. It leased part of its premises to small canteenowners and charged parking fees on the lots besides its building. The CIR wanted to tax YMCA for such income; however the latter claimed that it isexempt from such. Which side is correct?

A: The CIR is correct that YMCA is liable to pay income tax. The assessment here was for deficiency INCOME tax on income derived from rental of real propertyand NOT PROPERTY tax. Section 27 of the NIRC provides that even if non-profitable clubs are exempted, the last paragraph expressly states that profits realizedfrom real property from whatever source and wherever used is taxable (It is also taxable on income from profitable activities). On the other hand, the Constitutionalexemption under Art. 6 Sec. 28 (3) of Constitution (“charitable institutions, churches, non-profit cemeteries, etc.) refers to exemption from property taxes only. TheConstitutional exemption under Art. 14 Sec. 4 (3) which states that non-stock educational institution whose assets are used actually, directly and exclusively foreducational purpose is exempt from tax applies to income tax but this did not apply in the case at bar since YMCA was unable to prove that it is an educationalinstitution.

Q: What is the decision of the Supreme Court in the case of Lung Center Hospital vs. Quezon City as it relates to exemption of hospitals from propertytaxes?

A: The Court ruled that even if the hospital leases out portions for commercial purposes and admits both paying and non-paying patients, itdoes not lose its character as a charitable institution as long as the proceeds are used to further charitable purposes. However, even so, petitioner was deemed asnot exempt from real property tax on the portions of its property not actually, directly and exclusively used for charitable purposes. Thus, portions leased out forcommercial purposes are subject to real property tax while those used by hospital even if used for paying patients are still exempt from the same tax.

Q: What is the effect of multiplicity of situs of taxation? A: Due to the variance in the concept of “domicile” for tax purposes, and considering the multiple distinct relationships that may arise with respect to intangible

personality and the use to which the property may have been devoted, all of which may receive the protection of the laws of jurisdiction other than the domicile ofthe owner thereto, the same income or intangible property may be subject to taxation in several taxing jurisdictions .

A simple example is an American decedent who died while residing in Japan and who has properties in the Philippines. Depending on the type of tax beingimposed (i.e., income, donor’s, estate, etc.), multiple jurisdictions may impose similar taxes at the same time.

Q: How is the problem of multiplicity of situs addressed? A: The taxing jurisdiction may:

1) Provide for exemptions or allowance of tax credit for foreign taxes and;2) Enter into treaties with other states.


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Q: What are the elements of double taxation in its strict sense (direct duplicate taxation)? A:

a.) taxing twice,b.) by the same taxing authority,c.) within the same jurisdiction or taxing district,d.) for the same purpose,e.) in the same year (or taxing period).

Q: What are some examples of double taxation in its broad sense (indirect duplicate taxation) and are thus not prohibited? A:

(1) income of corporation which is both subject to income tax and then to withholding tax when declared as dividends to individual shareholders(2) tax levied by two different states

Q: The City of Manila sought to enforce both Sections 14 and 21 of the Manila Revenue Code claiming that the former is a tax on manufacturers, etc.while the latter applies to business subject to excise, VAT or percentage tax. Will the imposition of both sections amount to invalid double taxation?

A: Yes. There is in fact double taxation since both sections are being imposed on the same subject matter (privilege of doing business within the city), for thesame purpose, by the same taxing authority, within the same taxing jurisdiction, for the same taxing period, and of the same kind or character (a local business taximposed on gross sales or receipts). The Court further said that the LGC provision applicable (Section 143) clearly states that Section 143 (h) may be imposedonly on businesses that are subject to excise tax, VAT, and percentage tax “and that are not otherwise specified in the preceding paragraphs”.

Q: What happened in the case of CIR vs. Toda as to justify the Court’s finding that the taxpayers were guilty of tax evasion ? A: CIC Corp. sold Cibeles building to Mr. Altonaga for 100 million who, on the same day, sold the same building to Royal Match Inc. for 200 million. Theassessment was based on the taxable gain not reported by virtue of the scheme adopted by the parties. The Court ruled that the three factors in tax evasion are allpresent in this case, viz: (1) end to be achieved (payment of less tax) (2) evil or deliberate state of mind (not merely accidental) (3) course of action which isunlawful. The Court added that the two transfers were tainted with fraud since the intermediary transfer (from CIC to Altonaga) was prompted only by the desire tomitigate tax liabilities and not for any business purpose.

Q: Private respondents are locators within Subic Economic Zone and have been granted tax- and duty-free incentives under R.A. 7227. Subsequently,R.A. 9334 was passed in 2005 which stated that notwithstanding any special contrary, “importation of cigarettes, spirits, liquors into the Philippineseven if destined for tax and duty free shops, shall be subject to all applicable taxes” and specific reference was made to goods destined for the SubicEconomic Zone. Will the Subic locators continue enjoying tax incentives even after R.A. 9334?

A: No. The revocation of the tax- and duty-free exemption of importation of cigarettes is valid because(1) There is no vested right in tax exemption and may thus be modified or withdrawn at will by the granting authority.

(2) Tax exemptions are strictly construed against claiming party.(3) While tax exemption may have been part of the inducement to carry on business within the zone, this exemption is not contractual and, as such, the

non-impairment clause of the Constitution can not be rightly invoked.(4) Whatever rights were granted in the certificates/licenses issued to the locators, the same must yield to exercise of police power (‘taxation may be

made the implement of police power’). (Republic of the Philippines vs. Caguioa)

Q: Can a law be passed rationalizing the fiscal incentives granted to special economic zone locators such as PEZA, Subic Economic Zone, ClarkDevelopment Corporation, etc. such that the same will have the effect of withdrawing or altering the current fiscal/tax incentives by the locators?

A: Yes. There are no vested rights in tax exemption and the grant thereof may thus be modified or withdrawn at will by the granting authority. This applies even ifthe locators infused significant amounts of capital, equipment, etc.


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Q: How are tax laws construed? A: The legislative intent is primarily looked into. In case of doubt, the statue is construed strictly against the government unless the language of the law is clear.

Q: Who promulgates tax rules and regulations? A: The Secretary of Finance acting on the recommendation of the Commissioner of Internal Revenue

Q: Can the CIR delegate the issuance of a ruling regarding an issue which has not previously been subject of a ruling? A: No. The issuance of rulings of first impression cannot be delegated by the Commissioner of Internal Revenue.

Q: What are the requisites of a taxpayer’s suit? A: The two minimum requisites for taxpayer suit are that (1) public funds are disbursed and (2) the law violated affects the petitioner. This is why in the case ofLozada vs. BP, petitioner’s action mandamus to call election to fill up BP vacancies was not considered a taxpayer’s suit because the failure to call elections doesnot involve public expenditure and in fact seeks government to spend funds.

Q: The Municipality of Agoo in La Union province passed a resolution authorizing its mayor to obtain a loan from the Petitioner and mortgaging ascollateral a portion of the Agoo plaza. As additional security, the municipality assigned a portion of its internal revenue allotment (IRA) in favor of thePetitioner. The loan proceeds were used to construct a commercial center on the plaza which was objected to by the local residents including theRespondent. Did the Respondent have standing to file for the nullification of the loan?

A: Yes. The two requisites for a taxpayer’s suit have been complied with. First, even if the construction of the commercial center would be sourced from the loanproceeds from the Petitioner, the said funds were already converted into public funds upon receipt by the municipality and the assignment of the IRA likewise

characterized the funds as public. Second, since the plaza is for public use, the Respondent, like all other Agoo residents, is directly affected. Besides it has beenheld that as long as taxes are involved, people have a right to question government contracts even if they are not party to the contract/s. ( Land Bank of thePhilippines vs. Cacayuran)


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B. INCOME TAX

Q: What are the features of the Philippine tax system A: the Philippine tax system is (1) direct; (2) progressive; and (3) semi-schedular (varying taxes imposed on passive income), semi-global (one rate for all types ofgross income)

Q: What are the elements of a taxable income? A: 1) gain or profit (as opposed to mere reimbursements or return on capital; note also that stock dividends are generally not considered as taxable incomegiven that it is merely a return on capital as the same does not result in the increase in the proportional interest of the shareholder in the company)2) received or realized during taxable year (as opposed to the common examples of unrealized forex gains or mere revaluation increments) ---REALIZATION concept

CONSTRUCTIVE RECEIPT doctrine --- An item is treated as income when it is credited to the account of or made unconditionally available to thetaxpayer; no physical possession is required.

3) not exempt from income tax (example of exempt is de minimis benefits and professional fees of general professional partnerships)

Q: After the PCGG filed cases to recover the ill-gotten wealth of the late husband of Beendicto, a compromise agreement was reached wherein theparties agreed that Swiss cases involving Benedicto’s husband’s bank deposits would be terminated in exchange for the PCGG unfreezing all of thedeposits so that Benedicto could get his 49% share from the deposits. The CIR assessed the amount of the unfrozen accounts claiming that the same

was income subject to tax. Did Benedicto’s husband realize income as a result of the compromise agreement which led to him receiving 49% of thedeposits? A: No. The 49% was in no way income because Benedicto’s husband did not gain any wealth nor did he become any richer than he was before as in fact hiswealth diminished to the extent of the 51% which he ceded to the PCGG. The 49% was a mere return of capital not subject to income tax. The Court ruled that itis only the interest income of the deposits which may be subjected to income tax as the same is the only gain. (CIR vs. Benedicto)

Q: Is back pay paid to a separate employee considered income? A: Yes. Notwithstanding that it is paid when possibly the employer-employee tie has been severed, the fact remains that the amount paid arose out of the sameemployer-employee relationship.

Q: A frugal person decides to grow his own produce in his backyard. He calculated that his savings from not having to buy his goods from the market(such as tomatoes, kalamansi, etc.) is around P5,000. Is this P5,000 income to him?

A: No. There is no realized gain since the same requires that there be a closed and completed transaction. As there was no counterparty involved in the casethere is no transaction to speak of.

Q: Is the security deposit paid by a lessee to a lessor income to the latter upon his receipt? A: No. As the lessor’s entitlement to the said amount is still subject to some contingency, conditions, etc. which may ultimately limit his ability to realize theincome, the same cannot be considered income at the point of receipt. This is based on the CLAIM-OF-RIGHT DOCTRINE.

Q: A businessman asks one of his customers that instead of paying him that the customer instead writes a check payable to the school of thebusinessman’s son. In short, the businessman never had possession of the money due from his customer. Is the amount income to the businessman?

A: Yes. This is an exact example of the constructive receipt doctrine where the income recipient need not have physical possession of the income as long as thesame is made unconditionally available to him/her.


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Q: Are political contributions for election campaigns income to the candidate? A: No. The law explicitly excludes this from the recipient -candidate’s gross income except only in the instance when the same are unutilized (for the campaign)and thus becomes income of the recipient-candidate.

Q: What are not considered as wages for withholding tax purposes? A: The term wages includes all remuneration for services performed by an employee for his employer including the cash value of all remuneration paid in anyform other than cash except that such term shall not include: (1) products of the farm where agricultural labor is performed (example: paying farmhand with eggs,milk, etc.); (2) payments for domestic services in a private home; (3) payments for casual labor (occasional, irregular) not in the course of the employer’s trade orbusiness (example: asking your driver to line up and buy UAAP tickets for you) (4) payments for services by resident or citizens for foreign government,international organizations . However, while these items are not subject to withholding the same will still be generally taxable in the hands of the recipient unlessthere is some other basis for them not to be subject to income tax such as for example if they are minimum wage earners, etc.

Please note that for (4) above, it has been clarified that the individuals exempt from income tax are only the following: (a) diplomats (including family, staff,servants if they are not locals/Filipinos); (b) officials of the UN and specialized agencies (ILO, UNESCO, IMF, WHO, UNICEF, ILO, FAO-UN) regardless of theirnationality or place of residence; (c) officials of other international organization such as ADB, IMF, IBRD, UNICEF, IRRI but only those that are non-Filipinos. Thus,for those that are still subject to income tax (example: Filipino employee of ADB), the rule is that their wage is not subject to withholding BUT they are still requiredto file their return and pay their income taxes albeit they have to do it on their own.

Q: How does income differ from capital? A: Income is any wealth that flows into the taxpayer other than a return of capital while capital constitutes the investment which is the source of income.Therefore, capital is fund while income is the flow. Capital is wealth while income is the service of wealth. Capital is the tree while income is the fruit.

Q: How do you classify taxpayers? A:

A. According to source of income:Those taxed on WORLDWIDE income are only resident citizens and domestic corporations; ALL OTHER types of taxpayers are subject only totax on Philippine sourced income

B. According to tax base:Those taxed on GROSS income are only nonresident alien not engaged in trade or business in the Philippines and nonresident foreigncorporations; ALL OTHER types of taxpayers are subject to tax on net income (i.e., may claim deductions)

Q: How is the residency of an alien determined?

A: An alien is considered a nonresident if he/she stays here for a DEFINITE SHORT PERIOD of time. An alien will be considered a resident if the stay here iseither (a) DEFINITE AND EXTENDED or (b) INDEFINITE. Once determined to be a nonresident alien, the test to determine whether the alien is a nonresidentalien ENGAGED in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days.

Nonresident aliens not engaged in business are subject to tax of 25% on gross income earned from all sources EXCEPT (1) interest from FCDU/OBU deposits(exempt) and (2) CGT on sale of shares (5%/10%) and real property (6%) classified as capital asset. They are also not entitled to Optional Standard Deduction.

Q: How is a dual citizen treated for tax purposes? A: A dual citizen is considered a Filipino citizen for tax purposes. So the tax implications of his/her income, transactions will depend on his/her residency.

Q: Define “Taxable Income”


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A: The term 'taxable income' means the pertinent items of gross income specified in the Tax Code less the deductions and/or personal and additional exemptions,if any, authorized for such types of income. In formula form ---

IncomeLess: Exclusions

Gross Income

Less: Deductions/ExemptionsTaxable Income

Q: What is the rationale for using net taxable income (as opposed to gross income) as the tax base against which the tax rate is applied? A: This is consistent with the “ability-to-pay” concept.

Q: What is the consequence of an income item being subjected to FINAL tax? A: Such income is no longer “RETURNABLE”, i.e.; it will no longer be declared as income in the Income Tax Return, hence will no longer be subject to theschedular rates on income tax (for individuals) or to 30% (for corporations).

Q: What income items are considered as passive income subject to final tax in the hands of an individual resident citizen? A: These are (i) interest from bank deposits; (ii) royalties; (iii) prizes exceeding P10,000; and (iv) dividends.

Q: How are prizes taxed under the Tax Code?

A: The tax imposable will depend on the amount of the prize. If the prize is:more than 10,000 = 20% FINAL TAX10,000 or less = forms part of gross income which is subject to the SCHEDULAR rate

However, winnings from the PCSO and LOTTO are EXEMPT from tax.

Q: What is the taxability of dividends received by individuals? A: It depends. If the dividends are from a DOMESTIC COPRORATION, the recipients will be taxed as follows:

Citizens and resident aliens = 10%Nonresident aliens engaged in trade or business in the Philippines = 20%Nonresident aliens engaged NOT in trade or business in the Philippines = 25%

If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer subject to scheduler rate(except NRANETB which is still the 25%) BUT note that the situs of the income becomes material except for a resident citizen who is taxed on

worldwide income.

Q: What is the taxability of dividends received by corporations from a domestic corporation? A: It depends. If the dividends are from a DOMESTIC CORPORATION, the recipients will be taxed as follows:

Domestic or Resident Foreign corporation = 0% (as inter-corporate dividends)Nonresident foreign corporation =

Tax treaty rate, if any15% if no tax treaty but satisfies tax-sparing provision30% if no tax treaty and does not comply with tax-sparing provision


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If the dividends are from a FOREIGN CORPORATION, then it will form part of the gross income of any type of taxpayer BUT note that the situs ofthe income becomes material except for a domestic corporation which is taxed on worldwide income.

Q: Are retirement benefits taxable? A: They are generally taxable except if the same are granted (i) in accordance with a reasonable private benefit plan maintained by the employer; (ii) in favor of aretiring official or employee who 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 ofhis retirement; and (iii) is availed of only once by the said individual.

Q: What is the tax implication of liquidating dividends? A: Any gain (computed as the difference between the fair market value of the liquidating dividend received and the cost basis of the shares in the liquidatingcompany) shall be subject to the regular tax rate (scheduler rate for individuals and 30% for corporations).

Q: Are SENIOR CITIZENS supported and living with a taxpayer included for purposes of claiming additional exemptions? A: According to a BIR Ruling, senior citizens do not qualify for purposes of claiming additional exemptions because such does not have basis in law.

Q: What is the effect of a change in status of the taxpayer or the CHANGE-IN-STATUS rule? A: The rule of thumb is THAT WHICH WILL BE BENEFICIAL TO TAXPAYER (e.g., if the child is born on the last day of the year, the parent can still take thewhole P25,000 additional exemption in the same way that if the child dies on the first day of the year, the whole P25,000 is still claimable. Note that the P50,000personal exemption is now applicable across the board so it does not matter whether one is single or married and there is no longer no concept of a head of thefamily.)

Q: Is a nonresident alien entitled to personal and additional exemption? A: It depends. If engaged in trade or business and country of residence allows exemptions to Filipinos, then the individual is allowed the lower of either theexemptions in the Philippines or those available in his/her home country. If the nonresident alien is not engaged in trade or business, he/she will NOT be allowedany exemption.

Q: Are employees of ROHQs, OBUs and FCDUs entitled to personal and additional exemptions: A: No, these employees are subject to tax on gross income without the benefit of deduction/exemptions.

Q: What are the changes introduced by REPUBLIC ACT NO. 9504 (TAX EXEMPTION OF MINIMUM WAGE EARNES AND INCREASINGPERSONAL/ADDITIONAL EXEMPTIONS / CHANGE IN OSD) (June 17, 2008)?

A:

• “Minimum wage earners” shall be exempt from the payment of income tax on their taxable income. Moreover, the holiday pay, overtime, night shift differentialpay, and hazard pay received by such minimum wage earners shall likewise be exempt from income tax. The term “statutory minimum wage” refers to the ratefixed by the Regional Tripartite Wage and Productivity Board.

• Increases the amount of personal exemption for all individuals to a fixed amount of P50,000.00, from the previous varying amounts of P20,000.00, P25,000.00and P32,000.00. Also increases the additional exemption from P8,000.00 toP25,000.00 for each dependent, not exceeding four (4).

• Amends Section 34(L) to ---(1) Increase to 40% of gross sales or receipts the 10% Operational Standard Deduction (OSD) previously allowed to individuals (except nonresident

aliens) engaged in business or earning income in the exercise of their profession; and(2) Now allow corporations (except nonresident foreign corporations) to claim OSD, instead of itemized deductions, in an amount not exceeding 40% of

their gross income.


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• If the taxpayer did not indicate in his or her return his or her intention to elect the OSD, he or she shall be considered as having availed (irrevocable for thatyear) of the itemized deductions. Hence, the election can be made on a yearly basis. An individual who opts for the OSD shall not be required to submitfinancial statements but a corporation availing of the OSD is still required to submit its financial statements.

Q: Who are the individuals who are NOT required to file an ITR? A:

(1) A compensation earner whose income does not exceed the allowable exemptions;(2) A compensation earner whose withholding taxes were correct EXCEPT if he/she had 2 or more employers;

(3) Those whose only income is subject to Final Withholding Tax;(4) Individuals exempt from income tax;(5) Those whose total compensation is below 60T.

However, an individual who is engaged in business is ALWAYS required to file an ITR regardless of the amount of income generated.

Q: How do you differentiate between Capital Gains Tax on sale of shares of stock not traded in the local stock exchange and Capital GainsTax on saleof real property considered as capital asset?

A: The sale of shares of stock not traded in the local stock exchange is subject to CGT at the rate of 5% for the first P100,000 and 10% on the amount in excessof P100,000. The tax base shall be only the GAIN on the sale. Such sale will always be subject to CGT without any possibility of exemption. As for thesale of real property considered as capital asset, the rate is 6% and the tax base is the ENTIRE SELLING PRICE or the FAIR MARKET VALUE, becauseunder the law this is a PRESUMED GAIN from the sale. However, there is a possibility of exemption as when the proceeds of the sale will be utilized by

the taxpayer to buy his principal residence, such purchase to be made within 18 months from the sale. The money in this case shall be put in escrow. Thesale of real property classified as capital asset to the government may be subject to either the 6% CGT or form part of gross income of the taxpayer (in thelatter case, only the gain forms part of the gross income), subject to the taxpayer’s choice.

CGT on --- Rate Base Exemption

(1) Sale of real property

5% / 10% Net Capital Gain Sale of principalresidence withproceeds to beused to buyanother one

(2) Sale of unlistedshares

6% Gross Selling Price or FairMarket Value, whichever is

higher

None

Note that SHARES OF STOCK IS DEFINED TO INCLUDE warrants and/or options to purchase shares of stock, units of participation in a partnership(except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and RECREATIONOR AMUSEMENT CLUBS (SUCH AS GOLF, POLO OR SIMILAR CLUBS), and mutual fund certificates.

TAX ON CORPORATIONS

Q: Are professional fees paid to general professional partnerships subject to withholding tax?


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A: No, since the GPPs are exempt from tax, payments to them are also not subject to withholding tax. However, payments made BY them (or any other tax exemptentity) are subject to withholding tax if the payee/income recipient is not similarly exempt from income tax.

Q: What is the tax implication when a partner in a partnership withdraws or retires and consequently receives his partnership interest? A: As this is akin to selling his partnership interest, the gain derived by the partner (computed similar to a liquidating gain; i.e., amount received less cost) istreated as an ordinary gain and not a capital gain. Thus, the same gain will form part of the partner’s gross income.

Q: In the cases of Obilos and Gatchalian, what were considered as the elements to establish that a taxable unregistered partnership existed? A: The elements that were deemed necessary for a taxable unregistered partnership were (1) mutual contribution of funds and (2) joint interest in properties andgains. In the Obilos case the fact that a father bought land which he then transferred to his children who then resold them without actually introducingimprovements or subdividing was considered as NOT giving rise to a taxable unregistered partnership as opposed to the Gatchalian case where they agreed tocontribute funds to buy lotto tickets and then showed clear intent to divide profits.

Q: St. Luke’s is a non-stock non-profit hospital. The BIR assessed St. Luke’s based on the argument that Section 27 (B) of the Tax Code should applyto it and hence all of St. Luke’s income should be subject to the 10% tax therein as it is a more specific provision and should prevail over Section 30which is a general provision. St. Luke’s countered by saying that its free services to patients was 65% of its operating income and that no part of itsincome inures to the benefit of any individual. Does Section 27 (B) have the effect of taking proprietary non-profit hospitals out of the income taxexemption under Section 30 of the Tax Code and should instead be subject to a preferential rate of 10% on its entire income?

A: No. The enactment of Section 27 (B) does not remove the possible income tax exemption of proprietary non-profit hospitals. The only thing that Section 27 (B)captures (at 10% tax) in the case of qualified hospitals is in the instance where the income realized by the hospital falls under the last paragraph of Section 30such as when the entity conducts any activity for profit. The revenues derived by St. Luke’s from pay patients are clearly income from activities conducted for profit.

(CIR vs. St. Luke’s Medical Center, Inc.)

PAY PATIENTS – 30% OF TOTAL PATIENTS

INCOME TAX = SUBJECT AT 10% (ST LUKE’S) RPT = STILL EXEMPT (LUNG CENTER)

CHARITY PATIENTS – 70% OF TOTAL PATIENTS

INCOME TAX = EXEMPT RPT = EXEMPT

RESTAURANTS, ETC.

INCOME TAX = SUBJECT AT 10%RPT = SUBJECT

Q: What is the taxability of the sale of realty to the government?

A: It will be subject to EITHER the regular income tax OR 6% CGT, at the option of the TAXPAYER

Q: When is the MCIT imposable on a domestic corporation?

A: It is imposable on the fourth year following the year of operation

Q: Up to what period may the MCIT be carried over? A: It may be carried over up to the three (3) immediately succeeding taxable years.

Q: How is the MCIT imposed? A: It is imposed if the computed 2% tax on gross (excludes passive income subject to final tax from gross income and with only direct costs as deductions) ishigher than the regular income tax (computed based on gross income less the deductions allowed under the Tax Code)

Q: Can the imposition of the MCIT be suspended? A: Yes, in cases of force majeure, labor strike or legitimate business reverses BUT note that only the Department of Finance can grant the suspension.


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Q: When is a company considered as a resident foreign corporation? A: The Tax Code defines such an entity as being engaged in trade or business or who, as defined in jurisprudence, “undertakes continuous businesstransaction”. A BRANCH corporation is a RESIDENT FOREIGN CORPORATION while a SUBSIDIARY is a DOMESTIC CORPORATION.

Q: Air New Zealand is a foreign corporation engaged as an off-line international carrier having no landing rights in the Philippines but which has ageneral sales agent in the Philippines which agent sells passage documents for compensation or commission covering off-line flights of Air NewZealand. Is Air New Zealand totally exempt from Philippine taxes?

A: No. While Air New Zealand is not subject to Gross Philippine Billings (GPB) as an offline carrier, it is liable for corporate income tax as it is considered a residentforeign corporation for doing business in the Philippines as evidenced by its maintenance of a general sales agent here. ( Air New Zealand vs. CIR)

Q: Are there corporations exempt from the BPRT? A: YES. PEZA companies are not subject to BPRT.

Q: What is the difference between a Regional/Area Headquarters and a Regional Operating Headquarters? A: An R/AHQ can only perform supervisory, communication, coordination functions while an ROHQ can do planning, logistics, R&D, financial advisory, etc. Forincome tax purposes, an R/AHQ is exempt from income tax primarily because it is not expected to generate any income while the ROHQ is subject to thepreferential tax rate of 10%. For VAT purposes, services by an R/AHQ are VAT exempt while those of the ROHQ may be VAT-taxable or VAT zero rated if, in thelatter case, the services are performed for nonresidents and paid for in foreign currency.

Q: Will the 15% preferential rate for Filipinos occupying managerial and technical position in an ROHQ apply even if the position is not concurrently

held by expatriate ? A: Yes.

Q: What are the requirements so that a Filipino employed by an ROHQ is entitled to the 15% preferential tax rate? A: The employee must pass the three-fold test such that ---

(1) He/she is occupying a managerial or highly technical position(2) His/her taxable income is at least P975,000 per year(3) He/she is employed exclusively by the ROHQ

Q: How is the income of a head office which transacts business independently of the branch taxed?

A: The head office shall be treated as a nonresident foreign corporation with respect to the income it generated from the transaction carried out independently of

the branch [Marubeni case]. An example is when a head office acquires shares of another company independently of its branch office in the Philippines, thedividends received by the head office is taxes as one received by a nonresident foreign corporation (i.e., (i) treaty rate or (ii) 15% if w/ tax sparing or (iii) 30% aspart of gross income) and not a resident foreign corporation (i.e., exempt as intercorporate dividends).

Q: Petitioner withheld a 15% tax on its remittances to its head office in Germany using as basis the Tax Code provision on BPRT. Believing that itoverpaid the BPRT since the RP-Germany provides for a lower rate of 10% on branch remittances, the Petitioner filed a refund with the BIR andsubsequently with the CTA. Both the BIR and the CTA denied stating that the branch office should have filed a tax treaty relief application prior toavailing of the preferential treaty rate in view of the existing doctrine in the Mirant case. Is Deutsche Bank entitled to the claim for refund even if it didnot file a tax treaty relief application with the BIR?


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A: Yes. The Court initially stated that the minute resolution upholding the doctrine in Mirant is not a binding precedent specially since there are differences in theparties, taxable period, etc. On the substantive issue, the Court said that the principle of pacta sunt servanda requires the performance in good faith of treatyobligations. Thus, to require that taxpayers must first comply with an administrative requirement (under RMO 1-2000) is not in consonance with the performance ingood faith. The obligation to comply with a tax treaty must take precedence over the objectives of the said RMO. In addition, it was pointed out that the priorapplication becomes illogical if the premise of the claim was an erroneous payment since the taxpayer could not have known it would be entitled to the refundsince precisely it was using a different basis when it paid the taxes due. (Deutsche Bank AG Manila Branch vs. CIR )

Q: How do you trace the ownership for purposes of determining whether corporation is closely-held for purposes of determining exemption from theIAET ?

A: You trace it all the way up to the ultimate parent. An example would be if Company A improperly accumulates earnings and the company is owned 100% byCompany B who is in turn owned by Company C who is in turn owned by Company D. Even if only Company D is a public company, the same still inures toCompany A’s benefit thus exempting it from IAET.

Q: Are there entities exempt from Improperly Accumulated Earnings Tax? A: YES.

1. banks and other non-bank financial intermediaries2. insurance companies3. publicly-held corporations4. general professional partnerships5. non-taxable joint ventures6. enterprises duly registered with the PEZA, BCDA, and those under special income tax regimes

Q: Are there ways by which to avoid liability from the IAET? A: YES, when the accumulation of earnings is justified by reasonable needs of the business such as:

1. accumulation up to 100% of the paid-up capital2. for definite corporate expansion projects or programs3. for buildings, plants or equipment acquisitions4. for compliance with a loan covenant or pre-existing obligation under a legitimate business agreement5. when there is a legal prohibition for its distribution6. in the case of Phil. subsidiaries of foreign corporations, undistributed earnings intended or reserved for investments within the Philippines

Q: When improperly accumulated earnings are subjected to the IAET, will it still be subject to the tax on dividends when eventually declared asdividends?

A: YES.

Q: In justifying the required corporate liquidity to justify exemption from IAET, is the Bardahl formula applicable to all corporations? A: NO. The Bardahl formula may apply only to companies with shorter operating cycles. An operating cycle of 288.35 days does not justify a high liquidity asopposed to companies with operating cycle of 3.33 months

Q: What is the tax benefit rule? A: This rule states that the recovery of an amount previously written-off but which was subsequently collected is a taxable event TO THE EXTENT THAT ITBENEFITED THE TAXPAYER, i.e., to the extent that the said deduction resulted in a lower taxable INCOME, hence a lower tax due. Thus, if the taxpayer wasalready in a taxable loss position before deducting the bad debts, then subsequent recovery of the bad debt will not be taxable since the bad debt did not benefithim with a reduced tax due.


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Q: What is the rule on the taxability of STOCK dividends? A: Generally, STOCK dividends are not taxable EXCEPT when

1. it changes the proportionate interest of a shareholder after its receipt2. the stock dividends are subsequently sold

Disguised dividends = excessive payments by a corporation to shareholders (not in the form of dividends) which may be interpreted as ways to avoid tax ondividends (example: interest and loan payments)

Liquidating dividend = dividends declared by a dissolving company. The tax implication to the shareholder is as if he/she sold his/her shares to the liquidatingcompany (i.e., actual gain computed as liquidating dividend less cost basis in the share subscription). The liquidating company is NOT subject to any tax.

Q: Define transfer pricing. A: It is the power of the Commissioner to distribute, apportion, allocation and shift income and expenses between related taxpayers to reflect their true taxableincome or to prevent evasion of taxes.

Q: What is the tax implication of a forgiveness of debt? A: If the forgiveness of debt is made:

for services rendered, it shall be taxed as compensation income on the part of the recipientfor no consideration, it is subject to donor’s taxby a corporation in favor or a debtor who is likewise a stockholder of the creditor-corporation, it will be treated as a dividend

by a stockholder in favor of a corporation-debtor, it will be treated as additional capital of the stockholder-lender on the corporation-debtor [SEC. 50 OF RR2]

Q: Are the income of property donated likewise excluded from gross income if the donor’s tax is paid ? A: No. Only the property donated will be excluded but not the income (ex. Dividends on shares donated)

Q: What are considered as exclusions from gross income: A:

1) life insurance paid to heirs of deceased2) retirement pay if (i) at least 50 and 10 and (ii) plan registered w/ BIR and (iii) benefit availed only once3) benefits received under SSS/GSIS

4) gifts (because subject to donor’s tax already) BUT income of property (ex. Dividends of shares) is TAXABLE5) 13

th month pay AND other benefits

6) income by foreign government. from loans, bonds, stocks, deposits by foreign government, financing institution owned, controlled or refinanced by gov’t., orinternational regional financial institution set-up by foreign government7) income derived by the government or its political subdivisions from any public utility or from the exercise of any essential governmental function8) prizes and awards to recognize religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if (i) the recipient was selected withoutany action on his part to enter the contest or proceeding; and (ii) the recipient is not required to render substantial future services as a condition to receiving theprize or award.9) all prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad andsanctioned by their national sports associations.


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Q: What are the de minimis benefits exempted from income tax?

A:

(a) Monetized unused VL not exceeding ten (10) days during the year(b) Medical cash allowance not exceeding 1,500 per year(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month(d) Uniform and clothing allowance not exceeding P5,000 per annum;(e) Actual yearly medical benefits not exceeding P10,000 per annum;

(f) Laundry allowance not exceeding P300 per month;(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(h) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum;(i) Flowers, fruits, books, or similar items given to employees under special circumstances, e.g., on account of illness, marriage, birth of a baby, etc., and(j) daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage."

Q: Can a company also consider as de minimis benefit other amounts of relatively small value given to employees (such as cell phone allowance) evenif the same is not in the above list of de minimis benefits?

A: No. The current list of de minimis benefits not subject to tax is exclusive.

Q: What is the income tax implication when taxes are successfully refunded?

A: If the tax was previously c laimed as deduction then subsequently refunded, it will form part of gross income at the year of refund. However, if said tax was notclaimed as deduction in the first place as they are non-deductible types of taxes (such as income tax, estate tax, etc.), it will not constitute taxable income in theyear of recovery/refund.

Q: Will separation pay received due to redundancy be exempt as well? A: YES. Redundancy is also considered as a cause beyond the control of the employee.

Q: What benefits are exempt from the FBT? A:

1. Benefits granted to rank and file employees2. Benefits required by the business or for the convenience of the employer3. De minimis benefits

4. Benefits exempted by law

Q: When are loans granted to employees subject to Fringe Benefit Tax? A: When the interest on said loans are lower than the legal rate of 12%. In which case, the difference between 12% and the stipulated interest rate shall besubject to FBT.

Q: When is educational assistance exempt from FBT? A: When the following conditions concur:

(1) the education is related to employer’s business and(2) Such assistance is coupled with a service contract.

Otherwise, the assistance is subject to FBT.


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If granted to relatives of the employee (ex. child), then the same is subject FBT except if there is a competitive scholarship scheme

Q: The spouses Benaglia were provided rooms and meals free of charge by the Royal Hawaiian Hotel during the time that the husband was stationedas the hotel manager. The government asked the spouses to include in their gross income the market value of the rooms and meals furnished by thehotel. Are the amounts subject to fringe benefits tax?

A: No. The rooms and meals were provided for the “convenience of the employer” since they were not given as compensation for services and not for the personalconvenience of the employee. The same was given because he could not otherwise perform his services required of him and that so he would be able to performhis duty continuously and his presence was possible at a moment’s call. The advantage provided to the spouses was merely incidental since the primary goal was

to give convenience to the employer.

Q: Are transportation allowances taxable? A: If they are part of the salary and are given as a fixed amount, it is taxable as compensation. If it is required by the nature of the work and the employee isrequired to liquidate, it is not taxable.

Q: Can housing benefit be exempt from FBT? A: Yes. If the housing is (i) less than 50 meters away from the workplace or (ii) the stay of the employee is less than 3 months.

Q: Once an item is subjected to FBT will the same still form part of the taxable income of the recipient-employee? A: No. The FBT is a final tax.

Q: Who can avail of the deductions provided under the law? A: All types of taxpayers EXCEPT:

1. nonresident aliens not engaged in business and2. nonresident foreign corporations3. other individuals subject to tax on gross income such as employees of ROHQs, OBUs, etc.4. those who elect to avail of the OSD

Q: What are examples of capital expenditures which are considered as non-deductible are instead spread out over the life of the asset? A: Some examples would be litigation expenses to protect the title of a property and advertising expense (see below). The test to characterize a payment as acapital expense is if the benefit/s extends beyond the taxable year when payment was made.

Q: What is the taxability of advertising expense?

A: It depends. If the advertising expense was incurred to stimulate current sales (tactical), it is deductible in full. If however it is incurred to stimulate future sale(thematic), it will be treated as a capital expenditure and the cost thereof will be amortized over the years benefited, with each year able to claim only the amountamortized in such year. [GENERAL FOODS (APRIL 14, 2003)] (note also that in this case, the SC held that the amount was not considered ORDINARY, therebyfailing one of the requisites for deductibility of business expenses, since the P9 million cost of advertising was inordinately large as it constituted ! of thecompany’s total marketing expense)

Q: What are the requisites for business expense to be deductible?

A:

(1) ordinary and necessary (which integrates the requirement that the same be reasonable and connected with the trade or business)


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(2) paid or incurred(3) if there is a requirement to withhold, that the payor must have withheld and remitted the taxes(4) must be substantiated with documents(5) the payments are not illegal

Q: What is the ceiling imposed on representation expense for purposes of deduction from gross income? A: for sale of goods: 0.50% of net sales

Sale of service: 1% of net revenue

However, when supporting documents reflect a lower amount, then such lower amount shall be used. Note that the treatment of representation expense will applyif the taxpayer is able to show that it was in fact NOT a fringe benefit granted. An example would be the club memberships which, if used to entertain clients, wouldbe part of representation expenses but if only used by the employee-officer, the it will be subject to FBT.

Q: What is interest arbitrage? A: It results in the reduction of the interest expense by a percentage of the interest income subject to final tax. It is also defined as a circumstance which ispresumed to exist because by putting excess funds in deposits/securities subject to 20% withholding, taxpayers are able to avoid the 32% tax which will happen ifsame funds are invested in revenue-generating activities (thus, margin is 12%). Another illustration of this is when a taxpayer borrows money from the bank(interest payments on which can then be claimed as expense and thus a 32% benefit) then deposits it in a bank (and subsequently suffers only a 20% finalwithholding tax), thus benefiting by 12% representing the difference between the 32% deduction and the 20% withholding tax. It does not matter if taxpayeractually intended to save on taxes.

Q: Will interest payments between a parent company and its subsidiary be disallowed in view of Section 34 (B)(2)(b) in relation to Section 36 (B) of theTax Code? A: No. The prohibition on non-deductibility of interest expense refers to a case where the creditor and debtor are commonly owned by at least 50%. The case of aparent and subsidiary loan does not refer to a case of commonly-owned entities but one where one entity owns the other.

Q: What is the treatment of interest paid to acquire property used for business? A: Interest incurred to acquire property used for business may either be claimed as a deduction or treated as capital expenditure

Q: Who may avail of tax credits for income tax purposes? A: Only those subject to tax on worldwide income (resident citizen and domestic corporation) because they pay taxes for foreign sourced income twice (in thePhilippines and abroad), and the tax credit is meant to lessen the impact of double taxation.

Q: What are the non-deductible taxes? A:

(1) Income tax(2) estate and donor's taxes; and(3) taxes assessed against local benefits of a kind tending to increase the value of the property assessed (RPT)

Q: Are unclaimed input VAT (such as for instance when there is an excess of input VAT and there is no basis to refund or the period to refund haslapsed) deductible?

A: No. There is no legal basis to claim this as deductions.


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Q: When is there a net operating loss carry-over (NOLCO)? A: When the allowable deductions exceed gross income.

Q: For how long may the NOLCO be carried over? A: It may be carried-over for 3 succeeding years. Any NOLCO remaining beyond said period is forfeited.

Q: Are there instances when a net operating loss may not be carried over? A: YES. When the net operating loss is incurred at the time when company not taxable (e.g., registered under the BOI), such net operating loss may NOT becarried-over.

Q: Can the depreciation expense exceed the amount of acquisition cost of the asset if the property is reappraised and it is shown that thereappraised value is higher than the acquisition cost?

A; No.

Q: What properties are subject to depreciation? A: Tangible and intangible assets which are limited in duration such as copyright, patent, franchise. Property not subject to depreciation would be inventories,LAND, properties not used for business and intangibles with unlimited use.

Q: Using the straight-line method, what is the annual depreciation of an equipment which was acquired for 5M and an estimated useful life of 5 yearsand a salvage value of zero?

A: The annual depreciation will be 1M pesos computed as follows: (5,000,000 less 0) divided by 5 years .

Q: Mr. X buys a computer for P15,000. The computer has an estimated useful life of 5 years and, as such, it takes a yearly depreciation expense ofP3,000. After 5 years, Mr. X sells the computer for P5,000. Mr. X claims a loss of P10,000 as he claims that the amount realized of P5,000 is less than thecost basis of P15,000. Is he correct?

A: No. Mr. X’s basis has to be adjusted to take into account the depreciation expense already claimed. Thus, the adjusted cost basis would be zero as thecomputer is already fully depreciated. Mr. X will then have a gain of P5,000 which is P5,000 (amount realized) less zero (adjusted cost basis). To take the positionthat the basis is not reduced by the depreciation is a clear violation of the CAPITAL RECOVERY CONCEPT.

Q: When are forex losses and re-appraisal adjustments deductible? A: The same are deductible only when there is already a close and completed transaction because it is only at such point when the loss is realized. An example iswhen a $100 loan incurred when the exchange rate was P50:$1 is subsequently paid when the exchange rate is already at P60:$1, the same will result in adeductible forex loss of P1000 which represents the additional amount of peso the borrower has to come up to pay the same amount of dollar loan (100). Before

actual payment, there is as yet no closed and completed transaction which may be claimed as a deductible expense.

Q: When are bad debts deductible? A: When they are ascertained to be worthless and after having gone through the process of ascertainment such as by sending demand letters, etc. Note that inthe cases of banks claiming the expense, the BSP must approve of the bad debt deduction. On the other hand, if the bad debt being written off is from aninsurance company, the insurance company must be proven as being insolvent.

Q: Philex entered into an agreement with Baguio Gold entitled “Power of Attorney” whereby Philex was made to manage and operate Baguio Gold’smining claim in Sto. Nino, Benguet province. In return, Philex was to receive as compensation 50% of the net profit of the Sto. Nino project. In thecourse of the project, Philex made advances of cash and property until the mine stopped operating due to losses. Subsequently, Philex wrote off the


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indebtedness to Baguio Gold. The BIR disallowed the write-off as the same was considered as investment in a partnership rather than as a loan. IsPhilex entitled to the write-off of bad debts?

A: No. The amount advanced by Philex was meant to be investments (NOT loan) since (i) 50% share is too big to be interest (ii) no requirement to repay forBaguio Gold (iii) no collateral (iv) sharing of profit and creation of common fund are indicators of joint venture. As such they are not bad debts that could be writtenoff. (Philex Mining Corporation vs. CIR )

Q: When are donations deductible in full? A: When the same are made to:

(1) Government for PRIORITY ACTIVITIES in education, health, youth & sports, human settlements, science, economic development

(2) Foreign institutions and international organizations(3) accredited NGOs, provided the following conditions are met:

a. it utilizes the same w/in the 15th day after the 3

rd month from close of the year,

b. the administrative expenses of such NGO does not exceed 30%,c. upon dissolution, the assets of such NGO are required to be transferred to another NGO, andd. its board members receive no compensation

Q: When is the amount of donation deductible subject to limitation? What is the limitation? A: When the donation is made to:

(1) the government for public purposes(2) accredited domestic corporations for religious, charitable, scientific, etc. purposes(3) social welfare institutions

(4) NGOs (not accredited according to the conditions above)

The limitations are that the deductible donation does not exceed ---(1) 10% of the net income for individual taxpayers(2) 5% of the net income for corporate taxpayers

Q: Are interest and penalties paid on a deficiency tax assessment deductible for tax purposes ? A: Only interest is deductible, the penalties paid are not.

Q: Who can avail of the optional standard deduction (OSD)? A: The following are entitled to avail of the OSD: (1) individuals except nonresident aliens (whether engaged or not engaged in trade or business): (2) estates; (3)trusts; and (4) corporations except nonresident foreign corporations

Q: What is the difference in the way that the OSD is determined for individuals and corporations? A: The 40% OSD for individuals is applied on the gross sales/receipts while the 40% OSD for corporations is applied against gross income.

Q: Can partnerships and the constituent partners claim OSD? A: Yes. However, for GPPs, if the GPP availed of the itemized deductions, the partners can still claim itemized deductions but cannot cla im the OSD. On theother hand, if the partnership already claimed the OSD, then the partners cannot claim any more expenses, whether it be itemized or also the OSD.

Q: What items are non deductible for income tax purposes? A:

(1) Personal expenses


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(2) Amounts to improve buildings (because the amounts spent thereon are capitalized, but which will subsequently be deductible in the form of depreciationexpense)

(3) Restoration expenses for property subject to depreciation (because capitalized)(4) Premiums for life insurance on employee where taxpayer is beneficiary of insurance(5) Losses from sale or exchange between related parties

Q: What are capital assets? A: Capital assets are those property held by the taxpayer (whether or not connected with his trade or business), BUT DOES NOT INCLUDE

1. stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the

taxable year, or2. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or3. property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or4. Real property used in trade or business of the taxpayer.

These four items are considered as ORDINARY ASSETS.

Q: Mr. A owns a ten-door apartment with a monthly rental of P5,000 each unit. He sells the entire complex to Mr. B. Is the sale subject to capital gainstax?

A: No. The apartment complex is definitely real property used in business and the gains derived from the sale is considered ordinary income.

Q: When is the holding period material for purposes of imposing the capital gains tax? A: Only when the shares are sold by an individual such that if the same has been held for more than 12 months, only 50% of the gain or loss is taken into

account. This does not apply to corporations.

Q: A bought X Co. shares today and sold it after 3 months and suffered losses but after 15 days also bought X Co. shares. Is the loss suffered in theprevious sale allowed?

A: No. This is an example of a wash sale where the losses from sale of stocks or securities is disallowed if taxpayer acqui red 30 days before and after stocks orsecurities substantially identical EXCEPT if the taxpayer involved is a dealer in securities.

Q: Are equity investments considered as capital assets? A: YES. Equity investments are considered capital assets and not ordinary asset. The only instance when shares of stock are considered as ordinary assets iswhen the same is in the hands of a dealer in securities. Thus, loss in investments which become worthless is capital loss (deductible only from capital gains, ifany) and NOT deductible as a bad debt. (China Banking Corporation vs. CIR )

Q: Describe a simple tax-free transfer under Section 40 (C)(2) of the Tax Code. A: X Corp. transfers a parcel of land to Y Corp. in exchange for Y Corp. shares as a result of which transfer X Corp. gains control of Y Corp. (i.e., sharestransferred makes X Corp. owner of at least 51% of Y Corp.). Subsequent to the exchange, the cost basis of the assets transferred will be as follows: (1) land inthe hands of Y Corp. – same cost basis as in the hands of X Corp. / Y Corp. shares – same cost basis as the land exchanged by X Corp.

Q: What is the purpose for the exemption/deferral accorded under Section 40? A: To encourage corporations in pooling, combination or expanding resources to spur economy

Q: What is the situs of dividends? A: It is considered as sourced within the Philippines if the dividends are declared by:

1. A domestic corporation


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2. A foreign corporation, at least 50% of whose gross income for the three-year period ending with the close of its taxable year preceding the declaration ofsuch dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines – but pro rated(i.e., only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period derived from sources withinthe Philippines bears to its gross income from all sources.

If the income derived from sources within the Philippines is less than 50% of the total gross income, the entire amount of income generated is NOT consideredas Philippine-sourced.

Q: What is the situs of services? A: It is considered as sourced within the Philippines when performed in the Philippines

Q: An employee of a multinational company holds office and performs all his services in the Philippines. Its employer structures his salary such thatpart of it is paid out of the Philippines and part of it is paid out of Singapore where an affiliate company is located. Would the portion of the employee’ssalary that is paid out of Singapore not be subject to Philippine taxes?

A: No. As long as the services are performed in the Philippines, the place of payment and/or the source of the salary are irrelevant and the compensation incomewill still be considered as Philippine-sourced.

Q: What is the situs of sale of personal property? A: It situs is the place of sale EXCEPT:

(1) if what is sold are shares of a domestic corporation which is always considered as Philippine sourced income(2) if such personal property is manufactured abroad and sold here or manufactured here and sold abroad – in which case the amount shall be allocated

Q: What is the situs of rentals, royalties, and other intangibles? A: It is considered as sourced within the Philippines when the same is used in the Philippines.

Q: Would it matter if the underlying contract which is the source of payment was signed outside the Philippines? A: No. The place of execution of a contract is never considered in determining the situs of income.

Q: What is the situs of insurance contracts? A: The situs of which is the place of activity (meaning the location of risk) and NOT the place of business (which reinsurers do not have in the Philippines).

Q: What is the situs of interest income? A: In NDC vs. CIR it was said that “The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or theplace of payment, is the determining factor of the source of interest income.”

Q: X Corp., a Philippine company, engaged Y Corp., a nonresident US company, to perform services abroad. Will X Corp.’s payments be subject towithholding tax?

A: No. Since Y Corp.’s income is not subject to Philippine tax as it is earned by a nonresident foreign corporation and is considered as non-Philippine sourceincome, the same is not subject to income tax and to the Philippine withholding taxes.

Q: What is meant by MOBILIA SEQUUNTUR PERSONAM as it relates to situs rules? A: Taxation follows the property or person who shall be subject to tax.

SALE ON INSTALLMENTS - BANAS VS. C.A. (FEBRUARY 10, 2000)Petitioner sold lots to Ayala and was paid less than 25%, the balance was covered by 4 checks.


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On the same day, the checks were discounted (meaning exchanged for cash at an amount lower than the face value) also to Ayala.Petitioner reported as income for the year of sale only the cash amount received from sale and excluded the amounts received from the discountedchecks. The balance was reported as income by the petitioner only in the next 4 years.Petitioner claims it was correct because initial payment excludes evidences of indebtedness including Promissory Notes.

SC = The transaction remains to be an installment (not cash) sale as the law expressly excludes “evidence of indebtedness” in the determination ofhow much was paid for the year. However, even if the proceeds of discounted note is not considered as part of initial payment, the income realizedfrom the discounting itself is still a separate taxable income in the year it was converted into cash because it was at this year that there was actual gain

on the discounted notes.

Q: When a taxpayer indicates in his ITR that the excess income tax paid shall be carried over to the succeeding taxable years, may he subsequentlyapply for a tax credit or refund for the same amount?

A: NO. The option to carry-over, once exercised, is irrevocable [Section 76 of the Tax Code]. The same rule will apply even if the taxpayer did not tick the “carry-over” box in the year when the excess payment occurred but did indicate in the succeeding year that the excess amount was being treated as “prior year’s excesscredits”. (Philam Asset Management vs. CIR )

Q: What are the elements required to successfully file a claim for excess CWT payments? A: The elements required are:

a.) filing a claim within 2 yearsb.) the income upon which the taxes were withheld were included in the return of the claimantc.) the fact of withholding is established by certificate/s issued by the payor to the payee-claimant (Filinvest Development Corp. vs. CIR )

Q: Who are required by law to withhold on income payments?

A:agents, employees of withholding agentspersons having control of the payment and claiming the expense (ex. Utility bills paid to SM by concessionaires)payor having control of the payment where payment is made thru brokers (ex. Travel agents)

Q: When does the obligation to withhold arise? A: Either when:

1. it is paid

2. it becomes payable (i.e., it is legally due, demandable or enforceable) or3. it is accrued as an asset or expense

Q: Distinguish creditable withholding tax (CWT) from final withholding tax (FWT).

A: Payments under the CWT merely approximate the tax due on the payee while those under the FWT constitute dull payment of the tax due. Under the CWTsystem, the income recipient is still required to report the income from which taxes were withheld although it may claim the CWT as credit. Under the FWT, thepayments subjected to the same are no longer reported as taxable income.

Q: Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism will provide programming andconsultancy services to Smart. Thinking that the payments to Prism were royalties, Smart withheld 25% under the RP-Malaysia Tax Treaty. Smart thenfiled a refund with the BIR alleging that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid


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to an entity without a permanent establishment in the Philippines. Does Smart have the right to file the claim for refund even if it is “just” a withholdingagent?

A: Yes. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes hebelieves were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., nonresident), the authority as agentis held to include the filing of a claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes. It is important to notethat the Court pointed that the obligation of Smart is to give the refunded amount to Prism to avoid unjust enrichment. (CIR vs. Smart Communication, Inc.)

Q: X Corp. pays Y Corp. regularly. The payments are generally subject to withholding tax but X Corp. has refused to withhold on the basis that it (XCorp.) is exempt from tax. Is X Corp. correct?

A: No. The exemption has to pertain to the payee, in this case Y Corp., so that the withholding taxes would not be due.

Q: When is a short period return due after a merger? A: Within 30 days from the effectivity of the merger based on the SEC approval

Q: Is it necessary for the person who executed and prepared the withholding tax certificates to be presented and to testify personally on theauthenticity of the certificates?

A: No. The copies of the withholding tax certificates when found by the duly commissioned independent certified public accountant to be faithful reproductions ofthe original copies would suffice to establish the fact of withholding. This is in accordance with Rule 13 of the Revised Rules of the Court of Tax Appeals. While theRules further state that the documents may be subject to verification and comparison, the CIR was not deprived of the opportunity to examine the certificates sinceRespondent manifested that the original copies of the documents are available at the Respondent’s office but the CIR made no effort to examine the same andverify their authenticity. (CIR vs. Team (Philippines) Operations Corporation)


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C. ESTATE AND DONOR’S TAXES

Q: When is the property transferred? A: Civil Code says property is transferred at time of death WITHOUT interruption. Thus, the governing law is that which was existing at the time of death.

Q: In case of a conditional transfer (as when the will provides that the property may not be sold within 10 years from the death of the testator), whendoes the estate tax accrue?

A: The tax thereon accrues at the time of death notwithstanding the condition. (Lorenzo vs. Posadas)

Q: In the same situation, which value is considered for purposes of computing the estate tax? A: Since death is generating source from which the power of state to impose tax, tax should be measured by value at time of death regardless of (i)postponement of actual possession or (ii) subsequent appreciation or depreciation.

Q: What law shall govern in such a situation? A: It will be governed by the law in force at the time of death.

Q: What are the two general classifications of properties that are covered by the estate tax?

A:1. Those directly included:

a. For citizens and residents – property located WORLDWIDE, whetheri. realty,ii. personal property (tangible or intangible)

b. For nonresident alien – property located in RPi. realty,ii. personal property (tangible or intangible)

However, INTANGIBLE PERSONAL property (such as shares of a foreign company 85% of whose business is located in the Philippines) of nonresidentaliens where there is reciprocity may be excluded, meaning the country of residence of the decedent

(a) did not impose transfer tax or(b) allowed similar exemption from transfer tax of property owned by Filipino citizens NOT residing in that foreign country

2. Those indirectly included:a. Transfers in contemplationb. Revocable transfersc. Property under general power of appointmentd. Transfers with retention of certain rights over income or enjoymente. Transfers for insufficient consideration

These are considered “substitutes for testamentary dispositions” – although inter vivos in form, they are mortis causa in substance.

Q: When is a transfer considered as one made in contemplation of death?


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A: When the motivating factor for such transfer is the thought of death, or if given near the time of death – ex. old age, failing health, length of time betweendonation & death, concurrence with will-making.Note: the 3 year presumption under PD. 1705 (which provides that transfers made within 3 years of death are presumed to have been done in contemplation ofdeath) NO longer applies.

Q: Are there instances which DISPROVE that the transfer was made in contemplation of death? A: YES. When it is shown that the reason for the transfer was the decedent’s desire:

1. to see his children enjoy the property2. to save income taxes

3. to settle family disputes4. to relieve donor from administrative burden5. to reward services rendered

Q: When an heir renounces his/her rights from an inherited property what is/are the tax implication/s? Example: A died leaving as his only heirs, hissurviving spouse B, and three minor children, X, Y and Z. Since B does not want to participate in the distribution of the estate, she renounced herhereditary share in the estate. Is the renunciation subject to donor’s tax?

A: No. The general renunciation by an heir, including the surviving spouse, as in the case B, of her share in the hereditary estate left by the decedent is not subjectto donor’s tax. This is because the general renunciation by B was not specifically and categorically done in favor of identified heir/s to the exclusion ordisadvantage of the other co-heirs in the hereditary estate.

Q: Supposing that instead of a general renunciation, B renounced her hereditary share in A’s estate to X who is a special child, would your answer be

the same? A: My answer would be different. The renunciation in favor of X would be subject to donor’s tax. This is because the renunciation was specifically and categoricallydone in favor of X and identified heir to the exclusion or disadvantage of Y and Z, the other co-heirs in the hereditary estate.

Q: In determining whether a transfer is a donations inter vivos or a donation mortis causa, is a determination of the type of heir relevant? A: YES. Where there is a donation inter vivos to a person who is NOT a forced heir, the presumption is that such transfer was inter vivos. But if the recipient ofthe donated property is a forced heir, the transfer is presumed to be made merely to accelerate the inheritance, hence mortis causa. However, the presumptionmay be rebutted by evidence to the contrary (Vda. De Roces vs. Posadas)

Q: What deductions are not available to nonresident estates? A: Nonresident estates cannot deduct the 1 million standard deduction, medical expenses and family home.

Q: Illustrate transfers for insufficient consideration. A:

Case A Case B Case C

FMV at the time of transfer 1,000 1,000 1,000Consideration received at the timeof transfer

700 1,000 0

FMV at the time of death2,000 2,000 2,000

Amount included in estate 1,300 0 2,000


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In determining whether there was sufficient consideration, compare the FMV of the property at the time of transfer with the amount of consideration received at thetime of transfer. However, the amount to be included in the estate is computed by taking the difference between the FMV of the property at the time of death andthe amount of consideration received at the time of transfer.

Q: What is the reason behind allowing as deduction for estate tax purposes property which was previously taxed (vanishing deduction)? A: To mitigate the harshness of previous taxation.

Q: What are the conditions for the deductibility of property previously taxed or VANISHING DEDUC

Tax Reviewer Montero.pdf

Documents

Transcript of Tax Reviewer Montero.pdf