Professional Documents
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Tax 2 TSN
Tax 2 TSN
Justice Aurelio-Yap
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2 TAXATION 2 – Atty. Justice Aurelio-Yap
Is he liable, or exempted? credit, meaning the taxes that have already been
paid in advance.
Why? Because there are laws which exempt
persons or entities from paying taxes. So 6. SIXTH, add the interests, penalties
determine if the taxpayer is exempted or not. and surcharges.
2. SECOND, determine the gross If there was delay in paying your taxes,
income. interests, penalties or surcharges shall be added
on your tax liability.
Gross income means all income derived from
whatever source (NIRC, Sec. 32). After adding all the interests, penalties and
surcharges, you will arrive at the TOTAL
Gross Sales/Receipts
AMOUNT PAYABLE.
- Less Sales Retruns/Sales
Allowance/Sales Discount
- Less Cost of Sales CLASSIFICATION OF INDIVIDUAL TAX
PAYERS
= GROSS INCOME
Kinds of Taxpayers:
What is the income earned by a tax payer. 1. Individuals
Remember that there are several kinds of a. Citizen
income, compensation income, business income, i. Resident Citizen (RC)
passive income, interest income. There are ii. Non- Resident Citizen (NRC)
different rules governing these kinds of income. b. Aliens
i. Resident Alien (RA)
3. THIRD, determine the exemptions or ii. Non- Resident Alien (NRA)
allowable deductions. (1) Engaged in Trade or Business (NRA-
ETB)
Identify the expenses and certain other items
(2) Not Engaged in Trade or Business
that can be deducted from the taxpayer’s
(NRA- NETB)
taxable income in order to determine the final
iii. Special Aliens
taxable income.
c. Special class of individual employees
So gross income, less the allowable deductions i. Minimum wage earner
and you arrive at the TAXABLE INCOME. 2. Corporations
a. Domestic
4. FOURTH, apply the applicable tax b. Foreign
rate. i. Resident foreign corporation (RFC)
ii. Non-resident foreign corporation (NRFC)
Remember that there are different tax rates. c. Joint venture and consortium
Because there are taxpayers who are subject to 3. Partnerships
the graduated schedular rates under Section 24 4. General Professional Partnerships
and there are those who are subject of a 5. Estates and Trust
different set of rates. 6. Co-ownerships
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3 TAXATION 2 – Atty. Justice Aurelio-Yap
3. Alien Individual Employed by Regional or (5) The taxpayer shall submit proof to the
Area Headquarters and Regional Commissioner to show his intention of leaving the
Operating Headquarters of Multinational Philippines to reside permanently abroad or to return
Companies; to and reside in the Philippines as the case may be for
purpose of this Section. (NIRC, Sec. 22e)
4. Alien Individual Employed by Offshore
Banking Units; and
5. Alien Individual Employed by Petroleum
Service Contractor and Subcontractor The phrase “most of the time” under number 3
(NIRC, Sec. 25). of paragraph E under Section 22 is interpreted to
mean presence abroad for at least 183 days
Who is a CITIZEN? during the taxable year.
Section 1. The following are citizens of the Who is a RESIDENT ALIEN?
Philippines:
The term "resident alien" means an individual
[1] Those who are citizens of the Philippines at the
whose residence is within the Philippines and
time of the adoption of this Constitution;
who is not a citizen thereof (NIRC, Sec. 22f).
[2] Those whose fathers or mothers are citizens of
the Philippines; A RA is an alien actually present in the
Philippines who is not a mere transient or
[3] Those born before January 17, 1973, of Filipino sojourner.
mothers, who elect Philippine citizenship upon
reaching the age of majority; and But residence does not mean mere physical
presence. An alien is considered a resident or
[4] Those who are naturalized in accordance with law
non-resident depending on his intention with
(1987 Philippine Constitution, Art. 4 Sec. 1).
regard to the length and nature of his stay.
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4 TAXATION 2 – Atty. Justice Aurelio-Yap
They must be registered as such with the POEA, (C) An individual citizen of the Philippines who is
working and deriving income from abroad as an
with a valid overseas employment certificate.
overseas contract worker is taxable only on income
“Exclusively in international trade” - If you are a derived from sources within the Philippines: Provided,
seafarer, but your transactions are only That a seaman who is a citizen of the Philippines and
who receives compensation for services rendered
domestic, you cannot be considered as an OFW,
abroad as a member of the complement of a vessel
thus your salary as a seaman shall be subject to engaged exclusively in international trade shall be
Philippine income tax. treated as an overseas contract worker;
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5 TAXATION 2 – Atty. Justice Aurelio-Yap
(D) An alien individual, whether a resident or not of employee for his employer unless specifically
the Philippines, is taxable only on income derived excluded under the NIRC.
from sources within the Philippines;
Determine first whether there is an employer-
employee (ER-EE) relationship for it to fall under
(E) A domestic corporation is taxable on all income
the compensation income.
derived from sources within and without the
If there is no ER-EE relationship, you are
Philippines; and
considered as an independent contractor.
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6 TAXATION 2 – Atty. Justice Aurelio-Yap
1, 000, 000 - 500, 000 = 500, 000 (difference) Who are covered by this new provision?
Second – Multiply difference by 32% Those individuals with Purely Compensation
500, 000 x .32 = 160, 000 (product) Income and those who practice their profession
such as those with firms and the like are given
Third – Add product to 125, 000 (based an option under this new provision.
on table)
2 OPTIONS
160, 000 + 125, 000 = 285, 000
1. The FIRST OPTION is to still be
subject to the graduated tax schedule,
the table we discussed earlier.
BUSINESS INCOME arises from self-
employment or practice of profession. But you are still separately liable with the
percentage tax (3%) or VAT (12%).
Self-employment means you are engaged in
business. So you separate liabilities.
Practice of profession means you are a lawyer, Example: I practice my profession as a lawyer.
engineer or architect and you practice your own Under this first option, I am liable of 2 kinds of
profession. taxes, income tax and percentage tax. The basis
of my income tax is the table.
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7 TAXATION 2 – Atty. Justice Aurelio-Yap
Example: Your gross income (sales/receipts) for Then your income from business or practice of
the entire year is 1 million. You chose the 2nd profession shall be subject to the 2 OPTIONS we
Option, the 8%. How do you compute? discussed earlier.
1 million – 250, 000 = 750, 000 x .08 = So since you earn two different kinds of income,
HOW ARE YOU TAXED?
BUT I still have to research if there
Tax separately the compensation income and
really is no allowable deduction. the income from business or practice of
profession.
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8 TAXATION 2 – Atty. Justice Aurelio-Yap
Q: What if you are really a lending institution certificates in such form prescribed by the
and you earn interest through lending, are those Bangko Sentral ng Pilipinas (BSP) shall be
interests passive income? exempt from the tax imposed under this
Subsection: Provided, finally, That should the
A: NO, because the interests earned through holder of the certificate pre-terminate the
your lending business are directly derived from deposit or investment before the fifth (5th)
you main source income. Those interests are year, a final tax shall be imposed on the entire
income and shall be deducted and withheld by
business income.
the depository bank from the proceeds of the
Q: If you are a lawyer at the same time you lend long-term deposit or investment certificate
money with interests, but you are not a based on the remaining maturity thereof:
registered lending institution? “x x x”
A: The interest you earn from lending is (2) Cash and/or Property Dividends. – A final tax
considered as business income since “income” at the rate of ten percent (10%) shall be
may come from whatever source. imposed upon the cash and/or property
dividends actually or constructively received by
Q: If you are a lawyer, but you are also a broker an individual from a domestic corporation or
and you invest in stocks, the dividends you earn from a joint stock company, insurance or
from your investment are not anymore mutual fund companies and regional operating
considered as passive income. Those are headquarters of multinational companies, or on
business income. the share of an individual in the distributable
net income after tax of a partnership (except a
general professional partnership) of which he is
a partner, or on the share of an individual in
RULE ON PASSIVE INCOME the net income after tax of an association, a
joint account, or a joint venture or consortium
“(B) Rate of Tax on Certain Passive Income-. taxable as a corporation of which he is a
(1) Interests, Royalties, Prizes, and Other member or co-venturer. (NIRC, Sec. 24B as
Winnings. – A final tax at the rate of twenty amended)
percent (20%) is hereby imposed upon the
amount of interest from any currency hank
deposit and yield or any other monetary Basta bank deposit, 20% jud na. But this foreign
benefit from deposit substitutes and from trust
currency deposit system, before, 7.5% now,
funds and similar arrangements; royalties,
15%.
except on books, as well as other literary
works and musical compositions, which shall “Prizes (except prizes amounting to Ten
be imposed a final tax of ten percent (10%);
thousand pesos (P 10,000) or less which shall be
prizes (except prizes amounting to Ten
subject to tax under Subsection (A) of Section
thousand pesos (P 10, 000) or less which shall
be subject to tax under Subsection (A) of 24”
Section 24; and other winnings (except
This means that, when the prize you
winnings amounting to Ten thousand pesos
receive amounts to 10, 000 or less only that will
(P10, 000) or less from Philippine Charity
Sweepstakes and Lotto which shall be be subject to the graduated tax schedule table
exempt), derived from sources within the for regular income. It will not be considered as a
Philippines; Provided, however. That interest passive income.
income received by an individual taxpayer
(except a nonresident individual) from a How about the rules on passive income?
depository bank under the expanded foreign
This provision is an exception to the rule
currency deposit system shall be subject to a
that a passive income is not subject to the rules
final income tax at the rate of fifteen percent
(15%) of such interest income: Provided, on regular income. When your prize amounts
further, That interest income from long-term only to 10, 000 or less, even if it is only a
deposit or investment in the form of savings, passive income (based on the test), it will still be
common or individual trust funds, deposit subject to the rates for regular income under
substitutes, investment management accounts Section 24 (A).
and other investments evidenced by
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9 TAXATION 2 – Atty. Justice Aurelio-Yap
“Other winnings (except winnings amounting to increased, but the value is still the same. There
Ten thousand pesos (P10, 000) or less from is no income, unlike cash and property
Philippine Charity Sweepstakes and Lotto” dividends.
trusts: Provided, That the tax liability, if any, on gains is the tax base used for computing the capital
from sales or other dispositions of real property to the gains tax.
government or any of its political subdivisions or
agencies or to government-owned or controlled From among the three values, you immediately
corporations shall be determined either under Section multiply the highest value to 6%.
24 (A) or under this Subsection, at the option of the
taxpayer. (NIRC, Sec. 24 D[1]) HOWEVER, if the tax payer is engaged in selling
real properties, a real estate broker, then the
property sold shall not be subject to the capital
gains tax.
In the capital gains from sale of real property,
the first thing to remember is that the property The income derived from that sale transaction is
sold here is a capital asset. considered business income, therefore is a part
of the gross income for purposes of computing
Capital Assets means property held by the
taxable income in computing income tax.
taxpayer (whether or not connected with his
trade or business), but does not include stock in Q: Who pays the capital gains tax, the buyer or
trade of the taxpayer or other property of a kind seller?
which would properly be included in the
inventory of the taxpayer if on hand at the close A: In practice, it depends on the agreement of
of the taxable year, or property held by the the parties. Usually it is the buyer who pays, but
taxpayer primarily for sale to customers in the in essence it is supposed to be paid by the seller
ordinary course of his trade or business, or because the seller is the one who obtains income
property used in the trade or business, of a and therefore, “gains” from the transaction.
character which is subject to the allowance for This RULE has an exception found in (2) of the
depreciation provided in Subsection (F) of same provision.
Section 34; or real property used in trade or
business of the taxpayer. (NIRC, Sec. 39A [1]) (2) Exception - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or
disposition of their principal residence by natural
When you say capital asset, kanang dili gud ka persons, the proceeds of which is fully utilized in
engaged in selling. Meaning, it is not in the acquiring or constructing a new principal residence
ordinary course of business, and that you only within eighteen (18) calendar months from the date of
sold the property in one instance, an isolated sale or disposition, shall be exempt from the capital
transaction. gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real
Example: You have a house and lot, and you property sold or disposed shall be carried over to the
want to sell it because you want to change your new principal residence built or acquired: Provided,
residence. further, That the Commissioner shall have been duly
notified by the taxpayer within thirty (30) days from
That is an example of a sale of real property the date of sale or disposition through a prescribed
subject to capital gains tax. return of his intention to avail of the tax exemption
herein mentioned: Provided, still further, That the said
It is called “capital gains tax” because it is a sale tax exemption can only be availed of once every ten
on a capital asset. (10) years: Provided, finally, that if there is no full
utilization of the proceeds of sale or disposition, the
To obtain the capital gains tax, you choose from portion of the gain presumed to have been realized
among the values. You compare the different from the sale or disposition shall be subject to capital
values: gains tax.
1. The gross selling price; For this purpose, the gross selling price or fair market
2. the market value (the assessed value of value at the time of sale, whichever is higher, shall be
the assessor’s office by the LGU); and multiplied by a fraction which the unutilized amount
3. the zonal value provided by the BIR. bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under
Remember: There are three market values which paragraph (1) of this Subsection shall be imposed
you need to compare and whichever is higher
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11 TAXATION 2 – Atty. Justice Aurelio-Yap
thereon. (NIRC, Sec. 24 D[2]) extent of the difference between the market rate and
actual rate granted;
(6) Membership fees, dues and other expenses borne
by the employer for the employee in social and
The exception from payment of capital gains tax athletic clubs or other similar organizations;
from sale of real property is if you sold your (7) Expenses for foreign travel;
principal residence for purposes of buying, (8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his
acquiring or constructing a new principal dependents; and
residence. (10) Life or health insurance and other non-life
insurance premiums or similar amounts in excess of
To be exempt, the following are the conditions: what the law allows. (NIRC, Sec. 33B)
prior rates to transactions entered into during How much is the Capital Gains Tax from the
the years when they were applicable. sale?
TIP: REMEMBER the procedures in determining Type of tax payer = Resident Citizen
income tax while referring to the table we made. Type of Income = Capital gains tax
Selling Price = 2.5 million (higher value)
1. FIRST, identify the tax-paying party or
Fair market value = 2.3
entity and if it is liable, or exempted
Asa ang assessed value ug zonal value?
Remember the presumption that a nonresident
alien is doing business in the Philippines if he
TIP: Kung wala gani gipakita, ayaw
stays therein for an aggregate period of more
pud ninyo pangitaa. *sobs, kbye :P*
than one hundred eighty (180) days during any
calendar year.
TRAIN Law became effective on January 2018. Taxable income depends upon the kind of tax
payer, if he is an individual earning purely
After identifying the tax-paying party (first row),
compensation income, or purely self-
determine the kind of income (regular income,
employment/business income earner, or mixed
passive income or capital gains) (first column).
income.
Then match.
Q: How do we compute the taxable income?
Under the passive income, determine first if it is
dividend. If not, then refer immediately to (a).
The usual problem that we might encounter is TAXABLE INCOME is comprised of, for:
the sale of real property. Make sure that what is
being sold is a capital asset. 1. Purely Compensation Income
Earner
Q: Kung daghan syag balay ma’am?
Gross Compensation Income – Non-
A: Still subject to capital gains tax as long as he taxable income/benefits = Taxable
is not engaged in the business of selling Income
properties. Look at the intention of the
transaction if he transacts on a regular basis or Gross Compensation Income is the income of the
not. employee for the whole year.
PRACTICE: Nicos a resident citizen sold his Non-taxable income/benefits are those not
residential house and lot in Tagum for 2.5 taxed. These are benefits of small value
million. The cost of the house 3 years ago was exempted from income tax. BUT there is a limit
1.5 million while the fair market value at the on the value.
time of the sale is 2.3 million. Example: Rice allowance, 13th month
pay, De Minimis, Bonuses
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NOTE: There are no more deductions of basic compensation income of 135, 000. He
and additional personal exemption under TRAIN contributed to SSS, PHIC, Pag-Ibig amounting to
Law because the exemption was increased to 5, 000. He received 13th month pay of 11, 000.
250, 000. So the basic and additional personal
exemption were already absorbed in the 250, Compensation Income: 135, 000
000. Contribution: 5, 000
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But the following CONDITIONS must be If you are engaged in services or practice of
satisfied to avail of this Second Option: profession, your “halin” is called GROSS
RECEIPTS.
a. That your gross income for the whole
year must not exceed 3 million VAT
threshold;
A tax payer is considered as VAT
If you exceed, 3 million, you cannot avail of the Registered if:
Second Option, 8%.
1. His gross income exceeded the 3M
b. That your gross income is based ONLY threshold, thus he automatically has to
on gross sales/receipts. Tax base must be registered as a VAT tax payer; or
be gross sales/receipts. 2. He registered himself voluntarily as a
VAT tax payer even if his gross income
Gross Sales/Receipts
did not exceed 3M threshold.
If you are engaged in selling goods and
merchandise, your “halin” is called GROSS
SALES. Scenario: A tax payer avails of the 8% on the
first quarter, but at the end of the taxable year
If you are engaged in services or practice of
realizes that his gross income exceeded 3million.
profession, your “halin” is called GROSS
What happens?
RECEIPTS.
He will go back to the First Option and use the
Remember that gross income has
graduated tax rate table. But deduct the 8%
allowable deductions and if you avail of
already paid from the total value computed
the First Option, you may deduct
under the graduated rate.
allowable deductions from your gross
sales/receipts.
TIP: If gamay ka’g income, ayaw pag 8%,
didto ka sa graduated tax rate. If mafeel
BUT if you avail of this 8% option, you
nimo na dako ka’g income, didto ka sa
cannot deduct the allowable deductions 8%.
(business expenses), thus you go
directly to gross sales/receipts.
Benefits in availing of the 8% Option:
c. Income is earned purely from self-
employment (business) or practice of 1. You are not required to attach a
profession. You cannot be a mixed financial statement on your final income
income earner for you to be able to tax return, but existing rules on
avail. bookkeeping still applies.
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15 TAXATION 2 – Atty. Justice Aurelio-Yap
tax, direcho yan 3% from gross sales/receipts OPERATING EXPENSES katong water, electricity,
without deductions. pamasahe, ug uban gastos nimo sa pagoperate
sa imong business]
But that is only advantageous if your gross
income is nearing 3 million. That becomes a Solution:
disadvantage if you have low income per month
Total gross sales/receipts – cost of sales = Gross
or that you do not purchase goods from other
Income
entities, such as practice of profession.
So if you always purchase goods, that is Gross Income – Operating Expenses = Taxable
Income
advisable, but the strategy there is you should
purchase from another VAT registered entity. 1.1M – 600, 000 – 200, 000 = 300, 000
When you opt for the 8%, that is irrevocable for Taxable Income = 300, 000
the entire taxable year. But you go back to the
graduated tax rate if your income exceeds 3 *Refer to Graduated Tax Rate Table
million.
8% multiply to gross sales/receipts and other The 250, 000 here is NOT an exemption, it is
non-operating income in excess of 250, 000 kay the amount provided in the graduated tax table,
mao man na ang exemption diba. do not confuse this from the 250, 000 threshold
we have been discussing before.
gross sales/receipts + non-operating income –
250, 000 = Taxable Income
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16 TAXATION 2 – Atty. Justice Aurelio-Yap
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17 TAXATION 2 – Atty. Justice Aurelio-Yap
benefits have a limit in their exemption, such Gross Sales: 2.4M (does not exceed 3M so
that the entire benefits may not be covered by pwede magavail ng 8%)
the exemption if it already exceeded 90, 000.
Non-operating Income: 100, 000
What is covered is only up to 90, 000.
2.4M + 100, 000 = 2.5M
What is covered by the exemption of the
benefits is only up to 90, 000. Any excess Taxable Business Income: 2.5M
shall be subject to tax. We did not use the cost of sales and operating
expenses because the Rule is, if the tax payer
opted for the 8%, you just base on the gross
sales.
The excess of 90, 000 from all benefits
shall be subject to tax. Remember, the 8% option for a mixed income
earner, (unlike in the purely business income
120, 000 – 90, 000 = 30, 000 shall be subject to
earner), we do not deduct 250, 000 exemption.
tax
So multiply directly to the 8%.
1.5M – 90, 000 = 1, 410, 000 Taxable
Compensation Income 2.5M x .08 = 200, 000
Taxable Compensation Income: 1, 410, Tax due on business income: 200, 000
000
How much is the TOTAL TAX DUE?
To compute for the tax due, use the graduated
313, 000 + 200, 000 = 513, 000
tax rates.
TOTAL TAX DUE = 513, 000
1, 410, 000 – 800, 000 = 610, 000 2nd – get the taxable income of the business
income
610, 000 x 0.3 = 183, 000
3rd – Add the taxable income of the two and
183, 000 + 130, 000 = 313, 000 Total tax due subject them to the graduated tax rate
Total tax due for compensation income:
313, 000
Taxable Compensation Income: 1, 410,
Draw the tax schedule on an index card 000 (same with the above computation)
to be used in our exam.
But to get the taxable business income, unlike
the above computation, we have to compute the
expenses.
b. BUSINESS INCOME
Gross Sales: 2.4M
i. Opted for 8% (2 nd
Option) Non-operating Income: 100, 000
TIP: Look at the gross sales first to see Cost of Sales: 1M
if he did not exceed 3M and if he has
complied with all the other conditions. Operating Expenses: 600, 000
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18 TAXATION 2 – Atty. Justice Aurelio-Yap
2.5M – 1M – 600, 000 = 900, 000 (C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Taxable Business Income: 900, 000 Multinational Companies. — There shall be levied,
collected and paid for each taxable year upon the
The difference of this First Option from the gross income received by every alien individual
Second Option above is that, in this case, we employed by regional or area headquarters and
deducted the cost of sales and operating regional operating headquarters established in the
expenses. Philippines by multinational companies as salaries,
wages, annuities, compensation, remuneration and
Taxable Compensation Income + Taxable other emoluments, such as honoraria and allowances,
Business Income = TOTAL TAX DUE from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent
1, 410, 000 + 900, 000 = 2, 310, 000 (15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos
Total Taxable Income = 2, 310, 000
employed and occupying the same position as those
of aliens employed by these multinational companies.
For purposes of this Chapter, the term multinational
How much is the TOTAL TAX DUE? company means a foreign firm or entity engaged in
international trade with affiliates or subsidiaries or
Use now the graduated rates branch offices in the Asia-Pacific Region and other
foreign markets. (NIRC, Sec. 24C as amended)
2, 310, 000 – 2, 000, 000 = 310, 000
Butangi jud ug peso sign kay kwarta But now, with the TRAIN Law, that 15%
jud baya ni. Ayaw kalimti. preferential tax rate was removed.
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Philippines from foreign government agencies and Ninety thousand pesos (P90,000) which shall cover:
other institutions, private or public. (i) Benefits received by officials and employees of the
national and local government pursuant to Republic
(d) Payments of benefits due or to become due to any Act No. 6686; (ii) Benefits received by employees
person residing in the Philippines under the laws of pursuant to Presidential Decree No. 851, as amended
the United States administered by the United States by Memorandum Order No. 28, dated August 13,
Veterans Administration. 1986; (iii) Benefits received by officials and employees
(e) Benefits received from or enjoyed under the Social not covered by Presidential decree No. 851, as
Security System in accordance with the provisions of amended by Memorandum Order No. 28, dated
Republic Act No. 8282. August 13, 1986; and (iv) Other benefits such as
productivity incentives and Christmas bonus.
(f) Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by (f) GSIS, SSS, Medicare and Other Contributions. -
government officials and employees. GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.
(b) Income Derived by the Government or its Political FRINGE BENEFITS is any good, service or
Subdivisions. - Income derived from any public utility other benefit furnished or granted by an
or from the exercise of any essential governmental
employer in cash or in kind, in addition to basic
function accruing to the Government of the Philippines
or to any political subdivision thereof.
salaries, to an individual employee, except rank
and file employee.
(c) Prizes and Awards - Prizes and awards made
primarily in recognition of religious, charitable, (B) Fringe Benefit defined. - For purposes of this
scientific, educational, artistic, literary, or civic Section, the term "fringe benefit" means any good,
service or other benefit furnished or granted in cash
achievement but only if: (i) The recipient was selected
or in kind by an employer to an individual employee
without any action on his part to enter the contest or
(except rank and file employees as defined herein)
proceeding; and (ii) The recipient is not required to
such as, but not limited to, the following:.
render substantial future services as a condition to (1) Housing;
receiving the prize or award. (2) Expense account;
(3) Vehicle of any kind;
(d) Prizes and Awards in Sports Competition. - All
(4) Household personnel, such as maid, driver and
prizes and awards granted to athletes in local and others;
international sports competitions and tournaments (5) Interest on loan at less than market rate to the
whether held in the Philippines or abroad and extent of the difference between the market rate and
sanctioned by their national sports associations. actual rate granted;
(6) Membership fees, dues and other expenses borne
(e) 13th Month Pay and Other Benefits. - Gross by the employer for the employee in social and
benefits received by officials and employees of public athletic clubs or other similar organizations;
and private entities: Provided, however, That the total (7) Expenses for foreign travel;
exclusion under this subparagraph shall not exceed (8) Holiday and vacation expenses;
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21 TAXATION 2 – Atty. Justice Aurelio-Yap
(9) Educational assistance to the employee or his “(2) Contributions of the employer for the
dependents; and benefit of the employee to retirement, insurance
(10) Life or health insurance and other non-life
and hospitalization benefit plans”
insurance premiums or similar amounts in excess of
what the law allows. (NIRC, Sec. 33B) If the contribution is for the benefit of the
employer, that is subject to fringe benefit tax.
Fringe Benefits to be taxable must be received
only by managerial employees. So if the fringe
benefit is received by a rank and file employee, Q: Who is liable for Fringe Benefit Tax?
then that is not subject to fringe benefit tax.
A: Employer
So if you are a rank and file employee (RF-EE),
and you receive fringe benefits, those are
exempted, PROVIDED, that the total amount of February 1, 2019
the benefit is only within the exempted value of
de minimis. FRINGE BENEFITS is any good, service or
other benefit furnished or granted by an
employer in cash or in kind, in addition to basic
salaries, to an individual employee, except rank
“in cash or in kind”
and file employee.
If sakyanan, kuhaon lang ang fair market value
RANK AND FILE EMPLOYEES (RF Ee) shall
mean all employees who are holding neither
managerial nor supervisory position as defined
“Expenses for foreign travel” under existing provisions of the Labor Code of
If you were asked to liquidate your expenses, the Philippines, as amended.
and pay any excess expenditure from the MANAGERIAL Ee are those who are given
amount given, that is not fringe benefit. Look at powers or prerogatives to lay down and execute
the intention of the problem. management policies and/or to hire, transfer,
(C) Fringe Benefits Not Taxable. - The following fringe suspend, lay-off, recall, discharge, assign or
benefits are not taxable under this Section: discipline employees.
(1) fringe benefits which are authorized and exempted SUPERVISORY Ee are those who effectively
from tax under special laws; recommend such managerial actions, if the
exercise of such authority is not merely routinary
(2) Contributions of the employer for the benefit of
or clerical in nature but requires the use of
the employee to retirement, insurance and
independent judgment.
hospitalization benefit plans;
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22 TAXATION 2 – Atty. Justice Aurelio-Yap
DE MINIMIS BENEFIT are facilities or Example: The Ee paid for his personal expenses
privileges furnished or offered by an employer to for his personal use, and subsequently, the Er
his employees that are of relatively small value reimbursed the amount, but the Er did not ask
and are offered or furnished by the employer for a receipt. That is an expense account, a
merely as a means of promoting the health, fringe benefit.
goodwill, contentment and efficiency of his
If it is duly receipted for under the name of the
employees.
Er and the claim do not partake of a personal
Example: Medical allowance or leave expense, then that is not a fringe benefit.
monetization.
3. Motor Vehicle
4. Household expenses
5. Interest on loan at less than market rate
Fringe benefit is imposed on the GMV of the 6. Membership fees, dues and other
fringe benefit furnished, granted or paid by the expenses borne by the employer for the
employer (ER) to managerial and supervisory Ee employee in social and athletic clubs or
(RF Ee are not covered), the ER may be an other similar organizations
individual or professional partnership or a 7. Expenses for foreign travel;
corporation. 8. Holiday and vacation expenses;
9. Educational assistance to the employee
The tax base is the GMV.
or his dependents; and
Q: How do we compute the GMV? 10. Life or health insurance and other non-
life insurance premiums or similar
amounts in excess of what the law
GUIDELINES IN GETTING THE GMV allows.
If the fringe benefit is granted or furnished in: FRINGE BENEFITS NOT SUBJECT TO THE
FRINGE BENEFIT TAX
1. Money, or is directly paid for by the
employer – the value is the amount 1. Fringe benefits which are authorized and
granted or paid; exempted from tax under the NIRC or
special laws (e.g. separation benefits which
2. Property other than money and ownership are given to employees who are
is transferred to the employee – the value involuntarily separated from work)
of the fringe benefit shall be equal to the
fair market value of the property as 2. Contributions of the employer for the
determined in accordance with the authority benefit of the employee to retirement,
of the Commissioner to prescribe real insurance and hospitalization benefit plans
property values (zonal valuation);
3. Benefits given to the rank and file
3. Property other than money BUT ownership employees, whether granted under a
is NOT transferred to the employee – the collective bargaining agreement or not
value of the fringe benefit is equal to the There is a specific exemption regarding RF Ee so
depreciation value of the property. do not anymore think whether the RF went
beyond the de minimis benefits because he has
his own separate exemption. If you are a RF Ee,
PLEASE READ: pg. 265 of Casasola automatically, the fringe benefit is NOT
taxable because he has a separate exemption.
1. Housing privilege
2. Expense account 4. De minimis benefits, whether given to rank
and file employees or to supervisory or
These are expenses incurred by the Ee, but
managerial employees
which is paid or reimbursed by the Er.
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(1) Interest from Deposits and Yield or any other MINIMUM CORPORATE INCOME TAX
Monetary Benefit from Deposit Substitutes and (MCIT)
from Trust Funds and Similar Arrangements, and Diba we have allowable deductions. So from
Royalties - A final tax at the rate of twenty gross sales/receipts, we deduct sales returns and
percent (20%) is hereby imposed upon the allowances then we arrive at the GROSS
amount of interest on currency bank deposit and INCOME. And from Gross Income, we deduct
yield or any other monetary benefit from deposit allowable deductions for us to arrive at the
substitutes and from trust funds and similar TAXABLE INCOME which is the basis of the
arrangements received by domestic income tax using the 30%.
corporations, and royalties, derived from sources
within the Philippines: Provided, however, That So the role of MCIT (Minimum Corporate Income
interest income derived by a domestic Tax) is to prevent corporations from under
corporation from a depository bank under the declaring sales and over declaring expenses for
expanded foreign currency deposit system shall them to have a low taxable income and tax due.
be subject to a final income tax at the rate of
Since MCIT is based on gross income, we don’t
fifteen percent (15%) of such interest income.
deduct the allowable deductions. So if direcho sa
(2) Capital Gains from the Sale of Shares of gross income, dako ang tax, 2%.
Stock Not Traded in the Stock Exchange. - A
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27 TAXATION 2 – Atty. Justice Aurelio-Yap
But MCIT only applies on the 4th taxable year of against the shareholder/tax payer. To prevent
business operations. this, the NIRC imposes IAET.
MCIT (2% of gross income) shall be compared Exceptions - IAET not applicable to the
to your normal income tax (NCIT the 30% of following: (NIRC, Sec. 29A 2)
taxable income).
1. Publicly-held corporations;
Whichever is higher between the two, will be the 2. Banks and other nonbank financial
taxable due for the taxable year. intermediaries; and
3. Insurance companies (NIRC, Sec. 29A 2)
Illustration:
(Grounds provided by the Corporation Code in
A domestic corporation in its 4th year of
order to exempt a corporation from IAET even is
operations had a gross income of ₱300,000 and
not included in the exceptions in the NIRC)
net taxable income of ₱100,000. How much is
the income tax due for the year? 4. For expansion projects, (restricted retained
earnings)
MCIT (₱300,000 x 2%) ₱ 6,000
5. Required by the loan agreement
NCIT (₱100,000 x 30%) ₱30,000 6. To meet contingencies.
GIU/TGI = 9/15 = 60% (more than 50%) corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits
GI – Deductions = Taxable Income exclusively to the members of such society, order, or
association, or nonstock corporation or their
15M – 3M = 12 M (Taxable Income) dependents;
12M x 30% (regular income tax rate) = 3.6M (D) Cemetery company owned and operated
exclusively for the benefit of its members;
Total Tax Due = 3.6M
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation
GOVERNMENT-OWNED OR CONTROLLED- of veterans, no part of its net income or asset shall
CORPORATIONS, AGENCIES OR belong to or inures to the benefit of any member,
INSTRUMENTALITIES organizer, officer or any specific person;
General Rule: All GOCCs are subject to income (F) Business league chamber of commerce, or board
tax in the same way as corporations and of trade, not organized for profit and no part of the
associations. net income of which inures to the benefit of any
private stock-holder, or individual;
Exception (Remember this, mugawas ni sa
(G) Civic league or organization not organized for
exam):
profit but operated exclusively for the promotion of
social welfare;
1. GSIS
2. SSS (H) A nonstock and nonprofit educational institution;
3. PHIC
4. Local Water Districts (I) Government educational institution;
Income Tax Benefit meaning, when you The timing or the basis in which remuneration is
write off your bad debts, you deduct paid is immaterial in determining whether the
that from your income because that bad remuneration constitutes compensation.
debt is considered expense. Now when
you deducted that from the previous If an Ee receives compensation or wages on the
basis of piece-work, percentage of profits (E.g.
year which resulted into a low income
your salary will be 5% of the income), or paid
tax, or you no longer have to pay
hourly, daily, weekly, monthly or annually,
income tax because the amount of your
immaterial.
bad debts is big.
They won’t matter as long as they are “sweldo,”
So when you benefited in declaring such bad
you still include them in compensation income.
debt (no income tax or low income tax), then
you are required to declare it on the succeeding The TEST is whether such income is received by
year. virtue of an employer-employee relationship.
BUT that declaration is only to the extent of the
income tax benefit.
What is PAYROLL PERIOD?
Example: Your gross income is 1M, and you
deducted 300, 000 as bad debts. So you have (B) Payroll Period. - The term 'payroll period' means a
700, 000 remaining gross income, that is your period for which payment of wages is ordinarily made
to the employee by his employer, and the term
income tax base. However, on the succeeding
'miscellaneous payroll period' means a payroll period
year, you were able to collect the entire 300,
other than, a daily, weekly, biweekly, semi-monthly,
000, so you check the previous year. Did you monthly, quarterly, semi-annual, or annual period.
have an income tax benefit? (NIRC, Sec.78B)
Meaning, was the tax I paid for the
previous year low, because of the bad debts? If
so, add the income tax benefit, (only to the Payroll period is the period of services for
extent of the 300, 000) in your gross income to which a payment of compensation is ordinarily
the succeeding year. made to an Ee by his Er.
Q: What if there is an interest imposed on the It is immaterial that the compensation is not
debt which was subsequently recovered? always paid at regular intervals.
A: The interest will become part of your gross It is the coverage of your period of service.
income, because the interest income is different Usually from the 1st to 15th day of the month.
from the bad debt you previously wrote off from
your books which you subsequently recovered.
EMPLOYEE
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32 TAXATION 2 – Atty. Justice Aurelio-Yap
XXX
FORMS OF COMPENSATION
(6) Retirement Benefits, Pensions, Gratuities, etc.-
o Compensation paid in kind
Xxx
E.g. stocks, bonds or other forms of property.
(b) Any amount received by an official or
Remember the mode or manner of payment is employee or by his heirs from the employer as a
immaterial. consequence of separation of such official or
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The “reasonableness” of the amount being paid In the example, if the vehicle was treated as a
is a prime consideration for an expense to be capital expenditure, the total value of the car
allowed. shall not be deducted from your gross income.
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36 TAXATION 2 – Atty. Justice Aurelio-Yap
useful life of 30 years (based on the accounting very low net income. It will also result to a low
policy). dividend or benefits for the stockholders.
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37 TAXATION 2 – Atty. Justice Aurelio-Yap
allowed as deductions because they are in The groceries for your family are not allowed to
pursuit of trade. be deducted as expense of your business.
Q: The company owner rents his own house and The feminine wash or other personal stuff you
lot. Are the rentals paid for the house and lot bought cannot be deducted as expense for your
included as business expenses allowed to be business, unless you justify that as necessary or
deducted? in furtherance of trade, business or profession.
A: NO, because that is not for the trade or d) Must not be contrary to law, morals
business. public policy or public order;
e) Must not be paid directly or indirectly, to
an official or employee of the national
4. Entertainment, amusement and government, or to an official or
recreation expenses; employee of any local government unit,
or to an official or employee of a GOCC,
Same Rule as the others, the expenses must be or to an official or employee or
directly related to the operation or the conduct representative of a foreign government,
of business, trade or profession and in or to a private corporation, general
furtherance of the conduct of trade. professional partnership, or a similar
entity, if the payment constitutes a bribe
Example: Your Company has guests and you
or kickback;
entertain them, the expenses incurred for the
entertainment or for the accommodation of the REASON: It cannot be substantiated and is
needs of those visitors can be claimed as contrary to law.
deductions.
f) Must be duly substantiated by adequate
“Provided that any expense incurred for proof by official receipts or invoices or
entertainment, amusement or recreation that is sales of accounts which should be in the
contrary to law, morals public policy or public name of the tax payer claiming the
order shall in no case be allowed as a deduction” deduction
But say you brought your guests to nights clubs The official receipt should really be under the
or hubo-hubo places, they cannot be claimed as name of the tax payer.
allowable deductions because they are not
directly related to your business. Example: You are a sole proprietor, but you used
office supplies bought by your sister the receipt
Also, by express provision of law, they cannot be of which is in the name of your sister. You
allowed as deduction. cannot claim that as a deduction
1.05
REQUISITES FOR DEDUCTIBILITY OF
EXPENSES
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38 TAXATION 2 – Atty. Justice Aurelio-Yap
The indebtedness must not be condoned and the 4. The property must have formed part of
action of the decedent must not have the gross estate of the decedent
prescribed. 5. Donors tax on the gift or the inheritance
must have been paid
Requisites for the deductibility: 6. Said property must be situated in the
1. The value of the claims against part of Philippines and now forms part of the
the gross estate gross estate of the decedent
2. And it must be shown that they are 7. Amount of the deduction is the full
insolvent amount and the amount decutible id
3. And the value of the claim must have diminished years upon
been added in the gross estate 8. VD must not ave been claimed by the
previous estate involving the same
Unpaid mortgages and indebtedness property
9.
1. Where the value should be included in
the value of the gross estat The earlier the death of the
2. The value of the property mortgage
must be included in the gross estate. Transfers for public use
3. Verified that such debt was contracted in
Disposition is in the last will and testament
good faith by the decedent during his
lifetime. In favour of the government
4. Substantiated by proff that such debt
Exclusively for public purpose
exists
5. Should have been included as part of And value of the property is included in gross
the gross estate estate
Requisites for the
Taxes on the income of such property The mentioned deductions are call ordinary
deductions.
Property taxes not accrued before his death
1. Family home
Vanishing deduction
Place where family actually resides
Pg 703 Revenue Regulation No. 12-2018
The family home is deemed family home.
1. Property involved must have been
transferred by a prior decedent to a
present decent through donation
Amounts received by heirs under RA 4967
2. Presentpresent decedent must have
3. Property can be identified from the one
received by the donor to the present
decedent
a. Through technical description
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